Privity of Contract
The doctrine of privity of contract means that a contract is a contract between the
parties only and not third party (i.e. stranger to contract) can sue upon it even if it is
avowedly made for his benefit.
Similarly, the third person is not bound by the contract as there is no mutuality
(doctrine of mutuality).
In DUNLOP PNEUMATIC TYRES CO. LTD. v. SELFRIDGE & CO:
o The plaintiff (Dunlop) sold goods to one Dew & CO. and secured an
agreement from them not to sell goods below the list price and if they sold
goods to another trader they would obtain from him a similar undertaking to
maintain price list.
o Dew & Co. sold goods to the defendants (Selfridge & Co.) who agreed not to
sell goods at less than list prince.
o On their doing so, the plaintiff sued them for the breach of contract.
o It was held that assuming that the plaintiffs were undisclosed principals, no
consideration moved from them to the defendants and that the contract was
unenforceable by them.
One of the criticism is that the general rule that ‘no third person can sue is only a rule
of procedure. It goes to the form of remedy, not to the underlying right.
In BESWICK v. BESWICK, Lord DENNING, concluded:
o That where a contract is made for the benefit of the third person who has a
legitimate interest to enforce it, it can be enforced by the third person..... it is
different when a third person has not legitimate interest, as when he is seeing
to enforce the maintenance of princes of public disadvantage.
Position in India:
In JAMUNA DAS v. RAM AVTAR:
o A had mortgaged some property to X. A then sold this to property to B, B
having regard with A to pay off the mortgaged debt to X.
o X brought an action against B to recover.
o Held, that since there was no contract between X and B, X could not enforce
the contract with mortgagee and the purchaser is not personally bound to pay
the mortgage debt.
In ISHWARAM PILLAI v. SONIVAVERU:
o A mortgaged his land to B and part of the consideration was B’s promise to
discharge A’s debt to C.
o C sued B but C was held to be a stranger to the contract.
The SC of India has approved the Privity of Contract in M.C.CHACKO v. STATE
BANK OF TRAVANCORE:
o Where the highland bank was indebted to the State Bank of Travancore under
an overdraft.
o One M was the manager of the Highland Bank and his father K had
guaranteed the repayment of the overdraft.
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Privity of Contract
o K gifted his properties to the members of his family. The gift deed provided
that the liability, if any, under the guarantee should be met by either M from
the bank or from the share of the property gifted to him.
o The state bank attempted to hold M liable under this provision of the deed.
o The SC, however, held that the state bank not being a party to the deed could
not enforce its covenants.
In M.V. SHANKAR BHAT v. CLAUDE PINTO (DECEASED):
o It was held that an agreement subject to ratification by others who are not
parties to it is not a conclusive contract.
Exceptions to the Privity rule:
Trust or Charge:
o A person (beneficiary) in whose favour a charge or other interest in some
specific property has been created may enforce it.
o In KHWAJA MUHAMMED KHAN v. HUSSAINI BEGUM:
There was an agreement between the lady’s father-in-law and her
father that in consideration of her marriage with his son, he would pay
to her Rs. 500 per month in perpetuity for betel-leaf-expenses.
Some immovable property was specifically charged for the payment of
these expenses. A suit was brought by the wife for the recovery of
arrears of annuity.
Held,
That the wife, although not a party to the agreement, was
entitled to enforce her claim as the contract had been entered
into for her benefit and certain immovable properties had been
specifically charged for the allowance.
o In M.C. CHACKO v. STATE BANK OF TRAVANCORE:
The court said that in order to create charge, there must be evidence of
intention disclosed by deed that a specific property or fund intended to
be made liable to satisfy debt.
The covenant that M.C. CHACKO will either personally or out of the
properties given to him satisfy the debts is intended to confer a right of
indemnity upon the members of the family, if the State Bank enforced
the liability against them, but created no charge in favour of the Bank.
Even if it is granted that there was an intention to create a charge, the
State bank was not being a part to the deed cannot enforce the deed as
it was not beneficiary under the terms of the contract.
Marriage settlement, Partition or other Family arrangement:
o In ROSE v. JOSPEH:
Where a girl’s father entered into an agreement for her marriage with
the defendant, it was held that the girl could sue the defendant for
damages for the breach of the promise of marriage even though she
was not a party to the agreement
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Privity of Contract
o In DAROPTI v. HASPAT RAI:
Where the defendant executed an agreement with his father-in-law to
pay his wife monthly maintenance, she was held entitled to enforce the
promise.
Acknowledgement or Estoppel:
o Whereby the terms of a contract a party is required to make a payment to a
third person and he acknowledges it to that third person (viz. while making a
part-payment) a binding obligation is there by incurred towards him.
o Acknowledgement can be express or implied.
Covenants running with land:
o In TULK v. MOXHAY:
A person who purchases a land with notice that the owner of the land is
bound by certain duties created by an agreement or covenant affecting
the land, shall be bound by them although he was not a party to the
agreement.
Assignee in insurance policy:
o The assignee of an insurance policy is entitled to sue on the contract made
between the insured and the insurer (insurance company).
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