File Copyright Online - File mutual Divorce in Delhi - Online Legal Advice - Lawyers in India

The Doctrine of Privity of Contract under Indian And English Law

The principle of privity of contract provides that, as a general rule, a contract cannot confer rights or impose obligations arising under it to any person who is not a party. The doctrine has long been criticized as artificial and contrary to the parties' intention to benefit a third party. As a result, the courts have frequently resorted to devices such as agency or trust to allow a third party to enforce a benefit conferred upon it.

Legislation has also made a certain exception to the doctrine of privity to contract to safeguard the interest of parties who are not involved directly in it but have some interest as an outcome of the contract or indirectly they may be called as a beneficiary to the contract with some conditions.

Introduction:
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 contract the contract have 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

The Indian Contract Act clearly states that there cannot be a stranger to a contract. What does this exactly mean? And are there any exceptions? This is explained through the Doctrine of Privity of a Contract

According to section 2(h) of the Indian Contract Act, 1872, an agreement between two parties that is enforceable by law and is backed by some form of consideration is a Contract. The term 'agreement' is defined in Section 2(e) as each promise and every pair of promises that establish the consideration for each other. And Consideration as defined in Section 2(d) is an act performed at the promisor's request or desire[2].

A well-settled rule of English Law is that:
Consideration must move from the promisee alone. If it is furnished by any other person and not by the promisee himself, the promisee becomes a "stranger to consideration", therefore, cannot enforce the promise. This is known as the doctrine of 'Privity of Consideration'. It means that the act or abstinence or promise constituting the consideration must be done or made by the promisee himself at the request of the promisor (English Law).

But the words promisee or any other person given in the definition of consideration under Section 2[d] of the Indian Contract Act indicate that consideration need not move from the promisee alone but may proceed from a 3rd person on behalf of the promisee. To that extent, the Indian Contract Act has departed from the rule of English Law. The definition of 'Consideration' under the Indian Law is, therefore, wider than that in the English Law.

"Under the English Law a "stranger to consideration" cannot sue the promisor. But in India, the Law is otherwise and here even a "stranger to the consideration" can sue on a contract provided of course that he was a party to the contract."

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

Privity Of Contract:

The Doctrine of Privity of Contract is a long-standing English law principle that states that no one shall be entitled to or bound by the conditions of a contract to which he is not a party original. It is based on the interest theory, which means that a stranger to a contract cannot sue or enforce the terms of the contract. This doctrine has made it difficult for third parties to carry out the obligations of the contracting parties.

For instance, if A makes a promise to supply some goods to B and A goes on to breach the contract, then in that case only B has the right to prosecute A, to the exclusivity of others

No one may be entitled to or bound by the terms of a contract to which he is not an original party." In other words, the rights and obligations are strict, the private matters of contracting parties and because of this, a stranger has no legal access to them. Thus, the doctrine of privity of contract means that a non-party cannot bring an action on the contract.

Privity of contract has three broad effects:
  1. A third party cannot receive a benefit if he is not a party to that contract.
  2. A third party cannot be liable under a contract if he is not a party to that contract.
  3. A third party cannot enforce a contract if he is not a party to that contract.
Generally speaking, a person will be regarded as being 'privy' to a contract if that person entered into the agreement (e.g. that person made a promise in exchange for another party's promise); and that person provided consideration in support of the agreement.

Two Implications:
  • A contract cannot impose an obligation (burden) on a third party without that party's consent.
  • Where a contract confers a benefit (right) on a third party, that party cannot enforce the contract
The issue of privity of the contract becomes important when two persons have entered into a contract and by the terms of that contract, a benefit has been conferred on a third person.

Privity does not prevent a contract from conferring a benefit on a third person. It simply prevents the third person from enforcing the contract.
  • Central to the rules of privity of contract therefore is identifying the contracting parties
  • Denies 3rd party to enforce right.
  • Best to argue that the 3rd party is a party to the agreement.

In the case of Coulls v Bagot's Executor & Trustee Co Ltd[3]

Facts:
A written agreement was entered into by Arthur Coulls and O'Neil Construction Pty Ltd (the Agreement) headed "Agreement between Arthur Leopold Coulls and O'Neil Construction Proprietary Limited" and included written terms:
  • Mr Coulls gives to O'Neil Construction the sole right to quarry 50 acres of his land.
  • O'Neil Construction agrees to pay 3d per ton for all stone quarried and sold, and a fixed minimum royalty of 12 per week for a period of 10 years with an option of another 10 years at the above basis. (consideration)
  • O'Neil Construction to pay all money connected with the Agreement to Mr. Coulls and his wife, Doris Coulls as joint tenants-(wanted to make it clear if I die my wife should inherit interest not children). The agreement was signed by Mr. and Mrs. Coulls and O'Neil Construction. (clearly endorsed agreement and was there at time agreement was made). After Mr. Coulls died, his 2 children from a previous marriage stood to benefit if the royalties were payable to Mr. Coulls' estate.
Held: HC held that the company owed no contractual obligation to Mrs. Coulls as she wasn't a party to the agreement. The contract expressly purported to be made between Arthur Coulls and the company. Moreover, the company made no express promise to pay royalties to Mrs. Coulls. The dissent argued that Mrs. Coulls signature of the agreement was explicable only on the basis that she was intended to be a party to the agreement

Aspects Of The Doctrine:

  • Burden aspect:
    Parties cannot impose liabilities or burdens upon a third party by their contract. There is a rational logic behind this rule how can we justify imposing any contractual obligation upon a person who is a stranger to a contract.
     
  • Benefit aspect:
    A stranger to a contract cannot take advantages arising out of the contract and he can't sue upon the contract. This is similar to the doctrine of consideration which says that a person, who is not a party to consideration, does not have any right to sue upon the contract. Actually, this aspect of privity has been subject to many criticisms.

Privity Of Contract: English Law:

The doctrine of privity of contract means that only those involved in striking an agreement can enforce it. In general, this is still the case. Only parties to a contract may sue for the breach of a contract although, in recent years, the rule of privity has eroded somewhat, and third-party beneficiaries have been allowed to recover damages for breaches of contracts they were not a party.

The rule of privity of contract was first recognized and established in the ruling of Tweddle v. Atkinson[4]. Tweddle's father-in-law and Atkinson entered into a contract to contribute a sum of amount $100 each to support Tweddle and his wife. Tweddle's father-in-law contributed his part of the agreement, but Atkinson died before paying anything.

Tweddle filed a suit against Atkinson's estate. However, the court rejected his claim due to the absence of consideration from Tweddle's father-in-law to Atkinson. Also, Tweddle himself was not a part of the contract. As Tweddle was a third party to both contract and the consideration, his claim was not accepted by the court even if it was for his benefit.

Further, the doctrine of privity was modified in the case Dunlop Pneumatic Tyre Co Ltd v. Self ridge & Co (1915)[5] in this case Dunlop did not want their tyres to be sold cheaply but to maintain a standard resale price. It agreed with its dealers (in this case, Dew & Co.) not to sell them below its recommended retail price.

It also bargained for dealers to get the same undertaking from their retailers (in this case, Selfridge). If retailers did sell below the list price, they would have to pay 5 per tyre in liquidated damages to Dunlop. Dunlop thus was the third party to a contract between Selfridge and Dew. When Selfridge sold the tyres at below the agreed price, Dunlop sued to enforce the contract by injunction and claimed damages.

Selfridge argued that Dunlop could not enforce the burden of a contract between Dunlop and Dew, which Selfridge had not agreed to. At trial, the judge of the first instance, found in favor of Dunlop. On appeal the damages and injunction were reversed, saying that Selfridge was not a principal or an agent and thus was not bound.

Privity Of Contract: Indian Law:

The rule of privity of contract has been applicable in India as well. Even though under the Indian Contract Act the definition of consideration is wider than under English law, yet the common law principle of privity of contract has been generally applicable in India, with the effect that only a party to the contract is entitled to enforce the same[6].

The authority for the application of the rule in India is the decision of the Privy Council in Jamna Das v. Ram Avtar[7]. where A borrowed Rs. 40,000 by executing a mortgage of her Zamindari in favor B. Subsequently A sold the property to C for Rs. 44,000 of the price in order to redeem the mortgage if he thought fit. B sued C for the recovery of the mortgage money, but he could not succeed because he was not a party to the agreement between A & B.

The Privy Council held that the undertaking to pay back the mortgagee was given by the defendant to his vendor. The mortgagee has no right to avail himself of that which he was not a party. The purchaser entered into no contract with him, and the purchaser is not personally bound to pay B his mortgage debt. (LORD MACNAUGHTAN). This line of thinking has been followed in various cases.

Consequently, a wife's action to recover the money due under her deceased husband's insurance policy was rejected because she, though a nominee under the policy was not a party to the contract between an insurance company and the deceased, and no interest passed to her merely because she was named in the policy (Pratapmull v. State of West Bengal[8].

Where the privy council held that there is no contract between the plaintiff and the other party which makes the plaintiff a stranger to the contract and hence, the plaintiff cannot claim for any damages arising out of the contract. But it doesn't mean that the above case will always be the same as in the famous case Donoghue v. Stevenson (1932) where Ms. Donoghue's friend brought a defective ginger beer that contained a partially decomposed snail due to which Ms. Donoghue filed a suit seeking damages.

In this case, the contract was between her friend and the owner of the shop but it was observed that the manufacturer should have some sense of commitment and a duty of care towards his customers, consequently she was awarded the damages.

For illustration, A had mortgaged some property to X. X brought an action against B to recover the mortgage money. It was held by the Privy Council that since there was no contract between X and B, X could not enforce the contract to recover the amount from B.

In another case Advertising Bureau v. C. T. Devaraj[9], the circus owner placed an order with the plaintiff-appellant for making advertisements for the circus. The plaintiff-advertiser did not make any agreement with the financer of the circus. The advertiser was not a party to the contract between the financer and the circus owner. There being no privity of contract between the advertiser and the financer, the suit by the advertiser against the financer was therefore dismissed.

Essentials Of Privity Of Contract:

  • 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.
  • Parties must be competent and there should be a valid consideration:
    Competency of parties and the existence of consideration are prerequisites for applying this doctrine.
  • 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.
  • Only parties to the contract can sue each other:
    Now after the breach, only Parties to a contract are entitled to sue against each other for the non-performance of a contract.

Role Of Consideration In Privity Of Contract:

Consideration has been defined as "When, at the desire of the promisor, the promise or any other person has done or abstained from doing or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called consideration of a promise"[10]. Without consideration, a person cannot enforce the contract.

Consideration is the most important element of any contract existing between the parties unless there is considering 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. Privity of consideration states that only a person who has provided consideration can enforce the contract and take action against it.

Consideration should be done at the promisor's desire. This is called Promissory Estoppel.

Consideration should always be of some value in the eyes of law.

There must be the performance of an act, abstinence or promise by the promisee.

Similarly, the doctrine of privity says that if a contracting party did not promise the third party a consideration, the third party cannot enforce the contract.

Comparison Between English Law And Indian Law:

If we compare both the laws (English and Indian) then we can say that there are many similarities between the English law and the Indian law that only the original parties of a contract can file the suit.

However, the scope of privity rules is much wider in Indian law than in English Law. It's because the definition and importance of consideration in Indian law are much wider than in English law (Babu ram Budhu mal and Ors. v. Dhan Singh Bishan Singh 1956). In India, a stranger or a third party can sue if the contract involves consideration but the same cannot happen in England.

According to Indian law, the act of consideration can be done by the promisor or any other person. Therefore, it becomes immaterial who has furnished the consideration as long as there is a consideration. However, this is not the case in English law. In English law, the fundamental propositions state that the consideration should be furnished by the promisee only and not by any other person.

Exception To The Doctrine Of Privity Of Contract:

As a general rule only parties to contract are entitled to sue each other, but now with the passage of time exceptions to this general rule have come, allowing even strangers to contract to prosecute. These exceptions are:
  • A beneficiary under a contract:
    If a contract has been entered into 2 persons for the benefit of a third person not being a party, then in the event of failure by any party to perform his part, the third party can enforce his right against the others. This concept of a beneficiary under a contract has been highlighted in the case of Muhammad Rustam Ali Khan vs Husaini Begam[11].

    Where the plaintiff, namely Husaini Begam, who was a Mohammedan lady, married the son of the defendant, namely Khwaja Muhammad Khan. As per Islamic customs, the plaintiff was to be given Rs. 500 as Kharch-i-Pandan. The agreement was enforced by the defendant at the time of marriage.

    The agreement was to be initiated after her reception into conjugal domicile, which started 6 years of their marriage. After 13 years of being together, the plaintiff abandoned her husband's home and stayed in Moradabad as a result of certain altercations. The husband Rustam Ali Khan never bought an action against his wife for the restoration of conjugal rights. The plaintiff sued the defendant for recuperation of Kharch-i-Pandan.

    Issues was:
    Whether The contract between Khwaja Mohammad Khan and Husaini Begum existed, as according to the rule of privity of contract, no stranger to contract can sue the parties in agreement to enforce the contract.

    Judgement:
    The plaintiff was allowed to enforce the contract. The court said that the rule of privity of contract does not apply to the said case, as the facts and circumstances of this case are different.
     
  • Conduct, Acknowledgement, or Admission:
    There can also be a situation in which although there may be no privity of contract between the two parties, but if one of them by his conduct or acknowledgment recognizes the right of the other, he may be liable on the basis of the law of estoppel (Narayani Devi v. Tagore Commercial Corporation Ltd).

    For eg., If A enters into a contract with B that A will pay Rs 5000 every month to B during his lifetime and after that to his Son C. A also acknowledges this transaction in the presence of C. Now if A defaults C can sue to him, although not being directly a party to the contract.
     
  • Provision for maintenance or marriage:
    This type of provision is treated as an exception to the doctrine of privity of contract for protecting the rights of family members who not likely to get a specific share and also to give maximum effect to the will of the testator. For eg., If A gives his property in equal portions to his 3 sons with a condition that after his death all 3 of them will give Rs 10,000 each to C, the daughter of A. Now C can prosecute if any one of them fails to obey this.
     
  • Family Settlement:
    If a contract is made under a family arrangement to benefit a stranger (person not a party to the contract), then the stranger can sue in his own right as a beneficiary of the contract. Peter promised Nancy's father that he would marry Nancy else would pay Rs 50,000 as damages. Eventually, he married someone else, thereby breaching the contract. Nancy filed a case against Peter which was held by the Court since the contract was a family arrangement with Nancy as the beneficiary.
     
  • Estoppels:
    A third party may be able to seek relief against a promisor on the basis of promissory estoppels principles. To succeed the third party would need to establish the elements of promissory estoppels. A person who is not a party to the contract can maintain a suit if he is authorized by a statute. Thus, under insurance acts, a stranger to the contract may recover from the insurance company in case of third-party risks are recovered by the insurance policy.
     
  • Agency:
    The rule here is that if one of the contracting parties contracts as an agent, then either the agent or the principal, but not both, can sue to enforce the contract. In our example, if B is C's agent then either B or C can enforce the contract against A. In these cases, it is immaterial as to whether A knew that B was C's agent. In terms of section 185 of the Act, no consideration is necessary to create an agency
     

Conclusion:
From the above discussion, we have seen that although only parties to the contract can sue each other, 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.

Under Indian Law, a person may not have himself given any consideration, but he can enforce the contract if he is a party to the contract. In India, the rule "stranger to contract cannot sue" (Privity of Contract) has to be distinguished from the rule "stranger to consideration can sue". Because in India "stranger to consideration" can sue but a stranger to contract cannot i.e., Doctrine of Privity of Consideration is not applicable in India, but Privity of Contract is applicable both in England and India.

The long-established rule of Privity of Contract had caused considerable injustice and inconvenience. The existence of the Privity rule has provoked criticism by judges, academicians, and law reform agencies alike and in some jurisdictions, statutory abrogation of the rule had occurred. There is no doctrinal, logical, or policy reason why the law should deny effectiveness to a contract made for the benefit of 3rd party where that is the parties' expressed intention.

The doctrine of privity of contract has changed in recent years and it is now well settled that a beneficiary under any contract or any special law can initiate legal action against a third party without being a party to the contract

End-Notes:
  1. *
  2. Indian Contract Act, 1872
  3. (1967; HC of A).
  4. (1861)1 B & S 393.
  5. [1914] UKHL 1 (1 July 1914).
  6. AIR 1973 Cal. 401.
  7. (1911) 30 IA 7.
  8. [(1957) 61 Cal WN 78].
  9. 1995 AIR 2251, 1995 SCC (3) 250.
  10. Bare Act, India Contract Act, 1872.
  11. (1907) ILR 29 All 222.
Written By: Vivekanand Jha, [LLB 3Years] KLE College Of Law

Law Article in India

Ask A Lawyers

You May Like

Legal Question & Answers



Lawyers in India - Search By City

Copyright Filing
Online Copyright Registration


LawArticles

Section 482 CrPc - Quashing Of FIR: Guid...

Titile

The Inherent power under Section 482 in The Code Of Criminal Procedure, 1973 (37th Chapter of th...

How To File For Mutual Divorce In Delhi

Titile

How To File For Mutual Divorce In Delhi Mutual Consent Divorce is the Simplest Way to Obtain a D...

Whether Caveat Application is legally pe...

Titile

Whether in a criminal proceeding a Caveat Application is legally permissible to be filed as pro...

The Factories Act,1948

Titile

There has been rise of large scale factory/ industry in India in the later half of nineteenth ce...

Constitution of India-Freedom of speech ...

Titile

Explain The Right To Freedom of Speech and Expression Under The Article 19 With The Help of Dec...

Types of Writs In Indian Constitution

Titile

The supreme court, and High courts have power to issue writs in the nature of habeas corpus , quo...

Lawyers Registration
Lawyers Membership - Get Clients Online


File caveat In Supreme Court Instantly