ARTICLE ON PRIVITY TO CONTRACT

INTRODUCTION

The main principle highlighted by this concept of Privity to Contract is regarding the rights of
third parties in a contract. Though the position in various countries is now similar, if not the
same, it was not the same when the rule came into being. The most important question to be
considered was whether a third party could acquire rights, or incur obligations to a contract to
which he or she is not a party?

These questions were highly prevalent in England from 17th to 20th century. Under Common
Law, the answer to this question was no. It was developed by the end of 19 th century that third
parties were necessarily strangers to contract and hence could neither acquire the rights nor
incur obligations upon any party to a contract to which they themselves were not a party.

Here, it has been tried to establish how the above mentioned position was achieved and the
conditions and the scenario that paved the path for the current position of the third parties,
especially after the Rights of Third Parties Act, 1999.

After establishing the position in England, it has been tried to discuss the position of the
concept of Privity, in detail, in the Country of India, mostly with the help of landmark case
laws, changing the course of rule despite of the very high influence of the English laws and
cultures on the Indian laws.

In fact, the Doctrine of Privity is one of the controversial doctrines under law of contracts,
including that in the country of India. The debates are not just due to the lack of clarity in
statutes or dissenting judicial pronouncements but much of these owe to the academic and
judicial debates linked with the ground roots of this doctrine.

EVOLUTION OF DOCTRINE OF PRIVITY

Though the doctrine of privity was recognized and established in the case of Tweedle v.
Atkinson1, its foundation has been laid by the English Courts over the years, starting from as
early as the end of the 16th century. But in these cases, it can be seen that the Courts rather
decided upon them by keeping in mind the so-called ‘Interest Theory’. This theory basically
meant that only he who had an interest in the promise could bring up an action before the

1
123 ER 762: 1B&S 23, 393: 30 LJ QB 218: 4 LT 468.
court, or in the words of the Court, “He that hath interest in the promise shall have the
action.”2

The first recorded case of such an instance was decided upon in 1599. This was the case
of Levett v. Hawes3. In this case, a father brought an action of assumpsit upon a promise
made directly to him that marriage money would be paid to his son. The court was of the
opinion that the action ought to have been brought by the son, “for the promise is made to
the son’s use and the ordinary covenants of marriage are with the father to stand seized to
the son’s use; and the use shall be changes and transferred to the son, as if it were a
covenant with himself; and the damage of non-performance is thereof to the son.”4

Another important decision is that of Hadves v. Levit5. In this case, the bride’s father (the
defendant) had promised the groom’s father (the plaintiff) that he would pay 200 pounds to
the plaintiff’s son after the marriage had taken place and hence the plaintiff on this condition
gave his consent to the marriage. But, after the marriage, the defendant failed to pay the
required sum to the son which resulted in the plaintiff bringing an action in assumpsit. This
claim was rejected by the Court of Common Pleas. Richardson, J. stated that the action
should have been “more properly” brought by the son, for he was the person “in whom the
interest is.”

The doctrine of privity had its genesis in the English common law, having been adopted by
the Court of King’s Bench as early as 1677 in Dutton v. Poole6. However, the court did not
follow the doctrine of privity of contract strictly. The court observed that the stranger was
having very close relations to the promise. He could, therefore, maintain an action on a
contract as a beneficiary. In this case:

A person had a daughter to marry and in order to provide her a marriage portion he intended
to sell a wood of which he was possessed at the time. His son (the defendant) promised that if
‘the father would forbear to sell at his request, he would pay the daughter £ 1000.’ The father
accordingly forbore but the defendant did not pay. The daughter and her husband sued the
defendant for the amount.

2
Corny and Curtis v. Collidon; 1674 (1) Freem K.B. 284
3
(1598) Cro. Eliz. 619,652
4
Ibid
5
(1632) Het. 176. This decision was supported, obiter, by Lord Mansfield in Martyn v. Hind(1776) 2 Cow p.
437, 443: ER 1174, 1177
6
Court of King’s Bench, (1677) 2 Levinz 210: 83 ER 523
It was held that the sister could sue, on the ground that the consideration and promise to the
father may well have extended to her on account of the tie of blood between them. Here, the
plaintiff was neither privy to the contract nor interested in the consideration. But it is equally
clear that the whole object of the agreement was to provide a portion to the plaintiff. It would
have been highly inequitable to allow the son to keep the wood and yet to deprive his sister of
her portion. He was accordingly liable.

DOCTRINE OF PRIVITY

A contract cannot confer rights or impose obligations arising under it on any person except
the parties to it. No one but the parties to a contract can be entitled under it or bound by it.
This principle is known as that of privity of contract.

The doctrine has two aspects. The first aspect is that no one but the parties to the contract are
entitled under it. Contracting parties may confer rights or benefits upon a third party in the
form of promise to pay or to perform a service, or a promise not to sue (at all or in
circumstances covered by an exclusion or limitation clause). But the third party on whom
such right or benefit is conferred by contract can neither sue under it nor can rely on defences
based on the contract.

The second aspect of the doctrine is that parties to a contract cannot impose liabilities on a
third party. A person cannot be subject to the burden of a contract to which he is not a party.
It is the counterpart of the proposition that a third party cannot acquire rights under a
contract.

THE DOCTRINE OF PRIVITY IN ENGLISH LAW

It was an established rule of English law that a third party could not sue on a contract though
made for his benefit, described as well as established as a fundamental principle, and an
elementary principle. The principle is that apart from special considerations of agency, trust,
assignment or statute, a person not a party to contract cannot enforce or rely for protection on
its provisions. English law knows nothing of a jus quaesitum tertio arising by way of
contract. Such a right may be conferred by way of property, as for example, under a trust, but
it cannot be conferred on a stranger to a contract as a right to enforce the contract in
personum.
Tweedle v. Atkinson7 is the case in which the doctrine of privity of contract was finally
established by the Court of Queen’s Bench in 1861. In this case, the plaintiff was to be
married to the daughter of one G and in consideration of this intended marriage G and the
plaintiff’s father entered into written agreement by which it was agreed that each would pay
the plaintiff a sum of the money. G failed to do so and the plaintiff sued his executors. The
court noted, “.........it is now well established that at law, no stranger to the consideration can
take advantage of the contract, though made for his benefit. If it were otherwise, a child
might sue his own father in such a case as this.”

This case laid the foundation of ‘privity to contract’ which means that a contract is a contract
between the parties only and no third person can sue upon it even if it is avowedly made for
his benefit.

In Drive Yourself Hire Co (London) v. Strutt8, Denning LJ said that it is often said to be a
fundamental principle of our law that only a person who is party to contract can sue on it.i
wish to assert, as distinctly as I can, that the common law in its original setting knew to such
principle. Indeed, it is said quite to the contrary. For the last two hundred years before 1861 it
was settled law that, if a promise in a simple contract was made expressly for the benefit of a
third person in such circumstances that it was intended to be enforceable by him, then the
common law would enforce the promise at his instance, although he was not a party to the
contract.

The principle was affirmed by the House of Lords in Dunlop Pnuematic Tyre Co v. Selfridge
& Co Ltd9.

Plaintiffs (Dunlop & Co) sold certain goods to Dew & Co and secured an agreement from
them not to sell the goods below the list price and that if they sold the goods to another trader
they would obtain from him a similar undertaking to maintain the price list. Dew & Co sold
the motor tyres to the defendants (Selfridge & Co) who agreed not to sell the tyres to any
private customer at less than the list prices. The plaintiffs sued the defendants for breach of
this contract.

In this case, the House of Lords accepted that it was fundamental principle of English Law
that only a party to a contract who had provided consideration could sue on it. It was held that

7
123 ER 762: 1 B&S 23, 393: 30 LJ QB 218: 4 LT 468
8
(1954) 1 QB 250 at p. 272: (1953) 3 WLR 1111
9
1915 AC 847
Dunlop Co. could not bring an action the defendant because there was no contract between
the two parties.

DOCTRINE OF PRIVITY OF CONTRACT IN INDIA

The term ‘contract’ is defined in section 2(h) of the Indian Contract Act, 1872, as follows:

“An agreement enforceable by law is a contract.” The word ‘agreement’ is defined in section
2(e) as “every promise and every set of promises forming the consideration for each other is
an agreement.” And under section 2(b), a promise is defined as an accepted proposal. Thus, a
contract is an agreement; an agreement is a promise and a promise is an accepted proposal.

But, unless the agreement is supported by ‘consideration’, the agreement would be void
except in the three instances mentioned in section 25. Therefore, unless a promise is
supported by ‘consideration’ it will not, ordinarily, enforceable by law. Section 2(d) defines
consideration as follows:

“When, at the desire of the promisor, the promisee or any other person has done or abstained
from doing or does or abstains from doing, or promises to do or to abstain from doing,
something, such an act or abstinence or promise is called a consideration for the promise.”

One of the most notable feature of section 2(d) is that the act which is to constitute
consideration may be done by the “promisee or any other person”. It means that as long as
there is consideration for a promise, it is immaterial who has furnished it. It may move from
the promisee, or, if the promisee has no objection, from any other person.

Even though under Indian Contract, the definition of consideration is wider than in English
law and the consideration can very well be given by a non-contracting party, yet the common
law principle of Doctrine of Privity is accepted in India.

Decisions following English Law

In India also, there has been a great divergence of opinions in the courts as to how far a
stranger to contract can enforce it. There are many decided cases which declare that a
contract cannot be enforced by a person who is not a party to it and that the rule in Tweedle v.
Atkinson10 is as much applicable in India as well. But there is no provision in the Contract Act
either for or against the rule.

10
123 ER 762: 1 B&S 23, 393: 30 LJ QB 218: 4 LT 468
The Privy Council extended the rule to India in its decision in Jamna Das v. Pandit Ram
Autar Pande11. In this case, A borrowed Rs.40,000 by executing a mortgage of her zamindari
in favour of B. Subsequently she sold the property to C for Rs.44,000 and allowed C, the
purchaser, to retain Rs.40,000 of the price in order to redeem the mortgage if he thought fit. B
sued C for the recovery of the mortgage money, but he could not succeed because he was no
party to the agreement between A and B.

Lord MacNaughtan, in his very short judgement, said that the undertaking to pay back the
mortgagee was given by the defendant to his vendor. “The mortgagee has no right to avail
himself of that. He was no party to the sale. The purchaser entered into no contract with him,
and the purchaser is not personally bound to pay this mortgage debt.”

Decisions not following English Law

The Privy Council in Nawab Khwaja Muhammad Khan v. Nawab Hussaini Begum12
observed:

In India and among communities circumstanced as Mahommedans, among whom marriages

Accordingly, in Muniswami Naicker v. Vedachala Naicker13, the Madras High Court held:

There is ample authority for the proposition that in this country, and indeed in a certain class
of cases in England where a contract is made between A and B for the benefit of C, C is
entitled to sue the defaulting party. It is unnecessary to cite authorities, but the principle is
firmly established for this country by the decision of the Privy Council in Nawab Khwaja
Muhammad Khan v. Nawab Hussaini Begum.14

EXCEPTIONS TO PRIVITY RULE

TRUST

11
(1911-12) 39 IA 7: ILR (1911-12) 34 All 63
12
(1909-10) 37 IA 152: (1909-10) 12 Bom LR 638
13
AIR 1928 Mad 23
14
(1909-10) 37 IA 152: (1909-10) 12 Bom LR 638
Trust is a well established exception to the rule of privity. This means that if A makes a
promise to B for the benefit of C, C can enforce this promise against A if B has constituted
himself trustee of A’s promise for C. It means a person in whose favour a charge or other
interest in some specific property has been created may enforce it though he is not a party to
contract.

But this rule is subject to certain restrictions. A promise can be held to be a trustee for a third
party only if he has the intention to create a trust and this intention must be to benefit the
particular third party and not third parties generally. Also, the intention to benefit the third
party must be irrevocable. And a mere intention to confer benefit is not enough, there must be
an intention to create a trust. An intention to create a trust is clearly distinguishable from a
mere intention to make a gift.

An Indian case relevant under this head is that of Rana Uma Nath Baksh Singh v. Jang
Bahadur15. In this case:

U was appointed by his father as his successor and was put in possession of his entire estate.
In consideration thereof U agreed with his father to pay a certain sum of money and to give a
village to J, the illegitimate son of his father, on his attaining majority.

It was held that in the circumstances mentioned above, a trust was created in favour of J for
the specified amount and the village. Hence, he was entitled to maintain the suit.

MARRIAGE SETTLEMENT, PARTITION OR OTHER FAMILY ARRANGEMENTS

Where an agreement is made in connection with marriage, partition or other family

In Rose Fernandez v. Joseph Gonslaves16, a girl’s father entered into an agreement for her
marriage with the defendant, it was held that the girl after attaining majority could sue the
defendant for damages for breach of the promise of marriage and defendant could not take
the plea that she was not a party to the agreement.

15
AIR 1938 PC 245
16
ILR (1924) 48 Bom 673: AIR 1925 AP 965
In Shuppu Amaal v. Subramaniyam17, where A and B, two Hindu brothers, divided the family
property between them, and agreed at the time of partition that they should contribute Rs.
300/- in equal shares and invest sum on the security of immovable property and pay the
interest towards the maintenance of their mother. It was held that the mother, though not a
party to the contract, was entitled to sue her sons to have that amount invested in her favour.

ACKNOWLEDGEMENT OR ESTOPPEL

Where by 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, a binding obligation is thereby incurred towards him.
Acknowledgement may be express or implied. This exception covers cases where the
promisor by his conduct, acknowledgement, or otherwise, constitutes himself an agent of the
third party. The case of N. Devaraja Urs v. Ramakrishnaiah18 is relevant under this head:

A sold his house to B under a registered sale deed and left a part of the sale price in his hands
desiring him to pay this amount to C, his creditor. Subsequently B made part-payments to C
informing him that they were out of the sale prices left him and that the balance would be
remitted immediately. B, however, failed to remit the balance and C sued him for the same.

The suit was held to be maintainable. “Though originally there was no privity of contract
between B and C, B having subsequently acknowledged his liability, C was entitled to sue
him for recovery of the amount.”

COVENANTS CONCERNING LAND

The law allows certain covenants (whether positive or restrictive) to run with land so as to
benefit (or burden) people other than the original contracting parties. The relevant covenant
may relate to freehold land or leasehold land has recently been reformed by the Landlord and
Tenant (Covenants) Act 1995.

The benefit and burden of covenants in a lease granted prior to 1996 would pass on an
assignment of the lease or reversion so as to benefit or bind the assignee of the lease or the
reversion, provided that the covenant “touched and concerned” the land.

The principle of the famous case of Tulk v. Moxhay19 is that a person who purchases a land
with notice that the owner of the land is bound by certain duties created by an agreement or
17
ILR (1910) 33 Mad 238
18
AIR 1952 Mys 109
19
(1843-60) All ER Rep 9: (1919) 88 LJKB 861 (HL)
covenant affecting the land, shall be bound by them although he was not a party to the
agreement.

INSURANCE

In principle, the privity doctrine applies to contracts of insurance, but there are several
statutory exceptions to the doctrine in the case of common contracts that provide for benefits
to be payable to third parties.

 For example, under s.148(7) of the Road Traffic Act 1988, an injured third party may
recover compensation from the insurance company once the injured third party has
obtained judgement against the insured.
 Under s.11 of the Married Women’s Property Act 1882, a spouse has an enforceable
right to recover sums due on a policy of life insurance taken out by the other spouse
on their own life.

CRITICISM OF THE DOCTRINE OF PRIVITY

The rule of “privity to contract” is generally criticised because the reasons for the privity
doctrine are unclear. In Trident General Insurance Co. Ltd v. McNiece Brothers Proprietary
Ltd20, in the High Court of Australia, Toohey J considered that the privity doctrine ‘lacks a
sound foundation in jurisprudence and logic.’

In 1937, the Law Revision Committee, under the chairmanship of Lord Wright, also criticised
the doctrine and recommended its abolition. In the Sixth Interim Report the Committee
stated:

Where a contract by its express terms purports to confer a benefit directly on a third party, the
third party shall be entitled to enforce the provision in his own name, provided that the
promisor shall be entitled to raise against the third party any defence that would have valid
against the promisor........

The criticisms of the Privity Rule are as follows:

1. The third party rule prevents effect being given to the intentions of the contracting
parties. If remedy is denied to the third party when the contracting parties intended it
to be so, it frustrates their intentions.

20
(1998) 165 CLR 107
 2. It causes injustice to the third party who may have relied on the contract to regulate
his affairs, and thus, upsets the reasonable expectations of the third party to the benefit
under the contract.
3. The third party who suffers a loss cannot sue, and the promisee who has suffered no
loss can.
4. Therefore, the third party who suffers loss cannot claim compensation, and the
promisee not having suffered any loss can claim nominal damages only.
5. Even if the promisee were to obtain a satisfactory remedy, he may not be able to, or
may not wish to sue.
6. Lastly, the third party rule causes difficulties in commercial life, particularly where
transactions and projects involve a ‘network’ of contracts allocating risks,
responsibilities and liabilities between the parties.

The courts have developed exceptions to the doctrine to avoid justice. The existence of the
number of exceptions demonstrates its basic injustice, and the fact that these exceptions
continue to evolve and are litigated, shows that the existing exceptions have not solved the
problems.

JUSTIFICATION FOR THE DOCTRINE OF PRIVITY

 It has sometimes been suggested that the doctrine rests on a principle of mutuality, to
the effect that it would be unfair to allow a person to sue on a contract where that
person cannot be sued by the other party. Thus, it is unjust to enable a third party to
sue on the contract and not be liable for it.
 It has also been suggested that it would be undesirable to allow third party rights to be
created by contract because enabling third parties to enforce contracts would affect or
limit the rights of contracting parties to vary or terminate the contract.
 Alternatively, it was suggested that the third party beneficiaries were frequently
gratuitous recipients of the benefit in their favour and so the rule was closely related
to the doctrine of consideration. The third party may not have provided the
consideration, and hence should not be able to enforce the contract.

REFORMS IN THE RULE

In Beswick v. Beswick21, it was held that the plaintiff was entitled to enforce the agreement in
her personal capacity, although she was not a party to it and it was considered not necessary
to infer a trust in favour of the plaintiff. Lord Reid cited with approval the Law Revision
Committee’s proposals that when a contract by its express terms purports to confer a benefit
directly on a third party, it should be enforceable by the third party in its own name. While
implying that the way forward was by legislation, he stated that the House of Lords might
find it necessary to deal with the matter if there was a further long period of Parliamentary
procrastination.

In Swain v. Law Society22, Lord Diplock referred to the general non-recognition of third
party rights as “an anachronistic shortcoming that has for many years been regarded as a
reproach to English private law.”

In The Pioneer Container23, Lord Goff called into question the future of the rule, and in White
v. Jones24, his Lordship said, “Our law of contract is widely seen as deficient in the sense that
it is perceived to be hampered by the presence of an unnecessary doctrine of consideration
and (though a strict doctrine of privity) stunted through a failure to recognise a jus quaesitum
tertio.”

CONTRACTS (RIGHT OF THIRD PARTIES) ACT 1999

This is one of the biggest reforms that took place when the rule of privity or precisely, third
party beneficiaries is considered. In its 1996 report, the Law Commission had recommended
that the privity doctrine be reformed by legislation in order to ‘enable contracting parties to
confer a right to enforce the contract on a third party’, i.e. the right to enforce remedies for
breach of contract that would have been available had the third party been a contracting party
and the right to enforce an exemption clause as if the third party were a party to contract.

Following many years of gestation, the Contracts (Right of Third Parties) Act 1999 came into
force on November 11, 1999. The broad effect of the Act is to allow a third party to enforce a

21
1968 AC 58: (1967) 3 WLR 932: (1967) 2 All ER 1197
22
(1983) 1 AC 598, 611
23
(1994) 2 AC 324, 335
24
(1995) 2 AC 207
contract which was made for their benefit. The Act provides that a third party may be able to
enforce a contract in two situations:

1. If the contract expressly provides that the party can enforce the contract;
2. If the contract purports to confer a benefit on that third party.

These two grounds are provided in s.1, as follows:

1. Subject to the provisions of this Act, a person who is not a party to a contract (third
party) may in his own right enforce a term of the contract if-
a) The contract expressly provides that he may, or
b) Subject to subsection 2, the term purports to confer a benefit on him.
2. Subsection 1(b) does not apply if on proper construction of the contract it appears
that the parties did not intend the term to be enforceable by the third party.
3. The third party must be expressly identified in the contract by name, as a member of
a class or as answering a particular description but need not be in existence when the
contract is entered into.

The committee took a view that the relation between privity and consideration was largely
unproblematic-the consideration requirement is relevant as to whether there is an enforceable
bargain (a contract): the privity doctrine determines who is permitted to enforce the contract.

CONCLUSION

Thus with the help of essential legislative actions and decisions in various countries,
especially those of England and India, this study has established the very basis of the
Doctrine of Privity.

The current relaxed requirements of modern contract law and non-conventional approach of
the judiciary in relation to Doctrine of Privity have provided an avenue for redress to
genuinely affected persons who the strict interpretation of Doctrine of Privity might have
been deprived of rights as such. Under the current operation of the law, a stranger could be
awarded damages if the infringement is proved.