What is Doctrine of Privity of Contract India?

 

DOCTRINE OF PRIVITY OF CONTRACT

Privity means privacy, which here refers to private between the parties to contract.

Essentials of privity to contract application or claim:

1.      Contract entered into between 2 parties: Most importantly there must be 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 at least 1 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: After the breach, only Parties to a contract are entitled to sue against each other for non-performance of the contract.

 

 

Doctrine of Privity under Indian Contract Act 1972

  Ø  Sec. 73 of the Indian Contract Act provides for compensation to the party, by the party breaching the contract

  Ø  In sec. 73 it appears that compensation arises for actual damages caused due to non performance of the contract and not indirect damages. Here only pecuniary damages are taken into account.

  Ø  In estimating the loss arising from the breach of contract, the means of remedying the inconvenience caused by the non-performance of contract must be considered

  Ø  Sec. 73 states, In estimating the loss arising for breach of contract inconvenience caused by non performance of contract must be considered

Graphical representation of privity of contract


Exceptions to Privity of Contract

There are, certain exceptions to the rule of privity of contract recognized both by the English Law and the Indian Law, under which a person, who is not a party to a contract can sue on it. The exceptions to the rule are:

1. Trust or Charge

Sometimes under contract, a benefit is given to a person who is not a party to the contract. This benefit can be given by creating a Trust or Charge in favour of such person. In such cases, the beneficiary under the trust or charge may enforce the contract even though he is not a party to it.

2. Marriage Settlement, Partition or Other Family Arrangements

In an agreement made in connection with marriage, partition or other family arrangements, a person, for whose benefit the provision is made, can enforce the agreement though he is not a party to it.

3. Acknowledgement of Payment

If a party acknowledges the payment to the third person or constitutes himself as an agent of that third person, then the third person can recover the amount from such a party.

4. Agreements Affecting the Land

If such land is purchased by somebody with the notice of rights and obligations of the owner, then those rights and obligations shall bind the purchaser although he was not a party to the agreement.

5. Agency

A principal, even if concealed, may sue on a contract made by an agent. The third party cannot plead that there was no contract between him and the principal.

6. Assignment

The assignee of a debt or an actionable claim may sue the original debtor if the assignment is a legal one.

7. Holder in Due Course

A holder in due course of a negotiable instrument is one who has obtained the negotiable instrument in good faith and for valuable consideration. He can sue prior parties to the negotiable instrument.

8. Fund in Hands of a Party

Where a fund is created in the hands of one of the contracting parties in favor of a third party, it may be possible to give the latter, a remedy in quasi-contract on the grounds that to allow the contracting party to keep the fund would be to allow unjust enrichment.

As a general rule, both Indian and English law are similar to each other that only parties to contract can sue each other. In a leading English case of Tweddle v. Atkinson, it was held that the plaintiff cannot sue as he was both a stranger to the contract as well stranger to consideration. This concept of privity of contract was again analyzed in the case of Dunlop Pneumatic Tyre Co.Ltd v. Selfridge & Co. Ltd.

 

Infographics on privity of contract


Exceptions to Privity of Contract

    ·         Benefit Aspect of Contract

    ·         Burden Aspect of Contract

    ·         Doctrine of Privity under Law of Agency


Benefit Aspect of Contract

ü  A person stranger to contract cannot enforce the contract except some exceptions defined in court rulings or previous cases.

ü  2 basic court ruled exceptions where a stranger to contract can sue the other party / parties are:

o   Beneficiary/beneficiaries under the contract towards who contract creates trust

o   Beneficiary/beneficiaries under the contract which is a part of family arrangement

           

Burden Aspect of Contract

1.      Burden of contract stands for liability of obligation created by the contract

2.      A contract gives right to a party/parties and assigns duty to other party/ parties

 

Doctrine of Privity under Agency (Exceptions)

1.      The principal-agent relationship is named as ‘agency’. Also, the agent does the agency work by representing the principal toward other parties.

2.      The principal, as well as the agent in their capacity have certain rights and duties towards other parties directly attributable to the acts of his agent or the agency

3.      In most cases specific to agency despite the agents fault it is treated as that of the principal and the principal is liable towards other parties acts and omissions of his agent 


What is the Position of Privity of Consideration in India?

This principle of the doctrine of privity of consideration is not applicable in India. As per the Indian Contract Act, 1872 the definition of consideration in Section 2(d) states, consideration may be furnished by ‘the promisee or any other person’ as long as it is ‘at the desire of promisor’. Thus, the consideration may move from promisee, or some other person, if the promisor has no objection, from any other person. The leading authority, in this case, is the case of Venkata Chinnaya v. VenkataramayaGaru.[1881 Madras HC].

  

Position of Privity of Contract in Indian Law

In India, the apex court has by its decision in MC Chacko vs. State of Travancore (1970SC) in a far reaching attempt of clearing the ambiguities in the application of the Doctrine of Privity held that a person not a party to a contract cannot subject to certain well recognized exceptions, enforce the terms of the contract. The recognized exception mentioned in the quoted judgment is worded widely so as to cover the beneficiaries under the terms of the contract. Views on the rights of third party beneficiaries have been laid down by other courts of India. For instance in:

1.  Bhujendra Nath vs. Sushamoyee Basu ( Calcutta HC in 1936), the division bench of the Calcutta High Court has held that a stranger to a contract which is to his benefit is entitled to enforce the agreement to his benefit. Also, in Pandurang vs. Vishwanath (1939), it has been held the person beneficially entitled under the contract can sue even though not a party to the contract itself.

2. Chinnaya v. Rammya (Madras HC in 1987), a lady granted her daughter some land via registered gift deed one of the terms that she will pay an annual sum to her maternal aunt after her death which she defaulted and denied payment invoking privity of contract i.e. claiming that her aunt was not a party to contract. In this case though the consideration was paid by the mother (vide sec. 2D of Indian Contract Act 1872) and not aunt so the uncle is stranger to consideration, along with stranger to contract. Yet his suit was allowed as he was a beneficiary of the contract under law. As the consideration may be given by the promise or anyone of their behalf, here, the consideration to the daughter was given by her mother on behalf of her aunt.

 

Stranger to Consideration

In context of Indian law, as long as there is consideration for promise, it does not matter who furnishes the consideration. Which means in Indian law doctrine of Privity of Consideration does not apply. It can be clarified by the words given under Section 2(d) of Indian Contract Act, 1862. It states that, when, at the desire of the promisor, the promise or any other person. This concept has been confirmed by the then judicial system in the case of Kedarnath Bhattacharji v Gorie Mohammad (1887)

 

Stranger to Contract

The doctrine of privity of a contract is a common law principle which 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.

 

Position of Privity of Contract in English law

In a leading English case of Tweddle v. Atkinson[1861], it was held that the plaintiff cannot sue as he was both a stranger to the contract as well stranger to consideration. This concept of privity of contract was again analyzed in the case of Dunlop Pneumatic Tyre Co.Ltd v. Selfridge & Co. Ltd. Where there was an agreement between a Dunlop dealer and a subdealer. Here Dunlop could not sue as it was stranger to contract[1915]


There are, certain exceptions to the rule of privity of contract recognized both by the English Law and the Indian Law, under which a person, who is not a party to a contract can sue on it. Some exceptions to the rule pertaining to some circumstances under the following:

1. Trust or Charge

Sometimes under contract, a benefit is given to a person who is not a party to the contract. This benefit can be given by creating a Trust or Charge in favour of such person. In such cases, the beneficiary under the trust or charge may enforce the contract even though he is not a party to it.

2. Marriage Settlement, Partition or Other Family Arrangements

In an agreement made in connection with marriage, partition or other family arrangements, a person, for whose benefit the provision is made, can enforce the agreement though he is not a party to it.

3. Acknowledgement of Payment

If a party acknowledges the payment to the third person or constitutes himself as an agent of that third person, then the third person can recover the amount from such a party.

4. Agreements Affecting the Land

If such land is purchased by somebody with the notice of rights and obligations of the owner, then those rights and obligations shall bind the purchaser although he was not a party to the agreement.

5. Agency

A principal, even if concealed, may sue on a contract made by an agent. The third party cannot plead that there was no contract between him and the principal.

6. Assignment

The assignee of a debt or an actionable claim may sue the original debtor if the assignment is a legal one.

7. Holder in Due Course

A holder in due course of a negotiable instrument is one who has obtained the negotiable instrument in good faith and for valuable consideration. He can sue prior parties to the negotiable instrument.

8. Fund in Hands of a party

Where a fund is created in the hands of one of the contracting parties in favor of a third party, it may be possible to give the latter, a remedy in quasi-contract on the grounds that to allow the contracting party to keep the fund would be to allow unjust enrichment.

As a general rule, both Indian and English law are similar to each other that only parties to contract can sue each other. In a leading English case of Tweddle v. Atkinson, it was held that the plaintiff cannot sue as he was both a stranger to the contract as well stranger to consideration. This concept of privity of contract was again analyzed in the case of Dunlop Pneumatic Tyre Co.Ltd v. Selfridge & Co. Ltd.


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