CRITICAL STUDY OF PRIVITY OF CONTRACTS
A contract creates a daily part of dealing, either expressly or impliedly. And important principle of the contract is rule of privity of contract also known as doctrine of privity of contract. The principle of privity of contract provides that a contract cannot confer rights or impose obligations arising under it to any person who is not a party. The doctrine has long been criticized as artificial and contrary to the party’s intention to benefit a third party. As a result, the courts have frequently resorted to device such as agency or trust to allow a third party to enforce a benefit conferred upon it. Legislation has also made incremental inroads into the doctrine by providing for certain specific exceptions.
In this Article, we will be considering the privity of contract in English law, in India and exceptions of it.
Only a person who is a party to a contract can sue on it or a stranger to contract cannot sue is an axiomatic principle of law of contract emanating from such conceptions i. This principle is known as “privity of contract”, signifying that a contract binds only those that are privy to it or that there must be a contractual privity for the enforcement of the contractual rights and Obligations.
The doctrine of privity of contract means that only those persons who are parties to the contract can enforce the same. strangers to the contract cannot enforce a contract even though the contract may have been entered into for the benefits. If in a contract between A and B some benefit have been conferred upon x, x cannot file a suit to enforce the contract because A and B the only parties to the contract where as x is a stranger to the contract.
The doctrine of privity emerged along side the doctrine of consideration, the rule of which state that consideration must move from the promise, that is to say that if nothing is given for the promise of something to be given in return, that promise is not legally binding unless promised as a deed ii. The year 1833 saw the case of Prince V. Easton2, where contract was made for work to be done in exchange for payment to a third party. ______________________________________________________
1.All Answers Ltd. (November 2018).
2. (1833) 4B & Ad.433(c).
when the third party attempted to sue for the payment, he was held to be not privy to the contract, and as such his claim failed to stop this was fully link to the doctrine of consideration, and establish as such.
The leading cases on the classic doctrine are prince V. Easton, Tweddle V Aktison and Dunlop Pneumatic Tyre co Ltd V. Selfridges & co Ltd.
The doctrine of privity of contract, which debars third party to enforce a contract, forbids the parties to the contract from enforcing any obligation of a contract to which he is not a party and the logical consequence is that a stranger cannot acquire rights under the contract ii. This general rule, no doubt, is subject to certain exceptions.
The black's law dictionary (6th 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 relationship to the same right of property, or such an identification of interest of one person with another as to represent the same legal rights”.
PRIVITY OF CONTRACT: ENGLISH LAW.
The doctrine of privity of contract means that only those involved in striking agreement can enforce it. In general this is still the case. Only parties to contract may sue for the breach of a contract although in recent years, the rule of privity has eroded somewhat and the third party beneficiaries has been allowed to recover damages for breach of contract they were not party to. Recent example in England is passing of contract ( Right of third parties)Act 1999.
The rule of privity of contract was first recognized and established in the rule of Tweddle V. Atkinson4. Tweddle's father and Atkinson, Tweddle’s father-in-law enter into a contract to contribute a sum of money each to support Tweddle and his wife. Tweddle’s father kept his part of the bargain but Atkinson died before paying anything. Tweddle sued the executor of Atkinson's estate.
4. (1861) 1 B & S 393.
His suit was rejected because he himself was not party to the contract even though it was for his benefit. The court held that it was not possible to claim that there was a implicit contract between Tweddle and Atkinson, more so, in the absence of consideration from Tweddle to Atkinson. In this case, the plaintiff was both stranger to the contract as well as stranger to consideration and therefore, he could not enforce his claim.
The rule of privity of contract was reaffirmed by the House of Lord’s in Dunlop Tyre Co V. Selfridge5. The plaintiff sold tyres to Dew & co. wholesale distributors on terms that Dew would obtain and undertaking from retailers that they should not sell below the plaintiffs listed price. Dew sold some of the tyres to the defendants, who retailed them below listed price. The plaintiff sought an injunction and damages. The action failed because although there was a contract between the defendants and Dew, the plaintiffs were not a party to the contract.
The two basic principles under the English law as can be determined from these cases that firstly consideration should move from the promise only and secondly that a contract cannot be enforced by a person who is not a party to the contract even if it is made for his benefit.
PRIVITY OF CONTRACT: INDIAN LAW
The rule of privity of contract has been applicable in India as well in. Even though under the Indian contract Act the definition of consideration is wider than under English law, yet the common principles of privity of contract has been generally applicable in India, with the effect that only a party to the contract is entitled to enforce the same7. The authorities of the application of the rule in India is decision of the privy Council. In Jamna Das V. Ram Avtar8 in this case, A had mortgaged some property to X. X brought an action against B to recover the mortgage money. It was held by the privy Council that since there was no contract between X and B, X could not enforce the contract to recover the amount from B.
5. (1915) A C 847.
6. All Answers Ltd. November 2018.
7. Narayani Devi V. Tagore Commercial Ltd. AIR 1773 cal.401.
8. (1911) 30 IA.7
In advertising bureau V. C-T Devaraj9, The circus owner placed order with the plaintiff-appellant for making advertisements for circus. The plaintiff-advertiser did not make any agreement with the financer of circus. The advertiser was not party to the contract between financer and the circus owner. There being no privity of contract between the advertiser and the financer, the suit by the advertisers against the financer was therefore, dismissed.
Privity of contract occur only between the parties of the contract, most commonly contract of sales of goods and services. Horizontal privity arises when the benefits from the contract are to be given to a third party. Vertical privity involves a contract between two parties, with an independent contract between one of the parties and another individual or company. If a third party gets a benefit under contract, it does not have the right to go against the parties to the contract beyond its in entitlement to a benefit. An example of this occurr when a a manufacturer sells a product to a distributor and the distributor sell the product to a retailer. The retailer then sells the product to a consumer. There is no privity of contract between the manufacturer and the consumer.
This, however, does not mean that the parties do not have any other form of action like in Donoghue V. Stevenson10 where a friend of MS Donoghue about her a bottle of Ginger beer which was defective. Since the contract was between her friend and the shop owner, there was no privity of contract, but it was established that the manufacturer has a duty of care on of their consumers and she was awarded damages in tort. Privity is the legal term for a close, mutual, or successive relationship to the same right of property or the power to enforce a promise or warranty.
EXCEPTION TO THE RULE OF PRIVITY OF CONTRACT There are certain exceptions to the rule of privity of contract.
9. AIR 1995 SC 2251.
10. (1932) All ER Rep 1;(1932).
A trust is a third-party fiduciary relationship in which the first party, the trustor or settler transfers a property (often but not necessarily a sum of money) upon the second party (the trustee) for the benefit of the third party, the beneficiary 11. Let say if a person say A promise to another person B for the benefit of C, C can enforce this promise if B has constituted himself trustee of A's promise for C. But this rule is subjected to certain restrictions. A promisee can be held to be a trustee for third party only e 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.
FAMILY ARRANGEMENTS, MARRIAGE SETTLEMENT, PARTITION:
when an agreement is made in connection with partition or family arrangement and a provision is made for the benefit of a person then that particular person may sue although he is not a party to the agreement.
Example: Two brothers on a partition of ancestral property agreed invest equal share that is a certain sum of money for the maintenance of their mother. It was held by the court that the mother was entitled to require his sons to make investment.
CONVENANTS RUNNING WITH THE LAND
The law allows certain convenants (whether positive or restrictive) to run with land so as to benefit (or burden) people other than the original contracting parties. The relevant covenant main related to freehold land for lease hold land. The benefit and burden of covenants in a lease granted prior to 1996 would pass on an assignment of the lease or reversion so as to benefit or bind the assignee of the lease or the reversion, provided that the covenant “touched and concerned” the land.
BENEFICIARY TO THE CONTRACT: 11. Business Dictionary, web finance, Inc. Retrieved 10 August 2017
This can be understood with the help of case law of Khaja Mohd V. Hussaini Begum
C & D are wife and husband. A & B makes an agreement that A should give part of his share to C before it is made both the parties died. Now C, sued legal heirs of A for consideration. This case can be considered because C is beneficiary through he is a third party.
Under section 83 of the fire prevention (metropolis)Act 1774,where an insured house or building is destroyed by fire, the insurers may be required upon the request of any person or persons interested to lay out the insurance money for the Restoration of the building 12. The other statutory exceptions to privity of contract are:
· Life insurance
· Motor insurance
· Third parties right against insurance
· Insurance by person with limited interest
· Companies Act, 1985 section 14
it is a general rule of law that only parties to contract can sue or be sued on the contract (privity of contract). The term “ parties” seems to be simple but in certain cases or situation it become difficult for doubtful that as to who exactly is a party to a contract and who should be held liable for any breach in the eye of law. And sometimes the third party who is to get benefited from the contract cannot sue if any breach happens due to privity of contract, thought there are some exceptions to it.
· The law commission consultation paper no 121 privity of contract: contracts for the benefit of third parties
· Rule of privity of contract: study in English and Indian context
· The doctrine of privity of contract under the Indian law.
Written by: NUSRATH BANU.