PRIVITY OF CONTRACT  

The term ‘contract’ has been defined under section2(h) of the Indian contract act 1872, which states that- a contract is an agreement entered by two parties with certain consideration and is enforceable by law. Section10 of the Indian Contract Act, 1872 further lays down ‘what agreements are contracts’- An agreement will be a contract if:

  • It has been entered by the free consent of the parties,
  • who are competent to contract;
  • There is a lawful consideration and a lawful object, also
  • the agreement has not been expressly declared void.

The doctrine of privity of contract implies that a person stranger to the contract cannot sue for the enforcement of that contract. This doctrine can be traced back to various English cases. In Tweddle v. Atkinson [1], it was held that only parties to the contract can sue each other. The same was reiterated by the House of Lords in Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd. [2] and the doctrine of privity was upheld.

In Dunlop’s case, Dunlop Co. was a tire manufacturer who sold the tiers to Dew & Co. with the agreement that they cannot be sold below the list price. Dew & Co. was asked to forward the same condition to the retailer companies. Further, it was decided that if the tires were sold below the recommended price, the respondents would pay appellants (Dunlop Co.) a sum of ₤5 for every tyre sold below the list price. The Selfridge & Co. (respondent) sold some tyres below the list price and thereby Dunlop Co. asked for the damages regarding same.

It was held that Dunlop Co. wasn’t entitled to the damages from Selfridge & Co. since the parties to the contract were Dew & Co. and Selfridge & Co.. Further, Dunlop Co. had not given any consideration to Selfridge, thus it cannot be treated as a valid third party to the contract.

POSITION IN INDIA:

The doctrine of privity of contract is by far the same in India as in England. However, the Indian Contract Act, 1872 does not explicitly state the applicability of the doctrine. The trend regarding the privity of contract in India can be witnessed through the rulings in various judgments. In Jamna Das v. Ram Autar [3] Lord Macnaughtan said:

“The mortgagee has no right to avail himself of that. He was no party to the sale. The purchaser entered into no contract with him, and the purchaser is not personally bound to pay this mortgage debt.”[4]

In the aforementioned case, A sold his mortgaged property to B. B agreed to pay off the mortgage debt to X on behalf of A. X to claim his payment brought an action against B. It was held by Privy Council that there was no contract between X and B thereby X could not enforce the contract to recover his amount from B.

 The doctrine of privity of contract was supported in most of the judgments in India. In the cases, State of Bihar v Charanjitlal Chadha [5], Advertising Bureau v. C.T. Devaraj [6], the suits were dismissed on the ground of privity of contract.

EXCEPTIONS TO THE DOCTRINE OF PRIVITY OF CONTRACT

Laws and provisions evolve as society develops. Similarly, the rule of privity has not been kept rigid in India; it has grown certain exceptions, i.e., in some circumstances one who is not a party to the contract can also sue for enforcement of the contract. These exceptions are:

  1. Trust of contractual rights or beneficiary under a contract: If an individual is not a party to the contract but the contract confers certain benefits on him, then that person can also sue for the enforcement. This exception has been supported by Privy Council in Nawab Khwaja Muhammad Khan v. Nawab Hussaini Begum [7]. The same happened in Klaus Mittelbachert v East India Hotels Ltd [8] where plaintiff was injured by the negligence of a hotel. Though he himself did not enter into the contract with the hotel, he was held to be a beneficiary under the contract and was awarded compensation for the damages he suffered.
  2. Marriage settlement, partition or other family arrangements: When a benefit is intended towards the third party (not a party to the contract) under a family arrangement, then that third party can also sue for enforcement. In Yeeramma v Appayya [9]daughter agreed to maintain her mother on the condition that her father would convey the property in her favour. The mother however not being a party to the contract was held entitled to sue for the specific performance in her favour.
  3. Acknowledgement or estoppel: If a person by his conduct, acknowledgement or admission recognizes other’s right to sue him for his default then the doctrine of privity will not apply. This exception was used in the case of Narayani Devi v. Tagore Commercial Corporation Ltd. [10]. It was agreed by defendants to pay certain amount to the plaintiff’s husband during his lifetime and to plaintiff thereafter. Defendants initially made some payments to the plaintiff and later asked for extension of time to pay. It was held that by already making some payments to the plaintiff defendants had acknowledged and admitted their liability towards plaintiff. The plaintiff was thus entitled to the rest of the payment.

CRITICISM: The doctrine of privity of contract has been criticized widely. The Law Revision Committee in 1937 headed by Lord Wright recommended the abolition of doctrine. Besides, famous English jurist Lord Denning was also a major critic; Lordship in various cases like Beswick v. Beswick [11] criticized the privity principle. The same was observed by Steyn LJ in Darlington Borough Council v. Wiltshier Northern Ltd [12]. The main ground for the criticism has been the interests of third party being jeopardized due to the privity of contract. If a contract provides certain benefits to the third party, the privity principle might cascade that party’s reasonable interests. Further, the third party cannot sue for the enforcement even when his interests are involved due to which they have to endure losses that otherwise could have been avoided.

CONCLUSION: Thus it can be concluded that although with the course of time various exceptions have been created regarding the doctrine of privity of contract but the true position of the rule still remains ambiguous. The doctrine does not attract any certainty. The Indian Contract Act, 1857 does not clearly state the validity and exceptions of the privity principle. Thus there is a need for positive modifications in the doctrine so that the needs of the parties to the contract and the strangers to the contract can be harmonized.

References:

Dr Avtar Singh, Contract Act and Specific Relief, EBC, 12th Edition, 2017

R.K. Bangia, The Indian Contract Act, Allahabad Law Agency, 15th Edition, 2016

  1. (1861) 1 B. & S. 393.
  2. 1915 AC 847.
  3. (1916) ILR 38 All 209.
  4. Jamna Das v. Pandit Ram Autar Pande, (1911) 30 I.A. 7.
  5. AIR 1960 Pat 139.
  6. AIR 1995 S.C. 2251.
  7. (1910) 37 IA 152.
  8. AIR 1997 Del 201.
  9. AIR 1957 AP 965.
  10. AIR 1973 Cal 401
  11. (1968) AC 58
  12. (1995) 3 AIIER 895.

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