Definition of Privity of Contract
The relationship or connection shared by two or more contracting parties has been defined as the Privity of Contract. When a contract is drawn, it imposes specific responsibilities and obligations to individuals who are parties to this agreement. Accordingly, the premise of the Doctrine of Privity of Contract is that only contracting parties can be sued or have the right to sue any of the other participants for any agreement related to the conflict.
The Doctrine further goes on to give a reason for this right. It states that contracting parties have this right as they share a pre-existing relationship and not with any third party as mentioned in the Privity of contract.
The rule of primitive contract means that a stranger to contract cannot sue, and has taken firm roots in the English common law. But the principle has been criticised gradually by others. In 1937, the law revision committee which was made under the chairmanship of lord Wright also criticised the doctrine and recommended its abolition.
In its 6th interim report the committee stated:
We are a contract by its express terms purpose to confer a benefit directly on the 3rd party, the 3rd party shall be entitled to enforce the provision in his own name provided that the promisor shall be entitled to raise against the 3rd party any defence that would have been validated against the promisor.
The private principle has never been able entirely to supplant another principle whose roots go much deeper. I mean a principle in which a man makes any conscious promise which is considered and intended to be binding. It is being said that under the seal or for good consideration, a promise must be kept by him and the court has a right to hold him to it. Not only at the suit of the party who has given the consideration but also at the suit of the one who was not being considered a party to that contract. That contract was made for his own benefit and that he has a sufficient interest to entitle him to enforce it subject always of course to any defences that may be open on the writs.
Privity of Contract Cases
The main points in this Doctrine of Privity of Contract emerged after the case of the Tweddle vs Atkinson case. Here, John Tweddle and William Guy agreed that they would both pay a sum of money to Tweddle’s son who was engaged to be married to William’s daughter. However, William passed away before making any payment. Tweddle’s son then sued Mr Guy’s estate executor for the promised sum. But a court ruled that a third-party beneficiary cannot impose the promise or agreement that one contracting party had made to another.
This Privity of Contract definition was firmly established after the case of Dunlop Pneumatic tyre Co. Ltd vs Selfridge & Co. Ltd. Dunlop manufactured tyres and wanted to maintain a standard market price. Accordingly, it entered a contract with its dealers Dew & Co. to not sell any product below the fixed retail price.
This contract also stated that Dew & Co. should obtain an agreement from its retailers that if the latter sold below the agreed retail price, they would have to pay a certain amount per tyre to Dunlop. Consequently, when Selfridge & Co. sold below retail price, Dunlop sued them and claimed damage.
The court ruled that since Dunlop was a third party to this contract between Dew & Co. and Selfridge & Co., it cannot claim damage from the latter under the rule of Privity. It also established the Doctrine of consideration which states that for a promise or agreement to be applicable, the promisee must provide something to the promisor in return for successful completion of the contract.
Indian Contract Act
The Indian contract act of 1872 was established based on these principles of Doctrine of Privity of Contract. However, the definition of Privity of Contract and Privity of Consideration is different under Indian law. It states that consideration can shift to a third party also, which means that both a promisee and a third party can also provide consideration. Consequently, according to Indian Contract law, a person stranger to consideration can sue one of the parties.
Two Types of Privity of Contract
Apart from understanding Privity of Contract meaning, one should have a thorough grasp of the two types of Privity of Contracts – Horizontal and Vertical Privity of Contract.
In horizontal Privity of Contract, the beneficiary is a third party and not one of the individuals who is a participant in said contract. On the other hand, in a vertical contract, all signatories to an agreement stand to benefit directly from the same.
Exceptions
However, there are some exceptions to the Privity of Contract. Given below are some circumstances when a third party can sue one of the contracting parties –
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.
Contract through an Agent
If an agent enters a contract with a third party on behalf of the principal, then the latter is obligated to fulfil the contractual agreement with the third party. The Indian Contract Act on Privity of Contract defines an agent as a person who has been formally employed to perform acts and represents another in dealings with strangers. The person who engages an agent or anyone who is represented by one is called the principal.
Family Settlement
If the contract is a family arrangement such as a marriage settlement a third party or beneficiary can sue the signatories to the contract to impose the agreement under exceptions to the Doctrine of Privity of Contract.
Beneficiaries under trust or charge or another arrangement
A person in whose favour ‘A’ charge or other interest in some specific property has been created may enforce it even though he is not considered to be a party to the contract. The decision Of the privy council in Nawab Kwaja Bombad Khan V Nawab Hussaini Begum is illustrative of this principle.
Acknowledgement or Estoppel
Whereby the terms of a contract of a party is required to make a payment to a 3rd person I said and he acknowledges it to that 3rd person, a binding obligation was incurred towards him. Acknowledgement may be expressed or implied. This exception covers cases where the promiser buys conduct acknowledgement or otherwise constitutes himself an agent of the 3rd party.
A Covenant running with the land
The rule of privity may also be modified by the principles relating to the transfer of any property which is immovable. There is a principle by the very famous case of Tulk V Moxhay which says that a person who purchases land with notice that the owner of the land is bound by certain duties which are created by an agreement or covenant affecting the land which shall be bound by them although he was not a party to the agreement.
FAQs on Doctrine of Privity of Contract: Explained
1. What is the position of privity of contract in India?
In India also there has been a great diversion of opinion in the courts as to how far a stranger to a contract can enforce it. There are many decided cases that declare that a contract cannot be enforced by a person who is not a party to it and that the rule in Twiddle V Atkinson is as much applicable in India as it is in England. But there is no provision in the contract act either for or against the rule. The privacy council extended the rule to India for its decision in the Jamna Das vs Pandit Ram Autar ande.
2. What are the fundamental propositions of English law?
Stated in other words the 2 fundamental propositions of English law referred to by his lordship. The generation must move from the promisee and the promisee only. If any other person furnishes it, the promisee becomes a stranger to the consideration and therefore won’t be able to carry out the promise made.
We cannot enforce any of the contracts by any person who is not a party to the contract even though it is great for the benefit of that person. He is considered a stranger to that contract and cannot claim any rights to it.
3. What is a Contract of Insurance?
Generally, a life insurance policy is a doctrine of Privity of Contract as it is an agreement between only the policyholder and the insurance company. However, beneficiaries of an insurance policy can sue the company to claim the sum assured. At this stage, one should note that beneficiaries are both strangers to policy agreement as well as to the consideration.
4. What is meant by Privity of Contract?
Thus, the Privity of Contract states that only the two parties who have an existing relationship hold rights to sue each other and claim damage or impose terms of an agreement to the other party. However, certain exceptions and provisions such as Privity of Contract and Consideration have been introduced to benefit the third party.
5. Can a stranger sue parties involved with consideration under the Indian Contract Act?
An individual, who is a stranger to consideration, can legally sue one of the parties involved with the Privity of Contract under the Indian Contract Act. This is one of how Privity of Contract differs in India when compared to the rest of the world.
