Doctrine of Privity of Contract – Meaning, Types, Essentials, Exceptions

Introduction

Before we begin with what exactly is the Doctrine of Privity of Contract, we need to understand the meaning of the terms ‘Privity’ and ‘Contract’. The word ‘Privity’ means, “A relation between two parties that is recognized by law, such as that of blood, lease, or service.”

According to the Black’s Law Dictionary, ‘contract’ is An agreement between two or more parties creating obligations that are enforceable or otherwise recognizable at law.” As per Section 2(h) of the Indian Contract Act, 1872 “An agreement enforceable by law is a contract.”

Thus ‘Privity of Contract’ means “an agreement which is made between two parties, and thus no third party or stranger to the agreement can sue the other party.”

Historical Background

The major points in this Privity of Contract doctrine emerged after the Tweddle vs. Atkinson case, in which John Tweddle and William Guy agreed that they would both pay a sum of money to Tweddle’s son, who was engaged to marry Williams’ daughter. However, William died before making any payments. Tweddle’s son thus sued Guys’ property executor over the promised amount, but the court ruled that a third-party beneficiary cannot enforce the promise or contract one party made with another. 

The contract definition was later established firmly after the Dunlop Pneumatic Tire Co. Ltd case against Selfridge & Co. Ltd. Dunlop made tires and wanted to keep a standard market price. Therefore, Dunlop signed a contract with its distributors Dew & Co. That contract also stipulated that Dew & Co. should seek an agreement from its retailers that the latter would pay Dunlop a certain amount per tire if they sold below the agreed retail price. When Selfridge & Co. sold below retail prices, Dunlop sued them for damages. The court ruled that Dunlop, as it was a third party to this contract between Dew & Co. and Selfridge & Co., cannot claim damages for the same.

Privity of Contract under Indian Contract Act, 1872

Under Indian Law, there is no independent enactment legislation on the doctrine of Privity of Contract, however, fortunately, in contrast to other countries, the Contract Law in India is codified. It is to be, however, referred to that the Indian Contract Act, 1872 does not explicitly incorporate a provision referring to the doctrine of Privity of Contract. Therefore, the doctrine can be visualized in the mild of numerous provisions of the Contract Act. It can be inferred from the provisions of the Contract Act that the promisor is answerable to the promisee and the promisee is answerable to the promisor. It indicates that only parties to a contract are the appropriate members who can put in force the contractual rights and shoulder the contractual obligations. Thus, there exists a Privity of Contract among parties to the contract.

Essentials of Privity of Contract

There are four essentials of the Privity of Contract:

1. Contract between two parties: The most important thing is that a contract has been concluded between two or more parties.

2. The parties must be competent and a valid consideration must be provided: The competence of the parties and the existence of a consideration are prerequisites for the application of this doctrine. 

3. It was a breach of contract by one of the parties: The breach of contract by one of the parties is essential for the application of the doctrine of Privity of the Contract. 

4. Only parties in contract can sue each other: Each of the parties has the right to sue each other for breach of contract.

Types of Privity of Contract

While studying about the Privity of Contract, we also need to know about the types of Privity of Contract which exists. There are two types of Privity of Contract namely:

1. Horizontal Privity of Contract: In this type of Privity of Contract, the benefit from the contract goes to the third party instead of the two parties who were the part of the contract.

2. Vertical Privity of Contract: In this type of Privity of Contract, the benefit from the contract would directly go to the parties in the contract and not to any third party.

Privity of Consideration

The doctrine of Privity of Consideration states that the consideration should only circulate from the promisee and the stranger to the contract, despite the fact that a beneficiary can put into effect the terms of the agreement. This precept of the doctrine of Privity of Consideration is not applicable in India. As according to the Indian Contract Act, 1872, the consideration may also circulate from the promisee, or some different person, if the promisor has no objection, from any other person. Under the English Law a “stranger to consideration” cannot sue the promisor. But in India, the Law is opposite and here even a “stranger to the consideration” can sue on a contract, provided of course that he became a party to the agreement.

In the case of Chinnaya v. Ramaya, ‘A’ by a deed of gift gave over certain property to her daughter with a direction that the daughter should pay an annuity to A’s brother. After A’s death, the daughter declined to fulfill the promise. A’s brother sued her to recover the damages. It was held that the consideration must move from the promisor herself and thus the brother was entitled to keep the suit.

Exceptions to the Privity of Contract

Even though we have studied above that the stranger to the contract cannot sue the parties but over the years there have been certain exceptions wherein the third party or the stranger to the contract can sue the party for damages. These exceptions include:

1. Trust:

If a contract is made between the trustee of a trust and some other party, then the beneficiary of the trust can sue via means of enforcing his right under the trust, even supposing he’s a stranger to the contract.

Ram’s father had an illegitimate daughter, Riya. Before he died, he placed Ram in possession of his property with a condition that Ram would pay Riya an amount of Rs 500,000 and transfer half of the property in Riya’s name, as soon as she turns 18 years old. After reaching that age whilst Riya didn’t get hold of the money and inquired Ram about it, he denied giving her share. Riya filed a case for recovery of damages. The Court held that a trust was formed with Riya as the beneficiary for some amount and share of the property. Hence, Riya had the right to sue upon the contract between Ram and his father, despite the fact that she was not a party to it.

2. Assignment of a Contract:

If a contract is made for the advantage of someone, then he can sue upon the contract despite the fact that he is not a party to the agreement. It is crucial to note right here that nominee of a life insurance policy does not have this right. 

3. Acknowledgment or Estoppel:

If a contract calls for that a party will pay a certain amount to a third-party and he/she recognizes it, then it will become a binding responsibility for the party to pay the third-party. The acknowledgment also can be implied. 

Sita offers Rs 1,000 to Gita to pay Sarita. Gita recognizes the receipt of funds to be paid to Sarita. However, she fails to pay her. Sarita can sue Gita for recovery of the amount. 

Priya sold her house to Neema. A real estate broker, Samar, facilitated the deal. Out of the sale price, Samar was to be paid Rs 25,000 as his professional charges. Neema promised to pay Samar the amount before taking ownership of the property. She made 3 bills of Rs 5,000 each, after which stopped paying him. Samar filed a case against Neema in which the court held that because Neema had acknowledged her liability through conduct. 

4. A Covenant Running with the Land:

When someone purchases a piece of land with the notice that the proprietor of the land will be bound through all obligations and liabilities affecting the land, then he can sue upon a contract among the preceding land-proprietor and a settler even if he was not a party to the contract. 

Nidhi owned a piece of land which she offered to Peter under a covenant that some part of the land will be maintained as a public park. Peter abided through the covenant and ultimately offered the land to Arav. Though Arav was aware of the covenant, he constructed a house in the precise plot. When Peter got to know of it, he filed a suit against Arav. Although Arav denied liability given that he was now no longer a party to the agreement, the Court held him liable for violating the covenant. 

5. Family settlement:

If a contract is concluded under a family arrangement in favor of a stranger (a person who is not a party to the contract), the stranger himself can sue as the beneficiary of the contract. Shyaam promised Nora’s father that he would marry Nora or else he would pay Rs 50,000 in damages. Eventually he married someone else and broke the contract. Nora filed a lawsuit against Shyaam, which was upheld by the court because the contract was a family arrangement with Nora as the beneficiary.

Etika was a part of a Hindu Undivided family (HUF). The family had made arrangements for her marriage. Eventually the family split up and Etika filed a lawsuit to seek the cost of her marriage. The court upheld the case because as Etika was the beneficiary of the provision even though she was a stranger to the contract.

6. Contract via an Agent:

If someone enters right into an agreement via an agent, wherein the agent acts in the scope of his authority and in the name of the person (principal).

Conclusion

The Doctrine of Privity of Contract is a very controversial topic of debate in various judgments of the countries. The major difference between the English Law and Indian Law in regard to this matter is related to the Privity of Consideration wherein strangers to consideration cannot sue in English law but he/she can sue under the Indian Law. Earlier we studied that no third party or stranger could sue the parties for damages but over a course of time, certain exceptions have been made to safeguard the rights of the third party/Stranger.

References

  1. www.scconline.com
  2. https://www.toppr.com/guides/business-laws/indian-contract-act-1872-part-i/doctrine-of-privity-of-contract/
  3. https://www.vedantu.com/commerce/the-doctrine-of-privity-of-contract
  4. http://www.legalservicesindia.com/article/378/Privity-of-contract-&-third-party-beneficiary-in-a-contract.html

This article has been written by S Pavithra, 2nd Year B.A.LL.B student at Army Institute of Law, Mohali

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