Doctrine of Privity under the Indian Contract law, 1872
Introduction
According to Section 2(h) of the Indian contract act 1872, a contract is an
agreement between two parties enforceable by law backed by some consideration.
The essence of the law of contract lies in the promise which both parties have
made towards each other for fulfilling their part of the contract.
Privity of contract Meaning and scope
The doctrine of privity of a contract is a common law principle which 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.
Illustration
If Ramesh makes a promise to deliver goods to Arun. Then in this case, if Ramesh
breaches the contract then only Arun 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 contract.
English law vs Indian Law
As a general rule, both Indian and English law are similar to each
other that only parties to contract can sue each other. In a leading
English case of Tweddle v. Atkinson, it was held that the plaintiff
cannot sue as he was both a stranger to the contract as well stranger to
consideration. This concept of privity of contract was again analyzed
in the case of Dunlop Pneumatic Tyre Co.Ltd v. Selfridge & Co.
Ltd. In the Indian context also this concept of privity of contract is
similar, the only difference being that in India a person who is
stranger to consideration can sue whereas in England he cannot.
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.
Exceptions 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
1. A beneficiary under a contract:- If a contract has been entered into
between 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. For eg. In a contract between Alex and
James, beneficial right in respect of some property may be created in favor
of Robin and in that case, Robin can enforce his claim on the basis of this
right. This concept of a beneficiary under a contract has been highlighted in
the case of Muhammad Khan v. Husaini Begum.
2. Conduct, Acknowledgement or Admission:- There can also be 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 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 contract.
3. Provision for maintenance or marriage under family
arrangement:- These type of provisions 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.
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.
There are a number of general law principles which enable a third
party, to overcome the doctrine of privity under English common
law are-
(a) 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.
(b) Trusts
The law of trusts can enable a third party beneficiary to initiate action
that will enforce the promisor’s obligation. Using the above example,
if B had contracted with A in the capacity of trustee for C, C as
beneficiary under the trust has enforceable rights. These rights arise
because the law of trusts gives a beneficiary certain rights against a
trustee.
In the context of privity, if C is a beneficiary under a trust, C can bring
an action against B, the trustee, that has the effect of compelling B to
sue A for breach of contract. In formal procedural terms C sues in an
action in which B and A are joined as defendants.
The use of trust law here does not give rise, in the strict sense, to an
exception to the doctrine of privity. In conceptual terms, the action
against A is pursued by B, albeit at C’s insistence.
When the trust exception is pursued and B sues for damages, the
measure of damages that is recovered reflect the loss to C, the
beneficiary of the trust. The damages that are recovered are held by B
on trust for C: Lloyd’s v Harper[3]; and Eslea Holdings Ltd v
Butts [4]
(c) Estoppels
Following the decision in Waltons Stores (Interstate) Ltd v
Maher[5], 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.
In Trident, Mason CJ, Wilson J, at 123-124, were of the view that it
was likely that estoppels could be established on the facts of the case,
but it was not necessary for them to determine the issue on the basis
that they had decided the case on other grounds.
(d) Unjust Enrichment
The essence of the principle is that it requires a defendant ‘to make
fair and just restitution derived at the expense of a plaintiff’: Pavey &
Matthews Pty Ltd v Paul [6].
In Trident, Deane J, at 145-146, indicated that the principle could
possibly be the basis for a third party to seek relief. However, it was
Gaudron J, especially at 176, in Trident who based her decision in
favour of Mc Niece Bros on the basis of the principle of unjust
enrichment.
The action based upon unjust enrichments is not based upon the
contract but independent of it. However, usually it will correspond in
content and duration with the promisor’s.
4. Statutory exceptions to the doctrine of privity of contract
As per the Indian contract Act 1872, the exception to the doctrine of
privity of contract are given under section
As per the Contracts (Rights of Third Parties) Act 1999 (UK)
1. - (1) Subject to the provisions of this Act, a person who is not a
party to a contract (a "third party") may in his own right enforce a
term of the contract if-
(a) the contract expressly provides that he may, or
(b) subject to subsection
(2), the term purports to confer a benefit on him. (2) Subsection (1)(b)
does not apply if on a proper construction of the contract it appears
that the parties did not intend the term to be enforceable by the third
party.
This entails that a person who is named in the contract as a person
authorized to enforce the contract or a person receiving a benefit from
the contract may enforce the contract unless it appears that the parties
intended that he may not.
As per the Contracts (Rights of Third Parties) Act 1999 court can
enforce a third party to a contract only when -
(a) the contract expressly provides that he may, or
(b) subject to subsection (2), the term purports to confer a benefit on
him.
