Doctrine of Privity of Contract: Meaning, Exceptions and FAQs

What is the Privity of Contract?

As per the Indian Contract Act 1872, the Doctrine of Privity of Contract states that a third party to a contract cannot sue for a contract, for which he was not a party and a promise for which he didn’t furnish any consideration, even if the contract was made for his benefit. Any contract which is entered by two or more persons thereby creates rights and obligations on them, it is only a party to the contract who can enforce his rights against the other party. This creates a basic principle underlying the law of contract, that a stranger to a contract cannot maintain a suit for a remedy.

The law entitles only those who are parties to the contract can file suits for exercising their rights. This is known as the Privity of Contract. This law of contract creates jus in personam as distinguished from jus in rem. Therefore, a stranger to a contract cannot sue for a contract to which he was not in privity. Hence, the Indian Contract Act, 1872 does not allow a stranger to file a suit on the contract. Only a person who is a party to the contract holds the right to sue.

Geeky Takeaways:

• Under the Indian Contract Act, 1872, it is prescribed that only a party to the contract can be the appropriate person who can enforce the contractual rights and fulfill the contractual obligations. Thus, there exists a Privity of Contract between the parties to the contract.
• Whereas, in case of breach of contract that person will be entitled to sue for breach who was a party to the contract and who has suffered a loss due to such breach while being a party to the contract.
• Accordingly, a person who is not a party to the contract is a stranger to the contract and he cannot bring an action for breach of the contract to which he was not a party to the contract.

Doctrine of Privity of Contract

The Doctrine of Privity of Contract establishes that no one will be entitled to or bound by the terms of a contract to which he was not a party to the original contract. In other words, a stranger to a contract has no legal access to the rights and obligations, since rights and obligations are strictly the private matters of primary contracting parties. Thus, the Doctrine of Privity of Contract states that a non-party to a contract cannot bring any action on the contract irrespective of the fact that he would benefit from the contract.

Privity of Contract has three major effects, which are:

1. A third party cannot receive a benefit if he is not a party to the contract.

2. A third party cannot be liable to a contract if he is not a party to the contract.

3. A third party cannot enforce a contract if he was not a party to the contract.

For example, B has advanced loan to A. A is a seller, who sold certain goods to C. C promises to A, that he will pay off A’s debt to B, as a consideration for the contract which was established between A and C. In case C fails to pay the debt of A, B will have no right to sue C, as B is a stranger to the contract between C and A. To sum it up, C is not in privity with B. However in this case, C stands in privity with A.

Important Case Laws

1. Tweddle v. Atkinson: The major points of the Doctrine of Privity of Contract emerged after the Tweddle vs. Atkinson case. Here John Tweddle and William Guy agreed that both of them would pay a sum of money to Tweddle’s son, who was engaged to marry the daughter of Williams. However, before making any payment, William passed away. As William failed to fulfil his obligation, Tweddle’s son sued William’s property executor over the unfulfilled obligation which was promised before the death of William, but the court held that a third-party beneficiary cannot enforce the contract as it was made between William and Tweddle, and Tweddle’s son was not a party to the contract.

2. Dunlop Pneumatic Tyre Co Ltd v. Selfridge & Co (1915): The Doctrine of Privity of Contract began to evolve firmly in the case of Dunlop Pneumatic Tyre Co Ltd v. Selfridge & Co, which is seen as a landmark ruling that marked a departure from its earlier application which was considered to be rigid. In this case, Dunlop, a tire manufacturer, came into agreements with its dealers, among which Dew & Co. was also one of them to not to sale the product below the agreed fixed retail price to maintain the resale price for their products, Dunlop also required dealers to obtain similar undertakings from their retailers as well. Selfridge was a retailer who used to deal with Dew & co. when Selfridge sold tires below the agreed fixed price, Dunlop sued Selfridge for the breach of contract. However, Selfridge argued that Dunlop could not enforce the contract’s burden against them because Selfridge had not consented to the contract established between Dunlop and Dew. The court ruled the judgement in favour of Selfridge, establishing that Selfridge was neither a principal nor an agent and therefore was not bound by the contract that exists between Dunlop and Dew. This case also led to the exceptions to privity when justice and equity were demanded.

Exceptions to the Doctrine

There are certain exceptions to the Privity of Contract, meaning, a stranger or a person who is not a party to a contract can sue on a contract in the following cases:

1. Trust

When an agreement between several parties results in the formation of the trust in favour of a third party or a beneficiary, in that case, the latter is eligible to take legal action against the contracting parties as an exception to this Doctrine of Privity of Contract. For example, A gives possession of his company’s share to B, but with a condition that B will give 50% of his share to C. However, A died and B refused to give the share to C which was promised before the death of A. As B failed to fulfil his obligation, C sued B. In this case, C trusted B to receive the shares of the company but B didn’t fulfill the obligation. Here, C can sue B, even if he was not part of the contract.

2. Contract through an Agent

If an agent enters into a contract with a third party on behalf of a principal, then the latter is compelled to fulfil the contractual agreement with the third party. The Indian Contract Act on Privity of Contract defines an Agent as a person who has been formally recruited to perform and represents the principle in dealings with strangers. The person who employs an agent or anyone to be represented by one is called the principal. For example, if A is an agent of B, then A will build a contract with Z and deal with him on behalf of B.

3. Family Settlement

If the contract is of a family arrangement, like a marriage settlement. A third party or beneficiary can sue the parties to the contract to impose the agreement under exceptions to this Doctrine. For example, Sonia belongs to a joint family, and her family made some financial arrangements to pay the expenses for her marriage. However, the family parted ways due to which the arrangement for the marriage expenses of Sonia was not fulfilled. Later, Sonia sued for her benefits even though she was not part of the contract.

4. Beneficiaries under trust or charge or another arrangement

A person in whose favour a charge or other interest in some specific property has been created may enforce it even though he was not considered to be a party to the contract. The decision of the privy council in the case Nawab Kwaja Bombad Khan Vs Nawab Hussaini Begum is a landmark judgement on this principle. For example, If a contract is made between Aman and Jiya and it creates a beneficial right for Rohini over some property, Rohini can enforce her claim based on this right.

5. Acknowledgement or Estoppel

Whereby the terms of a contract have specified to make a payment to a 3rd person and both parties agree and acknowledge the fact to make the payment to that 3rd person, a binding obligation will be incurred towards him. Acknowledgement can be either expressed or implied. For example, Ajay asks Mahesh to give ₹5,000 to Uma on his behalf. If in this case, Mahesh acknowledges it then he is bound to pay the amount to Uma. If he doesn’t pay the amount then Uma can sue him irrespective of the fact that she is the third party.

Frequently Asked Questions (FAQs)

1. What is the Privity of a Contract?

Answer:

The Privity of Contract means that only the two parties to the contract hold the right to sue each other and claim damages or enforce the terms of the contract.

2. What are the essentials of Privity of Contract?

Answer:

• Contract should be between at least two parties.
• The parties to the contract must be competent and a valid consideration must be provided.
• Only parties in a contract can sue each other (Exceptions applicable).
• Breach of contract by either of the parties.

3. What are Horizontal Privity of Contracts?

Answer:

In these types of Privity Contracts, the benefit of the contract goes to the third party instead of the two parties to the contract.

4. What are Vertical Privity of Contract?

Answer:

In this type of Privity Contract, the benefit of the contract directly goes to the parties to the contract and not to any third party.

5. What are the Exceptions to the Doctrine of Privity of Contract?

Answer:

The exceptions to the Doctrine of Privity of Contract are Trust, Contract through an Agent, Acknowledgement or Estoppel, Family Settlement, and Beneficiaries under trust or charge or another arrangement.