Problem

A mortgaged his property to B for Rs. 10 Lakhs. Subsequently,

he sold the same property to C for Rs. 14 lakhs and allowed C,
the purchaser to retain Rs. 10 lakhs of the price in order to
redeem the mortgage, if he wants to do so. B sues C for the
recovery of the mortgage money. Decide
Legal Issues involved in the problem
1. Does a legally binding contract exist between B and C?

2. Can B seek to recover the mortgage debt owed by A from C,

who is not a direct party to the original agreement?
Provisions of Law applicable to the case
Section 2(h) of the Indian Contract Act, 1872, defines a contract
as an agreement that is enforceable by law, serving as the
cornerstone for understanding contractual relationships in
India. It explicitly states: "An agreement enforceable by law is a
contract." This provision establishes two essential elements
that must be present for any agreement to attain the status of
a contract—mutual agreement and legal enforceability.

For an agreement to be considered a contract under Indian law,

the following criteria must be fulfilled:

Existence of an Agreement: There must be a clear mutual

understanding and arrangement between two or more parties,
where the parties have agreed to specific terms. This
agreement forms the foundation of any contract, ensuring that
the parties involved have willingly consented to the terms.

Enforceability by Law: Beyond the existence of an agreement, it

is critical that the arrangement has legal validity. This means
that the agreement must not only be recognized by law, but it
must also meet the legal requirements necessary to be
enforced in a court of law. Agreements that violate public
policy, are illegal, or lack essential elements such as
consideration, capacity, or free consent cannot be enforced,
and hence, do not qualify as contracts.

Thus, Section 2(h) ensures that contracts are not just social or
informal arrangements, but legal obligations that the parties
must adhere to. Without enforceability, an agreement remains
a mere promise without legal consequences.

This section also lays the groundwork for the doctrine of privity,
which governs who can enforce contractual obligations. The
doctrine of privity maintains that only those parties who are
directly involved in a contract, i.e., the parties to the agreement,
have the right to enforce it or be held liable under it. Third
parties, even if they benefit from the contract, cannot enforce
its terms or claim any rights, unless specific exceptions apply.

By defining a contract as an agreement enforceable by law,

Section 2(h) implicitly supports the principle of privity. Since
enforceability is restricted to parties to the contract, it follows
that individuals who are not directly part of the agreement,
such as third parties, cannot enforce it. This limitation is
fundamental to maintaining the integrity of contractual
relationships, ensuring that only those who have offered
consideration and are bound by the terms of the agreement
can claim rights or remedies under the contract.

The doctrine of privity of contract complements the principles

outlined in Section 2(h) of the Indian Contract Act, 1872, by
reinforcing that only parties to a contract can enforce its terms
or claim its benefits. This legal doctrine is essential in ensuring
that contracts remain exclusive to the parties involved, thus
safeguarding the clarity and integrity of contractual
relationships.

Privity of contract asserts that no third party—an individual or

entity who is not a signatory to the agreement—can derive
rights from or impose obligations under a contract, unless
explicitly allowed by the contract itself. This ensures that the
enforceability of the contract remains limited to the parties
who have directly participated in the formation of the
agreement. For instance, if one party to a contract defaults on
their obligations, only the counterparty—the other party to the
contract—can seek legal remedies such as damages or specific
performance. Outsiders, or third parties, cannot interfere or
claim entitlements, even if they may stand to benefit from the
contract’s performance.

This doctrine is rooted in the interest theory, which posits that

only individuals or entities with a direct interest in the contract
have the standing to enforce its terms or seek remedies. By
restricting enforcement to the parties with vested interests, the
law ensures that only those who are legally bound by the
contract's terms can sue or be sued for breaches or non-
performance.

Under the framework of privity, several important legal

implications arise, particularly in relation to the enforceability
of rights and liabilities, supported by the core concepts of
Section 2(h):

 Enforcement of Rights: Only the contracting parties have

the legal capacity to enforce the rights and obligations
created under the agreement. This exclusivity ensures that
the benefits and responsibilities stipulated in the contract
are only accessible to those who have actively participated
in the negotiation and formation of the agreement. It
prevents third parties from asserting rights or claiming
benefits, thus maintaining the sanctity of the contract.

 Restriction on Liability: Just as third parties cannot enforce

the terms of a contract, they also cannot be held liable for
any breaches or obligations arising from it. The liabilities
under the contract are confined strictly to the contracting
parties, ensuring that third parties are protected from any
unintended consequences of agreements to which they
were not a party. This ensures a clear delineation of
responsibility and protects individuals or entities from being
unfairly implicated in disputes between others.
 Preservation of Contractual Relationships: The doctrine of
privity upholds the exclusive nature of the relationship
between the contracting parties. This exclusivity protects
the mutual promises made within the contract and ensures
that they are honored only by those who consented to them.
In this way, the legal and commercial relationships formed
through contracts are respected and preserved.
Legal Analysis
The key questions in this case revolve around whether a legally
binding contract exists between B and C, and whether B, the
mortgagee, can recover the mortgage debt from C, the
purchaser of the mortgaged property, who was not a party to
the original mortgage agreement.

The first issue pertains to whether a legally enforceable

contract exists between B and C. Under Section 2(h) of the
Indian Contract Act, 1872, a contract is defined as an
agreement that is enforceable by law. For a contract to be valid,
there must be a mutual agreement between the parties and
legal enforceability of that agreement. In this case, while C has
purchased the property from A, there is no evidence of a direct
agreement or mutual understanding between B and C that
would constitute a contract. The mortgage arrangement was
exclusively between A and B, and C did not enter into a direct
contractual relationship with B. As a result, no enforceable
contract exists between B and C under the provisions of the
Indian Contract Act.

The second issue addresses whether B can recover the

mortgage debt from C. This raises the question of privity of
contract, a legal doctrine that stipulates that only parties to a
contract can enforce its terms or be held liable under it. As per
the doctrine of privity, since C was not a party to the original
mortgage agreement between A and B, C cannot be directly
held liable for the debt owed by A. The mortgage contract,
which created a financial obligation for A to repay B, does not
extend to C, as C was not involved in the formation of that
contract. Therefore, B cannot seek to recover the mortgage
debt from C, who is a third party with respect to the original
agreement.
However, it is important to note that when A sold the property
to C, A permitted C to retain Rs. 10 lakhs from the purchase
price, which could be used to redeem the mortgage if C chose
to do so. While this arrangement may imply that C had the
option to discharge the mortgage, it does not create a binding
obligation for C to pay B. The agreement between A and C
merely provided C with the discretion to pay off the mortgage,
but this does not constitute a legally enforceable contract in
favor of B. Without an express agreement between B and C, B
cannot compel C to pay the mortgage debt.
Related case laws- brief summary
Tweddle vs. Atkinson 1
This case sets an important precedent in contract law by
reinforcing the principles of privity and consideration. It
clarifies that a third party, even if benefiting from a contract,
cannot enforce its terms if they are not one of the original
contracting parties. This emphasizes that only those directly
involved in a contract hold enforceable rights and obligations
under it.

Gross v. United States Mortgage Company (1883)2

The case of Gross v. United States Mortgage Company is a
critical landmark case that explores the rights of mortgagees in
situations involving property transfers. In this case, Benjamin
Lombard sold mortgaged property to the National Life
Insurance Company, with the sale being subject to the existing
mortgage. It highlighted that the mortgagee could not sue the
purchaser, Gross, due to the non-existence of a direct
contractual relationship, reinforcing the principle that privity of
contract limits legal claims

Babu Ram Budhu Mal And Ors. vs Dhan Singh Bishan Singh An
d Ors. (1956)3
In this case, the plaintiffs (mortgagees) sought to recover
mortgage money from the defendants, who had purchased the
mortgaged property. However, the court ruled in favor of the
defendants, holding that they could not be held personally
liable for the mortgage debt as they were not parties to the
original mortgage contract. The decision reinforced the
principle that liability for mortgage debt is restricted to the
original parties involved unless explicitly assumed by a third-
party purchaser.
1
Tweddle v. Atkinson, (1861) 1 B & S 393, 121 Eng. Rep. 762 (Q.B.)
2
Gross v. United States Mortgage Company, 108 U.S. 477 (1883).
3
AIR 1957 PUNJAB 169
Jamma Das v. Pandit Ram Autar Pande4
In this case, A took out a loan by mortgaging her zamindari to B
and later sold the property to C. As part of the sale, C agreed to
withhold a portion of the purchase price to repay the mortgage.
However, the court ruled that C, the buyer, was not liable for
the mortgage debt because he was not a party to the original
mortgage agreement.

4
AIR 1916 ALLAHABAD 232
Conclusion
In light of the matters stated so far, there is no legally binding
contract between B and C that would allow B to recover the
mortgage money from C. The doctrine of privity of contract
prevents B from enforcing the mortgage obligation against C, as
C was not a party to the original agreement between A and B.
B's right to recover the mortgage debt remains solely against A,
who was the original borrower under the mortgage contract. C,
as the purchaser of the property, is not legally obligated to
discharge the mortgage unless there was a separate and
explicit agreement with B, which is not present in this case.
Therefore, B's legal recourse lies with A, and any attempt to
recover the debt from C would not be legally tenable.
Bibliography
1. Indian Contract Act, 1872
2. Tweddle v. Atkinson, (1861) 1 B & S 393, 121 Eng. Rep. 762
(Q.B.)
3. Gross v. United States Mortgage Company, 108 U.S. 477
(1883).
4. AIR 1957 PUNJAB 169
5. AIR 1916 ALLAHABAD 232
6. “Contract and Specific Relief” by Avatar Singh