Introduction:
The Doctrine of Privity of Contract is a very common principle in the common law system. The doctrine states that only the people who are a party to the contract can enforce the same. A stranger cannot file a suit in the court of law to get his rights ensured when he was not a party to the contract, in the very first place.
Let us take an example to understand it better:
Bhaskar owes Amar, his friend an amount of 1,00,000 Rs. Bhaskar also has a property that he decides to sell to Chandan. In return, Chandan promises Bhaskar to pay Amar’s dues on his behalf.
In this scenario, even if Chandan fails to pay the money, then also Amar cannot sue Chandan as he is a complete stranger to the contract.
Thus, in normal circumstances, a stranger to a contract cannot file a suit for the performance of the contract or relating to anything mentioned in the contract. Only the parties to the contract can sue each other for any discrepancy in the contract. It is based on the theory of Interest which states that only the people having an interest in the contract are entitled to protect their rights.
Position English Law and Indian Law
Though, the English, as well as the Indian law, are on the same page in the context that a third party cannot sue on the contract. But there is a slight difference between the two laws. But, in English law, a stranger to the consideration of the contract cannot sue the parties to the Contract. In Tweedle[1]v. Atkinson, it was held by the court that a stranger to the consideration of the contract, cannot file a suit in the court of law for the performance of the contract.
On the other hand, a stranger to the consideration of the consideration can sue the parties under Indian law. In the case of Chinaaya v. Ramayya[2], the mother had gifted a house to her daughter as a gift but on the condition that the daughter would pay an amount of Rs. 653 annually to her aunt. She agreed to the condition, but when the mother died, she stopped paying the amount.
Thus, the aunt sued the daughter and contended that the amount should be paid to her. The court also held that the aunt could sue the daughter as she was a beneficiary of the contract. Though she was a stranger to the consideration, she was capable of suing the daughter as she was a beneficiary under the contract.
Exceptions to the Doctrine of Privity of Contract
A stranger or a third party to the contract can sue in exceptional situations. The exceptions to this doctrine are stated below:
Any Family Settlement
Where a contract is initiated to give any benefit to a third party, under a family arrangement, then the third party can sue as his own right as a beneficiary[3].
In Veeramma v. Appayya,[4]a contract was entered into, under a family arrangement. The father’s house was to be given to his daughter, in return for which, the daughter promised to maintain him for his entire life. Since she was a beneficiary of the contract, she had the right to sue for the performance of the contract.
Trust
When a contract is made between a trustee of a trust and some other party, then the person who is going to be benefited from the arrangement can sue to get his rights ensured in the court of law, even if he/she is not a party to the contract.
Acknowledgement, Estoppel or Admission
If the contract is of such a nature that it requires any third party to make any payment or acknowledge any obligation on behalf of one of the parties to the contract, then, it becomes binding on the third party to fulfill the obligation. If the third party fails to perform his/her duty, the party to the contract can sue such defaulting(third) party.
A owes Rs 10,000 to be paid to B. A asks C to pay the amount on his behalf and C acknowledges the receipt of funds to be paid to B. But, later on, C fails to make the payment.
Here, B can sue C for the recovery of the said amount.
A Beneficiary Under the Contract:
If two parties have entered into a contract for the benefit of a person who is not a party to the said contract, then the third person can sue upon the contract and get his right enforced on against the parties to the contract. But, a nominee of a life insurance policy does not have this right.
Contract Through an Agent
If a person makes a contract with an agent and where the agent is acting on behalf of his principal( within the scope of Agency), then the person can sue the principal on behalf of the wrong acts of his agent.
From all the above-mentioned points, we can clearly conclude that the third parties do not have any right to sue on the contract. They are not allowed to enter between the two parties to contract.
But, as the times are changing, we also need to bring changes in our laws so that no person’s right can be violated. Thus, third parties can get their rights enforced in the court of law by means of filing a suit. Third parties now have the right to protect their rights in a contract, though not a party to it.
Contractual Obligations
When two parties enter into a contract with one another, they have certain obligations towards each other which need to be fulfilled. ‘Contractual obligation’ is the term given to the duties or obligations that the parties to the contract have towards one another, by means of the terms and conditions mentioned in the contract. As a matter of fact, the contractual obligations are mentioned in the contracts only. Section 37 of the Indian Contract Act,1872 states that each party is bound to perform its obligations and duties under the contract. This section deals with the obligations of the parties to a contract.
The nature of such obligations will vary from every contract as the parties to the contract are the only ones who set these obligations. Every time, the parties enter into a contract, it follows the exchange of a valid consideration which can be anything such as a product, a service, money etc. In connection to this consideration, each party will have certain obligations and duties to fulfill. If any party fails to perform its contractual obligations, it leads to the breach of contract.
But, some of the most common obligations that almost all contracts have are-
- Payment: A party must have to make a payment of a certain amount of money as a part of his obligation.
- Responsibility: A party to a contract may have the duty/responsibility to do something specified in the contract. The responsibility to decide the method of payment, to decide the time and place of delivery etc. is included as a part of the obligation.
- Delivery: A party may have an obligation to deliver something on a particular date, day, time etc., at a certain place or through a specific means.
- Quality of Goods: A party may have an obligation to deliver a specific quality of goods to the other party as a part of its obligation.
- General Obligations: The party to a contract might have some basic principles and obligations such as fair dealing, no foul play, no undue influence etc.
Transfer of Obligations to Third Parties
Though, not generally, but under some circumstances, the contractual obligations of one party can be transferred to a third party. It is not easy to transfer your obligations to another, but a party can do it only if it feels the need to do it with the consent of the other party to contract. It is also known as Contract Delegation. Interestingly, it does not transfer the Contractual rights of the party. Only the rights and obligations are given to another.
A asked B, who was a famous builder to undertake the construction of his house. B, further asked C, his good friend to undertake the construction work as he was already occupied with a lot of work. Here, B has delegated his contractual obligation to C.
Rights of a Third Party
Privity of Contracts is a very common doctrine which states that any third party to a contract cannot sue for the enforcement of the rights. Only the parties to the contract have this provision to sue for enforcement. According to the Doctrine, any third party does not have a say as to getting the rights enforced as he/she is not a party to a contract. ‘Third Party’ is simply a person who is not a party to the contract.
But, The Contracts( Third Party Rights) Act,1999 has changed the picture of the Doctrine of Privity of Contracts.
Third parties can now enforce the conditions of the Contract on the parties under the following 2 circumstances:
- The third party is a beneficiary to the contract.
- The Contract, itself enables any third party to do so.
Standing of Third Parties in the Eyes of Law
The right to get the rights enforced does not make the third party, a party to the contract. The third-party only has the right to sue on the contract, to claim damages or Injunction similarly if they were a party to the contract.
The third parties can only get their rights enforced if they were to get something out of the Contract. Otherwise, the parties do not stand a chance to sue on the Contract.
Drawbacks of the Third-Party Rights
- Any third party, who is going to get benefit from the contract, may resort to illegal and immoral means to get more and more benefit, even if it may mean disturbing the parties to the contract and not letting them work efficiently.
- The main parties to the contract may not give the due benefit to the third party and try to defraud the third party.
- There may be a conflict among the parties to the contract and the third parties or between the main parties due to which the performance of the contract becomes difficult or impossible.
- Sometimes, the actual parties to the contract may feel unattached to the contract due to constant interferences of the third parties. This may make them less dedicated to their duties in the contract.
Conclusion
The rights of the third party have always been very debatable as they are different under almost every law. The English law does not recognize the third-party rights as are recognized in Indian law.
Under Indian law, the third party beneficiaries are entitled to sue either party to the Contract for its performance. The reason is that no person should be disadvantaged merely because of the reason that the contract could not be completed.
But, giving the right to any third party to sue for performance or non-performance of a contract makes the main parties to the contract somewhat detached from the contract and not determined to complete it. There are even more disadvantages of giving any third party such extensive rights.
But, the benefits to them cannot be denied on the pretext of privity of contract and that no party can sue on the contract other than the parties to contract.
So, the rights of the third party become very important in cases where they are going to get some benefits from the performance of the contract, but the parties are unable to carry out the terms of the contract.
References:
[1] (1861), 1 B&S 393, 121 ER 762
[2] ILR (1876-82) 4 Mad 137
[3]Rakhmabai v. Govind, (1904) 6 Bom. L.R. 421
[4]AIR 1957 AP 965
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