This article is written by Asna Parveen, 2nd year student at Atal Bihari Vajpayee School of Legal Studies, CSJM University, an intern at Legal Vidhya.
Abstract
A valid Consideration must be something of Value in the eyes of the law – “Thomas Currier”
The doctrine of privity of Consideration is a legal principle in contract law that states that only the parties who have provided consideration for a contract can enforce the contract or can sue the parties for the breach of contract. This means that a third party who is beneficiary of the contract, but has not given anything in return, cannot sue the promisor or the promisee. This doctrine is closely related to the doctrine of privity of contract, which states that only the parties who have agreed to the contract can enforce it or be bound by it.
This article aims to provide an overview of the privity of Consideration. This article will begin by defining the doctrine and its significance in Contract law. It will then discuss the position of privity of consideration in England and India. Finally, this article will conclude by discussing the implications of the doctrine of privity of consideration in modern contract law.
Keywords– Privity, Consideration, Indian Contract Act, Promise, Contractual Security, Estoppel, Trust.
Introduction
The word Consideration has been defined in Indian Contract Act in Section 2(d) i.e. Consideration refers to the act of doing something, abstaining from doing something, or promising to do something in exchange for the promise of the other party. It is one of the main elements of a valid contract. It is defined as something of value given by one party to the other in exchange of promise. A Promise to do something will take a form of agreement when there is some consideration on part of both the parties and an agreement will become contract when there is some substantial consideration.
According to Blackstone consideration is the renumeration that’s given by the one party to the other contracting party.” The term privity refers to the relationship between the parties of the contract, doctrine of privity states that only parties to the contract has the right to enforce the rights and obligations provided by the contract and strangers to the contract can’t enforce any obligations. The doctrine of privity of consideration has been developed in different jurisdictions, such as England and India. It is fundamental principle of English Law that consideration must move from the promisee and the promisee only.
If it is initiated by any other person, the promisee becomes a stranger to the consideration and, therefore cannot enforce the promise[1]. In simple terms, the emphasis was placed on the sanctity of contractual agreements between the immediate parties involved. Third parties, regardless of their interests or stake in the contract, were traditionally barred from asserting any rights or claims arising from it.
According to the Indian Contract Act, an act which constitute a consideration can be done by the promise or any other person. It other words, as long as there is consideration for a promise it is immaterial who has furnished it. It may be given from the promisee or, if the promisor has no disagreement, from any other person.
Doctrine of Privity
The word privity is a combination of ‘knowledge and consent’. It is a doctrine of contract law which sates that only parties to contract have the right to enforce the contract and strangers to the contract can not enforce any obligations provided by the contract and cannot sue in case of breach. This doctrine protects the parties from any contractual liabilities that they never agreed to incur. This is a English law principle as it recognizes consideration can moves from the promise himself and not from any other person.
Background of Privity of Consideration
The concept of Privity can be traced in English law in 19th century it was firmly established in the case of Tweddle v Atinkson, it was held a stranger to the contract could not sue in case of breach and for the performance. In a landmark case of Dutton v. Poole the court of chancery established the principle that the rule of privity to contract coupled with lack of consideration prevent third- party suit for breach of a contract and an exception to the rule facts of the case were:
A person had a daughter to marry and in order to provide her a marriage portion he intended to sell a wood of which he was possessed at that time. His son (defendant) promised that if the father would forbear to sell at his request, he would pay the daughter 1000 euro. The father consequently forbore but the defendant didn’t pay. The daughter and her husband sued the defendant for the money. It is clear that the defendant gave the promise to his father and it was the father alone who had furnished consideration for the promise, the plaintiff was neither party to the contract nor interested in the consideration. But it was very clear that the whole object of the agreement was to provide a portion to the plaintiff.[1]
English law states that consideration must move from the promise only and the Indian law states that consideration may move from the promise or any other person because of the Indian Contract Act. It may be even through a stranger. However, a stranger to a contract can only sue if he/she is a party to a contract. As a promise is will be of some value in the eye of law only if some consideration is there and it is not necessarily e given from the promise.
In the leading case of Chinnaya v Ramayya[2] the defendant’s promise was given to the plaintiff, but consideration was furnished by the plaintiff’s sister. This case shows how English law differs from the Indian Law and consideration can be given by given by the promisee or any other person.
Important Case Laws
Dunlop Pneumatic Tyre Ltd Co v Selfridge & Co Ltd (1915)[3]
The case of Dunlop Pneumatic Tyre illustrates the Doctrine of Privity of Consideration in the context of third- party beneficiaries. In this case, Dunlop had sold tires to a retailer, Selfridge, with a contract clause prohibiting Selfridge from selling the tires below a certain price. Selfridge then sold the tires to a third party at a reduced rate. Dunlop sought to sue the third party for breach of Contract. The House of Lords held that the third party was not liable because they were not privy to the consideration in the original contract between Dunlop and Selfridge.
Shanklin Pier Ltd v Detel Products Ltd [4]
The case further clarified the Doctrine of Privity of Consideration. In this case, a lease agreement between Shanklin Pier and a tenant contained a clause that allowed the tenant to assign the lease with the landlord’s consent. The tenant assigned the lease to Detel Products Ltd without obtaining the required consent. Shanklin Pier sued Detel for breach of contract, arguing that the assignment was invalid. The court ruled in favor of Detel, stating that they were not privy to the original lease agreement and, therefore, Shanklin Pier could not enforce the contract against them.
Significance of the Doctrine of Privity of Consideraion
This doctrine holds an important place in Contract Law as it serves important functions:
- Contractual Security
It a principle that contract are agreement between two parties. This doctrine provides a security between the parties that a stranger to a contract can’t enforce the contract except in certain conditions. It also provides the freedom to the parties that third party can not interfere in the contractual relationship.
- Limiting responsibilities and Claims
This doctrine also prevents the parties from vexatious claims by the third party as it limits the third party to enforce the contract. It also enhances the predictability and certainty of contractual relationships.
- Consideration must be of some value
Even a valueless act will serve to make a good consideration if it is only done at the promisor’s desire. Illustration: A promises to give his new Rolls- Royce car to B, handed B will bring it from the garage. The act of appealing the car cannot by any stretch of imagination be called a consideration for the promise. Yet it is only act, the promisor desired the promisee to do. Such an act no doubt satisfies the word of definition, but it does not catch its spirit. It is for this reason that the English Common Law has always claimed that consideration must be of some value in the eyes of the law.
Though the Indian Contract Act does not in terms give that consideration must be good or precious to sustain a contract it has always been understood that consideration means commodity which is of some worth in the eyes of law. It is not, still necessary that consideration should be according to the promise. The acceptability of the consideration is for the parties to consider at the time of making the agreement, nor for the court when it is sought to be executed.
Exceptions of the Doctrine of Privity of Consideration
There are some exceptions to this doctrine, where a third party can have a right or liability under a contract. Some of these are:
- Contract made out of Trust
Trust is something that is created by a contract between the parties for the benefit of the third party. In a trust contract, one party transfers the title of a property to the other party i.e. trustee, so that the trustee holds it for the benefit of the third party who can be called as the beneficiary. Therefore, the exceptions is, if the contact is made out of trust for the benefit of the third party then he have the right to enforce the provisions of trust for his benefit.
If a contract is made between a trustee and another party for the benefit of a third party, who is beneficiary of the trust, then the beneficiary can sue the trustee or the other party to enforce the contract.[2]
In Rana Uma Nath Baksh Singh v. Jang Bahadur, the trustor was the father who transferred all of his property to his son to hold it for the benefit of the father’s illegitimate son with some money on regular basis. When the son failed to perform his duty, the illegitimate son filed a suit to recover the amount to be given to him here, suit is justifiable indeed though he was not privity to the contract.
- Acknowledgment or estoppel
Law of Estoppel means that a person cannot go back in his own words. Thus, if a party to a contract acknowledges by words or conduct that third party has the right to sue him, he cannot deny later because of the rule of estoppel. If a party to a contract acknowledges this right of a third party under the contract, or acts in a way that induces the third party to believe that they have such rights, then the third party can sue or be sued on the contract.[3]
In case of Devraj Urs v. Ramakrishnayya, S brought a house from B. B asked A to pay the price for the deal to B’s creditor. The buyer paid a piece of the price to the creditor and promised him that he would renumerate the rest subsequently. On his dereliction, the creditor filed a suit against him. The court ruled in favor of the creditor, though he was not the party of the contract.
- Contract through an agent
It is very common for the people to get involved in business through their agents. These agents can enter into contract on behalf of their principle or employer and represents them in relations that arise in such contracts. Therefore, whatever contracts entered into by an agent while acting within the ambit of his authority can be executed by the principal. In this case it may seem that the agent is the party to the contract, but in reality, he is more or the representative of the principal.
It can be well- understood by an illustration, A appoints an agent B. He asks B to buy a bag of cement from C on his behalf. Here, B enters into a contract with C when he buys a bag of cement, but is A who has the right to enforce the contract and he’ll be liable in case of breach as B is merely a representative of A.
If a contract is made by an agent on behalf of a third party, who is the principal, then the third party can sue or be sued on the contract as long as the agent has the authority to make the contract. [4]
- Collateral contracts
Collateral contracts can be defined as the contract that is complement of the original contract. It could be enforced by the same parties or one of the original parties with another party. It can be made before or after the original contract came into existence. When a third party enter into a collateral contract, he can also enforce the contract or can file a suit to enforce the contract even though he is not a party of the contract. The best example is manufacture’s guarantee regarding the sold goods because here seller is directly related to the buyer and the guarantee is the collateral contract.
In the case of Shanklin Pier Ltd. V. Detel Producers Ltd., a person X was employed as a contractor by Z. Z asked X to buy paint manufactured by A. Z wanted X to buy A’s pain because of the statement that was once made by the A that his paint would last for seven years. But the paint only last for three months. In this case, the guarantee given by A to Z forms a contract that is collateral to the contract made by X and Z. The suit filed by Z was maintainable even though he was not a party to the main contract.
Covenant running with the land– If a contract is made between the owner of a land and another party, and the contract affects the rights or liabilities of the land, then the third party who acquires the land can sue or be sued on the contract.
Conclusion
In conclusion, the Doctrine of Privity of Consideration serves a critical rule in contract law, ensuring that only parties who have directly exchanged consideration can enforce a contract’s terms. While it can sometimes be unfair as in some cases as mentioned above, the doctrine provides clarity and stability in contractual relationships. It is essential for parties to be aware of the doctrine’s limitations and implications, as it can have a significant impact on their legal rights and responsibilities. The cases discussed in this article highlights the importance of understanding and applying the Doctrine of Privity of Consideration in Contract law, emphasizing the need for parties to carefully consider their contractual obligations and relationships from the outset. In India the applicability of this doctrine is different from Common law as this doctrine does not applies in Indian law but in common law it is clearly stated that stranger to a contract can not sue in case of breach and for the enforcement of rights.
References
[1]. [13th edition] [ Avtar Singh & Rajesh Kapoor], [Contract and Specific Relief] [2022]
[2]. https://blog.ipleaders.in
[4]. https://www.blog.ipleaders.in
[1] See Anson, PRINCIPLES OF THE ENGLISH LAW OF CONTRACT (23rd Edn by A.G. Guest, 1971) 89, Cheshire and Fifoot, LAW OF CONTRACT (8TH Edn, 1972) 64
[2] ILR (1872-82) 4 Mad 137
[3] (1915) UKHL Ac 847
[4] (1951) 2 KB 854
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