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 Doctrine of Privity of Contract in simple terms?
The Doctrine of Privity of Contract is a fundamental legal principle which states that only the parties who have entered into a contract have the right to enforce it or be sued under it. This means that a third party, who is not a signatory to the agreement (also known as a 'stranger to the contract'), cannot sue the contracting parties for any breach, even if the contract was intended to benefit them.
2. Can you explain the Doctrine of Privity of Contract with a classic case law example?
A classic example is the case of Tweddle v. Atkinson. In this case, the fathers of a groom and a bride agreed to pay a sum of money to the groom. After the bride's father passed away without making the payment, the groom sued the estate. The court ruled that the groom could not sue because he was a third party to the agreement made between the two fathers. He had not provided any consideration for the promise, and therefore, had no right to enforce the contract.
3. What are the two main types of privity of contract?
The two main types of privity of contract are:
- Horizontal Privity: This applies when the benefits of a contract are intended for a third party. For example, if a person buys a life insurance policy for their spouse, the spouse is the third-party beneficiary who has horizontal privity.
- Vertical Privity: This exists between parties in a chain of distribution, such as a manufacturer and a retailer. For instance, a contract between a manufacturer and a wholesaler has vertical privity.
4. What are the major exceptions to the rule of Privity of Contract under Indian Law?
While a stranger to a contract generally cannot sue, there are several key exceptions recognised in India where a third party can enforce a contract. These include:
- Trust or Charge: When a contract creates a trust or a charge on a specific property in favour of a third party, the beneficiary can enforce the contract.
- Family Settlement: In cases of family arrangements like marriage settlements or partitions, a third-party beneficiary can sue to enforce their rights.
- Acknowledgement or Estoppel: If a contracting party acknowledges their liability to a third party, that third party can sue to enforce the obligation.
- Contract through an Agent: When an agent enters into a contract on behalf of their principal, the principal can enforce the contract with the third party.
- Covenants Running with the Land: A person who buys a property with the knowledge of certain duties or obligations attached to it is bound by those obligations, even if they were not a party to the original agreement.
5. How does the concept of 'privity of consideration' in the Indian Contract Act, 1872, differ from English Law?
This is a crucial point of difference. Under English Law, consideration must move from the promisee only. This is the principle of 'privity of consideration'. However, the Indian Contract Act, 1872, in Section 2(d), defines consideration more broadly. In India, consideration can be provided by the promisee or 'any other person'. This means a person can be a stranger to the consideration but not a stranger to the contract, and can therefore sue to enforce the promise.
6. Why is the distinction between Privity of Contract and Privity of Consideration so important in India?
The distinction is vital because it determines who has the legal right to sue. In India, while the Doctrine of Privity of Contract (only parties can sue) is generally followed, the rule of Privity of Consideration is not. This allows for greater flexibility and protects beneficiaries. For instance, if a father contracts with a tutor to teach his son, and the grandfather pays the fees, the son (beneficiary) and the father (promisee) can enforce the contract even though the grandfather (a third party) provided the consideration.
7. How does the exception of 'Trust' work to allow a third party to sue?
The 'Trust' exception operates when a contract is created with the clear intention of benefiting a third party, effectively making one of the contracting parties a trustee for the beneficiary. For example, if 'A' gives money to 'B' with clear instructions to hold it in trust for 'C', a legal obligation is created. If 'B' misuses the money, 'C' (the beneficiary) can sue 'B' to enforce the terms of the trust, even though 'C' was not a direct party to the initial contract between 'A' and 'B'.
8. What legal principle was established in the landmark case of Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd.?
The case of Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd. firmly established two key principles in English Law:
- It solidified the Doctrine of Privity of Contract, confirming that a party who is not part of a contract cannot sue on it. Dunlop could not sue Selfridge for selling below the agreed price because their contract was with the dealer (Dew & Co.), not directly with Selfridge.
- It reinforced the doctrine of consideration, stating that for a promise to be enforceable, the promisee must have provided something of value in return. Dunlop had not provided any consideration for Selfridge's promise to the dealer.
