Introduction:
Under Section 2(h) of the Indian Contract Act 1872, a contract is a legal agreement that is supported by some consideration between two parties. A contract is a legally binding agreement that may be enforced. The commitment offered to each other by both parties to fulfil their half of the bargain is a fundamental feature of contract law. Contracts, whether stated or implied, are a regular component of commercial operations. The principle of privity of contract, commonly known as the “doctrine of privity of contract,” is one of the basic principles of contract law. The doctrine of the contract of privity is a common law concept or process that restricts contractual rights and responsibilities to the contracting parties.
What is Privity of Contract?
According to the doctrine of privity of contract, only those individuals who are parties to the contract may initiate a lawsuit. It refers to the relationship that exists between parties that have entered into contractual obligations. The essential tenet of the doctrine is that a contract is always a privity agreement between the individuals who make it. Under it, no other third party can gain rights or incur responsibilities. Despite the fact that the contract may have been put into for his/her advantage, a stranger to the contract cannot enforce it.
In Indian contract law, the theory of privity of contract has been approved. In the seminal case of M.C. Chacko v. State Bank of Travancore[1], the Supreme Court affirmed the concept. In this case, the appellant was the manager of a bank that had an overdraft account with a bank that eventually merged with the respondent. The appellant’s father had signed letters of guarantee from time to time, making himself accountable for the sum owed under the overdraft arrangements. The appellant’s father signed a document transferring his property to the appellant and other family members. The deed stated that he had implemented the letters of guarantee at the plea of the appellant and that the outstanding amount to the bank was to be remunerated by the appellant; however, if any amount had to be paid by him (father) pursuant to the letter of guarantee, the appellant and the properties allocated to him were to be held liable for that amount. The creditor bank sued the debtor bank, as well as the appellant and his father’s other descendants and legal staff, for the sum owed under the overdraft agreement, claiming that a charge had been placed on the assets to which the appellant’s father’s deed pertained. The trial court restricted the allegation against the debtor bank and the appellant to the property obtained from his father under the deed but concluded that the claim to pursue the father’s personal obligation against his legal representatives was prohibited by the statute of limitations. Even if there was an intent to impose a charge, Kottayam bank, which was not a party to the deed, could only enforce the charge if it was a beneficiary under the terms of the contract, which it is not. As a result, the case against M.C. Chacko was dropped. The high court’s decision was overturned, and M.C. Chacko is ruled not personally accountable for the amount owed under the letter of guarantee signed by K. C. Chacko.Given the facts of the case, particularly the concession made before the Supreme Court that people not parties to a contract may enforce the benefit accorded to them under the contract, it was determined that the parties to this case would bear the appropriate expenses throughout.
Illustration: ‘A’ gives a commitment to ‘B’ that he will supply items. In this scenario, if ‘A’ breaks the contract, only ‘B’ has the authority to prosecute him, and no one else has the authority to pursue him.
Exceptions to the Rule That a Third Party to Contract Cannot Sue[2]
The doctrine of privity of a contract states that only the parties to the contract have the legal right to sue one another. Perhaps, the exceptions to the doctrine of the privity of a contract have evolved over time and now, even strangers to the contract are authorized to sue. In the following situations, a stranger or a non-contracting party has the authority to sue or enforce the terms of a contract:
Trust of Contractual Rights or Beneficiary Under a Contract
A benefit may be granted to someone who is not a party to the contract under certain circumstances. If any kind of trust or other interest has been created in favour of a person, then that person can act as a beneficiary and can enforce the contract even though he’s not a party to the contract. Lord Haldane identified one of the exceptions to the theory of contract privity in Dunlop Pneumatic Tyre Co. v. Selfridge and Co.[3]
Even though it was said that only the parties to a contract have the right to sue on it; no such right is granted to a third party, it was also mentioned that “such a right may be conferred by way of property, as, for example, under a trust.”[4]
In the case of Klaus Mittelbachert v. East India Hotels Ltd.[5], a contract existed between Lufthansa, a German airline, and Hotel Oberoi Intercontinental, New Delhi, under which the staff of the former would remain at the latter’s hotel. When the plaintiff, a co-pilot of the airline, dove into a hotel swimming pool while staying at the aforementioned 5-star hotel, he sustained significant head injuries. The plaintiff was paralyzed and died after 13 years of suffering. Despite the fact that he had made no contract for work at the hotel, his suit against the management was successful. He was found to be the contract’s beneficiary, and he was compensated for the damages he suffered as a result of the swimming pool’s faulty structure. His activity was also subject to the law of torts since they were extra-hazardous because of the perilous condition of the premises and that compelled the defendant to accept total responsibility. As a 5-star hotel, the defendant was required to take greater precautions, and the damages awarded were likewise exceptional, totalling fifty lakh rupees. The foundation for a third party’s action in this situation is not the enforcement of the contract, but the right given by a specific contract in the form of trust for a third party. This exception has also been acknowledged under Indian Law.
Illustration: For the benefit of “E”, “D” consents to the transmission of specified property to be held by “H”. “E” may implement the agreement even though it is not a party to it.
Provision for Marriage Expenses or Maintenance Under the Family Arrangement
A person who is the beneficiary of a provision established in connection with marriage or other family arrangements may initiate a lawsuit, even if he is not a party to the agreement.
“Where under a family arrangement, the contract is intended to secure a benefit to a third party he may sue in his own right as a beneficiary”.[6]
In many situations, if a provision is made for the maintenance of the female members of the family when a joint family property is divided amongst the male members, such an act has been permitted. The application of the rule put out in Khawaja Muhammad Khan v. Husaini Begum[7] to such conditions is the foundation for recognizing such an action.
In Veeramma v. Appayya[8], the father’s house was to be transferred to his daughter under a family arrangement, and the daughter agreed to maintain it during his lifetime. It was decided that since the daughter was a beneficiary under the compromise agreement, she was eligible to sue for specific performance in her favour.
In the case of Daropati v. Jaspat Rai[9], the defendant’s wife left him due to his inhumane treatment. He then signed a contract with her father, pledging to treat her well and, if he didn’t, to pay her monthly maintenance and provide her with a place to live. Her husband mistreated her once more and she was thrown out of the house. She filed a lawsuit against her spouse. The court determined that she had the right to enforce the defendant’s promise to find her father as the beneficiary of their contract.
In the case of Rose Fernandez v. Joseph Gonsalves[10], the girl’s (petitioner’s) dad agreed to her marriage with the respondent. The respondent had a second marriage. The petitioner filed a lawsuit against the accused. The court found that the girl was entitled to damages for violation of the marriage vow after having become a majority, and the defendant could not plead for not being a party to the contract because it was a beneficiary.
Acknowledgement or Estoppel
One of the contracting parties may acknowledge payment to a third party or otherwise represent himself as the third party’s agent. In such instances, the party enters into a legally enforceable agreement with a third party who may enforce it. And if that party recognizes the payment to the third party or represents himself as that third party’s representative, the third party has the right to reclaim the money from that party.[11]
The question of whether the petitioner had the right to sue the respondents arose in Narayana Devi v. Tagore Commercial Corporation Ltd[12]., where there was no contract between the petitioner and the respondents but the respondents agreed to pay a certain amount to the petitioner’s husband during his lifetime and thereafter to the petitioner in their agreement with the petitioner’s husband. Following the death of the petitioner’s husband, the respondent made some payments to the petitioner in line with the agreement and then requested more time to pay. Furthermore, it was found that the respondents had previously asked the petitioner to sign certain documents, suggesting that the petitioner has several rights. The petitioner was thus authorized to her claim even though there was no contractual privity between the petitioner and the two respondents at the time the contract was entered into since the respondents had created such privity with her by their conduct, acknowledgement, and admission.
As demonstrated in the case of Kshirodebihari Datta v. Mango Binda Panda[13], acknowledgement by behaviour is also conceivable.
Contracts Entered into Through an Agent [14]
The principal may carry out the agreement signed by his agent provided that he operates in the sphere of his power and the name of the principle. When a third party is working as an agent in a contract, one of the primary exceptions to the theory of privity of contract is if the third party is acting as an agent in the deal.
If ‘D’ and ‘E’ make a deal and ‘E’ breaks it then in this situation, under the law of agency, ‘F’ may intervene and file a lawsuit against ‘E’ if ‘F’ can show that ‘D’ acted as his agent while entering into the contract.
In the case of Wakefield v. Duckworth[15], Mr. Wakefield was a professional photographer. Mr. Duckworth, a solicitor, came to his studio to buy photos to assist in his defence of a homicide suspect. Mr. Wakefield was aware that the pictures would be used in the case, and Mr. Duckworth sought the lowest feasible price for photographs because his client was not affluent. Mr. Wakefield requested reimbursement from the solicitor for the cost of the photos. The court ruled that Mr. Wakefield’s lawsuit was unsuccessful. Mr. Duckworth was acting on behalf of his client. And the photographer was well aware that he was acting on behalf of his primary client. Mr. Wakefield’s had no choice but to sue the principal.
There was no precedence for a solicitor taking on personal liability in this circumstance because it was not a monetary transaction.
The Court decided in Sruttons Ltd v Midland Silicon[16] that the stevedores may rely on an exonerating provision included in the contract between the owners of the vessels and the carrier based on the shippers’ contracts contracting as stevedore’s agents in that specific case.
Covenants Running with the Land
The owner of the land is authorized to various duties and responsibilities provided under a land agreement. A covenant is a pledge written in a sealed document.
When a property is transferred, the new owner receives all of the advantages associated with the land and is also obligated by the responsibilities imposed by a land-related agreement, even if he is unfamiliar with the agreement.
In the case of Tulk v. Moxhay[17], ‘D’ possessed a piece of property that he sold to ‘E’ with the condition that a portion of it be kept as a public park. ‘E’ kept his side of the bargain and finally sold the land to ‘F’. Despite being aware of the covenant, ‘F’ constructed a house on the designated site. When ‘D’ found out, he brought a lawsuit against ‘F’. Despite the fact that ‘F’ was not a party to the contract, the court found him liable for breaching the covenant.
It was decided that, in SAIL v. the State of M.P.[18], the central government was transferring the land alongside the company’s land claims, liberty, benefits, etc.
Assignment of a Contract
An assignee can claim for the exercise of his rights, title, and interests in the contract under a transfer made by the party or by law. For instance: death or insolvency.[19]
Conclusion
We can see from the preceding explanation of privity of contract that only contracting parties can sue each other, and no third party is authorized between the parties to sue. But the law has also changed and a third party has the full authority to sue or enforce the terms of a contract in rare circumstances over time.
If the court decides that any of the abovementioned exclusions should apply following a comprehensive analysis of the situation, a third party may litigate the contract.
However, if the Court determines that there are no exceptions, it will take the view that they do not apply and that no third party will be allowed to take proceedings against a contracting party.
Hence, these exceptions, therefore, allow a third party to implement a contract and sue the party.
References:
[1]1970 AIR 500, 1970 SCR (1) 658.
[2]Dr. R.K. Bhangia, Contract I (2017)
[4](1915) A.C. 847, at 853.
[5]A.I.R, 1997 Delhi 201.
[6] Mst.Dan Kuer v. Sarla Devi, A.I.R. 1947 P.C. 8 I.L.R. (1946) All. 756: (1947) 49 Bom. L.R.123; Rakhmabai v. Govind, (1904) 6 Bom. L.R. 421
[7] I.L.R (1910) 32 All. 410 (P.C.).
[8] A.I.R. 1957 A.P. 965.
[9] (1905) PR 171.
[10] (1924) ILR 48 Bom 673.
[11] Rishabh Soni, Doctrine of Privity of Contract, Ipleaders (March 14, 2019) https://blog.ipleaders.in/doctrine-of-privity-of-contract/.
[12]AIR 1973 Cal. 401.
[13] AIR 1934 Cal. 682.
[14]Hemant More, Doctrine of Privity of Contract, The fact factor (March 4, 2019). https://thefactfactor.com/tag/daropti-v-jaspat-rai/#:~:text=In%20Daropti%20v.%20Jaspat%20Rai%20%281905%29%20PR%20171.,maintenance%20and%20to%20provide%20her%20with%20a%20dwelling
[15] (1915) 1KB 218.
[16] (1962) AC 446.
[17] (1848) 41 ER 1143.
[18] AIR 1999 SC 1630.
[19]Sakshi Agarwal, Doctrine of Privity of Contract & its Exceptions, Law times journal (June 10, 2018) https://lawtimesjournal.in/doctrine-privity-of-contract/#_ftn21.
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