DR.

RAM MANOHAR LOHIYA NATIONAL LAW UNIVERSITY,

LUCKNOW

2021-22

CONTRACT ACT PROJECT

Project title- Privity of Contract

Submitted by- menka submitted to- Ms. Priya Anuragini,

Enrolment no-210101073 assistant prof. (Law)
BA LLB (Hons).
Semester-2
Section-A
 Acknowledgement
I express my gratitude and deep regards to my subject teacher Dr. Priya

Anuragini for giving me her exemplary guidance, monitoring and constant

encouragement throughout the course of this thesis.

I also take this opportunity to express a deep sense of gratitude to my seniors

and my friends in the college for their cordial support, valuable information

and guidance, which helped me in completing this task through various stages.

I am obliged to the staff members of Madhu library for the timely and valuable

information provided by them in their respective fields.

Menka

Declaration

I hereby declare that the project titled “privity of contract” submitted by me to

Dr. Ram Manohar Lohiya National Law University, Lucknow in partial

fulfillment for the award of the degree BA LLB (Hons.) is a record of bona fide

project work carried out by me under the guidance of Dr. Priya Anuragini.

I further declare that the work reported in this project has not been submitted

either in part or full, for the award of any other degree or diploma in this

institute or any other university.

Menka
 Table of contents
Acknowledgement
Declaration
. introduction
. Privity of consideration
. privity of contract
. types of privity contract
. essentials of privity of contract
. exceptions to privity of contract
. position of privity in English law
. position of privity in India
. criticism of the doctrine
. Conclusion
Bibliography
 Introduction
It is well settled rule of English Law that “Consideration must move from the
promisee alone. If it is furnished by any other person and not by the promisee
himself, the promisee becomes “stranger to consideration”, therefore, cannot
enforce the promise. This is known as the doctrine of ‘Privity of Consideration’.
It means that the act or abstinence or promise constituting the consideration
must be done or made by the promisee himself at the request of the promisor.
But the words “promise” or any other person” given in the definition of
consideration under Section 2[d] of the Indian Contract Act indicate that
consideration need not move from the promisee alone but may proceed from
a 3rd person on behalf of the promisee. To that extent Indian Contract Act has
departed from the rule of English Law. The definition of ‘Consideration’ under
the Indian Law is, therefore, wider than that in the English Law. “Under the
English Law a “stranger to consideration” cannot sue the promisor. But in
India, the Law is otherwise and here even a “stranger to the consideration” can
sue on a contract provided of course that he was a party to the contract.

Privity of consideration

The rule of Privity of Consideration is not at all applicable in India, in view of

the clear language used in Section 2[d] it is not necessary that consideration
should be furnished by the promisee only. Here in India a promise is
enforceable if there is some consideration for it and it is quite immaterial
whether it moves from the “promisee or another person.” The leading
authority is the decision of the Madras High Court in Chinayya V. Ramayya
 Privity of contract

Under the doctrine of privity of contract “a contract cannot be enforced by a

person who is not a party to the contract even though it is made for his
benefit. He is a ‘stranger to the contract’ and can claim no right under it. This is
known as the doctrine of Privity of Contract. The general rule of privity of
contract was evolved in a case Tweddle v. Atkinson in 1861 and was adopted
by the House of Lords in various cases and which subsequently came to be
known as The Doctrine of Privity of Contract, which means “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 this case, the plaintiff A married a girl B. After this marriage there was
contract in writing between A’s father and B’s father that ‘each would pay a
certain sum of money to A. After the death of the contracting parties, A
brought an action against the executors of B’s father to recover the promised
amount. It was held that A could not sue for the same on the ground that he
was a stranger to the contract as well as stranger to consideration. Thus,
although the sole object of the contract was to secure benefit to the plaintiff
he was not allowed to sue as the contract was made with his father and not
with him. The case laid the foundation of the rule – Privity of Contract i.e., a
stranger to contract cannot enforce the contract.

The rule was affirmed again by the House of Lords in Dunlop Pneumatic Tyre
Co. v. Selfridge &co. Dunlop & Co. sold certain goods to one Dew & Co. and
secured an agreement from them not to sell the goods below the list price and
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 goods to the
defendants (Selfridge & Co.) who agreed not to sell the goods to any private
customer below the list price, but the list price was not maintained by S &
Company. The plaintiffs (D. P & Co.) sued the defendants for breach of
contract. The House of Lords held that the contract was unenforceable as the
plaintiff Co. was not a party to the contract between Dew & Co. and S &
Company. It was also held that even if it is taken that Dew & Co. was acting as
agents for the Dunlops & Co. the latter still cannot maintain an action as there
was no consideration between Dun. & Co. and S & Co. because the whole of
the purchase price was paid by S & Co. to Dew & Co.

Types of privity of contract

Generally, there are two types of privity contract: horizontal and vertical

1. Horizontal Privity of Contract: In this type of Privity of Contract, the benefit

from the contract goes to the third party instead of the two parties who were
the part of the contract.

2. Vertical Privity of Contract: In this type of Privity of Contract, the benefit

from the contract would directly go to the parties in the contract and not to
any third party.
 Essentials of Privity of contract

1.A contract has been entered into between two parties: The most important
essential is that there has been a contract between 2 or more parties.

2.Parties must be competent and there should be a valid consideration:

Competency of parties and the existence of consideration are pre-requisites for
application of this doctrine.

3. There has been a breach of contract by one party: Breach of contract by one
Party is the essential requirement for the application of the doctrine of privity
of contract.

4.Only parties to contract can sue each other: Now after the breach, only
Parties to a contract are entitled to sue against each other for non-performance
Of the contract.

Exceptions to the rule of privity of contract

1.trust of contractual rights or beneficiary under a contract-: it is one of the

most important exceptions to the rule of privity of contract. It was recognized
in the Nawab Khwaja Muhammad khan v Nawab Hussaini Begum. In this case
the appellant executed an agreement with the respondent’s marriage with his
son (both being minor at the time) that he would pay to the respondent 500
rupees a month in perpetuity for the betel leaf expenses and charged certain
properties with the payment, with power to the respondent to enforce it. The
husband and wife separated on account of a quarrel and the suit was brought
by the plaintiff to the respondent for the recovery of arrears of this annuity. It
was held that the respondent, although no party to the agreement, was clearly
entitled to proceed in equity to enforce her claim. Here the agreement
executed by the defendant specifically charges immovable property for the
allowance which he binds, himself to pay the plaintiff. So, she is the only
person beneficially entitled under it.

2. Marriage settlement, partition or other family arrangements: Where a

provision is made in a partition or family arrangement for maintenance or
marriage expenses of female members; such members, though not parties to
the agreement, can sue on the footing of the arrangement. For example, in
Rose Fernandez v. Joseph Gonsalves, a girl’s father entered into an agreement
for her marriage with the defendant, it was held that girl after attaining
majority could sue the defendant for breach of the promise of marriage and
the defendant could not take the plea that she was not a party to the
agreement.

3. Contracts entered into through an agent: It is not uncommon for people

involved in commerce and business to enter into contracts through their

agents. These agents can enter into contracts for them and represent them in

the relations that arise in such contracts. Thus, whatever contracts entered

into by an agent while acting within the scope of his authority can be enforced

by the principal. It may seem that the agent is the party to the contract, but in

reality, he is more of a representative of the principal.

For example, A appoints B as his agent. He asks B to buy a bag of rice from C on
his behalf. Here, B enters into a contract with C when he buys the bag of rice,
but it is A who has the right to enforce the contract as B is a mere
representative of A.

4.Acknowledgement Or Estoppel: where by terms of a contract a party is

required to make a payment to a third person and he acknowledges it to a
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.
Ramakrishniah is a good example for this. 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 price left with 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.

5. A Covenant Running with the Land: When someone purchases a piece of

land with the notice that the proprietor of the land will be bound through all
obligations and liabilities affecting the land, then he can sue upon a contract
among the preceding land-proprietor and a settler even if he was not a party
to the contract. For example, Nidhi owned a piece of land which she offered to
Peter under a covenant that some part of the land will be maintained as a
public park. Peter abided through the covenant and ultimately offered the land
to Aarav. Though Aarav was aware of the covenant, he constructed a house in
 the precise plot. When Peter got to know of it, he filed a suit against Aarav.
Although Aarav denied liability given that he was now no longer a party to the
agreement, the Court held him liable for violating the covenant.

Position of privity of contract in English law

Firstly, the doctrine of privity of consideration was not applicable in England.

The court in Dutton v. Poole, did not consider this principle. In this case, a son
made a contract with his father to forbear him to cut down an oak woodland.
The son in return, would make a payment to his sister of £1000 once she had
married. The father died before the sister was married and the son subsequently
refused to pay his sister the money as was previously agreed, at the time of her
marriage. The sister and her husband sued her brother for the amount that was
originally promised between the father and son.

Here, the agreement was between the father and the son, the defendant had
made a promise to pay the amount to the plaintiff. The consideration for the
promise is the abstinence by the father to sell the wood. The court did not
consider the plaintiff’s privity to the contract nor interested in the consideration.
The purport behind the agreement was to provide the plaintiff a certain amount
of money. The court held that it was inequitable for the defendant to keep the
wood also and deprive the plaintiff of her share. Thus, the relationship between
the father and the son had made the sister a party to the agreement, even if she
was not included at the time the contract was agreed. The relationship between
father and daughter was found to extend the consideration that the father gave
in the promise to the children.
Later, in 1861, the position in England changed in Tweddle v. Atkinson. The court
of Queen’s Bench denied the principle and ruled that a beneficiary who is
stranger to the consideration cannot take advantage of it. Here, the plaintiff’s
father and ‘G’ entered into an agreement to pay the plaintiff a certain sum of
money in consideration to plaintiff’s marriage to the daughter of ‘G.’ ‘G’ failed
to do so and the plaintiff sued his executors for the same. Thus, though the
contract entered between his father and ‘G’ was for he is benefiting he remained
stranger the contract and the contract denied to give him rights to enforce the
terms of the contracts.

Further in Dunlop Pneumatic Tyre v. Selfridge and Co. Ltd., the fundamental
proposition in the English law, i.e. the Consideration must move from the
promisee to the promisor only. If any other person furnishes the consideration,
the promisee becomes the stranger and, therefore, cannot enforce the promise.
This is the postulate of the doctrine of privity of consideration.

Position of privity in India

In India there is no provision in the Contract Act either for or against the rule.
There has been a great divergence of opinion in Indian courts as to how far a
stranger to a 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 laid down in Tweddle v. Atkinson (Supra) is as much
applicable in India as it is in England. However, with the passage of time the
courts in India have created certain exceptions to the rule and there are
various cases in which it was held that a beneficiary (3rd person) under a trust,
family arrangement and under various laws can sue or enforce his rights.

The privity council extended the rule to India in Jamna Das v Pandit Ram Autar
Pande. In this case, A borrowed Rs. 40,000 by executing a mortgage of her
Zamindari in favour B. Subsequently A sold the property to C for Rs. 44,000 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
not a party to the agreement between A & B.

The Privy Council held 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 which he was not a party. The purchaser entered into no
contract with him; and the purchaser is not personally bound to pay B his
mortgage debt.

Thus, where all that appears is that a person transfers property to another and
stipulates for the payment of money to a third person, a suit to enforce that
stipulation by the third party will not lie. But the party making the contract
may sue for specific performance for the benefit of the third party.
 Criticism 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 should be repealed.

In numerous other situations, this rule was challenged by Lord Denning too, as
in Beswick v. Beswick. The principle was also criticized by Steyn Lj in Darlington
BC v. W.S. northern ltd.

. It is unfair towards the third parties who might depend upon the given
contract to govern their affairs. It dissolves the third party’s reasonable
anticipations of receiving benefit under the agreement.

. in case of a contracting party who mean to confer benefits on some third

party, this principle frustrates their agenda.

. in instance of third party suffering any harm, they have no recourse to their
redress.

. the doctrine of privity of contract 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 have not really addressed the issue in its entirety. The
possibility of further revisions and adjustments linger, casting doubts on the
doctrine’s fundamental viability.
The legislations in Australia, New Zealand, Canada, Singapore and England
have repudiated this doctrine.

Conclusion

The doctrine of Privity of contract is a very controversial topic of debate in

various judgements of the countries. The major difference between the English
law and Indian law in regard to this matter is related to the privity of
consideration wherein strangers to consideration cannot sue in English law but
he or she can sue under the Indian law. earlier no third party or strangers could
sue the parties for damages but over a course of time, certain exceptions have
been made to safeguard the rights of the third party.

Bibliography

. https://www.legarservicesindia.com