The doctrine of Privity of contract states that any third party, which is not even distinctly related to the two involved parties, does not have a right to initiate a suit against the said parties to the contract even though he/she is the beneficiary. Apart from promisor(s) and promisee(s), all persons constitute the third party. Thus, the third party cannot sue the contracting parties for the enforcement of the beneficiary clause in the contract. This principle originated from England. However, in India, as per Section 2(d) of the Indian Contract Act, 1872 the consideration can be furnished by either by the promisee or any other person, “at the desire of the promisor.”
Position of the Doctrine of Privity of Contract in England
Doctrine of privity of contract was developed in Tweddle v. Atkinsonand affirmed in Dunlop Pneumatic Tyre v. Selfridge and Co. Ltd. The Dunlop Co. manufactured tyres of motor-car and sold them to Dew & Co. There was a price maintenance agreement, the terms were that the company will not resell the tyres below a certain fixed price and the same undertaking would be taken by the company in case of sale to another trader. The Dew & Co. sold the tyres to the defendant who in turn agreed not to sell the tyres at less than list price and further agreed to pay liquidated damages to the Dunlop Co. in case of breach of this undertaking. However, the defendant sold them to customers at less than list price and Dunlop sued them for breach of contract.
The court stated two principles:
- Only a person who is a party to a contract can sue on it. A stranger to a contract does not have a right to enforce the contract in personam.
- Consideration must have been given by promisee to the promisor or to some other person at the promisor’s request.
The House of Lords reaffirmed in the doctrine of Privity of Contract in Beswick v. Beswick. Peter Beswick agreed to transfer his business to the defendant in consideration of the promise to employ Peter as ‘consultant’ during his lifetime and after his death, to pay an annuity of £ 5 a week to his widow. The defendant breached the promise to pay the annuity to the wife. She sued him in her personal capacity as the beneficiary of the contract and also in her capacity as administratrix of her deceased husband’s estate. It was held she could only sue as administratrix but not in her personal capacity.
In 1937, the Law Revision Committee recommended the abolition of this doctrine in its sixth interim report. The position in England regarding the doctrine of Privity of contract changed with the enactment of The Contracts (Rights of Third Parties) Act, 1999. Section 1(1)(2) of the act states that a third party could enforce the beneficiary clause of the contract. Thus, the common law now recognizes the right of third party to enforce contractual term.
Position of the Doctrine of Privity of Contract in India
In India, there has been a divergence of opinions in the courts regarding the doctrine of Privity of Contract. The rule in Tweddle v. Atkinson is as much applied in India as it is in England. However, there is no provision for the same in the Indian Contract Act,1872.
The English doctrine of Privity of contract was applied by the Privy Council in Jamna Das v. Ram AutarPande. Here, the debtor disposed of the mortgaged property to the purchaser. The purchaser, in return, agreed to pay off a mortgage debt. The judicial committee held that the mortgagee was not entitled to enforce this undertaking as he was not the party to the contract and thus, could not sue purchaser to pay off the debt.
The courts balancing the rights of the third party and the contracting parties has recognized certain exceptions which are equitable.
Exceptions to the Doctrine of Privity of Contract
Charges over some immovable property
When charges over immovable property are transferred, the person acquiring the charge acknowledges to take the obligation related to the property, the beneficiary can enforce the clause and the doctrine of Privity of contract doesn’t apply. In, Khirod Behari Dutt v Man Gobinda and Orsthe tenant and sub-tenant made an agreement that the sub-tenant would pay the rent directly to the landlord. Thus, the landlord was entitled to receive rent from sun-tenant and sub-tenant cannot escape from liability on account of Privity of Contract.
Covenants running with the land
When there is a transfer of property, the owner of the property now obtains all the benefits running with the land and is also bound by the obligations imposed by an agreement affecting the land, even though he is a stranger to the agreement. In SAIL v. State of M.P., it was held that the central government transferred the land along with rights, liberties, privileges, etc., pertaining to the land given to the company.
Trust is considered to be an exception to the Privity of Contract for the recognition and enforcement of the right of the third – party beneficiary created by a contract to which he is no party. While creating trust in favour of a person, the owner of property transfers the managing rights to the trustee and there are certain obligations imposed upon the trustee. This is based on the fiduciary relationship unlike charge given. The beneficiary may enforce the rights conferred upon him by the trust deed. The genesis of this rule is that his rights are equitable and not contractual.
Marriage settlement, partition or other family arrangements
A third – party beneficiary is entitled to enforce a contractual obligation coupled with a charge on an immovable property. A person entitled to take benefit of the beneficiary clause in the marriage settlement, partition or other family arrangements. For example, in Nawab Khwaja Muhammad Khan v. Nawab Hussaini Begum, the plaintiff, as per marriage settlement had been given ₹500 monthly as betel leaf expenses in perpetuity out of the income of certain properties, was held entitled to sue although she was not a party to the contract.
Another exception to Privity of contract is that an assignee under an assignment made by the party or by operation of law, for example, death or insolvency, can sue upon the contract to enforce his rights, title and interest.
The definition of consumer in the Consumer Protection Act, 1986 encompasses not only the party who buys goods or ordered for services but also the user of such goods or beneficiary of such services. Thus, even though consumers are complete strangers to the contract, the doctrine of Privity of Contract doesn’t apply and they have right to enforce it.
Acknowledgement or Estoppel
Where a party enters into an undertaking to pay a certain sum of money to a third person and he acknowledges it to that third person, the third person can enforce it. In Deb Narain Dutt v. Ram Sadhan Mandal, a transferee of debtor’s liability had acknowledged his obligation to the creditor for the debt and the same was communicated to the creditor. When a suit was initiated by the creditor for the recovery of debt, the transferee had undertaken the obligation for the benefit of the creditor and thus the doctrine of Privity of Contract is not applicable here.
 The Indian Contract Act, 1872 2(d).
 Tweddle v. Atkinson(1861) 1 B&S 393.
 Dunlop Pneumatic Tyre v. Selfridge and Co. Ltd. AC 847.
 The Contracts (Rights of Third Parties) Act, 1999.
 Supra Note 2.
 Jamna Das v. Ram Autar Pande(1916) ILR 38 All 209.
 Khirod Behari Dutt v Man Gobinda and OrsAIR 1934 Cal 682
 SAIL v. State of M.P. AIR 1999 SC 1630.
 Jang Bahadur v. Rana Uma Nath Bakhsh Singh AIR 1937Oudh 99.
 M.C. Chacko v State Bank Of Travancore 1970 SCR (1) 658
 V. Kesava Rao, Contracts I: Cases and Materials (Lexis Nexis Butterworths 2004).
 Nawab Khwaja Muhammad Khan v. Nawab Hussaini Begum (1910) 12 BOMLR 638.
 V. Visalakshi, & Bhupathi, Government contracts 56 (EBC, Lucknow 2014).
 Consumer Protection Act, 1986§ 2(d).
 Supra note 14.
 Deb Narain Dutt v. Ram Sadhan Mandal AIR 1914 Cal 129.