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Privity Of Contract And Exceptions To The Rule

Privity of contract Meaning

The doctrine of privity of a contract is a common law principle that implies that only parties to a contract are allowed to sue each other to enforce their rights and liabilities and no stranger is allowed to confer obligations upon any person who is not a party to contract even though is a contract the contract has been entered into for his benefit. The rule of privity is basically based on the 'interest theory' which implies that the only person having an interest in the contract is entitled as per law to protect his rights.

Illustration:
If Khushi makes a promise to deliver goods to sam. Then in this case, if Ramesh breaches the contract then only sam has a right to prosecute him and no other person can prosecute him.

Essentials of Privity of contract

  1. A contract has been entered into between two parties:- The most important essential is that there has been a contract between 2 or more parties.
  2. Parties must be competent and there should be a valid consideration:- Competency of parties and the existence of consideration are pre-requisites for application of this doctrine.
  3. There has been a breach of contract by one party:- Breach of contract by one Party is the essential requirement for the application of the doctrine of privity of contract.
  4. Only parties to contract can sue each other:- Now after the breach, only Parties to a contract are entitled to sue against each other for non-performance Of the contract.

Role of consideration in Privity of contract

Consideration is the most important element of any contract existing between the parties unless there is consideration a contract is considered to be void. It is defined in section 2(d) of the Indian contract act 1872. Consideration is considered as the foundation of every contract and it forms the basis of it.

The doctrine of privity in English law

English law is more restrictive in comparison to Indian law in the application of the doctrine of privity. This is because English law only recognizes consideration that moves from the promisee himself and not from anyone else, which puts both strangers to contract and strangers to consideration on the same footing. Thus, when the promisee to a contract does not provide the consideration himself, he loses his right to enforce the contract as he is a stranger to consideration.

The doctrine of privity of contract was first recognized in English law in the case of Tweddle v. Atkinson (1861). In this case, John Tweddle William Guy entered into a contract where they agreed that both of them would pay a sum of money to their children who were engaged. However, the father of the bride William passed away before he fulfilled his obligation. The father of the groom died too before he filed for a suit. The groom filed a suit against the executor of William for the payment of the sum of money. The Court ruled that since the son was both a stranger to the contract and a stranger to the consideration, his suit was not maintainable.

The relevance of the doctrine was affirmed again when it was cited in the well-known case Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd (1915). In this case, Dunlop Company manufactured tyres and they entered into an agreement with Dew & Co., who were dealers. Dunlop entered into the agreement so that they can maintain a standard market price for the tyres and Dew & Co. agreed that they would not sell the tyres below the fixed price.

Dunlop also insisted that the dealers must have the same terms in their agreements with the retailers. Dew & Co. entered into a contract with a retailer Selfridge, which had a provision that if the tyres were sold below the fixed price, they would have to pay 5 Pounds per tyre as damages to Dunlop & Co. When Selfridge sold some tyres below the fixed price, Dunlop sued them for damages and the decision was in favour of Dunlop. But, on appeal the decision was reversed and it was held that Dunlop did not have the right to claim damages as the contract was only between the retailer Selfridge and Dew & Co.

Exceptions to the rule that a Third Party to contract cannot sue

The doctrine of privity of contract is however not absolute. There are several exceptional situations in which a third party to a contract can sue.

The following are the exceptions to the doctrine of Privity in Indian law:
Trust of contractual rights or beneficiary under a contract
A trust refers to something created by a contract for the benefit of a third party. In a contract of trust, the trustor transfers the title of a property to the trustee, so that the trustee holds it for the benefit of a third party who is also called the beneficiary. Even though beneficiaries are third parties to a contract they have the right to enforce the provisions of the trust.

To cite an example, in the case of Rana Uma Nath Baksh Singh v. Jang Bahadur (1938), the trustor was a father who transferred all of his estates to his son for him to hold in trust for the benefit of the trustor's illegitimate son. The son had the obligation to provide the illegitimate son with money on a regular basis. When the son failed to perform his obligation, the illegitimate son filed a suit to recover the amount to be paid and the suit was maintainable even though he was not a party to the contract.

Provision for marriage or maintenance under a family arrangement

In a contract for a family settlement either for marriage or maintenance, where the contract is intended to benefit a third party, he may sue on the contract to secure his rights.

For example, in the case of Lakshmi Ammal v. Sundararaja Iyengar (1914), there was an agreement among the brothers of a Hindu joint family to pay for the expenses to be incurred for the marriage of their sister. Despite being a third party to the agreement, the sister had the right to enforce the provision that was made for her.

In the case of Veeramma v. Appayya (1955) the daughter of the family had the responsibility of taking care of the father. So, there was a family arrangement made for conveying the father's house to her. Since the agreement benefited her, she had the right to file a suit for the specific performance of the contract.

Acknowledgment or Estoppel

According to the law of estoppel, if a person by words or conduct suggests something, he is not allowed to contradict it later. Thus, if a party to a contract acknowledges by words or conduct that a third party has the right to sue him, he cannot deny that later by the rule of estoppel. In such cases, a suit filed by that party, despite being a stranger to the contract, is maintainable.

For example, A and B enter into a contract where A pays B a sum of money that has to be given to C. B acknowledges to C that he is holding the sum for him. If B defaults in the payment, C will have the right to recover the sum from him.

In the case of Devaraj Urs v. Ramakrishnayya (1951), A bought a house from B. B asked A to pay the price for the sale to B's creditor. The buyer paid a part of the price to the creditor and promised him that he would pay the rest later. On his default, the creditor filed a suit against him. The court ruled in favour of the creditor, though he was a third party to the contract.

Contracts entered into through an agent

It is not uncommon for people involved in commerce and business to enter into contracts through their agents. These agents can enter into contracts for them and represent them in the relations that arise in such contracts. Thus, whatever contracts are entered into by an agent while acting within the scope of his authority can be enforced by the principal. It may seem that the agent is the party to the contract, but in reality, he is more of a representative of the principal.

For example, A appoints B as his agent. He asks B to buy a bag of rice from C on his behalf. Here, B enters into a contract with C when he buys the bag of rice, but it is A who has the right to enforce the contract as B is a mere representative of A.

The charge created on a specific immovable property

In certain cases, charges or covenants are made on a specific immovable property, like land for the benefit of a third party. In such cases, these third parties can enforce the contract, though they are strangers to the contract.

Assignment of a contract

Assignment of contract refers to the transfer or assignment of the rights and liabilities arising from contractual relations to a third party. In cases where the benefits of a contract are being assigned, the assignee of the benefits can sue upon the contract though he is not a party to the contract.

For example, a husband assigns his insurance policy in favor of his wife. As the benefit of the contract is assigned to her, she has the right to enforce the contract though she is not a party to it.

Collateral contracts

Collateral contracts refer to the contracts subsidiary to the original contract. It could be entered into by the same parties or one of the original parties with another party. It can be made before or after the main contract is formed. When a third party has entered into a collateral contract, he can also file a suit to enforce the main contract in spite of not being a party to it. The best example of a collateral contract is a manufacturer's guarantee regarding the goods sold. The sale of the goods is the main contract and the guarantee is the contract collateral to it.

In the case of Shanklin Pier Ltd. v. Detel Producers Ltd. (1951), a person A was employed as a contractor by B. B asked A to buy some paint manufactured by C. B wanted A to buy C's paint because of a statement that was once made by C that the paint would last for seven years. But the paint only lasted for three months. In this case, the guarantee given by C to B forms a contract that is collateral to the contract made by A and B. The suit filed by B was maintainable even though he was not a party to the main contract.

Conclusion
From the above discussion, we have seen that although only parties to contract can sue each other and no stranger is allowed to enter between the parties to sue. But with the development of time, the law has also developed and now even a stranger is permitted to sue to safeguard his interest under exceptional circumstances.

A person A was employed as a contractor by B. B asked A to buy some paint manufactured by C. B wanted A to buy C's paint because of a statement that was once made by C that the paint would last for seven years. But the paint only lasted for three months. In this case, the guarantee given by C to B forms a contract that is collateral to the contract made by A and B. The suit filed by B was maintainable even though he was not a party to the main contract.

End-Notes:
  • https://ipsaloquitur.com/contract-law/cases/shanklin-pier-v-detel-products/
  • https://indiankanoon.org/doc/877630/
  • https://www.casemine.com/judgement/uk/5a8ff8d060d03e7f57ecdbc0
  • https://www.aequivic.in/post/aijacla-dunlop-pneumatic-tyre-co-ltd-v-selfridge-co-ltd
  • https://indiankanoon.org/doc/1731907/
  • https://indiankanoon.org/doc/45963/
  • https://www.lawyerservices.in/Kommineni-Veeramma-Versus-Kommineni-Appayya-1955-10-16
  • https://indiankanoon.org/doc/506634/


  • Award Winning Article Is Written By: Mr.Ayush Bansal

    Awarded certificate of Excellence
    Authentication No: MR206420702088-05-0222

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