Critical Study of Privity of Contracts

Only a person who is a party to a contract can sue on it’ or’ a stranger to a contract cannot sue’ is an axiomatic principle of law of contract emanating from such conceptions. This principle is known as ‘ privity of contract ‘, signifying that a contract binds only those that are privy to it or that there must be contractual privity for the enforcement of contractual rights and obligations. [1]

REASONS FOR EXISTENCE OF PRIVITY OF CONTRACT

The reasons for limiting the operation of the contract to its parties only are many and the following are the most profound:

The third party did not provide consideration for the promise, even though consideration was provided for the promise.

It is unjust to permit a person to sue on a contract when he cannot be sued upon it.

If non-contracting parties were permitted to enforce contracts made for their benefit, the rights of the contracting parties to vary or terminate such contracts would be affected.

It is unfair to call upon the promisor to be liable to two actions, from the promisee as well as the third party.

It is desirable to limit the potential liability of a contracting party from the possibility of a wide range of possible third party claimants

The Doctrine in India

There has been a divergence of opinion in India as to whether the Doctrine of Privity of Contract, which prevails in the English Courts, is applicable to the Indian Courts.

The Indian Contract Act, 1872 (hereinafter referred to as “the Act”) codifies the methods of entering into a contract, executing a contract; rules to implement provisions of a contract and effects of breach of a contract. The provisions of the Act prevail over any usage or custom or trade however the same will be valid as long as it is not inconsistent with provisions of the Act.

Section 2(d) of the Act says that ” 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 abstain from doing, something , such act or abstinence or promise is called a consideration for the promise”

It is clear from this section that the consideration for a contract can proceed from any person and not necessarily the parties to the contract. A promise is enforceable if there is some consideration for it and it is quite immaterial whether it moves from the promisee or any other person. However there is no specific provision in the Act which either for or against the Doctrine of Privity of Contact. It is through a series of case laws that the Doctrine has evolved.

In Debnarayan Dutt v Ramsadhan [2] it was observed that the doctrine in Tweedle v Atkinson is inapplicable in India and that “The aim of the Mofussil Courts of Justice in British India is to do complete justice according to the principles of Justice, equity and good conscience.”

The decision in Debnarayan Dutt v Ramsadhan was followed in N. Devaraja v M.Ramakrishnan [3] .The facts of the case in brief are that A sold a house to B under a registered sale deed under the terms that a certain sum will be paid to A and the remaining to C, A’s creditor. B subsequently made part- payments to C informing that the amount was in respect of the sale and that he would pay the remaining amount, B failed to make the payment and C sued B for the same. It was held that the suit was maintainable as B promised to pay the amount to C and hence C was entitled to bring a suit against B for recovery of the amount.

However in Jamna Das v Ram Autar [4] the Privy Council extended the doctrine to India and held that the person not party to the agreement cannot recover the amount due from one party. This decision has been followed in few cases later like Babu Ram Budhu Mal v Dhan Singh Bhishan Singh [5]  where the mortgagee was not allowed to recover the money retained by the second mortgagee under an agreement between the owner and the second mortgagee.

Subbu Chetti v Arunachalam [6] considers in detail the development of the Doctrine of Privity of Contract with reference to the decisions of the English Court. The court considering the decision in various English cases held that “where all that appears is that a person transfers property to another and stipulates for the payment of money to a third person a suit to enforce that stipulation by the third party will not lie.”

The Supreme Court has by its decision in M.C. Chacko v State of Travancore [7] expressed itself in favour of the rule in Tweedle v Atkinson thus clearing the ambiguities in the application of the doctrine of Privity of Contract.

There are two aspects of this doctrine. Firstly, no one but the parties to the contract are entitled under it. Rights or benefits may be conferred upon a third party but such a third party can neither sue under the contract nor rely on defenses based on the contract. The second aspect is that the parties to a contract cannot impose liabilities on a third party.

Privity of Contract in English Law [8]

The rule laid down in Tweedle v Atkinson [9] laid down the foundation of the doctrine of “Privity of Contract” which means that a contract is a contract between the parties only and no stranger to the contract can sue even if the contract is avowedly made for his benefit. Thus a stranger to the consideration cannot sustain the action on the promise made between two persons unless he has in some way intervened in the agreement.

In the above case the plaintiff was to be married to the daughter of one G and in consideration of this intended marriage G and the plaintiff’s father entered into a written agreement by which it was agreed that each would pay the plaintiff a sum of the money. G failed to do so and the plaintiff sued his executors.  Thus, although the sole object of the contract was to secure a benefit to the plaintiff, he was not allowed to sue as the contract was made with his father and not with him. [10]

In Scruttons Ltd v Midland Silicones Ltd [11] , it was observed that the principle is that apart from special consideration of agency, trust, assignment or statute, a person not a party to a contract cannot enforce or rely for protection of its provisions. The principle was reaffirmed in Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [12]  where it was held that as the plaintiffs were undisclosed principal, no consideration moved from them to the defendants and that the contract was unenforceable by them.

The two basic principles under the English Law as can be ascertained from the above cases are that firstly consideration should move from the promisee only and secondly that a contract cannot be enforced by a person who is not a party to the contract even if it is made for his benefit.

The exceptions to the Rule [13]

Beneficiaries under a trust or charge-Any beneficiary under a trust or when an obligation under a contract is undertaken for the benefit of a third party, coupled with a charge on immovable property; the third property beneficiary can enforce it.

Covenants running with the land – It is an accepted principle of the law of transfer of property that anyone who takes property will be entitled to all the benefits running with the land. Any covenant imposing an obligation on a party can be enforced by any stranger who gets that property.

Family Arrangements- Family arrangements between male members and female members of a family, benefiting female members in the family, such as provisions for maintenance and marriage expenses, are enforceable by the beneficiaries, i.e., the female members.

Acknowledgement-When one party to the contract, who has undertaken an obligation, for eg to pay a certain sum of money to a third person that he will be so obliged, the third person can enforce it

THE REFORM [14]

The law commission in India in its 13th report noted that there has been a conflict of judicial opinion as to the applicability of this doctrine in India. Some of the areas of conflict are discussed below .

In some cases the view has been taken that the words ‘any other person in s 2(d), which depart from the English rule in that the English rule in that consideration must proceed from the promisee, necessarily implied corresponding deviation from the English rule as to privity of contract

The preponderating view, however, is that the English rule of privity of contract applies to India, notwithstanding section 2(d). The privy council in Jamnadas vs Ram autar 34 All 63(pc)applied the rule. In krishnalal vs promila, Rankin CJ, struck a decisive blow to the argument based on the langiage of section 2 (d). While conceding that the clause might be construed as impling a departure from the corresponding English rule, he observed that the definitions of the promisor and promise in section 2, rigidly excluded the notion that a stranger to the contract can sue thereon.

At the same time, following English law, numbers of exceptions have been engrafted upon the doctrine by our courts. Thus, it has been held that a person who is not a party to a contract may nevertheless sue upon it-

Where the contract implies a trust in favor of the third party, whether any property is specifically charged or not.

Where money to be paid under the contract is charged on some immovable property

Conclusion

The Act does not specifically provide for the doctrine of Privity of Contract, however through a series of case laws the doctrine as laid down in Tweedle v Atkinson is now applicable in India along with various exceptions.

With reference to consideration of a contract the position in India and England are however different. Under the English law only a party to the contract can pay the consideration. If he doesn’t pay the consideration he becomes a stranger to the contract. Under the Indian Law, it is not necessary that consideration should be paid by the promisee.

Though there are no express provisions as to assignment of rights and obligations under a contract in the Act, the Principle of assignment has been recognized and developed by the courts through its various decisions.