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Doctrine of Privity of Contract

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HomeBrud.gifContract LawBrud.gifDoctrine of Privity of Contract

The Doctrine of Privity of Contract says that:

A contract is a contract between the parties only and no third party (that is stranger to contract) can sue upon it even if it is avowedly made for his benefit.

Thus, the contract cannot confer rights or impose obligations arising under it on any person or agent except the parties to it.

Similarly, the third person is not bound by the contract as there is no mutuality (doctrine of mutuality).

The doctrine is rooted in the English common law especially in the famous case of Tweddle v Atkinson, and Dunlop Pneumatic Tyre Company Limited v Selfndge & Co..

  • In Dunlop Pneumatic Tyre Company Limited v Selfndge & Co: The plaintiff (Dunlop Co.) sold goods to one Dew & Co. and secured an agreement from them not to sell goods below the list price and if they sold goods to another trader they would obtain from him a similar undertaking to maintain the price list. Dew & Co. sold goods to the defendants (Selfridge & Co.) who agreed not to sell goods at less than list price. On their not doing so, the plaintiffs sued them for the breach of contract. It was held that assuming that the plaintiffs were undisclosed principals, no consideration moved from them to the defendants and that the contract was unenforceable by them.

Disadvantages

The rule of privity of contract has been generally criticized.

One of the criticism is that the general rule that 'no third person can sue' is only a rule of procedure. It goes to the form of remedy, not to the underlying right.

In Beswick Verses Beswick, Lord Denning concluded that where a contract is made for the benefit of the third person who has a legitimate interest to enforce it, it can be enforced by the third person. It is different when a third person has no legitimate interest, as when he is seeking to enforce the maintenance of prices to the public disadvantage, as in Dunlop Co. case. But the House of Lords showed no preference for Lord Denning's approach and emphasised that if the principle of jus quaesitum tertio (that is right conferred by way of property, as for example, under a trust) is to be introduced into our law, it must be done by Parliament.

Exceptions to Privity Rule

In the course of time, the courts have introduced a number of exceptions in which the rule of privity of contract does not prevent a person from enforcing a contract, which has been made for his benefit but without his being a party to it (Beswick Verses Beswick)

Trust or Charge

A person (beneficiary) in whose favour a charge or other interest in some specific property has been created may enforce it.

In Khwaja Muhammad Khan v Hussaini Begum, there was an agreement between the lady's father-in-law and her father that in consideration of her marriage with his son, he would pay to her Rupees fice hundred per month in perpetuity for the betel-leaf expenses (Kharch-i-Pandari). Some immovable property was specifically charged for the payment of these expenses. A suit was brought by the wife for the recovery of arrears of annuity. Held that the wife, although not a party to the agreement, was entitled to enforce her claim as the contract had been entered into for her benefit and certain immovable properties had been specifically charged for the allowance. Further, among Mohammedans, where marriages are contracted for minors by parents and guardians, it might occasion serious injustice if the common law doctrine was applied to agreements or arrangements entered into in connection with such contracts. Thus, the rule laid down in Tweddle v Atkinson had no application to the circumstances of the case.

A trust is the property held and managed by one or more persons for another's benefit (as per Chinnaya case). In Rana Uma Nath Bakhsh Singh v Jang Bahadur, was appointed by his father as his successor and put in possession of estate. In consideration thereof A agreed to pay a sum and to give a village to B, the illegitimate son of his father, on his attaining majority. Held that trust was created in favour of B for the specific amount and the village, thus he (B) is entitled to sue. In an English case, A was indebted to both B and C. A assigned all his property to B in satisfaction of his debt and B promised to pay A's debt to C. He failed to pay. But he was held liable to pay C in terms of his promise with A.

Marriage settlement, Partition or other Family arrangements

Where a girl's father entered into an agreement for her marriage with the defendant, it was held that the girl could sue the defendant for damages for the breach of the promise of marriage even though she was not a party to the agreement (Rose v Joseph. Where two brothers, on a partition of joint properties, agreed to maintain their mother, she was held entitled to sue (Shuppu Ammal v Siibramaniyam)

Acknowledgement or Estoppel

Whereby the terms of a contract a party is required to make a payment to a third person and he acknowledges it to that third person (that is while making a part-payment), a binding obligation is thereby incurred towards him. Acknowledgement can be express or implied.

Thus, in Devaraja Urs v Ram Krishniah, A sold his house to B and left a part of the sale-price in his hands desiring him to pay this amount to C. Subsequently B made part payments to C, but failed to remit the balance. B while making part payments had informed C that they were out of the sale price left with him and the balance would be remitted soon. Held that though originally there was no privity of contract between B and C, B having subsequently acknowledged his liability, C was entitled to sue him.

Covenants running with land

A person who purchases a land with notice that the owner of the land is bound by certain duties created by an agreement or covenant affecting the land, shall be bound by them although he was not a party to the agreement of Tulk v Moxhay].

Assignee in insurance policy

The assignee of an insurance policy (that is a wife in case of husband or vice versa) is entitled to sue on the contract made between the insured and the insurer (insurance company).

Indian Case Law

  • Jamna Das v Ram Avtar
  • Iswaram Pillai v Sonivaveru
  • Subbu Chetti v Arunachalam Chettiar
  • Krishna Lal v Promila Bala
  • M.C.Chacko v State Bank of Travancore
  • M. K Shankar Bhat v Claude Pinto (Deceased) by LRs
  • Aries Advertising Bureau v C.T. Devara
  • Klas Mittelbachert v East India Hotels Ltd,

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