DOCTRINE OF PRIVITY OF CONTRACT: A STRANGER TO THE CONTRACT CANNOT SUE ON IT

This Article covers the concept of the Doctrine of privity of contract with view of English and Indian Law, its essentials and various exceptions to it.

 

1. INTRODUCTION:

It is a general rule of law that only parties to a contract may use and be sued on that contract. This is known as the “Doctrine of Privity of Contract”. “Privity of Contract” means relationship subsisting between the parties who have entered into contractual obligations. It implies a mutuality of will and creates a legal bond or tie between the parties to a contract.

 

The rule of privity is basically based on the 'interest theory' which holds that the only party with a legal right to enforce the contract is the one who has an interest in it.

There cannot be a stranger to a contract and has provided exceptions to this rule through the Doctrine of Privity of a Contract.

According to Section-2(h) of the Indian Contract Act, 1872, states an agreement enforceable by law is a Contract. Section-2(e) of the said Act provides Every promise and set of promises, forming the consideration for each other, is an agreement. And consideration is defined in Section-2(d) of the Act, 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 to abstains from doing, something, such act or abstinence or promise is called a consideration for the promise.

2. ENGLISH LAW:

In England the old rule was that if a person, who was to take a benefit under the contract, was merely related by blood to the promisee a right of action would vest in him (Dutton vs. Poole, 1678).

But this rule was no longer accepted in the case of Tweddle vs. Atkinson, (1861), in this case an agreement was entered into between the fathers of a husband and his wife. Under the agreement their fathers were to pay a sum of money to the husband and the husband could sue for such money. After the death of the fathers, the husband sued the executors of his wife’s father for the money promise to him. The Court held that he was not entitled to enforce the contract as he was not a party to the contract. The Court has made it clear that a person who is stranger to contract or stranger to consideration cannot enforce the contract, even if he is intended to be beneficiary of the contract.

This concept of privity of contract was again analyzed in the case of Dunlop Pneumatic Tyre Co.Ltd v. Selfridge & Co. Ltd. (1915), in this case the plaintiff sold certain tires to a company called Dew & Co. on the terms that the company would not resell the tires below certain scheduled price and that in the event of a sale to trade customers the company would extract a similar undertaking from them. Dew & Co. sold tires to Selfridge & Co. under the contract that the Selfridge & Co. would observe the restriction and in the case of breach, would pay the sum of £ 5 for each tire sold in breach of agreement. Selfridge & Co. supplied tires to two of their customers below the listed price. As between Dew & Co. and the Selfridge & Co. there was a clear breach of contract and damages therefore could be claimed but the action was not brought by the Dew & Co. but by the Dunlop Pneumatic Co. for recovering damages and restraining the further breaches of agreement.

The Court held that the suit by Dunlop Pneumatic Co. is not maintainable as the company is a stranger to the contract and therefore the Dunlop Pneumatic Co. was not entitled to enforce the contract. In this case Lord Haldane said that, “It was a fundamental principle of English law that only a person who is a party to a contract can sue on it and that the law knows noting of a right gained by a third party arising out of a contract.”

Thus, in England the general rule is that a stranger to contract cannot enforce the contract. However, this general rule is subject to certain exception, respectively, trust of contractual rights, assignment, agency, transfer on death and bankruptcy etc. 

3. INDIAN LAW:

In India there is no provision in the Indian Contract Act providing for the doctrine of privity of contract. However, by the judicial decision it has been well established that even in India the general rule is that a person who is not a party to the contract cannot enforce the contract, i.e., a stranger to contract cannot enforce the contract.

In Jamna Das vs. Ram Avtar, (1911), a person mortgaged his property to another person. Thereafter he sold his property to a third person who agreed with the seller to pay-off the mortgaged debt to the mortgagee. The mortgagee brought an action against the third person who purchased the property for the recovery of the mortgage money. The Court held that the contract was created between the seller and the purchaser, and the mortgagee was not a party thereto and therefore he was not entitled to enforce the contract.

In the case of M.C. Chako vs. State Bank of Travancore, (AIR 1970 SC 540), the Supreme Court has made it clear that a person who is not a party to the contract cannot enforce it. However, this general rule is subjected to a few exceptions. If a trust is created by contract in favour of a third person in relation to a property, the third person can enforce the contract, even if he is not a party to the contract. Besides, where the contract is a part of the family arrangement, the person for whose benefit it has been made can enforce it, even if he is not a part to the contract.

  

4. ESSENTIALS OF PRIVITY OF CONTRACT:

The essentials of privity of contract as such follows;

 

i. Parties to contract:  

A contract between two or more parties is the primary requirement for the Doctrine of Privity of Contract.

ii. Parties must be competent to contract and there should be a valid consideration:

Application of this doctrine is conditional upon the party’s competence and the presence of consideration.

iii. Breach of contract by one party:

The fundamental prerequisite for the application of the doctrine of privity of contract is a breach of contract by one Party.

iv. Only parties to contract can sue each other:

The parties to the contract get entitle to sue other when the breach of contracts or agreements occurred.

5. EXCEPTIONS TO THE DOCTRINE OF PRIVITY OF CONTRACT:

As a general rule only parties to contract are entitled to sue each other, but following are exceptions to the rule that, ‘a stranger to the contract cannot sue’.  These exceptions are:

i. Trust:

A person, called beneficiary, in whose favour a trust or other interest, in some immovable property has been created can enforce it, even though he is not a part to the contract.

ii. Marriage settlement, partition or other family arrangement:

If the contract has been entered into for the purpose of marriage-settlement or other family arrangement, the person for whose benefit such arrangement has been made may enforce it, even though he is not a party to the contract.

iii. Assignment of contract:

The assignee rights and benefits under a contract not involving personal skill can enforce the contract, subject to the equities between the original parties.

iv. Acknowledgement or estoppels:

Where the promisor by his conduct, acknowledges himself as an agent of the third party, a binding obligation is hereby incurred towards him. Acknowledgement may be express or implied. The conclusion of acknowledgement may be derived on the basis of the conduct of the parties.

v. Contract entered into through an agent:

The principal can enforce the contracts entered into by his agent provided the agent’s acts within the scope of his authority and in the name of the principal. 

vi. Covenants running with the land:

In case of immovable property, the purchaser of the land with notice that the owner of the land is bound by the certain conditions or covenants created by and agreement affecting the land shall be bound by them although he was not party to the original agreement which contained the conditions or covenants.

6. CONCLUSION:

General rule of law that only parties to a contract may use and be sued on that contract. But with passes of time, the law evolved as well, and today, in exceptional cases, even a stranger is allowed to file a lawsuit to protect his interests.

 

According to Indian law, a person cannot be required to give himself any consideration, but if he is a party to the contract, he can still enforce it. In India, the principle of privity of contract (stranger to contract cannot sue) has to be distinguished from the rule "stranger to consideration can sue". The doctrine of privity of consideration is not applicable in India, but the doctrine of privity of contract is applicable in both India and England. This is because in India, a stranger to consideration may sue, but a stranger to the contract may not.

 

Due to recent developments in the doctrine of privity of contract, it is now well established that a beneficiary of any contract or special law may file a lawsuit against a third party even though they were not parties to the contract.