Introduction

According to section 2(h) of the Indian Contract Act 1872, a contract is a document that binds two parties together and is enforceable by law backed with some consideration. The promise which both the parties made towards one another for fulfilling their part is where the essence of the law of contract lies.

The doctrine of privity of contract is a principle of common law that provides that the contract cannot confer rights or impose any of the obligations upon the person who is not the party to the contract. Even though the contract is made up for the benefit of the third party then also there cannot be any obligations involved to the third party.

The rule of privity is based upon the ‘interest theory’ which states that the person who is interested in the contract can only enjoy the rights given. In general, the case is still that the parties to the contract can only one another but in recent years there are some changes done which now allow the third party beneficiary to collect the damages for the breach in the contract. The duty owed test looks to work out if the third party was agreeing to pay a debt for the first party.

There are different opinions of various courts in India on the privity of contracts. There are some cases where the third party is not able to sue the party to the contract due to the rule of privity of contract and in some cases rule of privity of contract is entirely overlooked. Therefore it is the topic of great debate in the country.

Illustration

Ramesh makes a promise to deliver goods to Arun. Then in this case, if Ramesh breaches the contract then only Arun has a right to prosecute him and no other person can prosecute him.

Essentials of Privity of contract

  1. A contract entered between two parties: – The most important essential is that there has to be 2 parties or more in the contract that is made.
  2. Parties must be competent and a valid consideration: – Parties has to be competent and there must be some consideration which should be valid for the application of this doctrine to work.
  3. There must be a breach of contract by one of the party to the contract: – One Party must breach the contract which is the essential requirement for the application of the doctrine of privity of contract to work.
  4. Only parties to contract can sue each other: – The breach has happened now only the Parties to a contract are permitted to sue against each other for non-performance of contract or breach in the contract.

Privity of contract: English Law and Indian Law

The rule of privity of contract was first acknowledged and established in the ruling of Tweddle v.Atkinson. Tweddle’s father and Atkinson, Tweddle’s father-in-law entered into a contract to contribute a sum of money by each of them to support Tweddle and his wife. Tweddle’s father kept his part of the bargain but Atkinson died before paying anything. Tweddle sued the executors of Atkinson’s estate. His suit was rejected because he himself was not a party to the contract even though it was for his benefit. The court held that it was not possible to claim that there was an implicit contract between Tweddle and Atkinson, more so, in the absence of consideration from Tweddle to Atkinson. In this case, the plaintiff was both a stranger to contract as well as a stranger to consideration and therefore, he could not enforce his claim.

The rule of privity of contract was reaffirmed by the House of Lords in the case of Dunlop Tyre co. v. Selfridge. In this, the action failed as the plaintiff was not the party to the contract that was between the defendant and Dew.

The rule of privity of contract is also applicable in India. Although under the Indian Contract Act the term consideration is explained in wider terms than in English law. The common law principle of privity of contract is applicable in India as well. The authority for the application of the rule in India is the decision of the Privy Council in Jamna Das v. Ram Avtar.

In the Indian context also this concept of privity of contract is similar; the difference is only that in India a person who is stranger to consideration can sue whereas in England he cannot.

Tweddle v.Atkinson

Exceptions to the rule of privity

There is a general rule that in a contract the parties can sue one another only under this doctrine, no third party can be involved but as it is said there are always some exceptions in every situation. Here, are some of the exceptions to this rule of privity:

  • A beneficiary under the contract- If the contract is formed between 2 parties for the benefit of third person, but there was a failure in the contract then the third party has the right to enforce against others. For eg. In a contract between Alex and James, beneficial right in respect of some property may be created in favor of Robin and in that case, Robin can enforce his claim on the basis of this right.  This concept of a beneficiary under a contract has been highlighted in the case of Muhammad Khan v. Husaini Begum.
  • Conduct, Acknowledgement or admission- there can be a situation where no privity of contract is present between the 2 parties, but by the way of conduct or acknowledgment one recognizes the right of third party. Therefore third party can sue by the law of estoppel. For example, if A enters into a contract with B that A will pay Rs 5000 every month to B during his lifetime and after that to his Son C. A also acknowledges this transaction in the presence of C. Now if A defaults C can sue to him, although not being directly a party to contract.
  • Provision for maintenance or marriage under family arrangement- These type of provisions is treated as an exception to the doctrine of privity of contract for protecting the rights of family members who not likely to get a specific share and also to give maximum effect to the will of the testator. For eg., If A gives his Property in equal portions to his 3 sons with a condition that after his death all 3 of them will give Rs 10,000 each to C, the daughter of A. Now C can prosecute if any one of them fails to obey this.

Consideration in the rule of privity

Consideration is defined in section 2(d) under the Indian Contract Act, 1872. Consideration is considered to be one of the main essential for a valid contract. An agreement without consideration is a bare promise and exnudo pacto non aritio actio, i.e., cannot be held to binding on the parties. The consideration should not be illegal; it has to be a legal consideration. It is considered as the foundation for any contract to come into existence between the parties.

The person who is providing the consideration has the right to enforce the contract or take any action. In the illustration given below ‘Z’ cannot sue the party as he has not provided any of the consideration in the contract.

‘X’ promised ‘Y’ to pay Rs.100 to the third party ‘Z’.  Thus, ‘X’ and ‘Y’ can sue each other in case of a breach of contract. However, ‘Z’ cannot sue the parties. This is known as the privity of contract.

Relevance of privity of contract

The doctrine of privity is a normal law principle which obliques that only parties to a contract are allowed to prosecute one another implement their rights and accountabilities. No outsider is allowed to confer accountability upon any individual who isn’t an alliance to contract while the contract has been entered to his advantage. The rule of Privity is based totally on the ‘interest theory’ which states that the sole person having an interest within the contract is eligible as per law to guard his rights.

The extremely important obligation is that there to have been a contract between two parties or more the aptitude of parties and therefore the existence of consideration are preconditions for the applying of this doctrine. Breach of trust or contract by one party is that the vital need for the appliance of the doctrine of Privity of contract. After the breach of trust, only parties to a contract are eligible to prosecution against one another for non-performance of the contract.

Donoghue v Stevenson

Case Laws

In Donoghue v. Stevenson, a friend of Ms Donoghue ordered a bottle of ginger beer, it was defective as it contained decomposed snail in it. The contract was between her friend and the shop owner, therefore there is no privity of contract between manufacturer and the consumer. But later it was said that the manufacturer has a duty of care owed towards their consumers and she was awarded damages in tort.

In Dunlop Pneumatic Tyre v. Selfridge and Co. Ltd. through the judgment of Lord Haldane, the doctrine of privity of the contract further developed.

In Price v. Easton, where a contract was made for work to be done in exchange for payment to a third party. When the third party attempted to sue for the payment, he was held to be not to be in privity to the contract, and as such his claim failed.

Conclusion

From the above article, it can be stated that parties to the contract can sue each other and no stranger to the contract is allowed to participate in it. But with the development in the field of law, now even a stranger can safeguard his interest under the exceptions that are given.

Privity of contract is an established doctrine of contract law, and should not be lightly discarded through the process of judicial decree. Wholesale abolition of the doctrine would result in complex repercussions that exceed the ability of the Courts to anticipate and address.

Written By- Roopica Sharma

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