Doctrine of Privity of Contract


1. INTRODUCTION

This article defines Section 2(d) of the Indian Contract Act of 1872 which deals with the definition of consideration. This article also points out the general rule of the doctrine of Privity of contract. This article also points out the exceptions to the general rule of the third party. Some landmark cases and other important cases are also incorporated in this article to explore the doctrine of Privity of contract and consideration in a more efficient manner.


1.1 INTRODUCTION TO CONSIDERATION

One of the valid essentials of a valid contract is the presence of consideration. The final decree in India under certain circumstances is that “an agreement without a consideration is void”.


Consideration in simpler words means something which has some value within the eyes of the law, moving from the plaintiff. Section 2(d) of the Indian Contract Act of 1872 deals with the definition of consideration. Without a valid and legitimate consideration, the transaction made is just recognized as a voluntary gift.


2. INTRODUCTION TO PRIVITY OF CONTRACT

The doctrine of Privity of Contract is a general principle of law. This doctrine provides that a contract cannot confer rights or impose allegations upon any individual who is not a party to the contract.

Illustration:

A party “A” promised “B” to pay Rs. 100 to the third party “C”. Just in case of any breach of contract, “A” and “B” can sue each other. But, “C” cannot sue the parties. This illustration throws light on the doctrine of Privity of Contract.


The doctrine of Privity of consideration is of the view that only that person who has provided consideration can enforce a contract and take up any action against it. In the above mentioned illustration, “C” has not paid any consideration on his part, so he cannot sue the parties in case of breach of contract.


There are some aspects of the doctrine:

(i) An individual cannot enforce rights under a contract to which he is not a party;

(ii) A person who isn’t party to a contract cannot have contractual liabilities imposed on him;

(iii) Consensual remedies are designed to reimburse parties to the contract, not third parties or strangers.


2.1 Privity of Contract in English law

The modern day third party rule or the doctrine of Privity of Contract was established in the year 1861, in the famous case of Tweddle v. Atkinson. Let us understand the existence of the doctrine of Privity of contract.


2.1.1 Tweddle v. Atkinson case

The famous case of Twiddle v. Atkinson[1]is recognized as one of the foremost significant decisions made to the doctrine of Privity of contract. In this said case, it had been held that only parties to the contract can sue each other. Some facts of the case are mentioned below:

1. The plaintiff, “A” married a lady “B”.

2. After their marriage, a contract was made in writing between the plaintiff’s father and his father-in-law.

3. The contract said that both the fathers would pay a particular sum of cash to the plaintiff on marriage.

4. After their duly marriage, B’s father died before his portion of cash could have been paid.

5. “A” brought an action against the executors of B’s father to recover the promised amount.

2.1.1.1 Judgement

In this case, it was held that the plaintiff was both a stranger to the contract as well as a stranger to the consideration. Therefore, he couldn’t enforce the claim nor he couldn’t sue for the same.


2.1.2 Other landmark case

Dunlop Pneumatic Tyre Co. Ltd. V. Selfridge & Co. Ltd[2], the rule of Privity of contract was reaffirmed by the House of Lords. It was held that until there exists a contract between two parties, nobody can sue a case against the opposite party. If a party acts as an agent for another party, the party acting as an agent is not prone to pay for the recovery of damages or consideration.


2.2 Privity of Contract in Indian Law

The rule of Privity of contract is not a very well established doctrine in India. Though under the Indian Contract Act, the definition of consideration is much wider than that of the definition in English law, the common law principle of Privity of Contract is only applicable in India, with the effect that only a party forming a contract is entitled to enforce the same.


2.2.1 Jamna Das v. Ram Avtar

In the landmark case of Jamna Das v. Ram Avtar[3], it was seen that A had mortgaged some property to X. A then sold his property to B. B having agreed with A to discharge the mortgage debt to X. X brought an action against B to recover the mortgage money. It had been held by the Privy Council that since there was no contract between X and B, X couldn’t enforce the contract to recover the cash from B.


2.2.1.1 Judgement

It was held by Lord Macnaghten in observing that the undertaking to pay back the mortgage money being only by the purchaser of the property in favor of the seller, thereof he stated:

“The credit holder has no liberty to avail himself of that. He was no party to the sale. The purchaser entered into no contract with him, and therefore the purchaser is not personally bound to pay this mortgage debt.”

2.2.2 Other landmark cases

Advertising Bureau v. C.T. Devaraj[4], in this case, the circus owner placed an order with the plaintiff-appellant for creating 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 owner of the circus. There being no Privity of contract between the advertiser and also the financer, the suit by the advertiser made against the financer was, therefore, dismissed.


3. Exceptions to the rule of Privity of contract

Any stranger or a person who is not a party to the contract can sue on a contract in certain cases. Following are some exceptional cases where a stranger can sue a case against other parties to the contract:


3.1 Trust of contractual rights or beneficiary under a contract

Indian law recognized this exception. It had been stated that, if a contract is created between the trustee of a trust and another party, then the beneficiary of the trust can sue by enforcing his right under the trust, whether or not he is a stranger to the contract. In Narayani Devi v. Tagore Commercial Corporation Ltd.[5], the plaintiff was the widow of A, who came into contract with B. C stood as surety of B. After the death of A, some payments were made by C to the plaintiff. But after sometime, the payments were stopped. The plaintiff brought an action against B and C to recover the amount. One of the defendant pleaded that she was not legally entitled to bring any suit. The Calcutta High Court keeping in view the facts and circumstances of the case held that the plaintiff was entitled to sue although she was not a party to the contract.


3.2 Provision for marriage expenses or maintenance under a family arrangement

If under a family arrangement, any contract is formed, and that contract is meant to secure a benefit to the third party or a stranger, then the stranger can sue his own right as a beneficiary of the court. It mostly happens in such cases, where there occurs partition in joint family property between the male members, a provision is created for the maintenance and upkeep of the female members of the family.


In Veeramma v. Appayya[6], under certain family arrangement, the father’s house was to be conveyed to his daughter and therefore the daughter undertook to maintain him in his lifetime. The daughter being a beneficiary under the compromise arrangement, it had been held that she was entitled to sue for the specific performance in her favour.

3.3 Conduct, Acknowledgement or Admission

In certain cases, there may be no Privity of contract between the two parties, but if one of them by his conduct, acknowledgement or admission recognizes the right of the other to sue him, he could also be held answerable on the ground of the law of estoppel.


In case of Narayani Devi v. Tagore Commercial Corporation Ltd.[7], even there was no contract between the plaintiff and defendants, the defendants had created such Privity with the plaintiff by their conduct and by acknowledgement and by admission, that the plaintiff was entitled to her action.


3.4 Contract through an Agent

In some cases, where an individual enters into any contract through an agent, where the agent acts within the scope of his authority and in the name of his principal, he can sue or can also be sued.


4. Conclusion

The doctrine of Privity of contract states that a contract cannot confer rights or impose those obligations arising under that, on any person except the parties to the contract. It is that legal rule which states that only parties to a contract can sue for breach of contract.

Different courts in India have different sayings regarding the concept of Privity of contract. For this reason, the rule of Privity of contract still remains to be regarded as an excellent topic for debate amongst scholars.


5. References:


A. Book

- Dr. R.K. Bangia, Contract-I 69-77 ( Allahabad Law Agency, Faridabad {Haryana}, 6th Edition, 2009, Reprint-2016)


B. Websites

- Elaboration of the consideration and Privity of Contract, available at https://blog.ipleaders.in (last visited January 14, 2021)

- Privity of contract and consideration, available at www.legalbites.in (last visited January 13, 2021)



[1] (1861) 1 B. & S. 393 [2] (1915) A.C. 847 [3] (1911) 30 I.A. 7 [4] A.I.R 1995 S.C. 2251 [5] A.I.R. 1973 Cal. 401 [6] A.IR. 1957 A.P. 965 [7] A.I.R. 1973 Cal. 401

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