APPRAISAL OF DOCTRINE OF PRIVITY OF CONTRACT

Introduction

The Doctrine of Privity of contract, a longstanding principle in both English and Indian contract
law, has faced criticism for its rigid stance on who can enforce a contract. Originally, this doctrine
dictated that only parties to a contract had the right to sue each other to enforce its terms,
effectively barring third parties from pursuing claims.1

However, as the legal landscape has evolved, exceptions to this doctrine have emerged, allowing
third parties to enforce contracts under specific circumstances. This post explores the doctrine of
privity of contract, its historical development, and the exceptions that have been established to
strike a balance between legal rigidity and fairness in contractual relationships.

The doctrine of privity of a contract is a common law principle that implies that only parties to a
contract are allowed to sue each other to enforce their rights and liabilities and no stranger is
allowed to confer obligations upon any person who is not a party to contract even though contract
the contract have been entered into for his benefit. The rule of privity is basically based on the
‘interest theory’ which implies that the only person having an interest in the contract is entitled
as per law to protect his rights

According to section 2(h) of the Indian Contract Act, 1872, 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€ as each promise and every pair of promises that establish
the consideration for each other. And Consideration as defined in Section 2(d) is an act performed
at the promisor’s request or desire.

A well-settled rule of English Law is 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 a “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 (English Law).

But the words promisee 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 third person on behalf of the promisee. To that extent, the 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.

1
https://www.legalserviceindia.com ( accessed on dated 1-09-2024).

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“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.”

Illustration:- If Ram makes a promise to deliver goods to Nitin. Then in this case, if Ram breaches
the contract, then only Nitin has a right to prosecute him and no other person can prosecute him.

Meaning of Doctrine of Privity of Contract

This Doctrine has its roots in the Latin maxim Vinculum Juris i.e. legal bond or legal tie. The Black’s
Law Dictionary (Sixth Edition) defines privity of contract as ‘That connection or relationship which
exists between two or more contracting parties’. It further defines privity as ‘mutual or successive
relationships to the same right of property, or such an identification of interest of one person with
another as to represent the same legal right’.

“No one may be entitled or bound by terms of a contract to which he is not original party”.2 In
other words a person who is not a party to a contract is neither entitled to contractual benefits
nor he is bound by the contractual obligations. Rights and obligations emerging out of a contract
are limited to its parties only and do not extend to a stranger3. This is known as the doctrine of
privity of contract. The rights and obligations are strictly private matters of contracting parties
and because of this a stranger has no legal access to them. Thus doctrine of privity of contract
means that a non- party cannot bring an action on contract 4 . The doctrine enunciates a
fundamental principle of law of contract that a stranger to a contract cannot sue upon it

For instance, if there is a contract between A and B, thereby conferring some benefit upon X, X
cannot file a suit to enforce the contractual obligations because A and B are the only parties to
the contract, whereas X is a stranger to the contract. The rule of privity finds its genesis from the
‘interest theory’, which implies that solely the individual having an interest in the contract is
entitled to protect his rights.

In 1861, the general rule of “Privity of contract” was enunciated in a case Tweddle v. Atkinson5
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 (stranger) can sue upon
it even if it is avowedly made for his benefit”

2
Price v. Easton (1833) 4B. & Ad. 433.
3
A stranger is a person who is not a party to the contract.
4
Cheshire, Fifoot and Furmston’s Law Of Contract, 11th Edition (1986) at page no.438.
5
(30 LJ QB 218).

2
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 (father of A & B), 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.

Privity of contract has 3 broad effects:

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

A third party cannot be held liable under a contract if he is not a party to that contract.

A third party cannot enforce a contract if he is not a party to that contract.

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 contract.

Types Of Privity Of Contract

1-Horizontal Privity Of Contract :- Horizontal privity can be brought up if benefits in a contract

are given to another party that is not a party to the contract. Horizontal privity exists when the
beneficiary of a contract is a third party, and not one of the signatories of the original contract.
The aforementioned life insurance example would be considered a horizontal contract. Again, the
beneficiary of the insurance policy would not typically be in a position to take legal action against
either the insurance company or the policy holder6.

Thus Herein, the beneficiary is a third party and not one of the individuals participating in the said
contract.

6
https://www.upcounsel.com. (accessed on dated 1-09-2024).

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2-Vertical Privity Of Contract :- This may be raised when another contract is made arising from
one of the parties to another contract. A vertical contract exists when the two signers of the
contract are the ones who would directly benefit from the agreement. An example of this would
be someone who purchases an Individual Retirement Account (IRA) with the expectation that the
money be paid to them upon their retirement. In this case, the owner of the IRA would have legal
standing to take action against the administrator of the IRA (typically, a bank or other type of
financial institution) for failure to pay or other type of negligence.

Thus herein all signatories to an agreement here, stand to be entitled to the benefit directly
arising out of the same contract.

Aspects Of The Doctrine

A)-Burden aspect: Parties cannot impose liabilities or burdens upon a third party by their
contract. There is a rational logic behind this rule how can we justify imposing any contractual
obligation upon a person who is a stranger to a contract.

B)-Benefit aspect: A stranger to a contract cannot take advantages arising out of the contract and
he can’t sue upon the contract. This is similar to the doctrine of consideration which says that a
person, who is not a party to consideration, does not have any right to sue upon the contract.
Actually, this aspect of privity has been subject to many criticisms.7

Position in England

The doctrine of privity of contract, deeply rooted in English common law, established the principle
that only the parties directly involved in a contract had the legal standing to enforce its terms.
English law is more restrictive in comparison to Indian law in the application of the doctrine of
privity. This is because English law only recognizes consideration that moves from the promisee
himself and not from anyone else, which puts both strangers to contract and strangers to
consideration on the same footing. Thus, when the promisee to a contract does not provide the
consideration himself, he loses his right to enforce the contract as he is a stranger to
consideration.

Thus under common law there is two basic principles which can be identified with the doctrine
of privity of contract:-

1)-Consideration should move from the promisee only:- In Tweddle v Atkinson ,it was affirmed.

FACTS: John Tweddle’s son was to marry William Guy’s daughter. The two fathers entered into an
agreement whereby each was to pay a sum of money to the son, William, on the marriage. The

7
https://www.legalserviceindia.com/legal/article-8557-the-doctrine-of-privity-of-contract-under-indian-and-
english-law.html (accessed on dated 1-09-2024).

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agreement stated expressly that both parties agreed that William should have “full power to sue”
for the payments. On the marriage, William Guy did not pay and he later died. William Tweddle
sued Guy’s executor for the sum.

HELD: He failed on the ground that he had provided no consideration for the promise by William
Guy. The Court ruled that since the son was both a stranger to the contract and a stranger to the
consideration, his suit was not maintainable.

2)-A contract cannot be enforced by a person who is not a party to the contract:- Only a promisee
may enforce the promise meaning that if the third party is not a promisee he is not privity to the
contract.

The relevance of the doctrine was affirmed again when it was cited in the well-known case
Dunlop Pneumatic Tyre Co. Ltd. V. Selfridge & Co. Ltd 8 , In this case, Dunlop Company
manufactured tyres and they entered into an agreement with Dew & Co., who were dealers.
Dunlop entered into the agreement so that they can maintain a standard market price for the
tyres and Dew & Co. agreed that they would not sell the tyres below the fixed price. Dunlop also
insisted that the dealers must have the same terms in their agreements with the retailers. Dew &
Co. entered into a contract with a retailer Selfridge, which had a provision that if the tyres were
sold below the fixed price, they would have to pay 5 Pounds per tyre as damages to Dunlop & Co.
When Selfridge sold some tyres below the fixed price, Dunlop sued them for damages and the
decision was in favour of Dunlop. But, on appeal the decision was reversed and it was held that
Dunlop did not have the right to claim damages as the contract was only between the retailer
Selfridge and Dew & Co.

Concluding it can be said that doctrine of privity of contract debars the third party to enforce the
contract and it also forbids parties from enforcing any contractual obligations from strangers and
the position is well settled in English law.

Historical Background Of Privity Of Contract In England

Though in common law the doctrine of privity was recognised and established in the case of
Tweddle v. Atkinson , its foundations had been laid by the English courts over the years, starting
from as early as the end of 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 court, or in
the words of the Court, “He that hath interest in the promise shall have the action” 9.

The first recorded case of such an instance was decided upon in 1599 in England.

8
(1915 ) A.C. 847.
9
Corny and Curtis v. Collidon; 1674 (1) Freem. K.B. 284

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This was the case of Levitt v. Hawes10, 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.”

Rippon v. Norton11 which was decided in the year of 1602, In this case, the father of a child’s
assumpsit on the father of another child in order to stop the latter child from assaulting the
former. But the objection made by the defendant party, which was relied upon former case of
Levitt v. Hawes, was upheld by the court and it was held that “because there is no damage to the
father by the battery to the son an action lies not for the father. Another important decision is
that of Hadves v. Levit12 In this case, the bride’s father (the defendant) had promised the groom’s
father (the plaintiff) that he would pay 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 for the
marriage. But, after the marriage, the defendant failed to pay the required sum to the son which
resulted in the plaintiff bringing and 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”.

In Dutton v. Poole13, a son promised his father that, in return for his father not selling a wood,
he would pay 1000 pounds to his sister. The father refrained from selling the wood, but the son
did not pay. 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.

ESTABLISHMENT AND DEVELOPMENTS IN THE RULE

Though many cases were decided in the 17th century, the privity rule was still not established. It
took a few more centuries for the rule to take its form as we know it. A study of a few cases
decided in the 18th century and the 19th are essential in order to reach that establishment

In Marchington v. Vernon14, Buller J said that, independently of the rules prevailing in mercantile
transactions, if one person makes a promise to another for the benefit of a third, the third party
may maintain an action upon it.

10
Cro. Eliz. 654.
11
Cro. Eliz. 849.
12
(1632) Het. 176. This decision was supported, obiter, by Lord Mansfield in Martyn v. Hind (1776) 2 Cow p.
437, 443: ER 1174, 1177.
13
(1678) 2 Lev 210; 83 ER 523.
14
(1797) 1 Bos & P 101, n (c); 126 ER 801, n(c).

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In Carnegie v. Waugh15, the tutors and curators of an infant, C, executed an agreement for a lease
with A, for an annual rent to be paid to C. It was held that C could sue on the instrument, even
though he was not a party to it.In spite of these cases favouring actions by third party
beneficiaries, it is not accurate to say that the third party rule was entirely a 19th century
innovation. There were other 16th and 17th century cases where a third party was denied an
action on the grounds that the promisee was the only person entitled to bring the action, in
Jordan v Jordan16 C gave a warrant to B to arrest A for an alleged debt. A promised B that, in
return for not arresting him, he would pay the debt. C failed in his action, on the ground, inter
alia, that the promise had been made to B. Similarly in Taylor v Foster17, A, in return for B marrying
his daughter, agreed to pay to C an amount which B owed to C. In an action by B against A, it was
held that B was the person to sue, being the promisee. There were also cases where the reason
given why the third party could not sue was because he was a stranger to the consideration, that
is, he had given nothing in return for the promise18 These cases typically involved the following
facts. B owed money to C. A would agree with B to pay C in return for B doing something for A,
such as working or conveying a house. A would not pay, and C would sue A. C would lose because
he or she had given nothing for A’s promise.

Finally came the case of Tweddle v. Atkinson in which Wightman J said: “It is now established
that no stranger to the consideration can take advantage of a contract, although made for his
benefit.”, whereas, Crompton J said that “consideration must move from the promisee”.

The authority of Tweddle v Atkinson was soon generally acknowledged. In Gandy v Gandy 19
Bowen LJ said that, in spite of earlier cases to the contrary, Tweddle v Atkinson had laid down
“the true common law doctrine”. In Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd. the
House of Lords accepted that it was a fundamental principle of English law that only a party to a
contract who had provided consideration could sue on it.

In Drive Yourself Hire Co (London) Ltd v Strutt 20 Denning LJ said: “It is often said to be a
fundamental principle of our law that only a person who is a party to a contract can sue on it. I
wish to assert, as distinctly as I can, that the common law in its original setting knew no such
principle. Indeed, it said quite the contrary. For the 200 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,

15
(1823) 1 LJ (OS) KB 89.
16
(1594) Cro Eliz 369; 78 ER 616.
17
(1600) Cro Eliz 776; 78 ER 1034.
18
Bourne v Mason (1669) 1 Ventr 6; 86 ER 5; Crow v Rogers (1724) 1 St 592; 93 ER 719; Price v. Easton (1833)
4 B & Ad 433; 110 ER 518.
19
(1885) 30 ChD 57, 69.
20
[1954] 1 QB 250.

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 then the common law would enforce the promise at his instance, although he was not a party to
the contract. “Despite several attempts by Denning LJ to allow rights of suit by third party
beneficiaries, the House of Lords reaffirmed the general rule in Midland Silicones Ltd v Scruttons
Ltd21 Viscount Simonds said: “heterodoxy, or, as some might say, heresy, is not the more attractive
because it is dignified by the nameof reform. …If the principle of jus quaesitumtertio is to be
introduced into our law, it must be done by Parliament after a due consideration of its merits and
demerits.

Position in India

In India there is no provision in the Contract Act either for or against the rule. Under the Indian
Contract Act, the definition of consideration is broader than under the English Law, yet the
common law doctrine is generally applicable in India.

Section 2(d) in The Indian Contract Act, 1872: 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 Act or abstinence or promise is called
a consideration for the promise. One of the most notable features of Section 2(d) is that the act
which is to constitute a consideration may be done by “the promisee or any other person”. It
means therefore, that as long as there is a consideration for a promise, it is immaterial who has
furnished it. It may move from the promisee or, if the promisor has no objection, then from any
other person. But under English law the consideration must move from the promisee only. So this
is the point of difference between English law and Indian law on the doctrine of privity of contract.

The position of this doctrine Is the same as in the Indian Contract Act, 1872, with the only
difference being that under Indian law, a stranger or third party can sue if there is involvement of
consideration whether it is from the promisee or any other person, as opposed to such a position
in England. The main and only point of difference between English law and Indian law is that a
person can sue even if he is a stranger to the consideration. The scope of Privity is much wider
under Indian law, as the definition of consideration and its importance also have a wider scope
than that in English law. Since under Indian Contract Act ,1872 Privity of Consideration is not at
the same footing as that of Privity Of Contract therefore a person can sue even if he is stranger to
consideration22.

The rule of privity of contract has been applicable in India as well. Even though under the Indian
Contract Act the definition of consideration is wider than under English law, yet the common law
principle of privity of contract has been generally applicable in India, with the effect that only a

21
[1962] AC 446.
22
www.manupatra.com ( accessed on dated 1-09-2024).

8
party to the contract is entitled to enforce the same. The authority for the application of the rule
in India is the decision of the Privy Council in Jamna Das v. Ram Avtar Pandey.

In Jamna Das v. Ram Avtar Pandey 23 , A borrowed ₹40,000 by executing a mortgage of her
zamindari in favour of B. Subsequently she sold her property to C for ₹44,000 and allowed C, the
purchaser, to retain ₹400,000 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 Mac Naughtan, in his very short judgment, said that the undertaking to pay back the
mortgagee was given by the defendant to the vendor. “The mortgagee has no right to avail himself
of that. He was no party to the sale. The purchases entered into no contract with him, and the
purchaser Is not personally bound to pay this mortgage debt.

“This Doctrine of Privity, though accepted in many jurisdictions, has been subject to various
reforms, each depending on the jurisdiction in question. In the words of Jenkins, CJ:“That Indian
Contract Act is unlike the English Contract Act and the limits with which the doctrine of privity of
contract operates in English law cannot with same vigour be applicable to Indian Contract Act”24.

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 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 (third person) under a trust, family arrangement and under various laws can sue or
enforce his rights.

Decisions In Favor of Rule of Privity of Contract

The line of thinking in Jamna Das’s has been followed in various cases. Consequently, in
Pratapmull v. State of West Bengal 25 a wife’s action to recover the money due under her
deceased husband’s insurance policy was rejected because she, though a nominee under the
policy was not a party to the contract between insurance company and the deceased, and no
interest passed to her merely because she was named in the policy.

In the opinion of BANKIN CJ this seems to be the effect of the Contract Act itself. In Krishna v.
Pamila Bala 26 his lordships observed: “Not only, however, is there nothing in Section 2d to
encourage the idea that contracts can be enforced by a person who is not a party to the contract,

23
AIR 1916 All.232.
24
Debnarayan Dutt v. Chunilal Ghose (1914) ILR 41 Cal 137.
25
(1957) 61 Cal WN 78.
26
AIR 1928 Cal 518.

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but this notion is, rigidly excluded by the definition of ‘promisor’ and ‘promisee’”.
The Supreme Court of India has expressed itself in favor of the Privity rule laid down in Tweddle

v. Atkinson case in M. C. Chako v. State Bank of Travancore27 , In the present case the Highland
Bank was indebted to the State Bank of Travancore under an overdraft. One M was the manager
of the Highland Bank and his father K had guaranteed the repayment of the overdraft. K gifted his
properties to the members of his family. The gift deed provided that “the liability if any should be
met by M either from the bank or from share of property gifted to him.” The State Bank attempted
to hold M liable under this provision of the deed, but M was not liable. The Supreme Court held:
“State Bank of Travancore not being a party to the deed cannot enforce the covenants and was
bound by them. It is a settled law that a person who is not a party to the contract cannot enforce
its terms.”

In FCI v. D. R. Krishnamurthy 28 , the agent of a contractor was not allowed to enforce the
contractor’s claim. Similarly, in Harman Singh v. Purbi Devi29, where an agreement for sale of land
was not allowed to be enforced by the brother of the contracting party.

In another case, Advertising Bureau v. C. T. Devaraj30 the circus owner placed an order with the
plaintiff-appellant for making advertisements for the circus. The plaintiff-advertiser did not make
any agreement with the financer of the circus. The advertiser was not a party to the contract
between the financer and the circus owner. There being no privity of contract between the
advertiser and the financer, the suit by the advertiser against the financer was therefore
dismissed.

Decisions against the Doctrine Of Privity Of Contract

Decisions against the rule have also been given, thereby elaborating the line of thinking based
upon the observation of the privy council in Khwaja Muhammad Khan v. Hussaini Begum 31
Nawab Khwaja Muhammad Khan (appellant) entered into an agreement with the father of
Husaini Begum on 25th October 1877. The agreement was regarding the marriage of his son,
Rustam Ali Khan, with Husaini Begum (respondent). Nawab Khwaja Muhammad Khan voluntarily
declared in the agreement to pay Rs 500 per month in perpetuity from the date of marriage to
Husaini Begum as her Kharcha-i-pandan. The agreement stated that Nawab Khwaja Muhammad
Khan would pay this amount using the income from certain properties that were specifically
described in the contract. The agreement stipulated the date of marriage as 2nd November 1877.
However, Husaini Begum as well as Rustam Ali Khan were minors at the time. Therefore, Husaini

27
AIR 1969 SC 504.
28
(1987) 2 Mad LJ 53.
29
AIR 2000 HP 108.
30
AIR 1995 SC 2251.
31
(1910) 12 BOMLR 638.

10
Begum moved into her in-laws’ house in 1883, upon gaining the age of majority. The husband and
wife continued to live together until 1896. Due to differences, she left her husband’s home and
has since lived more or less continuously in Moradabad. During this time, Nawab Khwaja
Muhammad Khan discontinued the monthly payment of Rs 500 to Husaini Begum. Therefore,
Husaini Begum brought a suit to claim arrears of the Kharcha-i-pandan against her father-in-law,
Nawab Khwaja Muhammad Khan. The Subordinate Judge, Agra dismissed the suit by holding that
Husaini Begum is not entitled to claim allowance. Aggrieved by the decision of the Subordinate
Judge, Husaini Begum filed an appeal before the Allahabad High Court. The Allahabad High Court
reversed the decision of the Subordinate Judge by holding that Husiani Begum has a right to claim
the arrears.

Moreover, several High courts have enunciated upon the rule that the Indian courts are not bound
by the principle laid down in the Tweddle v. Atkinson case.. The Calcutta High court observed in
Khirod Behari Dutt v. Man Gobinda32 that there is no provision in the Indian Contract Act either
for or against the rule and nor there is anything that prevents the recognition of a right in a third
party to enforce a contract made by others which contains a provision for that party’s benefit.
Recently, the Calcutta High Court in Raymond Woolen Mills Ltd. V. Coal India Ltd33 Observed that
the doctrine of privity of contract has undergone a change, and therefore, the principal as a
beneficiary under a contract (between his agent and third party) can initiate a lawful action
against the third party without being a party to the contract. It has often been observed that the
established rule of privity of contract has caused considerable injustice inconvenience and has
provoked criticism by the judges, academicians and law reform agencies alike.

In the famous case Donoghue v. Stevenson34 where Ms. Donoghue’s friend brought a defective
ginger beer that contained a partially decomposed snail due to which Ms. Donoghue filed a suit
seeking damages. In this case, the contract was between her friend and the owner of the shop
but it was observed that the manufacturer should have some sense of commitment and a duty
of care towards his customers, consequently she was awarded the damages.

The Calcutta High Court also cited Indian MGIS Ltd. V. Himalaya Finance Co. Ltd.35 where the ratio
of the decision was that the owners of a vehicle who really have legal interest in the property
could very easily come within the definition of “beneficiary”, though not party to the contract,
because the same was taken out by the hirer. The court further held that there are thousands of
authorities on the point that this English rule is not applicable in India.

32
(1932) 61 Cal 841.
33
(1998)1CALLT382(HC).
34
(1932) AC 562.
35
AIR 1974 Del.114.

11
In another case, Fatechand Murlidhar And Etc. vs Maharashtra State Electricity Board36 it was
held that where the supply of electricity was granted to the occupier of a premises, its owner
could not be sued for dues, there being no Privity. Very recently the Supreme Court in Coats
Viyella Ltd v. India Cement Ltd.37 held that “a contracting party cannot shift liability under the
contract on to a third party which has no contractual relationship with the other contracting
parties.

EXCEPTIONS TO PRIVITY OF CONTRACT

1-Trust

When an agreement between several parties results in the creation of a trust in favour of a third
party or a beneficiary; the latter can take legal action against the contracting parties under an
exception to this principle of Privity of Contract. For instance, an individual has created a trust
with his younger brother in favour of his infant daughter. The terms of this trust are that, in the
event of his death, his younger brother will oversee his property. When the daughter comes of
age, this trust will hand over the property to her. If the brother refuses to do so, then the daughter,
who is a beneficiary, can sue the brother under the exception to the principle of Privity of
Contract.

No doubt the House of Lords in a number of cases maintained that only a party to the contract
can sue on it and no such right is conferred on a third party but the Law Revision Committee
(1937) which recommended its abolition and in its Sixth Interim Report 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

36
AIR 1985 BOMBAY 71.
37
2000 (9) SCC 376.

12
raise against the third party any defence that would have been valid against the promisor.” Trust
is a well-established exception to the rule of privity. But this rule is subject to certain restrictions.
A promisee 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 a 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 is that of Rana Uma Nath Baksh Singh v. Jang Bahadur 38 ,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 on 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 favor of J for the specified amount and the
village, Hence he was entitled to maintain the suit.

2- Contract through Agent- The contract between the principle and the third party is recognize if
an agent enters into an authorized contract with a third party on behalf of his/her principle. If the
agent makes a contract with a third party on behalf of his principle, that contract is regarded by
law as having been made by the principle himself/herself. Hence she/he can sue on it and be
sued on it, as provided under section 178 of the Law of Contract Act 1872. Thus in cases, if the
agent enters into a contract with a third party on behalf of his principle, then that authorized
contract is regarded by Law as having been made by the principle himself/herself. Therefore,
he/she can sue on it and be sued on it as well.

3- Family Settlement- 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.

Illustration: A daughter along with her husband entered into a contract with her father whereby
it was agreed that she will maintain her mother and the property of the father will be conveyed
to them. The daughter subsequently refused to maintain the mother. On a suit it was held that
the mother was entitled to require her daughter to maintain her, though she was a stranger to
the contract. The illustration is similar to the facts of case Veeramma v. Appayya39.

4- 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

38
AIR 1938 PC 245.
39
AIR 1957 AP. 965.

13
himself an agent of the third party. The case of Devaraja Urs v Ram Krishnaiah 40 is a good
example. In this case A sold his house to B under a registered sale deed and left a part of the sale
price in hi s 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 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.”

An illustration of acknowledgment by conduct is Khirod Behari Dutt v. Man Gobinda (AIR 1934
Cal 682). In this case the tenant and the sub – tenant of a piece of land agreed between
themselves that the sub-tenant would pay the tenant’s rent direct to the landlord. The agreement
was acted upon by all the parties interested. Under these circumstances the landlord was allowed
to obtain a decree for his rent directly against the sub – tenant. In other words, the sub – tenant
was estopped from denying his liability to pay the tenant’s rent on the ground that there was no
such contract between him and the landlord.

In Alfred McAlpine Construction Ltd v Panatown Ltd 41, there was a tripartite building contract,
the builder contracted with his employer and simultaneously agreed to be directly responsible to
the owner of the building. It was held that the employer had no right to sue the builder for any
loss caused to the owner by any deficiency in works. Such liability was incurred directly to the
owner.

5- Covenants Running With Land- The rule of privity may also be modified by the principles
relating to transfer of immovable property. The principle of the famous case of Tulk v Moxhay42
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 covenant affecting the land, shall be bound by them although
he was not a party to the agreement.”

A modern illustration of the principle is Smith & Snipes Hall Farm Ltd. V River Douglas Catchment
Board 43, in this case the defendants (the Board) agreed with certain landowners adjoining a
stream to improve the banks of the stream and to maintain them in good condition. The landlords
on their part paid proportionate costs. Subsequently one of the landlords sold his land to the first
plaintiff and he to the second plaintiff. There was negligence on the part of Board in maintaining

40
AIR 1952 Mys. 109.
41
(2001) 1 AC 518.
42
(1848) 41 ER 1143.
43
(1949) 2 All ER 179 (CA).

14
 the banks, which burst and the land was flooded. Both the plaintiffs were strangers to the
agreement with the Board, but even so the Court of Appeal allowed them to sue the Board for
breach of the contract, for the whole arrangement was for the benefit of the landowners whoever
they might be and not merely the parties to the agreement.

In Steel Authority of India Ltd. V State of MP44, Where the Central Government assigned a piece
of land to its own corporate undertaking with all the rights, interests and privileges, it was held
that privileges or rights to exemption from payment of land revenue which had accrued to the
Central Government in respect of that land would also be available to the undertaking as a
successor in interest to the Central Government.

6- Assignment of rights under a contract- In favour of a third party either voluntarily or by

operation of law, the assignee can force the benefits of the contract, e.g., the assignee of an
insurance policy or the official assignee on the insolvency of a person can sue on the contract
even though originally they were not parties to it.

Conclusion

From the above discussion, we have seen that although only parties to the contract can sue each
other, no stranger is allowed to enter between the parties contract. But with the development of
time, the law has also developed and now even a stranger is permitted to sue to safeguard his
interest under exceptional circumstances.

Under Indian Law, a person may not have himself given any consideration, but he can enforce the
contract if he is a party to the contract. In India, the rule “stranger to contract cannot sue” (Privity
of Contract) has to be distinguished from the rule “stranger to consideration can sue”. Because in
India “stranger to consideration” can sue but a stranger to contract cannot i.e., Doctrine of Privity
of Consideration is not applicable in India, but Privity of Contract is applicable both in England
and India.

The long-established rule of Privity of Contract had caused considerable injustice and
inconvenience. The existence of the Privity rule has provoked criticism by judges, academicians,
and law reform agencies alike and in some jurisdictions, statutory abrogation of the rule had
occurred. There is no doctrinal, logical, or policy reason why the law should deny effectiveness to
a contract made for the benefit of third party where that is the parties’ expressed intention.

The doctrine of privity of contract has changed in recent years and it is now well settled that a
beneficiary under any contract or any special law can initiate legal action against a third party
without being a party to the contract.

44
AIR 1999 SC 1636.

15
References:--

1-Dr. R.K. Bangia, Law of Contract I, 7th Ed. 2017.

2-Mullaa, The Indian Contract Act ,16th Ed. 2016.

3-Dr. S.K. Kapoor, Law Of Contract I,15th Ed. 2017.

4-Dr. Avatar Singh, Law of Contract,12th Ed. 2017.

5-https://www.lexisnexis.co.uk.

6-https://blog.ipleaders.in.

7-https://www.legalserviceindia.com.

8-https://www.manupatra.com.

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