Doctrine of Privity of Contract

I. INTRODUCTION

The Doctrine of Privity of Contract is a common law principle which implies that only the
parties to a contract can 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. 1 As per the dictionary meaning
‘Privity of Contract’ means that a contract confers rights and imposes liabilities only on its
contracting parties. They and not any third-party, can sue each other under the terms of the
contracts.

Privity is the legal term for a close, mutual, successive relationship to the same right of property
or the power to enforce a promise. As per the legal definition of privity of contract:
The doctrine of privity in contract law provides that a contract cannot confer rights or impose
obligations arising under it on any person except the parties to the contact. The rule of privity is
actually 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 Sandeep makes a promise to deliver goods to Varun. Then in this case, if Sandeep breaches the
contract then only Varun has a right to prosecute him and no other person or a third party to
contract can prosecute him.

II. ESSENTIALS

1. A contract has been entered into between two parties:- The most important essential
is that there has to be 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 applying this doctrine.

3. There has been a breach of contract by one party:- Breach of contract by one Party is
an essential requirement for the application of the doctrine of privity of contract.
1
https://blog.ipleaders.in/doctrine-of-privity-of-contract/.
 4. Only parties to the contract can sue each other:- Now after the breach, only Parties to
the contract are entitled to sue each other for non-performance of contract.

III. DEVELOPMENT

The principle of privity of contract was encountered while considering the rule that
‘consideration must move from the promisee’. It was so held in the case of Scruttons Ltd. v.
Midland Silicones Ltd.2 In another leading English case of Tweddle v. Atkinson3 it was held that
the plaintiff cannot sue as he was both a stranger to the contract as well stranger to consideration.

The principle was further developed in the case of Dunlop Pneumatic Tyre Co. Ltd v. Selfridge
& Co. Ltd.4 The facts of the case say: The plaintiffs sold a number of tyres to Dew & Co. on the
terms that the buyer would not resell them below certain scheduled prices and that in the event of
a sale to trade customers they would extract a similar undertaking. Dew & Co. sold the tyres to
the defendant who failed to observe this agreement. The claimants sought injunction and
damages. In this case, it was held that since Dunlop Pneumatic Tyre Co. Ltd was not a party to
contract and therefore it cannot sue the parties to the contract.

In the landmark case of Beswick v. Beswick5, A nephew agreed to buy a business from his uncle
in return for a weekly payment to his uncle and upon his death a weekly payment to his widow.
After the uncle’s death, the nephew defaulted and the widow brought an action for arrears and
specific performance. She sued as the administrator of the deceased husband’s estate and in her
personal capacity. In this case, it was held that the court granted the widow an order of specific
performance for the payment owed by uncle’s nephew as an administrator to her husband’s
estate. The court held that the damages would also not be limited due to the loss that had been
caused to uncle’s estate. However, the court found that uncle’s wife could not claim under her
personal capacity as she was a third party to the contract and was not a party to the original
agreement.

IV. POSITION IN INDIAN LAW

2
1962 AC 446: (1962) WLR 186.
3
123 ER 762:1 B&S 23.
4
1915 AC 847.
5
1968 AC 58:(1967) 3 WLR 932.
In the Indian context also this concept of Privity of Contract is quite similar, the only difference
being that in India a person who is stranger to consideration can sue whereas in England he/she
cannot.

In the case of Chinnaya v. Ramayya6, the scenario of privity rule has been relaxed. The facts of
the case are as – a mother by deed of gift, made over certain landed property to the daughter,
Ramayya. In accordance with the terms of the deed it was stipulated that an annuity of Rs.653
should be paid every year to the Plaintiff, who was the mother's sister Chinnaya. The defendant
Ramayya on the same day executed in plaintiff's favour an agreement promising to give effect to
the stipulation but Ramayya later on did not pay an annuity. So, Chinnaya sued to recover it from
Ramayya. The defendant, Ramayya tried to defend herself on the ground that the promise had
furnished no consideration. But the court allowed the Plaintiff to recover the annuity as
consideration given by "any other person" is equally effective. Thus in this case, Privity of
Contract has been abolished in case of the beneficiary as the contract was made for her benefit.

Similarly in the case of Khwaja Muhammad Khan v. Hussain Begum7 Privity of Contract has
been tranquil to a great extent. It was held that the respondent, although no party to the
agreement was clearly entitled to proceed in equity to enforce her claim. Furthermore, the Court
observed that in India and among Communities circumstanced as the Mohammedans, among
whom marriages are contracted for minors by Parents and Guardians, it might occasion serious
injustice if the common law doctrine was applied to agreements or arrangements entered into in
connection with such contracts.

The said Doctrine of Privity of Contract has also been upheld by the Supreme Court in M.C.
Chacko v. State Bank of Travancore8 and by the Calcutta High Court in Krishna Lal Sadhu v.
Promila Bala Dasi.9

V. GENERAL EXCEPTIONS

6
ILR (1876-82) 4 Mad 137: 6 Ind Jur 402.
7
37 IA 152 (PC1910)..12 Bom LR 638.
8
AIR 1970 SC 504.
9
AIR 1928 Cal 518.
In the course of time, the courts have introduced a number of exceptions in which the rule of
privity of contract does not prevent a person from enforcing a contract which has been made for
his benefit but without his being a party to it. Many of the exceptions are connected with the
special branches of law of contract, such as negotiable instruments, agency, bill of landing,
railway receipts, transfer of property, etc. Some of the most commonly known exceptions may
be considered here.

1. Beneficiaries Under Trust or Charge or Other Arrangements:- A person in whose

favour a charge or other interest in some specific property has been created may enforce
it though he/she is not a party to the contract. The decision of the Privy Council in
Nawab Khwaja Muhammad Khan v. Nawab Hussaini Begum10 is illustrative of this
principle.
2. Marriage settlement, Partition or other Family Arrangements:- Where an agreement
is made in connection with marriage, partition or other family arrangement and a
provision is made for the benefit of a person, he may take advantage of that agreement
although he is no party to it. For example:- Rose Fernandez v. Joseph Gonsalves11.
3. Acknowledgement or Estoppel:- Where by the terms of a contract a part is required to
make a payment to a third person and he acknowledges it to that third person, a binding
obligation is there by incurred towards him. Acknowledgement may be express or
implied. This exception covers cases where the promisor by his conduct,
acknowledgement, or otherwise, constitutes himself an agent of the third party. The case
of N. Devaraja Urs v. Ramakrishniah12 is a good example.
4. Covenants running with land:- The rule of privity may also be modified by the
principles relating to transfer of immovable property. The principle of the famous case of
Tulk v. Moxhay13 is that 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.

10
Supra Note 7.
11
ILR (1924) 48 Bom 673: AIR 1925 Bom 97.
12
AIR 1952 Mys 109.
13
(1843-60) A11 ER Rep 9: (1919) 88 LJKB 861 (HL).