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.
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.
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
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:
- A third party cannot receive a benefit if he is not a party to that
- A third party cannot be liable under a contract if he is not a party to
- A third party cannot enforce a contract if he is not a party to that
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.
- 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
- 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
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.
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
- 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. 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) 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
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.
The authority for the application of the rule in India is the decision of the
Privy Council in Jamna Das v. Ram Avtar
. 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
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
, 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
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
- 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". 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
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
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
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.
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.
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.
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
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
- 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.
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
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
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
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
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
Written By: Vivekanand Jha,
- Indian Contract Act, 1872
- (1967; HC of A).
- (1861)1 B & S 393.
-  UKHL 1 (1 July 1914).
- AIR 1973 Cal. 401.
- (1911) 30 IA 7.
- [(1957) 61 Cal WN 78].
- 1995 AIR 2251, 1995 SCC (3) 250.
- Bare Act, India Contract Act, 1872.
- (1907) ILR 29 All 222.
[LLB 3Years] KLE College Of Law