Privity of Contract

Introduction:

The doctrine of privity of contract is a common law principle which states that a person not a party to a contract cannot enforce the terms of the contract by suing on it. To simplify, only the parties to the contract bear the legal power to sue each other to ensure the enforcement of their rights and liabilities. Third parties do not have rights or obligations under the contract. The doctrine finds a ground in ‘Fairness Theory’ and ‘Bargain Theory’.

Illustration

If ‘A’ and ‘B’ enter a contract wherein A has made a promise to deliver goods to B and if A fails to do so it will be considered as a breach of the contract. In this only B has the right to use A for the breach and no other party can move a case against A.

Essentials of Privity of Contract

1. Parties enter a valid contract
2. Parties are competent to enter a contract.
3. Valid consideration
4. Breach of the contract by one party
5. Only parties to the contract can sue

Exceptions

The general rule allows only the parties of the contracts the entitlement to sue but with the passage of time and dynamic nature of the society and flexibility in law has given ways to certain exceptions. The exceptions are:

• A Third-Party Beneficiary under the contract– The third may have the right to sue on a contract, despite not being an active partner of the contract. This arises when the third party is an intended beneficiary of the contract. When two parties to a contract confer benefits on a third party who has not signed the contract, at that point no doubt they proposed that the outsider should be able to independently enforce that right. For e.g. In an agreement among A and B, valuable right or beneficial rights in regard of some property might be made for C, in this case, Robin can enforce his claim on the basis of this right. The concept is highlighted in the case of MC Chacko vs State Bank Of Travancore and Muhammad Rustam Ali Khan vs Husaini Begam.

• Agency– Agency is the relationship which exists between two persons, one of whom (the principal) expressly or impliedly consents that the other should act on his behalf, and the other of whom (the agent) similarly consents so to act or so acts. In agency situations, an agent can make a contract with a third party that is binding on the principal, even though he was not privy to the original contract. Thus, making the third party i.e. the principal able to sue (and be sued) on it.

• Family Arrangements- Marriage, settlement, partition or other family arrangements where a contract is made in any of the referenced concerns and a provision is made to serve an individual, he may exploit although he is no party to it. This exception can be better understood with the case Rose Fernandes vs Joseph Gonsalves.

• Conduct, Acknowledgement or Admission– There can likewise be a circumstance in which despite the fact that there might be no privity of agreement between the two parties, yet on the off chance that one of them by his conduct or acknowledgement recognizes the right of the other, he may be liable on the basis of the law of estoppel. Acknowledgement may be expressed or implied. This can be further understood with the case of  N. Devaraje Urs vs M. Ramakrishniah and Smt. Narayani Devi vs Tagore Commercial Corporation

Privity of Consideration

This is different from Privity of Contract in the sense it believes that consideration must flow directly from the parties to the contract. A party who is a stranger to consideration cannot sue. This principle was held in Dutton v Poole (1678)

 In this case, a son contracted with his father not to fell and sell the timber from their oak wood which the son would then inherit, and in exchange, he would pay £1000 to his sister on her marriage. The sister married after the father’s death, and the son refused to make good the promised sum (equivalent to £156,000 in 2019).

The court held that consideration moved indirectly, and the promise shuts out plaintiff from a certain benefit for a future benefit dependent on the fulfillment of the promise.

Similarly in the landmark case Tweddle v Atkinson where

The son and daughter of the parties involved in this dispute were getting married. As such, the father of the groom and father of the bride entered into an agreement that they would both pay sums of money to the couple. Unfortunately, the father of the bride died before he paid the money to the couple and the father of the son died before he could sue on the agreement between the parties. As a result of this, the groom brought a claim against the executor of the will for the payment that was previously agreed between the fathers.

The court, in this case, believed the appellant cannot sue because they were not a party to the consideration. Plaintiff did not lose anything from the promise and there was no detriment to him or benefit to promisors. Hence, no consideration

This principle of Privity of Consideration is not applicable in India. This is because Section 2(d) in The Indian Contract Act, 1872 widens the definition of “consideration” so as to enable a party to a contract to enforce the same in India in certain cases in which the English Law would regard that party as the recipient of a purely voluntary promise.

Conclusion

From the above discussion, we have seen that albeit just parties to the agreement being able to sue one another and no outsider is permitted to enter between the agreement to sue. However, with the passing of time, the law has likewise evolved and now even an outsider is allowed to sue to defend his interest under exceptional circumstances.