Privity of Consideration:

The doctrine of privity of a contract is a common law principle that 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.
The Indian Contract Act clearly states that there cannot be a stranger to a contract.
What does this exactly mean? And are there any exceptions? This is explained through the
Doctrine of Privity of a Contract. According to section 2(h) of the Indian Contract Act, of
1872, an agreement between two parties that is enforceable by law and is backed by some
form of consideration is a Contract.
The term 'agreement' is defined in Section 2(e) as each promise and every pair of promises
that establish the consideration for each other. And Consideration as defined in Section
2(d) is an act performed at the promisor's request or desire.
The doctrine of privity of contract is one of the major principles that govern the law of
contracts. The word ‘privity’ means ‘with knowledge and consent’. According to this
doctrine, only parties to a contract have the right to enforce the rights and obligations
provided by the contract and strangers to the contract are barred from enforcing any
obligation on any party. This doctrine protects parties to a contract from obligations that
they never agreed to incur. Only those parties that have an interest in the contract can sue
for its enforcement. The first case in India that affirmed the applicability of the doctrine
was the case of Jamna Das Vs. Ram Auter Pandey (1916).
Illustration:
If Ram makes a promise to deliver goods to Nitin. Then in this case, if Ram breaches the
contract, then only Nitin has a right to prosecute him and no other person can prosecute
him.
No one may be entitled to or bound by the terms of a contract to which he is not an
original party." In other words, the rights and obligations are strict, the private matters of
contracting parties and because of this, a stranger has no legal access to them. Thus, the
doctrine of privity of contract means that a non-party cannot bring an action on the
contract.
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Privity of Contract: English Law

The doctrine of privity of contract means that only those involved in striking an agreement can
enforce it. In general, this is still the case. Only parties to a contract may sue for the breach of a
contract. The rule of privity of contract was first recognized and established in the ruling of
Tweddle v. Atkinson. Tweddle's father-in-law and Atkinson entered into a contract to contribute
a sum of amount $100 each to support Tweddle and his wife. Tweddle's father-in-law contributed
his part of the agreement, but Atkinson died before paying anything. Tweddle filed a suit against
Atkinson's estate. However, the court rejected his claim due to the absence of consideration from
Tweddle's father-in-law to Atkinson. Also, Tweddle himself was not a part of the contract. As
Tweddle was a third party to both contract and the consideration, the court did not accept his
claim even if it was for his benefit.
Further, the doctrine of privity was modified in the case Dunlop Pneumatic Tyre Co Ltd v.
Selfridge & Co (1915) where Dunlop did not want their tyres to be sold cheaply but to maintain a
standard resale price. It agreed with its dealers (in this case, Dew & Co.) not to sell them below its
recommended retail price. It also bargained for dealers to get the same undertaking from their
retailers (in this case, Selfridge). If retailers did sell below the list price, they would have to pay £5
per tyre in liquidated damages to Dunlop. Dunlop thus was the third party to a contract between
Selfridge and Dew. When Selfridge sold the tyres at below the agreed price, Dunlop sued to enforce
the contract by injunction and claimed damages. Selfridge argued that Dunlop could not enforce
the burden of a contract between Dunlop and Dew, which Selfridge had not agreed to. At trial, the
judge of the first instance, found in favour of Dunlop. On appeal the damages and injunction were
reversed, saying that Selfridge was not a principal or an agent and thus was not bound.

Privity of contract: Indian Law

The rule of privity of contract has been applicable in India as well. Even though under the Indian
Contract Act the definition of consideration is wider than under English law, yet the common law
principle of privity of contract has been generally applicable in India, with the effect that only a
party to the contract is entitled to enforce the same. The authority for the application of the rule in
India is the decision of the Privy Council in Jamna Das v. Ram Avtar, where A borrowed Rs.
40,000 by executing a mortgage of her Zamindari in favour of B. Subsequently A sold the property
to C for Rs. 44,000 of the price in order to redeem the mortgage if he thought fit. B sued C for the
recovery of the mortgage money, but he could not succeed because he was not a party to the
agreement between A & B. The Privy Council held that the undertaking to pay back the mortgagee
was given by the defendant to his vendor. The mortgagee has no right to avail himself of that
which he was not a party. The purchaser entered into no contract with him, and the purchaser is
not personally bound to pay B his mortgage debt. (Lord Macnaghten).
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Essentials of Privity of Contract:

● A contract has been entered into between two parties:

The most important essential is that there has been a contract between two or more parties.
● Parties must be competent and there should be a valid consideration:
The competency of parties and the existence of consideration are prerequisites for applying
this doctrine.
● 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.
● Only parties to the contract can sue each other:
Now after the breach, only Parties to a contract are entitled to sue each other for the non-
performance of a contract.

Comparison of English Law and Indian Law:

If we compare the laws, English and Indian, then we can say that there are many similarities
between English law and Indian law that only the original parties of a contract can file the suit.

However, the scope of privity rules is much wider in Indian law than in English Law. It is because
the definition and importance of consideration in Indian law are much wider than in English law
(Babu Ram Budhu Mal and Ors. v. Dhan Singh Bishan Singh 1956). In India, a stranger or a third
party can sue if the contract involves consideration but the same cannot happen in England.

According to Indian law, the act of consideration can be done by the promisor or any other person.
Therefore, it becomes immaterial who has furnished the consideration as long as there is a
consideration. However, this is not the case in English law. In English law, the fundamental
propositions state that the consideration should be furnished by the promisee only and not by any
other person.
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Exceptions to the Doctrine Of Privity Of Contract:

As a general rule only parties to a 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:

● A beneficiary under a contract:

A trust refers to something created by a contract for the benefit of a third party. In a
contract of trust, the trustor transfers the title of a property to the trustee, so that the
trustee holds it for the benefit of a third party who is also called the beneficiary. Even
though beneficiaries are third parties to a contract they have the right to enforce the
provisions of trust. Indian Law has recognized this exception through the decision of the
Privy Council in Kh. Muhammad Khan v. Hussani Begum [ILR (1910) 32 AII. 410]. The
exception was the result of conflict between family laws and the Privity rule.
In the case of Rani Bakhsh Singh v. Jang Bahadur (AIR 1938 PC 245) decided by the Privy
Council where R was appointed by his father as his successor and was put in possession of
his entire estate. In consideration thereof, R agreed with his father to pay a certain sum of
money and to give a village to J – the illegitimate son of his father, on him attaining
majority. When R failed to perform his obligation, the illegitimate son filed a suit to
recover the amount to be paid. It was held by the Privy Council that in the circumstances
mentioned above, a trust was created in favour of J for the specified amount and the village,
hence he was entitled to file the suit even though he was not a party to the contract.

● Conduct, Acknowledgement, or Admission:

There can also be a situation in which although there may be no privity of contract
between the two parties if one of them by his conduct or acknowledgement recognizes the
right of the other, he may be liable on the basis of the law of estoppel (Narayani Devi v.
Tagore Commercial Corporation Ltd).
This exception covers cases where the promisor by his conduct, acknowledgement, or
otherwise, constitutes himself an agent of the third party. The case of Devaraja Urs v Ram
Krishnaiah (AIR 1952 Mys 109) is a good example: A sold his house to B under a registered
sale deed and left a part of the sale price in his hands desiring him to pay this amount to C,
his creditor. Subsequently, B made part–payments to C informing him that they were out
of the sale price left with him and that the balance would be remitted immediately. B
however, failed to remit the balance and sued him for the same. The suit was held to be
maintainable. “Though originally there was no privity of contract between B and C, B
having subsequently acknowledged his liability, C was entitled to sue him for recovery of
the amount.”
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● Provision for maintenance or marriage:

Where a provision is made in a partition or family arrangement for maintenance or
marriage expenses of female members; such members, though not parties to the agreement,
can sue on the footing of the arrangement. this type of provision is treated as an exception
to the doctrine of privity of contract for protecting the rights of family members.
Illustration: A daughter along with her husband entered into a contract with her father
whereby it was agreed that she will maintain her mother and the property of the father will
be conveyed to them. The daughter subsequently refused to maintain the mother. In a suit,
it was held that the mother was entitled to require her daughter to maintain her, though
she was a stranger to the contract (Veeramma v. Appayya AIR 1957 AP. 965).
● 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. In terms of section 185 of the Act,
no consideration is necessary to create an agency.
The Indian Contract Act on Privity of Contract defines an agent as a person who has been
formally employed to perform acts and represents another in dealings with strangers. The
person who engages an agent or anyone who is represented by one is called the principal.
Thus, When the defendant constitutes himself, as the agent of the third party: Thus if A
receives some money from B to be paid over to C and he admits of this receipt to C, then C
can recover this amount from A who shall be regarded as the agent of C (Surjan v. Nanat).
In the case of an agency, Where a contract is entered into by an agent, the principal can sue
for it.

● Covenants Running With Land:

The rule of privity may also be modified by the principles relating to the transfer of
immovable property. The principle of the famous case of Tulk v Moxhay (1843 – 60) AII
ER Rep 9. 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.”
Where the Central Government assigned a piece of land to its own corporate
undertaking with all the rights, interests and privileges, it was held that privileges or rights
to an exemption from payment of land revenue which had accrued to the Central
Government in respect of that land would also be available to the undertaking as a
successor in interest to the Central Government (Steel Authority of India Ltd. v State of
MP, AIR 1999 SC 1636).
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Conclusion:

From the above-mentioned facts, it is clear that although only parties to the contract can sue each
other, 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.