Privity of Contract

                     Privity of contract 

The rule of “Privity of contract” which means that a stranger to contract cannot sue, has taken from roots in the English Common Law. But the principal has been generally criticized. In 1937, the Law Revision Committee under the chairmanship of Lord Wright, also criticised the doctrine and recommended its abolition. In its Sixth Interim Report the committee stated:

 Where a contract by its express terms purports to confirm a benefit directly on a third party, the third party shall be entitled to enforce the provisions in his own name, provided that the promisor shall be entitled to raise against the third  party any defence that would have been valid against the promise of

Lord Justice DENNING has also criticised the rule in a number of cases in one of which the lordship observed :

 It (the privacy principle) has never been able entirely to supplant another principle whose roots go much deeper. I mean the principle that a man who makes a deliberate promise which is intended to be binding, that is to say, under seal or for good consideration, must keep his promise; and the Court will hold him to it, not only at the suit of the party who gave the consideration, but also at the suit of one who was not a party to the contract, provided that it was made for his benefit and that he has sufficient interest to entitle him to enforce it, subject always, of course, to any defences that may be open on the victims.

In the subsequent case of Beswick versus Beswick the Court of Appeal adopted the same approach. In that case:

B was a coal merchant. The defendant was assisting him in his business. B entered into an agreement with the defendant by which the businesses was to be transferred to the defendant. B was to be employed in it as a consultant for his life and after his death the defendant was to pay to his widow an annuity of $5 per week, which was to come out of the business. After B’s death the defendant paid B’s widow only one sum of $5. The widow brought an action to recover the arrears of the annuity and also to get specific performance of the agreement.

It was held that she was entitled to enforce the agreement. Thus the plaintiff was allowed to enforce the agreement in her personal capacity although she was not a party to it and it was considered not necessary to infer a trust in favour of the plaintiff. Lord DENNING MR concluded with the words:

Where a contract is made for the benefit of a third party who has a legitimate interest to enforce it, it can be enforced by the third party in the name of the contacting party or jointly with him or, if he refuses to join, by adding him as a defendant. In that sense, the 3rd party has a right arising by the way of contract. He has an interest which will be protected by law. The observations to the contrary are in my opinion erroneous. 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 disadvantages.

Position in India: Decisions following English Law

In India also there has been a great divergence of opinion in the courts as to how far a stranger to a contract can enforce it. There are many decided cases which declare that a contract cannot be enforced by a person who is not a party to it and that the rule in Tweddle v. Atkinson is as much applicable in India as it is in England. But there are no provinces in the contract act either for or against the rule. The Privity counsel extended the rule to India in its decision in Jamma Das versus Pandit Ram Autar Pandey.

A borrowed Rs.40,000 by executing a mortgage of her zamindari in favour of B. Subsequently she sold the property to C for Rs. 44,000 and allowed C, the purchaser, to retain Rs.40,000 of the price in order to redeem the mortgage if he thought fit.  B sued C for the recovery of the mortgage money, but he could not succeed because he was not part of the agreement between A and B.

Decisions not following English law

There is, however another line of thinking also which is mainly based upon and observation of the Privity council. The Calcutta High Court observed: Nor is there anything in the Indian contract Act, which prevents the recognition of a right in a third party to enforce a contract made by others, which contains a provision for his/her benefit.  The Supreme Court of India has expressed itself in favour of the rule in Tweddle v. Atkinson. This means that the supreme court upholds the rule of Privity.  

Exceptions to Privity rules 

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. Many of the exceptions are connected with the special branches of the law of contract, such as negotiable instruments, agency, bill of lading, railway receipts, transfer property, etc. Some of the most commonly known exceptions may be considered here.

1. Beneficiary under trust or charger other agreements. 

2. Marriage settlement, partition on other family arrangements

3. Acknowledgement or Estoppel

4. Convenants running with land