This is written by Ishita Chandra. She is a content writing intern at Legal Thirst
Table of Contents
INTRODUCTION
The doctrine of privity of contract implies that a contract may be a contract between the parties only and no third party (i.e. stranger to contract) can sue upon it whether or not it’s avowedly made for his/her benefit. Similarly, the person is not bound by the contract as there is no mutuality (doctrine of mutuality).
POSITION UNDER ENGLISH LAW
The doctrine is rooted within the English common law, especially in the famous case of Tweddle v. Atkinson[1] (1861), and Dunlop tyre Co. Ltd. V Selfridge & Co.[2] (1915). In the latter case, the plaintiff (Dunlop Co.) sold goods to Dew & Co. and secured an agreement from them to not sell goods below the asking price and if they sold goods to a different trader they might obtain from him an identical undertaking to keep up the worth list. Dew & Co. sold goods to the defendants (Selfridge & Co.) who agreed to not sell goods at but the selling price. On their failure to do so, the plaintiffs sued them for the breach of contract. It was held that considering that the plaintiffs were undisclosed principals, no consideration moved from them to the defendants which the contract was unenforceable by them.
POSITION IN INDIA
Even though under the Indian Contract Act 1872, the definition of consideration is broader than under English law, still the common law principle of the doctrine of privity of contract is normally applicable in India. It is significant to note that Indian law expressly negatives the English doctrine of privity of consideration. Nonetheless, there is no provision in the Indian Contract Act either for or against the rule of privity of contract. The authority for the application of the rule in India is the decision of the Privy Council in the case of Jamna Das V Ram Avtar[3] (1911). In this case, A had mortgaged some property to X. A then sold this property to B, B having agreed with A to pay off the mortgaged debt to X. X brought an action against B to recover. It was held by the Court that since there was no contract between X and B, X could not enforce the contract with the mortgagee and the purchaser is not personally bound to pay the mortgage debt.
In the case of Iswaram Pillai v. Sonivaveru[4], A mortgaged his lands to B, and part of the consideration was B’s promise to discharge A’s debt to C. C sued B but C was held to be a stranger to the contract. Similarly, in the case of Tirumulu Subbu Chetti v. Arunachalam Chettiar[5], it was held that “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”. In a sale deed between A and B, the stipulation to pay a certain sum to C cannot be enforced by C. In the case of Krishna Lal v. Promila Bala[6], the court had observed that the whole scheme of Section 2 of the Indian Contract Act 1872 is that, the promise comes into existence when one person signifies to another his willingness to do, and the person proposing is the promisor, the person accepting the proposal is the promisee and even, promise forming the consideration for each other is an agreement between those two persons. Thus, it is wrong to say that there is no provision in Indian law in support of this principle.
The Supreme Court of India has approved the rule of privity of contract in the case of M.C.Chacko V State Bank of Travancore[7] (AIR 1970), where the Highland Bank was indebted to the State Bank of Travancore under an overdraft. In this case, 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 furnished that the liability, if any, under the guarantee should be met by M either from the bank or from the share of property gifted to him. The State Bank tried to hold M liable under this provision of the deed. The Supreme Court, however, held that the State Bank not being a party to the deed could not enforce its covenants.
In the case of M.V. Shankar Bhat v Claude Pinto (Deceased) by Legal Representatives (2003), it was held that an agreement subject to ratification by others who are not parties to it is not a definitive contract. In the case of Aries Advertising Bureau v. C.T. Devaraj[8] (AIR 1995), a circus owner placed an order with the plaintiff for creating advertisements for a circus. The plaintiff 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. However, in a landmark decision of the Delhi High Court in the case of Klaus Mittelbachert v East India Hotels Ltd.[9] AIR 1997, such action was allowed under the exception to the privity rule. In this case, there was a contract between Lufthansa (a German Airline) and Hotel Oberoi Inter-continental. As per the agreement, the crew of Lufthansa will stay in the latter’s hotel. The plaintiff, who was a co-pilot of the Airline, stayed in said 5-star hotel and sustained serious head injuries due to the defective structure of the hotel’s swimming pool. He succeeded in an action against the hotel even though he did not make any contract for a stay in the hotel. He was held to be a beneficiary of the contract between the Airline and the hotel.
EXCEPTIONS TO PRIVITY RULE
With time, the courts have introduced several exceptions in which the rule of privity of contract does not contain a person from enforcing a contract, which has been made for his benefit but without him being a party to it [Beswick v Beswick (1966)].
- Trust or Charge – A person (beneficiary) in whose favor a charge or other interest in some specific property has been formed, may enforce such a contract. In the case of Nawab Khwaja Muhammad Khan v Nawab Husaini Begam[10] (1910), there was an agreement between the lady’s father-in-law and her father that in consideration of her marriage with his son, he would pay her Rs. 500 per month in perpetuity for the betel-leaf expenses (Kharch-i-Pandan). Some immovable property was especially charged for the payment of these expenses. A suit was brought by the wife for the recovery of arrears of annuity. It was held that the wife, even though not a party to the agreement, was entitled to enforce her claim as the contract had been entered into for her benefit, and certain immovable properties had been specifically charged for the assistance. Further, among Muslims, where marriages are contracted for minors by parents and guardians, it might occasion serious injustice if the common law doctrine was applied to agreements or arrangements entered into in connection with such contracts. Thus, the rule laid down in Tweddle v Atkinson[11] had no application to the circumstances of the case.
- Marriage settlement, Partition, or other Family arrangements-
In the case of Rose Fernandes v. Joseph Gonsalves[12] AIR 1925, a girl’s father agreed to her marriage with the defendant and it was held that the girl could sue the defendant for damages for the breach of the promise of marriage even though she was not a party to the agreement. In the case of Shuppu Ammal & Anr. V K. Subramaniyam & Ors.[13] (1910), two brothers, on a partition of joint properties, agreed to maintain their mother. In this case, she was held entitled to sue for failure on the part of her sons. Where the defendant executed an agreement with his father-in-law to pay his wife monthly maintenance (in case she is ill-treated and driven out), the wife was held permitted to execute the promise [Daropti v Jaspat Rai (1905) PR 171].
- Acknowledgment or Estoppel – Whereby under 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 (viz. while making a part-payment), a binding duty is thereby incurred towards him. The acknowledgment can be expressed or implied. Thus, in the case of Devaraja Urs v Ram Krishniah[14] (AIR 1952), A sold his house to B and left a part of the sale price in his hands, wanting him to pay this amount to C. Consequently B made part payments to C, but failed to remit the balance. B while making part payments had informed C that they were out of the sale price left with him and the balance would be remitted soon. It was held that though originally there was no privity of contract between B and C, B having afterward acknowledged his liability, C was entitled to sue him.
- Covenants running with land – In the case of Tulk v Moxhay[15], it was held that a person who buys land with notice that the owner of the land is tied by certain duties created by an agreement or covenant concerning the land, shall be bound by them even if he was not a party to the agreement.
- Assignee in insurance policy – The assignee of an insurance policy (e.g. a wife in case of a husband or vice versa) is allowed to sue on the contract made between the insured and the insurer (insurance company).
[1] Tweddle v Atkinson [1861] EWHC J57 (QB), (1861) 1 B&S 393
[2] Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] UKHL 1
[3] Jamna Das V Ram Avtar, (1911) 30 I.A. 7
[4] Iswaram Pillai v Sonivaveru, ILR (1913) 38 Mad 733
[5] Tirumulu Subbu Chetti v. Arunachalam Chettiar, AIR 1930 Mad 382
[6] Krishna Lal v. Promila Bala AIR 1928 Cal 518
[7] M.C.Chacko V State Bank of Travancore, 1970 AIR 500, 1970 SCR (1) 658
[8] Aries Advertising Bureau vs C.T. Devaraj 1995 AIR 2251, 1995 SCC (3) 250
[9] Klaus Mittelbachert vs East India Hotels Ltd. 1999 ACJ 287, 1997 IIAD Delhi 23, AIR 1997 Delhi 201
[10] Nawab Khwaja Muhammad Khan vs Nawab Husaini Begam, (1910) 12 BOMLR 638
[11] Tweddle v Atkinson [1861] EWHC J57 (QB), (1861) 1 B&S 393
[12] Rose Fernandes v. Joseph Gonsalves, (1924) ILR 48 Bom 673
[13] Shuppu Ammal And Anr. vs K. Subramaniam And Ors., 4 Ind Cas 1083
[14] Devaraja Urs v Ram Krishniah, (AIR 1952 Mys 109)
[15] Tulk v Moxhay [1848] 41 ER 1143
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