CONTRACT LECTURE – IV (THE DOCTRINE OF PRIVITY OF CONTRACT)

LAW OF CONTRACT
LECTURE – IV
THE DOCTRINE OF PRIVITY OF CONTRACT AND EXCEPTIONS TO THE
PRIVITY OF CONTRACT

Introduction

Section 2(h) of the Indian Contract Act, 1872 defines a contract as a legally enforceable
agreement between two parties, supported by some form of consideration. The core principle
of contract law is centred around the mutual promises made by both parties to fulfil their
respective obligations.

The concept of privity of contract, rooted in common law, dictates that only the involved parties
in a contract have the legal right to enforce its terms and obligations. This means that outsiders
or strangers to the contract cannot impose duties or liabilities on individuals who are not part
of the contractual agreement, even if the contract was made for their benefit. Essentially, privity
is guided by the principle of the ‘interest theory,’ asserting that only those directly vested in
the contract possess the legal standing to safeguard their rights under the law.

A Stranger to Contract cannot sue (Doctrine of Privity of Contract)

‘Privity’ means ‘with knowledge and consent’. The term ‘Privity denotes mutual or successive
relationship to the same right of property. Privity is a derivative kind of interest, founded upon
or growing out of the contract of another, as that which subsists between an heir and his
ancestor, between executor and testator, and between lessor and lessee and his assignee; a
relation which creates an obligation.

A contract cannot confer rights or impose obligations arising under it or any person except the
parties to it. No one but the parties to a contract can be entitled under it or bound by it. This
principle is known as that of ‘privity of contract’. This rule or doctrine debars third parties (i.e.,
strangers) from having any rights or obligations in a contract. It also prevents third party from
suing upon it even though the contract is for his benefit. Thus, a stranger to a contract cannot
sue upon it even though the contract may have been entered into for his benefit. Only a person
who is a party to a contract can sue on it. This rule prevents imposition of contractual
obligation upon a person without his consent.

Examples:

i) A receives Rs. 500 from B and promises B to deliver a watch to C. Here C is a stranger to
consideration as well as to contract. So he cannot sue A for the delivery of watch.

ii) A agrees with B to paint C’s car in consideration of some payment made by B. Since there
is no privity of contract between A and C and since C is a stranger to, the contract, C is not
entitled to enforce the contract.

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Essentials of Privity of Contract

Essentials of privity of contract are discussed below:

1. Existence of a Contract between Parties: The fundamental requirement is the

presence of a valid contract between two or more parties. Without a formal agreement,
the doctrine of privity of contract does not apply.

2. Competent Parties and Valid Consideration: Both parties involved in the contract
must be legally capable of entering into an agreement, and there must be valid
consideration exchanged between them. Competency and consideration are
prerequisites for the doctrine to be invoked.

3. Breach of Contract by One Party: For the doctrine of privity of contract to come into
play, there must be a breach of the contract committed by one of the parties. This breach
could involve failure to fulfil obligations, deliver goods or services, or adhere to terms
outlined in the agreement.

4. Exclusive Right of Parties to Sue Each Other: Following the breach, only the parties
directly involved in the contract have the legal standing to initiate legal proceedings
against each other for non-performance or breach of contract. This means that
individuals outside the contractual relationship cannot sue or be sued for breaches of
the agreement.

The doctrine of privity of contract serves to maintain the sanctity and autonomy of contractual
agreements by limiting legal enforcement to the parties directly involved. It upholds the
principle that contractual obligations are binding solely on those who willingly entered into the
agreement. This limitation prevents third parties from imposing liabilities or asserting rights
arising from a contract in which they have no direct involvement.

While the doctrine ensures clarity and predictability in contractual relationships, it can also
lead to situations where deserving parties may be unable to seek redress if they are not party to
the contract. This limitation has prompted legislative reforms and judicial interpretations aimed
at mitigating harsh outcomes, particularly in cases involving assignments, trusts, and certain
exceptions like contracts for the benefit of third parties.

Overall, the doctrine of privity of contract strikes a balance between protecting the interests of
contracting parties and maintaining the integrity of contractual agreements within the legal
framework.

English Law

According to English Law, a stranger to contract cannot sue upon it. In Tweddle v. Atkinson
[(1861) I B & S 393], A and B were the bridegroom and bride. After the marriage of A and B,

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there was a contract in writing between A’s father and B ‘s father that each would pay a certain
sum of money to A and that A would have power to sue for such sums. After the death of the
two fathers, A brought an action against the executors of B ‘s father to recover the promised
amount. It was held that A could not sue for the same as he was the third person (stranger) to
the contract. Since then (i.e., 1861), the rule of privity of contract (i.e., stranger has no right to
sue) came into existence in England.

The rule of privity of contract was re-affirmed by the House of Lords in the case of Dunlop
Preumatic Tyre Co. Ltd. v. Selfridge & co. Ltd. [(1915) AC 847]. In this case, Dew & co.,
were the agents of Dunlop Company for the sale of Dunlop tubes and tyres. Dew & Co., agreed
not to sell tubes and tyres below the listed price and to insist similar terms while selling to such
dealers. Later, Dew & Co., entered into a contract with Selfridge & Co., wherein it was stated
that 5 pounds should be paid for every tyre sold below the listed price. Selfridge & Co. sold
two tyres below the listed price. Duolop & Co. sued Selfridge & Co., for breach of the Contract.
The court held that Dunlop & Co., was a stranger to the contract and as such was not entitled
to sue.

In this case, Lord Haldane observed that “In the law of England certain principles are
fundamental. One is that only a person who is a party to a contract can sue on it. Our law knows
nothing of a Jus quaesitum tertio arising by way of contract. Such a right may be enforced by
way of property, as for example, under a trust, but cannot be conferred on a stranger to a
contract as a right to enforce the contract in personam.

The English Law is that a third party could not sue on a contract though made for his benefit.
This principle is that apart from special considerations of agency, trust, assignment or statute,
a person not a party to a contract cannot enforce or rely for protection on its provisions. Indian
Law

The principle of ‘stranger to contract cannot bring an action’ is equally applicable in India as
in England. But our law is wider than English Law. Section 2 (d) of the Contract Act, 1872
defines ‘consideration’ thus:

“When, at the desire of the promisor, the promisee or any other person has done or
abstained from doing, or does or abstains from doing, or promises to do or abstain from
doing, something, such act or abstinence or promise is called a consideration for the
promise.”

The phrase in Sec. 2(d) . the promisee or any other person gives the meaning that as long as
there is consideration for a promise, it is immaterial who has furnished it, if the promisor has
no objection. According to the Contract Act, consideration for an agreement may proceed from
a third party, but the thitd party who is a stranger to the agreement cannot sue on the agreement.

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Yet the common law principle of privity to contract is generally applicable in India, with the
effect that only a party to the contract is entitled to enforce the same.

In Jamna Das v. Ram Avtar [(1911) 30 1.A.7], A had mortgaged some property to X. A then
sold the property to B. B had agreed with A to pay off the mortgaged debt to X. X brought an
action against B to recover the mortgage money. It was held by the Privy Council that since
there was no contract between X and B, X could not enforce the contract to recover the amount
from B. Lord Macanaughtan observed, “The mortgagee has no right to avail himself of that.
He was no party to the sale. The purchaser entered into no contract with him, and the purchaser
is not personally bound to pay this mortgage debt.”

In Iswaran Pillai v. Sonniveralu [(1915) ILR 38 Mad. 753], A mortgaged his property to B in
consideration of B ‘s promise to A to pay A’s debt to C. It was held that C being no party to
the contract between A and B, he cannot enforce the promise of B.

In M.C. Chacko v. The State Bank of Tranvancore [AIR 1970 SC 504], it has been held that
except in the matter of a beneficiary under a trust created by a contract or in the case of a family
arrangement, no right may be enforced by a person who is not a party to the contract.

In Advertising Bureau v. C.T. Devaraj [AIR 1995 SC 2251], the circus owner placed order
with the plaintiff-appellant for making advertisements for circus. The plaintiff-advertiser did
not make any agreement with the financier of circus. The suit by the advertiser against the
financier was dismissed as there being no privity of contract between the advertiser and the
financier

Exceptions to the Doctrine of Privity of Contract i.e., a stranger to Contract cannot sue

Under the Indian Law, the following are the exceptions to the rule that ‘a stranger to a contract
cannot sue’.

1. Trust of contractual rights or beneficiary under contract

A trust is an arrangement created by a contract for the benefit of a third party. In such a contract,
the trustor transfers the title of a property to the trustee, who then holds it for the benefit of a
third party known as the beneficiary. Although beneficiaries are third parties to the contract,
they possess the right to enforce the provisions of the trust.

Examples:

i) ‘A’ creates a trust in favour of ‘B’ and appoints ‘C’, ‘D’ and ‘E’ as trustees of the
trust. B can enforce the provisions of the trust although he is not a party to the
agreement.

ii) ‘A’ agrees to transfer certain properties to ‘B’ to be held by ‘B’ in trust for the benefit
of ‘C’. ‘C’ can enforce the agreement even though he is not a party to the agreement.

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In Rana Uma Nath Baksh Singh v. Jang Bahadut [AIR 1938 PC 245], the father transferred
all his estate to his son. In consideration of this, the son has agreed to give a sum of money
regularly to his father’s illegitimate son. A trust was created to this effect. The son was made
as the trustee. But the son failed to give the agreed amount to the illegitimate son. Action by
the illegitimate son to recover the amount was allowed by the court, although he was not party
to the trust. He was only a beneficiary of the trust.

In Gandy v. Gandy [(1885) 30 ChD 57], a husband who was separated from his wife, executed
a separation deed by which he promised to pay to the trustees all expenses for the maintenance
of his wife. But he failed to do so. The wife filed a suit against her husband. It was held that
the agreement created a trust in favour of the wife and could be enforced by her.

In Chowdari Amir Ullah v. Government [(1915) 25 All. 432], an addressee of an insured

article is entitled to sue the post office in case of loss, as on receipt of such article the post
office becomes, in law, a constructive trustee for the addressee. So, if the article is not
delivered, the addressee can maintain a suit for compensation for the loss of the article.
Constructive trust means a trust inferred by conduct.

2. Provision in marriage settlement

A stranger to the contract can sue on the contract where a provision is made for him in marriage
settlement.

In Khawaja Mohammed v. Hussain Begum [ILR (1910) 32 All 410], it was decided that where
a Mohammedan lady sued her father-in-law to recover arrears of allowance payable to her by
him under an agreement between him and her own father in consideration of her marriage, she
could enforce the promise in her favour in so far as she was a beneficiary under the agreement
to make a settlement in her favour, and she was claiming as such beneficiary.

3. Provision for marriage or maintenance under family arrangement

Where, under a family arrangement, the contract is intended to secure a benefit to a third party,
he may sue in his own right as a beneficiary. In case a provision is made for the marriage or
maintenance of a female member of the family on the partition of a Hindu undivided family,
the female member can enforce the promise though she may be a stranger to the contract.

In Shuppu Ammal v. Subramaniyan [(1910) ILR 33 Mad 238], two brothers in a partition
deed agreed to pay Rs. 300 in equal shares to their mother for her maintenance. The brother
subsequently failed to pay the amount. The court held that the mother could enforce the promise
even though she was a stranger to the contract.

In Veeramma v. Appayya [AIR 1957 AP 965], under a family arrangement, the father’s house
was to be conveyed to his daughter and the daughter undertook to maintain him in his lifetime.

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The daughter being a beneficiary under the compromise arrangement, it was held that she was
entitled to sue for the specific performance in her favour.

In Sundaraja Aiyangar v. Lakshmiammal [(1915) 38 Mad. 788], the partition deed between
brothers in a joint Hindu family contained a provision for payment of marriage expenses to
their sister. It was held that their sister could enforce that provision though she was not a party
to the partition arrangement.

4. Conduct, Acknowledgment or Admission

Sometimes there may be no privity of contract between the two parties, but if one of them by
his/her conduct, acknowledgement, or admission recognizes the right of the other to sue him,
he may be liable on the basis of the law of estoppel. Example: A pays B Rs. 500 to be given to
C. B acknowledges to C that he holds that amount for him. C can recover the amount from B.

In Devaraja Urs v. Ramakrishnayya [AIR 1952 Mys. 109] at the time of sale of a house, the
sale price was left in the hands of the buyer, for payment to a creditor of the seller. Part payment
was made by the buyer to the seller’s creditor and promised to pay the remaining balance soon.
But he failed to pay the balance amount. The suit by the creditor against the buyer for the
balance amount was allowed by the court, though the creditor was a stranger to the agreement
between the buyer and the seller for the payment of the amount. The court treated the buyer’s
act of part payment as acknowledgement of liability.

In Narayani Devi v. Tagore Commercial Corporation Ltd. [AIR 1973 Cal. 401], there was no
contract between the plaintiff and the defendants but the defendants in their agreement with the
plaintiff’s husband had agreed to pay a certain amount to the plaintiff’s husband during his life
time and thereafter to the plaintiff. The defendants paid certain amounts to the plaintiff after
her husband’s death. It was held that the defendants had created such privity with the plaintiff
by their conduct and by acknowledgment and by admission, that the plaintiff was entitled to
her action even though there was no privity of contract between the plaintiff and two
defendants, when the said contract was entered to.

5. Charge created on specific immovable property

Where a charge on a specific immovable property is created for the benefit of a third party,
such a third party, though a stranger to the contract, can enforce it. Example: A charge was
created on the assets of the company in favour of debenture holders. Debenture holders being
the beneficiaries can enforce the charge if the company refuses to pay their claims.

6. Assignee of a Contract

The benefit of a contract may be assigned. The assignee of a contract can enforce the benefits
of a contract though he is not a party to it.

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Example: A assigns his insurance policy in favour of his wife. The wife can enforce it although
she is not a party to it.

7. Contract by Agent

Contracts entered into by an agent acting within scope of his authority can be enforced by the
principal.

Thus, a stranger to consideration can sue to enforce it provided he is a party to the contract but
a person who is not a party to a contract cannot file a suit in all cases to enforce any of the
rights arising out of the contract.

8. Collateral Contracts

A collateral contract is a separate agreement between a third party and one of the main
contract's parties that is related to the primary contract. This type of contract allows the third
party to enforce the terms of the main contract. An example of a collateral contract is a
manufacturer's guarantee, which is linked to the main contract of purchasing goods.

In Shanklin Pier Ltd., v. Detel Products Ltd. [(1951) 2 All ER 471], A employed B as a
painting contractor and instructed B to buy paint made by C. A gave this instruction on the
basis of a statement of C to A that the paint would last for seven years. The paint lasted for
three months. Although the contract was between A and B, it was held, in an action by A, that
there was a collateral contract between A and C that the paint would last for seven years.

9. Multilateral Contracts

In multilateral contracts, a stranger to the contract can sue. In a club or other unincorporated
association, one member joining the club or association is deemed to contract with other
members. He does so without being aware of the identity, and his communication is only with
the secretary. Similarly, where a number of persons agree to enter into a competition subject to
rules, such persons contract not only with the organising club but also with each other.

In conclusion, the doctrine of privity of contract is not an absolute rule. There are numerous
instances where a person who is not a party to a contract can enforce it, as illustrated above.
While the doctrine of privity of contract protects contracting parties from legal action by
outsiders, ensuring they are only obligated to each other, there are exceptions. These exceptions
allow third parties who are affected by a contract's breach to take legal action against the
contracting parties.

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