Privity of Contract

Privity of Contract is an essential part of a contract as per the Indian regulatory framework. The Indian Contract Act, of 1872 throws light on the definition of a contract under provision Section 2(h). It states that an agreement that forms between two parties or more than two parties is enforceable or in simpler terms has legal backing or recognition, and this agreement is known as a contract. 

When a contract is formed, it creates obligations or responsibilities for the involved parties or to the parties of the contract that they have to fulfil without default. However, if either of the parties fails to discharge its obligation or does not fulfil its commitments,  the other involved party has a full-fledged right to bring legal action against the defaulting party and sue them for breach. This is done for the goal of obtaining a remedy. An important aspect of ensuring that a contract has validity in the eyes of the law is consideration. The Indian Contract Act talks about consideration under Section 2(d). Consideration can be simply understood as any act or abstinence from carrying out an act performed by a promisee or any person other than the promisee at the request of the promisor. Moreover, it must be noted that as per Indian laws, someone who is not directly a party to the contract can provide consideration if it is done at the request of the promisor. 

Understanding The Privity Of Contract:

The principle of privity of contract forms an essential part of contract law. The term ‘privity’ can be defined as a relationship accepted with knowledge and consent between parties. Under this doctrine, only parties that are involved in a particular contract have the right to enforce any or all the rights and obligations that are included in the said contract. In simpler terms, it means that any stranger or a person who is not the party to the contract is barred or forbidden from enforcing the rights or obligations contained in the said contract. The doctrine of privity of contract is a safeguard measure in the law of contract since it protects contractual parties from any such commitments or promises that they did not consent to fulfil or discharge. In Jamna Das vs Ram Autar Pande (1916), the doctrine of privity of contract was upheld for the first time in India.

Example - Riya and Sita enter into a contract where Riya pays Rs. 1500 for Sita to deliver a novel to Shilpi. Shilpi being a stranger to the contract between Riya and Sita does not have the right to sue Sita if the novel is not delivered. While the third parties have the right to provide consideration at the request of the promisor, they cannot ask for the enforcement of the rights and obligations contained in the contract as they are not parties to the contract. At this given stage, it is crucial to understand the difference between someone who is a stranger to a contract and someone who is a stranger to consideration. When someone is a stranger to the contract, they do not have the right to enforce the contract. However, when someone is a stranger to a consideration, they can still be a party to the contract and have the right to challenge it.

Statistical Insights on Privity of Contract

Doctrine Of Privity In English Law

When it compares the doctrine of privity under both Indian Law and English Law, English law takes a more restrictive stance on the doctrine of privity. English law requires consideration to move specifically from the promisee and not from any other party. This restriction places both strangers to the contract and strangers to consideration in the same category, meaning that if the promisee does not provide the consideration themselves, they cannot enforce the contract.

The doctrine of privity in English law was first recognized in the case of Tweddle v. Atkinson (1861). In this case, a contract between John Tweddle and William Guy stipulated payments to their engaged children. However, when the father of the bride died before making the payment, and the groom's father also died before initiating a lawsuit, the groom's attempt to sue the executor of William's estate for the promised sum failed. The court held that since the groom was both a stranger to the contract and the consideration, his suit was not maintainable.

The doctrine was reaffirmed in the landmark case of Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd (1915). In this case, Dunlop, a tyre manufacturer, entered into an agreement with Dew & Co., dealers who agreed not to sell tyres below a set price. This agreement was extended to contracts with retailers, including Selfridge. When Selfridge sold tyres below the fixed price, Dunlop sued for damages. Initially, the decision favoured Dunlop, but it was later overturned on appeal, emphasizing that Dunlop, not being a direct party to the contract between Selfridge and Dew & Co., had no right to claim damages.

Exceptions To The Privity Rule

Despite its broad application, the doctrine of privity of contract is not absolute. Several exceptions allow third parties to sue on a contract:

1. Trust Of Contractual Rights Or Beneficiary Under A Contract: A trust involves a contract created for the benefit of a third party. Here, a trustor transfers property to a trustee, who holds it for the beneficiary's benefit. Even though beneficiaries are not parties to the original contract, they can enforce its terms. An illustrative case is Rana Uma Nath Baksh Singh v. Jang Bahadur (1938), where a father's transfer of his estate to his son for the benefit of his illegitimate son allowed the latter to sue when payments were not made as promised.
2. Provision For Marriage Or Maintenance Under Family Arrangement: Contracts related to family arrangements, such as those for marriage or maintenance, can be enforced by third parties intended to benefit from them. For example, in Lakshmi Ammal v. Sundararaja Iyengar (1914), an agreement among brothers to cover their sister's marriage expenses was enforceable by the sister, despite her being a third party to the agreement.
3. Acknowledgement Or Estoppel: Estoppel prevents a person from contradicting something they have previously affirmed, either through words or conduct. If a party acknowledges a third party's right to sue under a contract, they cannot later deny it. In Devaraj Urs v. Ramakrishnayya (1951), a creditor could enforce a contract after the buyer agreed to pay him directly, showing that acknowledgment established the creditor's rights despite being a third party.
4. Contracts Entered Into Through An Agent: Agents can enter into contracts on behalf of principals, making the principal the party who can enforce the contract, even though the agent appears as the contracting party. For example, if A appoints B as an agent to purchase rice from C, A retains the right to enforce the contract with C as B is merely acting as A's representative.
5. Charge Created On Specific Immovable Property: Third parties can enforce contracts where specific immovable property, such as land, is charged for their benefit.
6. Assignment Of A Contract: Contracts can be assigned, meaning the rights and obligations are transferred to a third party. The assignee can then enforce the contract. For instance, if a husband assigns his insurance policy to his wife, she can enforce the contract even though she was not an original party.
7. Collateral Contracts: Collateral contracts are ancillary to a primary contract and can involve different parties. Third parties in a collateral contract may enforce the main contract. In Shanklin Pier Ltd. v. Detel Producers Ltd. (1951), a guarantee provided by a paint manufacturer to a party not involved in the initial contract was enforceable when the paint failed to meet expectations.

Conclusion

In conclusion, while the doctrine of privity of contract serves to protect parties from obligations to which they did not consent, it is not an absolute rule. Various exceptions allow third parties to enforce contracts under specific conditions, reflecting the complexities of contractual relationships. These exceptions acknowledge situations where third parties might have legitimate interests affected by a contract's performance or breach, ensuring that the law provides adequate recourse in such scenarios.

About The Author:

Adv. Shashank Tiwari, a passionate first-generation lawyer and graduate of Guru Gobind Singh Indraprastha University, has built a career rooted in dedication and diverse legal expertise. Known for his strong observation skills and client-focused approach, he handles cases in Civil and Commercial Litigation, Arbitration, Insolvency, Real Estate, Property Law, and Intellectual Property Rights. Shashank actively represents clients across the Supreme Court, High Courts, District Courts, and various tribunals, always committed to staying updated with legal advancements and delivering effective, thoughtful solutions for his clients’ needs.