DOCTRINE OF PRIVITY OF CONTRACT

ABSTRACT

The privity of contract refers to the relationship subsisting between the parties. Strangers to the contract cannot sue this doctrine called doctrine of privity of contract. The third person cannot enforce the contract that’s why he cannot sue so that the privity of contract states that the third person cannot come between the contract and not enforce the contract on the other hand if any consideration is made for the beneficiary but strangers are not allowed to sue and came to enter into a contract then it is not possible because privity of contract not allowed strangers to enforce the contract. A contract cannot enforce by a person who is not party to it.

The doctrine of privity of contract indicates those parties to a contract may sue or be sued on that contract. This doctrine creates a legal bond between the parties to a contract. In 1937, the law revision committee, under the chairman ship of lord wright also criticised the doctrine because according to him the privity of contract is a contract by its express terms purports to confer a benefit directly on third party, the third party can also enforce the provision in his own name, provided that the promisor shall be entitled to raise against the third party any defence that would have valid against the promisor.

There are certain exceptions where the privity of contract does not enforce the person from enforcing a contract which has been made for his benefit but without his being party to it. this article elaborates the doctrine of privity of contract and their exceptions it covers all the aspects of this doctrine.[1]

Keywords:

stranger, contract, relationship, beneficiary of trust, family settlement, agency, negotiable instrument, exceptions, third party, decisions of English law, breach of contract.

INTRODUCTION

The doctrine refers as a principle or body of principles in a branch of knowledge. A relation between two parties that is recognised by law is called privity. the origin of privity of contract it has taken from “English common law “. According to the section 2(h) of the Indian contract act ,1872. the privity of contract is a contract is a co an agreement between two parties enforceable by law backed by the lawful consideration. The contract lies between the two parties and their promise towards each other for fulfilling their part of contract. The exceptions in the privity of contract stated that the stranger has a right to sue in the various matters. The doctrine of privity of contract is a fundamental principle in contract law that outlines the idea that contract creates legal rights and obligations only between the parties involved in forming the contract. in simple terms, a third party generally cannot enforce or be bound by a contract to which they are not a party. the doctrine aims to maintain the autonomy of the contracting parties and restricts the involvement of external individuals or entities in contractual matters. however, exceptions and alternative doctrine have evolved over time to address certain situations where third party rights may be recognized.

UNBOX THE TERM PRIVITY OF CONTRACT

The rule of privity of contract which means that a stranger to contract cannot sue to enforce contract. The doctrine of privity of contract is a common law principle which implies thar only parties to 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 have been entered into for his benefit.

There are two aspects of the doctrine of privity of contract:

No one expect a party to a contract can acquire right under it,
No one expect a party can be subjected to liabilities under it.

EXCEPTIONS OF DOCTRINE OF PRIVITY OF CONTRACT

The doctrine of privity of contract generally holds that only parties to a contract can enforce its terms. however, there are exceptions to this rule.

Third–party beneficiaries:

If a contract explicitly confers a benefit to a third party, that party may have the right to enforce the contract . this is known as the doctrine of intended third- party beneficiaries.

assignment of rights:

a party to a contract may transfer their rights and benefits to a third party through an assignment. the third party can then enforce those rights against the other party.

Agency:

If an agent enters into a contract on the behalf of a principal may be able to enforce the contract.

Collateral contracts:

In situations where a separate contract is made to support the main contract, a third party involved in the collateral contract may have enforceable rights.

Trusts:

In cases involving trusts, a third party may have enforceable rights if the trust is a party to the contract.

Statutory exceptions:

Some statutes allow third parties to enforce contract. for example, consumer protection laws made grant rights to third – party beneficiaries.

It’s important to note that the application of these exceptions can vary depending on jurisdiction, the specific language of the contract, and the circumstances surrounding the agreement. legal advice should be sought for precise situations.

ESSENTIALS OF DOCTRINE OF PRIVITY OF CONTRACT

The doctrine of privity of contract is a legal principle that restricts the rights and obligations of a contract to the parties involved in its formation. it means that only those who are parties to a contract have the ability to enforce its term or be bound by law.

Enforcement of rights:

Only parties who have entered into a contract can sue or be sued based on that contract. third parties generally lack the standing to enforce any rights arising from the contract.

No beneficiary rights:

Unless exists between the original parties to a contract. this means that their rights and obligations are directly related to the contract terms.

Exceptions to privity:

In certain circumstances, the law recognizes exceptions to the privity rule, for instances a trust or agency relationship may allow a third party to enforce a contract.

Assignment of rights:

While a party cannot assign its obligations under a contract without the consent of the other party, it can often assign its rights. the assignee then steps into the shoes of the original party with regard to those rights.

Contractual privity:

Privity exists between the original parties to a contract . this means that their rights and obligations are directly related to the contract terms.

Novation:

Novation is another way to alter the parties to a contract. it involves the situations of one of the original parties with a new party, with the consent of all involved.

Impact on third parties:

The doctrine provides stability and predictability by limiting the involvement of third parties in contractual relationships. it avoids confusion and conflicting claims.

Contractual privity and torts:

While contractual privity is essential for enforcing contract rights, it is distinct from liability in torts. in tort law, third parties may have a claim for damages if they suffer harm due to a party action, regardless of any contractual relationship.

ENGLISH LAW V. INDIAN LAW

The doctrine of privity of contract in English law and Indian law is a legal concept that deals with the parties involved in a contract and their rights and obligations.

ENGLISH LAW

Privity rule :

The traditional English rule is that only parties to a contract have rights or obligations under it .
A third party cannot enforce the terms of a contract , even if the contract was made for their benefit.

Exceptions :

There are exceptions to the privity rule , such as agency and trust relationships, where third parties may have certain enforceable rights.

Contract Act 1999:

This act introduced significant reforms, allowing throw parties to enforce contractual terms under certain conditions.
Parties can now expressly confer a benefit on a third party in a contract.

INDIAN LAW

Privity rule :

Indian law traditionally followed the privity rule similar to English law , restricting the rights and obligations of a contract to the parties involved .

Exceptions and developments :

Indian courts have recognized certain exceptions to the privity rule , particularly in cases involving trusts , family arrangements , and agency relationships.
Over time , judicial interpretation has expended to protect the interests of third parties in specific situations .

Indian Contract Act, 1872 :

The act not explicitly address the doctrine of privity , but court decisions have shaped its application in india.

Specific Relief Act, 1963:

This act provides remedies for breach of contract , and courts have sometimes applied it to protect the rights of third parties , even in the absence of privity.

Case law: Dunlop Pneumatic Company Limited v. Selfridge and Company Limited

It is an English contract law case which is decided by the house of lords. The facts of the case a tyre manufacturing company who sale tyres to the dealers as well as tyre company also signed an agreement to their dealers that they cannot sale the tyre below the recommended retailer price (RRP) with this dealer also took the same agreement from retailers followed this agreement. but there was a retailer Selfridge who sell the tyre below the price of recommended retailer price (RRP). Then Dunlop sued a case on the Selfridge. He contended that Dunlop was a third party and there is no agreement between him and the Dunlop and Dunlop has no right to claim charges from Selfridge. This case provided a fundamental statement of the privity of contract in which no person can be sued or be sued by the third party to it.

POSITION IN INDIA: DECISION FOLLOWING ENGLISH LAW

An English case i.e., twiddle vs. Atkinson satiated the rule stranger to contract cannot enforce the contract. The same is as much applicable in India as it is in England, but there is no provision in contract act either for or against the rule. In India a person can sue if he is stranger but in England is totally different where a stranger cannot sue. Privy council extended the rule to India in its decision in Jamuna Das v. pandit ram avatar Pande.

Lord mac Naughton, in his judgment said that “the mortgage has no right to avail himself of that. He was no party to the sale. The purchaser not entitled or bound to pay the mortgage debt if the purchaser is not entered into a contract. Thus, where all that appears is that person transfer property to another stipulates for the payment of money to a third person, a suit to enforce that stipulation by the third party will not lie. But party making the contract may sue for the specific performance for the benefit of third party.

DECISIONS NOT FOLLOWING THE ENGLISH LAW

There is another line of thinking also which is mainly based upon the observation of the privy council in nawab khwaja Muhammad khan v. nawab Hussaini begum. their lordship observed:

In India among communities circumstanced as the Mohammedi’s among whose marriage are contracted for minors by parents and guardians it might occasion serious injustice if the common law of doctrine was applied to agreements or arrangements entered into in connections with such contract. This statement is taken from the high court as laying down the rule that Indian court are not bound by the rule in Tweddle v. Atkinson. The Calcutta and madras high court stated that nor is there anything in the Indian contract act, which prevents the recognition of a right in a third party to enforce a contract for the benefit of others which contains in a provision.[2]

EXCEPTIONS TO PRIVITY RULE

In the course of time, the courts have introduced a number of exceptions in which ule 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 there under the law of contract with their special branches such as negotiable instruments, agency, railway receipts, transfer of property and family settlement etc. some of the most commonly known exceptions may be considered here which are mentioned below:

Beneficiaries under trust or other arrangement
For family settlement
Where the promisor has by his conduct created privity between himself and the stranger.
Law relating to negotiable instruments
Where a stranger is entitled to sue under certain enactments.
Contract with an agent.

Beneficiaries under trust or charge or other arrangements

It means where under a contract one of the parties constitutes himself a trustee for a third party, the third party may sue to enforce the trust in his favour and there will be no objection on the ground of his being stranger to the contract. The criteria of a person who become the trustee of the other person are in the following:

For Creating trust, the party have the intention to it.
Not all the third parties have intention it should to be benefit a particular third party.

In the case of rana Uma baksha Singh v. Jang bahadur the facts of the case were that rana given the entire possession by his father.in return rana required to pay certain amount of money and village to jang bahadur, who is a illegitimate child of his father .it was held by the court that a trust was created for the benefit of the illegitimate child and hence he is entitled to maintain the suit.

Another decision of the privy council in nawab khwaja Muhammad khan v. nawab Hussaini begum the facts of the case were the appellant executed an agreement with the respondent’s father that in the consideration of the respondent marriage with his son he would pay to the respondent Rs 500 a month in the payment, with the payment with the power to the respondent to enforce it. the husband and wife separated on account of a quarrel and the suit was brought by the respondent for the recovery of this annuity.

It was held that the respondent, although no party to the agreement was clearly entitled to proceed in equity to enforce her claim “here the agreement is executed by the appellant specifically charges immovable property for the allowance which he binds himself to pay the respondent. she is the only person beneficially entitled under it “.

For family settlement

Where the provisions are made in a partition or other family arrangements for the maintenance or marriage expenses of a female member or minor, such persons acquire an actual beneficial right so as to place them in the position of beneficiary under the contract.

Suppu ammal v. Subramaniam

In this case the father died in the Hindu undivided family and their son made a contract with each other and relied that they invest money 50,000 in the government security to return to his mother, if they breach the contract then mother is entitled to file a suit against their son. She was not the party of the contract but the mother is entitled.[3]

Where the promisor has by his conduct created a privity between himself and the stranger.

Where by the terms of a contract a party is required to make a payment to a third person and he acknowledges it to third person, a binding obligation is thereby incurred towards him. Acknowledgement may be express or implied. this exception covers cases where the promisor by his conduct, constitutes himself as an agent of the third party.

In the case of N. Devaraja V. ramakrishniah

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 maid a payment to c and informing him that they were out of the sale price left with him and that the balance would be remitted immediately. B failed to remit the amount and c 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 have subsequently acknowledged his liability, C was entitled to sue him for the recovery of the balance.

Law relating to negotiable instrument

Law related to negotiable instrument is also exception to the doctrine of privity of contract. The rule of privity may also be modified by the principles relating to negotiable instrument .an illustration is a good example of this example where A has an account in central bank. a draws a cheque of one thousand in favour of B. B goes to bank to encash the cheque. although there is no contract between the bank and B, yet the bank will be liable to pay one thousand to B.

Where a stranger is entitled to sue under certain enactments

A person who is not a party to a contract can file a suit if he is so authorized by a statue. Thus, under insurance act, a stranger to the contract may recover from the insurance company in case of third-party risks are covered by the insurance policy.

Contract with an agent

Where a contract is made between an agent and another person., then the principal of that agent can sue on breach of the contract on behalf of the agent.[4]

CONCLUSION

In this article we learn a lot of things about the doctrine of privity of contract and their exceptions. To sum up this doctrine of privity of contract is not an absolute privity rule. Through the doctrine of privity of contract, we embraced that the person who is not a party can also the enforce are explained in many cases which is mentioned above. This doctrine protects the rights of the party from a legal action taken by the strangers against them. There are many cases third party can enforce the contract.

This highlight the various situations where third parties can be aggrieved when he breaches the contract and the exceptions are there to take against the parties who entered into a contract.

REFERENCES

[1] AVTAR SINGH, CONTRACT AND SPECIFIC RELIEF, TWELFTH EDITION

[2] AVTAR SINGH, CONTRACT AND SPECIFIC RELIEF, TWELFTH EDITION

http://www.lexisnexis.co.uk

http://en.m.wikipedia.org

http://blog.igpleaders.in

[3]Rana Uma Nath Baksh v. Jang bahadur, 1938

Suppu ammal v. Subramaniam and ors. ,1909,4Ind Cas 1083

[4] http://www.legalserviceindia.com

http://papers.ssrn.com

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