Introduction:
The Privity of Contract is an English law concept that guarantees that no one should be entitled to or bound by the provisions of the arrangement to which he is not an undisputed party. In simple words, it can be said that it is a theory of common law that provides that privileges or duties should be enforced only on the parties to a contract. The doctrine makes it difficult for a third party to have any genuine power to execute the contract or to have contractual liabilities imposed as a result of the contract and that contractual options are solely for the contracting parties.
As per the dictionary meaning, the implication of privity of contract means the legal doctrine that a contract confers rights and imposes liabilities only on its contracting parties. The parties and not any third party can sue each other or be sued under the terms of the contracts. Privity is the legal term for a close and common relationship to the particular right of property or power to guarantee its warranty. Lack of privity refers to the absence of a contract between parties, therefore not entitled to perform certain duties and not granting them certain rights. So in the absence of privity of contract, there will be a possibility that an individual can also file a case or sue any one of the parties under contract or a possibility of no contractual obligations between the parties at all prevails.
The doctrine of privity of contract means that only those people who are involved in the contract will have the right to enforce it. In general, only parties to a contract have the right to sue for breach of a contract, although in recent years the rule of privity has degraded somewhat and third-party beneficiaries have been permitted to recover damages for breaches of contracts they were not a party to. There are two times where third-party beneficiaries are allowed to fall under the contract. The duty owed test looks to see if the third party had agreed to pay a debt for the original party. The intent to benefit test looks to see if circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised action.
Meaning
The Privity of a contract is a common law principle which states that only parties under the contract are permitted to sue each other to obligate their rights and liabilities and no stranger is allowed to impose obligations upon any person who is not a party to the contract even though the contract has been entered into for his benefit. The rule of privity is established on the interest theory which implies that the only person interested in the contract is authorized as per law to protect his rights.
It is to be noted that there isn’t a single clause concerning this doctrine in the Indian Contract Act. In India, through a series of case rules, it has been commonly acknowledged. Section 2(h) of the Indian Contract Act, 1872 defines a contract as an agreement implementable by statute supported by consideration between two parties. In other terms, just an agreement is a contract.
Under Section 2(e)[1] of the Act, the term ‘agreement’ has been specified. According to this clause, each promise and each set of promises, forming the consideration for each other is an agreement, Section 2(d)[2] describes consideration as an act that must have been undertaken at the promiser’s desire or request. One of the notable features of this section is that the promisee or some other person may conduct the act that is to establish consideration. This suggests that it is immaterial who provided it as long as there is a consideration for the promise. In the case of Dutton v Poole, this principle was established.
Illustration: If X strikes a contract with Y, if he fails to keep his word, he is under a civil requirement to pay damages. The enforceability or obligation of this contract is entirely in the hands of X and Y, to the exclusion of others, and it is the basis of the doctrine of contractual confidentiality. The theory of the privity of a contract is that a contract can’t grant rights or enforce on any individual, except on the parties, certain duties arising under it.
Laws
As a common rule, both English and Indian laws are similar to each other that only parties to contract can sue each other. In an important English case of Tweddle v. Atkinson[3], it was detained that the appellant cannot sue as he was both a stranger to the contract as well stranger to consideration. This concept of privity of contract was again examined in the case of Dunlop Pneumatic Tyre Co. Ltd v. Selfridge & Co. Ltd[4]. In the Indian perspective also this concept of privity of contract is alike, the only difference being is that in India a person who is a stranger to consideration can sue whereas in English law he cannot. The role of consideration in the Privity of contract is that consideration is the most important element of any contract existing between the parties unless there is considering a contract is considered to be void. It is stated in Section 2(d) of the Indian Contract Act 1872. Consideration is considered as the foundation of every contract and it forms the basis of it. Legal exceptions to the doctrine of privity of contract, as per the Indian Contract Act 1872, the exception to the doctrine of privity of the contract are given under section as per the Contracts (Rights of Third Parties) Act, 1999 (English Law).
- Subject to the provisions of this Act, a person who is not a party to a contract may in his own right enforce a term of the contract if the contract expressly provides that he may, or subject to subsection.
- The term significances confer a benefit on him. (2) Subsection (1) (b) does not apply if on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party. This entails that a person who is named in the contract as a person authorized to enforce the contract or a person receiving a benefit from the contract may enforce the contract unless it appears that the parties intended that he may not.
- As per the Contracts (Rights of Third Parties), Act 1999 court can enforce the third party to a contract only when the contract expressly provides that he may, or subject to subsection (2), the term purports to confer a benefit on him.
English law vs Indian Law
As a common rule, both Indian and English laws are almost like one another that only parties to contract can sue each other. During a leading English case of Tweddle v. Atkinson, it had been held that the appellant cannot sue as he was both a stranger to the contract also stranger to consideration. This idea of privity of contract was again analyzed within the case of Dunlop Pneumatic Tyre Co. Ltd v. Selfridge & Co. Ltd. within the Indian context also this idea of privity of contract is analogous, the sole difference being that in India an individual who may be a stranger to consideration can sue whereas in English law he cannot. Regarding consideration of a contract, the position in Indian law and English law is however different. Under English law, only a party to the contract pays the consideration. If he doesn’t pay the consideration he becomes a stranger to the contract. Under Indian Law, consideration doesn’t get to be paid by the promisee.
Landmark Case
P.R. Subramanian Iyer v. Lakshmi Ammal Lakshmi Ammal and Others[5]
This is a plea by certificate under Article 133(1) (a) of the Constitution. The case from which this appeal arises was brought on the foot of a promissory note executed by deceased R.A. Krishnan and G.R. HariharaIyer who was the 10th defendant in the case. But in the case, the decree was appealed against defendant No. 1 to 10 personally, against their assets and the business assets of the deceased Veeraraghava Iyer. A decree against the assets of the deceased R.A. Krishnan in the hands of Defendants 1 to 9 was also claimed.
From the promissory note, it appeared that it was a debt borrowed by the two executants. But the appellant’s case is that the debt was borrowed by VeeraraghavaIyer grandfather of R.A. Krishnan to finance the business left by him. Veera RaghavaIyer died on August 5, 1937, leaving behind him his widow, a daughter who was 1st defendant, and her children. He had also left behind him a son but he was a congenital idiot. After the death of VeeraraghavaIyer, the business was turned over to his widow. The widow died on January 19, 1945. She died during the awaiting settlement of this appeal. The first defendant succeeded to that estate.
Defendant No. 10, HariharaIyer was a stranger to the family of Lakshmi. Defendant no. 1’s sons were Defendant no. 2 to 6. The children of R.A. Krishnan were defendants’ no. 7 to 9. The plaintiff cannot have a personal decree against defendants 1 to 9 because they were not parties to the suit promissory note. There is no privity of contract between the plaintiff and defendants 1 to 9.
For granting a decree against the assets of defendants 1 to 9 there was no legal basis which could be found out. The plaintiff has been taking inconsistent positions. At one point he contended that defendant no.1 had put forward defendants 2 to 9 as the owners of the business left by VeeraraghavaIyer. Hence she must be deemed to have surrendered her right. This is an untenable contention. The mere fact that a mother’s estate was managed by her sons does not indicate that the mother had handed over to her right. At another point, it appears to have been contended on behalf of the plaintiff that deceased Krishnan borrowed the loan in question as to the agent of defendant no. 1. There is no basis for this either in the evidence or in the pleading. The trial court as well as the High Court have rejected that dispute.
The next plea taken was that the first defendant having allowed R.A. Krishnan to manage her businesses, she cannot now be allowed to contend that she is not liable for the suit debt. Both Courts have held that there is no suitable evidence to show that the suit debt was utilized for financing the businesses in question. We see no reason to differ from that conclusion. In this view, it is not necessary to go into the question of whether even if the money borrowed had been used for those businesses, the first defendant would have been liable in law for that debt.
The first defendant was the owner of the business in question in her own right and not as the representative of any family. There was no substance in any of the contentions advanced on behalf of the appellant. As the result, this appeal fails and the same is dismissed with costs.
Case Analysis
As a general rule only parties to contract are allowed to sue each other, but now with time exceptions to this general rule have arisen, allowing even strangers to contract to sue. These exceptions are beneficiary under a contract, Conduct, Acknowledgement or Admission, Provision for maintenance, or marriage under the family arrangement. There must be a privity of contract to attain a personal decree. A mere affirmative decree remains non-executable in most cases commonly. However, there is no prohibition upon a party from pursuing an amendment in the plea to include the unsought relief, provided that it is saved by restriction. However, it is mandatory on the part of the defendants to raise the issue at the earliest.
In the case mentioned above and as per the topic in the absence of privity of contract there is no contract between parties, thereby not requiring them to perform certain duties and not entitling them to certain rights. That’s why the plaintiff cannot have a personal decree against the Defendants 1 to 9 as they were not parties to the suit promissory note. There is no privity of contract between the appellant and Defendants 1 to 9. It is not shown how the appellant can get a personal decree against them.
Case Laws
In Donoghue v. Stevenson,[6] a friend of Ms. Donoghue bought her a bottle of ginger beer, which was flawed. To be specific, the ginger beer contained the partially decomposed remains of an animal that is a snail. Since the contract was between her friend and the shop owner as her friend bought it from the shop, there was no privity of contract between the manufacturer and the consumer, but it was established that the manufacturer has a duty of care and she was awarded damages in tort.
In Australia, it was held that third-party beneficiaries may sustain a promise made for its benefit in a contract to which it is not a party Trident General Insurance Co Ltd v. MacNeice Bros Pty Ltd[7]. There were warnings, however; the two parties to the contract can differ the terms of the contract as they see fit unless the third-party has depended on the promise, and the promisor is subject to any defences that it would have had the promise been enforced by the promisee.
The issue is any difficulties with consideration moving from the Docker must be made out. It was explored in the case of New Zealand Shipping Co Ltd v. AM Satterthwaite & Co Ltd[8], where it was held that the Docker had provided consideration for the benefit of the barring clause by the discharge of goods from the ship.
New Zealand has passed the Contracts Privity Act 1982, which allows third parties to sue if they are adequately recognized as beneficiaries by the contract, and in the contract, it is conveyed or implied they should be able to enforce this benefit.
In the case of Winterbottom v. Wright[9], in which winter bottom, a postal service carriage driver, was hurt due to a defective wheel, he attempted to sue the manufacturer of Wright for his injuries but the courts, however, decided that there was no privity of contract between them, the manufacturer and consumer to support the Industrial Revolution.
MacPherson v. Buick Motor Co[10], a case similar to Winterbottom v Wright involving a car’s defective wheel. Judge Cardozo, writing for the New York Court of Appeals, decided that no privity is required when the manufacturer knows the product is probably unsafe if defective, third parties i.e. consumers will be harmed because of said error, and there was no further testing after the initial sale.
The decisions in Nochulliyil Euzhuvan Theethi son Thethalan v. Eralpad Rajah styled Flaya Rajah Avargal of PatinharaKovilagam and KrishnaBhatta v. Narayana Acharya[11] on which the appellants’ counsel relies can be of no assistance. It was held in the Nochulliyil case that the mortgagee with possession from the lessee is not liable to the lessor for rent as there is neither estate nor privity of contract between them. With no doubt,the respondents had indeed transferred their entire interest in the property to the appellants, and therefore there existed a foundation for the creation of privity between the plaintiffs and the Board. However, as mentioned above, the Board never agreed to substitute the appellants as its debtors in place of the respondents. In Saradindu Mukherjee v. SmtKunjaKamini Roy[12]case, it was held that an express or implied recognition by the lessor of a transferee from the original tenant would be applicable to discharge the liability of the tenant. In this case, the evidence of such recognition is lacking. Krishan Bhatta’s case is different for the same reason.
Analysis
The case from which this plea arises was brought on the promissory note executed by deceased R.A Krishnan and G.R HariharaIyer the 10th respondent in the suit. A decree against the possessions of the deceased R.A Krishnan in the hands of Defendants 1 to 9 was also claimed. The trial court dismissed the case but the High Court in appeal decreed the suit against the possessions of R.A Krishnan in the hands of his heirs and the 10th defendant personally. The plaintiff cannot have a personal decree against Defendants 1 to 9 as they were not parties to the case on the promissory note. It was unable to find out any legal basis for granting a decree against the assets of Defendants 1 to 9.
The Act does not exactly provide for the doctrine of Privity of Contract, however, through a series of case laws the doctrine as laid down in Tweedle v Atkinson case is now applicable in India along with numerous exceptions. Nevertheless, there are no express provisions as to the allocation 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 taken during passing the judgments and various cases.
Conclusion
From the above discussion, we can see that although only parties to contract can sue each other and strangers are not allowed to enter between the parties to sue. But with time, the law has also developed and now even a stranger is permitted to sue to protect his interest under exceptional situations. Privity of contract is a doctrine of contract law, and should not be lightly cast off through the process of judicial decree. That being said, the outcome principle is equally compelling, which is that in suitable conditions, the Courts must not renounce their judicial duty to decide on gradual changes to the common law necessary to address progressing needs and principles in society.
References:
[1]Indian Contract Act, 1872, sec2 (e) pg.3
[2]Indian Contract Act, 1872, sec2 (d) pg.2
[3](1861) 1 B&S 393; (1861) 121 ER 762
[4]UKHL 1, AC 847
[5](1973) 2 SCC 54: AIR 1974 SC 1930 Civil Appeal No. 748 of 1967, decided on May 4, 1972
[6]UKHL 100, SC (HL) 31, AC 562, All ER Rep 1;
[7](1988) 165 CLR 107)
[8][1975] AC 154
[9](1842) 10 M&W 109; (1842) 152 ER 402
[10]111 N.E. 1050, 217 N.Y. 382
[11][AIR 1949 Mad 618: (1949) 1 MLJ 191]
[12][AIR 1942 Cal 514: 46 CWN 798]
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