INTRODUCTION
The doctrine of ‘Privity of Contract’ states that a contract is a contract between the parties only and no third party can sue upon it even if it is avowedly made for his benefit.[1]This doctrine has been criticized ever since for which the courts had to resort to concepts like agencies and trusts, allowing a third party to enforce his benefits conferred on him. This doctrine was first applied to the case in 1833 of Price v .Easton,[2] This was a contract drafted for work done in exchange of payment made to the third party. On breach of contract, the third party sued for the payment but failed due to the aforementioned doctrine. Hence, his attempts of enforcing his rights were sustained and claims failed.
PRIVITY OF CONSIDERATION
The rule as applied in common law states that a stranger to a contract cannot sue but in India, a stranger to a consideration can sue. Rule implying- the fact that a contract can be enforceable if it has consideration, immaterial whether it comes from the promisee or any other person. Unlike the proposition of Common Law which requires the consideration to flow from the promise itself and no other person.[3] As in the case of Chinnaya v Ramayya,[4] where an old lady made over certain landed property to the defendant, her daughter and according to the deed, the defendant was bound to pay an annuity amount of Rs. 653 to the plaintiff, the old lady’s sister. Later on, the defendant made an agreement with the plaintiff promising her to give effect to the stipulation. But due to the failure of the annuity, the plaintiff sued for the claim. The court cited the case of Dutton v Poole,[5] equated with its fact and hence, allowed the plaintiff to recover the annuity amount, as consideration given by any other person is equally effective in the eyes of law.
PRIVITY OF CONTRACT – ENGLISH LAW
In the law of England, there were two propositions of the law of privity: Firstly, only the party to the contract could sue on it[6] and secondly, consideration must move from the promisee.[7] Privity of contract came to be established from the case of Tweddle v Atkinson,[8] where the plaintiff and G entered into a written contract that each of them will pay the plaintiff a certain amount in exchange of the intended marriage between G’s daughter and plaintiff. In the subsequent failure of Gs payment the plaintiff sued his executors for his claim. The lord WHITMAN J opined the established principle that “no stranger to the consideration can take advantage of a contract, although made for his benefit.”[9] Later on this principle was criticized by many scholars and judges including Lord Justice Denning and thus with the combined efforts of eminent judges and the Law Revision committee in 1937 held the amendment of this principle and subsequent reform where in a contract made for the benefit of a third party, having a legitimate claim could enforce his rights and be protected by law[10].
Henceforth in the famous case of Beswick v Beswick,[11]where B, a coal merchant and the defendant, his assistant entered into a contract for the transfer of his business on his death to him in exchange of the defendant to pay his widow an annuity amount of $5 per week. The defendant paid once the amount and then seized the payment. Thus the widow brought an action against the defendant for recovery of her due arrears. The court of appeal, Lord Denning MR, following the revised principle allowed for the action and rightly called for the defendant to pay the arrears.
PRIVITY OF CONTRACT- INDIAN LAW
According to the Indian Contract act, 1872, section 2(d) states the wide definition of consideration with the implicit understanding of the fact that it is not necessary for the consideration to be furnished by the promisee-“Promisee or any other person” Yet the common law principle was generally applied in the Indian courts with the effect that only a party to the contract can enforce the rights. This rule was extended by the Privy Council in the case of Jamma Das v Pandit Ram Autar Pande,[12] where A borrowed a sum of Rs. 40000 by executing a mortgage of her zamindari in favor of B and eventually sold it to C for Rs 44,000, the purchaser to retain 40000 of the price in order to redeem the mortgage money, but could not succeed because he was no party to the agreement between A and B.[13] The court held that the mortgagee had no right and was no party to the sale between A and C. The purchaser had no liability towards A and hence is not personally bound to pay the debt.
EXCEPTIONS TO PRIVITY RULE
- Beneficiaries under trust or charge or other arrangement- if a person in whose favor a charge is created in some definite property, may enforce his rights on such property without being a party to the contract. Like the case of Nawab Khwaja Muhammad Khan v Nawab Hussaini Begam,[14] in which the court held the respondent, even having no relation to the contract was entitled to proceed with his claim attached with the property.
- Marriage settlements, partitions or other family arrangements- where a contract is made in regards to marriage or other family related orientations, provision is made for the person associated with the benefits of such contracts notwithstanding the correlation of his status with the contract. Like in the cases of Rose Fernandez v Joseph Gonsalves[15] and Daropti v Jaspat Rai[16]; wherein both cases grant was made in favor of the beneficiaries.
- Acknowledgment or estoppels- where a person by his conduct or words or acknowledges or recognizes the rights of others to sue upon him, he may become liable under the application of law of estoppels. Like in the case of Narayani Devi v. Tagore Commercial Corp. Ltd,[17] where the defendant by virtue of the language of his agreement with plaintiff compelled him to be liable to make a payment to the plaintiff for his entire life. Thus, because the defendant created such an agreement with the plaintiff by their conduct and acknowledgments which resulted in the favor of the plaintiff to rightfully claim her due.
- Covenants running with land- The rule of privity applicable to the transfer of immovable property can be best illustrated by the illustration of the case Tulk v Moxhay,[18] where the person who purchases the land with the 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.
LRC REFORMS
The Law Reform Commission identified the three cases where a third party should possess the right of enforcement in a contract to which they are not a party of. They extended their attempts by drafting out the bill of “Contract Law (Privity of Contract and Third Party Rights) Bill, 2008.”-
- When the term of the contract expressly declares the benefits of the third party, provided it was the intention of the contracting parties that the third party ought to be able to enforce the term. It shall be presumed that the contracting parties intended to bestow upon the third party the right of enforcement for the exiting legitimate benefit
- In the terms where there is express mention of the right of enforcement by the third party even at situations where there is no benefit to him.
- Where in the terms of the contract it permits a third party to rely on limitations and exclusions. The general rules of exemption clauses shall apply.
CONCLUSION
The Concept of privity is part of the foundation called common law which was derived from court decisions. Today, with the growing complexity in the realm of commerce there is dire need for change to fit in certain exceptions to the general rule and guarantee restitution to the aggrieved.
[1] Kanta Devi Berllia v Mohit Jhunjhunwala, (2006) 2 CHN 161.
[2] Price v Easton, (1833) 4 B & Ad. 433 (C).
[3] See Anson, PRINCIPLES OF THE ENGLLISH LAW OF CONTRACT (23RD Edn by A.G.Guest, 1971) 89; Cheshire and Fifoot, LAW OF CONTRACT (8TH Edn, 1972) 64.
[4]Chinnaya v Ramayya, ILR (1876-82)4 Mad 137.
[5] Dutton v Poole, Court of Kings Bench, (1677) 2 Levinz 210: 83 ER 523.
[6] Supra note 3, at page 370
[7] Supra note 3
[8] Tweddle v Atkinson, 123 ER 762: 1 B&S 23, 393: 30 LJ QB 218: 4 LT 468.
[9] Id.
[10] Catherine Mac Millan, A Birthday Present for Lord Denning; The Contracts (Rights of Third Parties) Act, 1999, (2000) 63 MLR 721 at pp. 726-731.
[11] Beswick v Beswick, 1968 AC 58: (1967) 3 WLR 932.
[12] Jamma Das v Pandit Ram Autar Pande , (1911-12) 39 IA 7: ILR (1911-12) 34 All 63.
[13] Avtar Singh, Contract and Special reliefs, 117-118.
[14]Nawab Khwaja Muhammad Khan v Nawab Hussaini Begam, (1909-10) 37 IA 152.
[15] Rose Fernandez v Joseph Gonsalves, ILR (1924) 48 bom 673: AIR 1925 Bom 97.
[16] Daropti v Jaspat Rai, (1905), Punj Rec, 171.
[17]Narayani Devi v. Tagore Commercial Corp. Ltd, AIR (1973) Cal. 401.
[18] Tulk v Moxhay, Supra note 13, page 120.
YLCC would like to thank Ridhi Jain for her valuable contributions in this article.
