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Privity of Contract

 PRIVITY OF CONTRACT


By: Robin Pandey Date:


04/03/2022


The doctrine of "privity of contract" means that a contract is contract between the parties only and

no third person can sue upon it. It means that a stranger to contract cannot sue. The Supreme Court

of India recognised this rule in M.C. Chacko v. State Bank of Travancore. It said in that case that: "It

is settled law that a person not a party to a contract cannot, subject to certain well recognised

exceptions, enforce the terms of the contract. Under the English Common Law only a person who is

a party to a contract can sue on it. In India, the common law doctrine of privity of contract is

generally applicable. In the course of time, the courts have introduced a number of exceptions to the

rule of privity of contract.

In Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd., the plaintiff sold a number of their tyres

to Dew & Co., on the terms that dew & Co. would not resell them below the listed price and that, in

the event of a sale to trade customers, they would obtain a similar undertaking from them. Dew &

Co. sold the tyres to Selfridge & Co. who undertook to observe the restrictions and to pay to Dunlop

& Co. £ 5 for each tyre sold in breach of the agreement. Selfridge & Co. supplied tyres to two of their

customers below the list price. Consequently, Dunlop & Co. Sued Selfridge & Co. to recover two

sums of £ 5 each as liquidated damages and asked for an injunction to restrain breaches of the

agreement. The House of Lords held the view that, "In the law of England certain principles are

fundamental. One is that only a person who is a party to a contract cal Sue on it." Dunlop & Co. was

held not entitled to sue Selfridge & Co.

Although the Indian Contract Act, 1872 is silent on the point whether a stranger to a contract can or

cannot sue, the Privy Council extended the principle of the English Law to India in its decision in

Jamna Das v. Ram Avtar Pandey. The Supreme Court affirmed the rule in M.C. Chacko v. State Bank

of Travancore,. In Jamunadas v. Ram Avtar Pandey, A mortgaged certain properties to B for Rs.

40,000. He (A) sold the property to C for Rs. 44,000 and left with him Rs. 40,000 to pay B for the

redemption of the mortgage. B Sued C for the recovery of the mortgage money. It was held that C

did not become liable to B because B was not a party to the contract between A and C.

The question was elaborately considered in Iswaram Pillai v Sonivavera. That was the case where A

mortgaged his lands to B and part of the consideration was B's promise to discharge a debt of A to C.

C sued B and it was held that C who was a stranger to the contract cannot sue B for the payment of

his debt without joining A as a party. The Court dealt exhaustively with the cases and laid down the

general rule of law to be that a party who is a stranger to contract cannot sue on the contract. In

Subhu Chetti v. Arunachalam Chettiar, the Court held that where a person transfers property by

way of sale deed to another and directs the vendee to pay a third person a part of the purchase

consideration which the seller owed to that third person, a suit by the third person to recover the

money from the vendee will not lie.

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