The doctrine of privity of contract means that a contract is a contract between the parties only and no third party (that is stranger to contract) can sue upon it even if it is avowedly made for his benefit. Similarly, the third person is not bound by the contract as there is no mutuality (doctrine of mutuality). The doctrine is rooted in the English common law especially in the famous case of Tweddle Verses Atkinson, and Dunlop Pneumatic Tyre Company Limited Verses Selfndge & Co..
In the latter case, the plaintiff (Dunlop Co.) sold goods to one Dew & Co. and secured an agreement from them not to sell goods below the list price and if they sold goods to another trader they would obtain from him a similar undertaking to maintain the price list. Dew & Co. sold goods to the defendants (Selfridge & Co.) who agreed not to sell goods at less than list price. On their not doing so, the plaintiffs sued them for the breach of contract. It was held that assuming that the plaintiffs were undisclosed principals, no consideration moved from them to the defendants and that the contract was unenforceable by them.
The rule of privity of contract has been generally criticized. One of the criticism is that the general rule that ‘no third person can sue’ is only a rule of procedure. It goes to the form of remedy, not to the underlying right.
In Beswick Verses Beswick, Lord Denning concluded that where a contract is made for the benefit of the third person who has a legitimate interest to enforce it, it can be enforced by the third person It is different when a third person has no legitimate interest, as when he is seeking to enforce the maintenance of prices to the public disadvantage, as in Dunlop Co. case. But the House of Lords showed no preference for Lord Denning’s approach and emphasised that if the principle of jus quaesitum tertio (that is right conferred by way of property, as for example, under a trust) is to be introduced into our law, it must be done by Parliament.
Even though under the Indian Contract Act the definition of consideration is wider than under English law, yet the common law principle of doctrine of privity of contract is generally applicable in India. It is important to note that Indian law expressly negatives the English doctrine of ‘privity of consideration.’ However, 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 Jamna Das Verses Ram Avtar. In that 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. Held that since there was no contract between X and B, X could not enforce the contract with mortgagee and the purchaser is not personally bound to pay the mortgage debt. In Iswaram Pillai Verses Sonivaveru, 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. Likewise, in Subbu Chetti Verses Arunachalam Chettiar, 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 Krishna Lal Verses Promila Bala, the court observed that the whole scheme of Section 2 of the Contract Act is that a promise comes into existence when one person signifies to another his willingness to do and the person making the proposal is the promisor, the person accepting the proposal is the promisee and every 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 M.C.Chacko Verses State Bank of Travancore, where 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, under the guarantee should be met by M either from the bank or from the share of property gifted to him. The State Bank attempted 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 M. K Shankar Bhat Verses Claude Pinto (Deceased) by LRs, it was held that an agreement subject to ratification by others who are not parties to it is not a conclusive contract. In Aries Advertising Bureau Verses C.T. Devara, a circus owner placed order with the plaintiff for making advertisements for circus. The plaintiff-advertiser did not make any agreement with the financier of circus. The advertiser was not a party to the contract between financier 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.
In a landmark decision of the Delhi High Court [Klaus Mittelbachert Verses East India Hotels Ltd, however, such an action was allowed under ‘exception to the privity rule’. In this case, there was a contract between Lufthansa (a German Airline) and Hotel Oberoi Intercontinental that crew of Lufthansa will stay in the latter’s hotel. The plaintiff, a co-pilot of the Airline, who stayed in said 5-star hotel got serious head injuries due to defective structure of the hotel’s swimming pool. He succeeded in an action against the hotel although he himself did not make any contract for stay in the hotel. He was held to be beneficiary to the contract between the Airline and the hotel.
In the course of time, the courts have introduced a number of exceptions in which the rule of privity of contract does not prevent a person from enforcing a contract, which has been made for his benefit but without his being a party to it [Beswick Verses Beswick.
A person (beneficiary) in whose favour a charge or other interest in some specific property has been created may enforce it. In Khwaja Muhammad Khan Verses Hussaini Begum, 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 to her Rupees five hundred per month in perpetuity for the betel-leaf expenses (Kharch-i-Pandari). Some immovable property was specifically charged for the payment of these expenses. A suit was brought by the wife for the recovery of arrears of annuity. Held that the wife, although 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 allowance.
Further, among Mohammedans, 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 Verses Atkinson had no application to the circumstances of the case. A trust is the property held and managed by one or more persons for another’s benefit (as per Chinnaya case). In Rana Uma Nath Bakhsh Singh Verses Jang Bahadur, was appointed by his father as his successor and put in possession of estate. In consideration thereof A agreed to pay a sum and to give a village to B, the illegitimate son of his father, on his attaining majority. Held that trust was created in favour of B for the specific amount and the village, thus he (B) is entitled to sue. In an English case, A was indebted to both B and C. A assigned all his property to B in satisfaction of his debt and B promised to pay A’s debt to C. He failed to pay. But he was held liable to pay C in terms of his promise with A.
In M.C. Chacko Verses State Bank of Travancore, the court said that in order to create charge, there must be evidence of intention disclosed by deed that a specific property or fund intended to be made liable to satisfy debt. The recitals in the deed (in the present case) do not evidence any intention of the donor to create a charge in favour of the State Bank … it was merely an arrangement between donor and his family members. The covenant that M.C. Chacko will either personally or out of the properties given to him satisfy the debts is intended to confer a right of indemnity upon the members of the family, if the State Bank enforced the liability against them, but created no charge in favour of the Bank. Even if it is granted that there was an intention to create a charge, the State Bank not being a party to the deed cannot enforce the deed as it was not a beneficiary under the terms of the contract (as per above).
Where a girl’s father entered into an agreement for her marriage with the defendant, 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 (Rose Verses Joseph. Where two brothers, on a partition of joint properties, agreed to maintain their mother, she was held entitled to sue [Shuppu Ammal Verses Siibramaniyam JLR. 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), she was held entitled to enforce the promise [Daropti Verses Jaspat Rai. Similarly, an agreement between male members of a Hindu Undivided Family to provide for the marriage expenses of a female member at the time of partition was held to be enforceable [Sundaraja Aiyangar Verses Lakshmi Animal,].
Whereby 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 (that is while making a part-payment), a binding obligation is thereby incurred towards him.
Acknowledgement can be express or implied. Thus, in Devaraja Urs Verses Ram Krishniah, A sold his house to B and left a part of the sale-price in his hands desiring him to pay this amount to C. Subsequently 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. Held that though originally there was no privity of contract between B and C, B having subsequently acknowledged his liability, C was entitled to sue him.
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 of Tulk Verses Moxhay].
The assignee of an insurance policy (that is a wife in case of husband or vice versa) is entitled to sue on the contract made between the insured and the insurer (insurance company).