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Privity of Contracts

This response paper critically analyses the evolution and scope of the Doctrine of Privity of Contract, primarily focusing on the legislations existing in England and India. It concerns with the application of the principle in India and the various exceptions under it. The last part deals with its criticisms with some probable suggestions to reform it.

According to section 2(h) of the Indian Contract Act, 1872[1], an agreement between two parties that is enforceable by law and is backed by some form of consideration is a Contract. The term 'agreement' is defined in Section 2(e) as each promise and every pair of promises that establish the consideration for each other. Consideration as defined in Section 2(d) is as an act performed at the promisor's request or desire.

Privity of Consideration

This rule is not applicable in India, on account of the language used in Section 2(d) in defining consideration, that it is of no solid relevance whether it is furnished from the promisee or some other person, as laid down in Chinniya v. Ramayya.[2]

Privity of Contract

The Privity of Contract Doctrine [3] is a long-standing English law principle that states that no one shall be entitled to or bound by the conditions of a contract to which he is not a party original. It is based on the interest theory, which means that a stranger to a contract cannot sue or enforce the terms of the contract. This doctrine has made it difficult for third parties to carry out the obligations of the contracting parties.

It was enunciated in the 1861 case of Tweddle v Atkinson[4] and reaffirmed again by the House of Lords in Dunlop Pneumatic Tyre Co v Selfridge & Co Ltd. [5]

Under the doctrine, a third party who is not a party to the contractual agreement, cannot: [6]

  1. Obtain benefits of the contract
  2. Liable under the agreement.
  3. Legally enforce the terms of the contract.
For instance, if A makes a promise to supply some goods to B and A goes on to breach the contract, then in that case only B has the right to prosecute A, to the exclusivity of others.

Position in India
Although there has been no provision in the Indian Contract Act pertaining to this doctrine, it has been generally recognized via a series of case rules.

The Privy Council expanded the scope of the doctrine in Jamna Das v. Pandit Ram Autar Pande[7] wherein it was unanimously held that that a person who is not a party to the agreement cannot recover the amount owed from another party to the agreement. RANKIN CJ in his opinion In Krishna Lal v. Promila Bala [8]put out that this principle seemed to be the outcome of the Contract Act itself by virtue of its section 2. [9]

The Supreme Court articulated itself in favour of the rule in Dunlop v. Selfridge [10] case in Chacko v. State Bank of Travancore.[11]

Exceptions to the Rule of Privity [12]

  • Beneficiaries under a Trust or other Arrangements

    An inidividual can enforce a contract of which he is not a party to, in case it has been created for their benefit or other interests, as illustrated in Nawab Khwaja Muhammad Khan v. Nawab Hussaini Begum.[13]
  • Estoppel or acknowledgement

    Where the promisor acts as the third party's agent through their conduct, acknowledgement, or other means, a binding obligation arises towards them; as highlighted in N. Devaraja Urs v. Ramakrishniah.[14]
  • Marriage/ Family Settlement

    When an agreement is made in regards to marriage, partition or other familial arrangements for the benefit of a member, they may sue on grounds of this agreement (for e.g., Rose Fernandez V. Joseph Gonsalves).[15]
  • Covenants running with land

    As held in Tulk v Moxhay[16] , if a person buys some land knowing that its owner is under specific duties created by a covenant or agreement regarding the land, they would be bound by those, irrespective of the fact that they were not a party to that agreement.

Justifications for the Rule[17]

Despite the fact that this concept has no solid foundation, there are various arguments for its continued existence:
  • Because a contract is founded on mutual agreement, enforcing obligations on at third party, not bound to the agreement would be unreasonable.
  • Allowing third parties to legally enforce agreements would influence or restrict the contractual parties' rights to alter or end contracts.
  • Third parties might not have provided with the necessary consideration and so must be barred from enforcing the contract.
  • The promisor then would be liable and might face actions from both the promise as well as the third party.

Criticisms of the Doctrine

The Doctrine having its origin in English Common Law and embraced by the House of Lords has been widely criticized.

The Law Revision Committee, chaired by Lord Wright, condemned the theory in 1937 and recommended that it be repealed. In numerous other situations, this rule was challenged by Lord Denning too, as in Beswick v. Beswick.[18] The principle was also criticized by STEYN LJ in Darlington BC v. W. S. Northern Ltd.[19]
  • It is unfair towards the third parties who might depend on the given contract to govern their affairs. It dissolves the third party's reasonable anticipations of receiving benefits under the agreement.
  • In case of a contracting party who mean to confer benefits on some third party, this principle frustrates their agenda.
  • In instances of third parties suffering any harm, they have no recourse he has no recourse to redress.
  • Even though a harmed third party is not authorized to sue under the doctrine, a promise who might not have incurred any loss can.
  • The Doctrine of Privity of Contracts is overly complicated and ambiguous. The judicial system has carved loopholes in it, to soften its rigidity which has relegated it to a vulnerable concept. In order to avoid injustices, exceptions have been created, which are gradually rising with the flow of time.
This indicates that this doctrine has fundamental flaws and that the exceptional cases haven't really addressed the issue in its entirety. The possibility of further revisions and adjustments linger, casting doubt on the doctrine's fundamental viability.

The legislations in Australia (Queensland and Western Australia), New Zealand, Canada (New Brunswick), Singapore and England have repudiated this doctrine.[20]

Analysis and Suggestions
If two contracting parties confer a benefit upon a third party who has not entered the contract, it would suggest that they intended that third party to be able to uphold the right in their own capacity. In other circumstances, if the parties to the contract, decided to nullify or amend its term, to the disadvantage of the said third party, the third party would suffer.

The Law Commission of India, in its 87th Report, advanced that when a certain contract clearly imparting a benefit to a third party is adopted by a third party, the contracting parties must not terminate, replace or amend the contract in order to affect the interests of a third party.[21]

However, this recommendation has not yet been adopted.

This may be because, by its implementation, the basic essence of the contract- the contracting parties' intentions and their right to alter the contract with their consents, on mutual grounds, at any moment, might be jeopardized as a result.

Consequently, it can be contended that as long as there exists reciprocity in terms binding conditions between the parties who wish to enforce it and the third party against whom the contract is to be applied; the parties must not be allowed to change or revise the contract's terms, unless they do so with common consensus.
This view was supported in the ruling of Kedar Das Mohta v. Nand Lal Poddar.[22]

Hence, after the beneficiary performs his contractual obligations, and the parties assent and conduct in line with the arrangements, it would imply that the contracting parties have acted in conformity of the terms of the contract and the recipient would be unable to refuse the rights of the intended beneficiary any further.

To put it clearly, the agreement's binding character must be reciprocal between the parties who want to execute it and the party against whom the terms are intended to be enforced.

A strict adherence to the principle of Privity will inevitably prove to be a challenge; it is still very ambiguous and unclear in nature and lacks clarity and is still evolving in character. As per the recommendations made by the 13th Law Commission Report, 1958, [23] the rule must be abated in order for a third party to legally enforce contracts rendered for its benefit in such conditions.

A better plan of action would be to embrace a generic exception in order to cover for all cases of contract presenting advantages to third parties and eliminate the specific occasions where the standard of Privity of contract must not be valid.

More precise definitions, with regard to the concerned parties (contracting as well as third parties) and their rights must be laid out and a separate statutory clause in accordance with the suggestions of the of the 13th Indian Law Commission Report, for third party rights under certain qualifying conditions analogous to Contracts (Rights of Third Parties) Act, 1999[24], should be passed. A new special legislation for the same also, may be enacted.

Under the modified stipulations of the contemporary contract law, as well as the courts' non-conventional stance on the Doctrine of Privity, mechanism of recourse has originated for parties who had have been legitimately harmed by the divestment of their rights as such under the rigid application of the Privity Doctrine.

If a violation is confirmed, a stranger might be entitled to damages under the current application of the law. Strangers with mutual obligations under the contract, however, should be considered within the intended beneficiary's reach.

Yet, it can be hard to determine who the intended recipients are when dealing with transactional and sophisticated agreements including third-party obligations such as advisors, agents and so on. In fact, the competence of the beneficiary and the enforcement of this notion are not universally agreed upon by the experts and the judiciary. There exists a prospect of debate and disagreements.

From a practical standpoint, it would be prudent to have an explicit provision enunciating that the parties to the contract (specified or categorized) may exercise their rights as Third party beneficiaries.

The Doctrine of Privity of Contracts is inherently vague and unsuited to the contemporary ethos. This long-standing rule has had resulted in a great deal of inequity and inconvenience. However, merely rescinding it or dismissing it would not address the issue, in lieu; constitute a severe threat to the legal system. As a result, there is a significant need to reformulate it.

  1. Indian Contract Act, 1872, No. 09, Acts of Parliament, 1872
  2. Chinniya V. Ramaya [(1882) 4 Mad 137.
  3. Harnam Singh v. Purbi Devi, AIR 2000 HP 108.
  4. Tweddle v. Atkinson (1861) 1 B&S 393.
  5. Dunlop Pneumatic Tyre Co Ltd v. Selfridge Ltd [1915] AC 847.
  6. Michael Furmstone, Cheshire, Fifoot And Furmston's Law Of Contract (Oxford University Press 2012).
  7. Jamna Das v. Pandit Ram Autar Pande, (1916) ILR 38 All 209.
  8. Krishna Lal Sadhu And Anr. vs Pramila Bala Dassi, 114 Ind Cas 658
  9. Indian Contract Act, 1872, � 2, No. 09, Acts of Parliament, 1872.
  10. Supra note 4.
  11. M. C. Chacko v. State Bank of Travancore, 1970 AIR 500.
  12. Avtar Singh, Law Of Contract And Specific Relief 120-124 (EBC 2017
  13. Nawab Khwaja Muhammad Khan v. Nawab Hussaini Begum, (1910) 12 BOMLR 638.
  14. Devaraja Urs v. Ramakrishniah, AIR 1952 Mys 109.
  15. Rose Fernandez V. Joseph Gonsalves, ILR(1924) 48Bom 673: AIR 1925 Bom 97.
  16. Tulk v Moxhay, (1919) 88 LJKB 861 (HL).
  17. Pollock & Mulla, Indian Contract And Specific Relief Act (Lexis Nexis 2006).
  18. Beswick v. Beswick, (1968) AC 58.
  19. Darlington BC v. W. S. Northern Ltd., (1995) 3 AIIER 895.
  20. Pandey, Ashalika, Doctrine of Privity of Contract Under Indian Law: Should it Be Abolished in Toto or Subject to Certain Proviso?, SSRN (April 7, 2013)
  21. Law Commission of India, Identification of Prisoners Act,1920, Report No.230, 8 29 (August, 1920).
  22. Kedar Das Mohta v. Nand Lal Poddar, AIR 1971 Pat 253.
  23. Law Commission of India,Contract Act, 1872, Report No. 13, 26 (September, 1958).
  24. Contracts (Rights of Third Parties) Act, 1999, c. 31 (Eng).

Award Winning Article Is Written By: Ms.Aishwarya Kapoor

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