Doctrine of Privity of Contract

Privity of Contract 01

  • The Indian Contract Act clearly states that there cannot be a stranger to a contract. It means any third party which is not a part of the contract for breach of contract. There are some exceptions. These exceptions are explained through the Doctrine of Privity of a Contract.
  • The Indian Contract Act. 1872, allows the ‘consideration’ for an agreement to proceed from a third-party. Here it should be noted the difference between the stranger (third-party) to consideration and a stranger to a contract.
  • In general, from the Indian Contract Act, a contract creates rights and obligations only between the parties to the contract. A third party neither acquires a right nor any liabilities under such contract.  i.e. the law does not allow a stranger to file a suit on the contract. This right is available only to a person who is party to the contract. This is what the proclaimed doctrine of “privity of contract”
  • Example: A has borrowed some money from B. A owns property and decides to sell it to C. C promises to pay B on behalf of A. However, if C fails to pay, then B cannot sue C since C is a stranger to the contract between A and B.
  • In Beswick v Beswick [1968] AC 58 case, A was in poor health and agreed with the defendant, his nephew, that he would transfer the trade and goodwill of his coal business to him on the basis that the nephew employed him as a consultant for the rest of his life and paid him for this. The nephew also agreed to pay A’s wife after A died for the rest of her life. She was not a party to the agreement. Upon the death of A, the nephew paid A’s wife once but then not again. A’s widow brought an action as administrator of A’s estate and also in her personal capacity claiming for specific performance. The court granted the widow an order of specific performance for the payment owed by A’s nephew as an administrator to her husband’s estate. The court held that the damages would also not be limited due to the loss that had been caused to A’s estate. However, the court found that A’s widow could not claim under her personal capacity as she was a third party to the contract and was not a party to the original agreement.
  • In Dunlop Pneumatic Tyre Co. Ltd. Vs. Selfridge & Co. Ltd. 1915 A.C. 847, 853. 3 case,Dunlop, a tyre manufacturing company, made a contract with Dew, a trade purchaser, for tyres at a discounted price on condition that they would not resell the tyres at less than the listed price and that any reseller who wanted to buy them from Dew had to agree not to sell at the lower price either. Dew sold the tyres to Selfridge at the listed price and made Selfridge agree not to sell at a lower price either and that they would pay £5 in damages if they violated this agreement. Selfridge proceeded to sell the tires below the price he promised to sell them for. Dunlop brought action and was successful at trial. The appellant Court held that Dunlop is the third party to the contract between Dew and Selfridge & Co. and also held that the appellant is seeking to enforce the maintenance of prices to public disadvantage and overturned the ruling by the lower court.

 Exceptions to the Doctrine of Privity of Contract

  • The doctrine of Privity has exceptions which allow a stranger to enforce a Contract through an agent

Trust:

  • This is the most common exception to the doctrine of privity of contract. If a contract is made between the trustee of a trust and another party, then the beneficiary of the trust can sue by enforcing his right under the trust, even if he is a stranger to the contract.
  • The intention to benefit the third party must be irrevocable and a mere intention to confer a benefit is not enough, there must be an intention to create a trust. An intention to create a trust is clearly distinguishable from a mere intention to make a gift.
  • In Rana Uma Nath Baksh Singh v. Jang Bahadur A.I.R. (1938) P.C. 245 case, Uma Nath Baksh Singh was appointed by his father as his successor and was put in possession of his entire estate. In consideration, thereof Uma Nath Baksh Singh agreed with his father to pay a certain sum on money and to give a village to Jang Bahadur, the illegitimate son of his father, on his attaining majority. On attaining majority Jang Bahadur asked for the proceedings of contract. Uma Nath Baksh Singh rejected the same and contend that Jang Bahadur is not the party to the contract. The Court held that in the circumstances mentioned above a trust was created between Uma Nath Baksh Singh and his father in favour of Jang Bahadur for the specified amount and the village, Hence Uma Nath Baksh Singh was entitled to maintain the suit.
  • In Khwaja Muhammad Khan v Hussaini Begum (1910) 37 IA 152 case, there was an agreement between the father and father-in-law of ‘A’ that in consideration of her marriage with his son, he would pay to her Rs.500 per month for the betel-leaf expenses and some immovable property was charged for the payment of these expenses. A filed a suit for recovery of arrears. The Court held that although she was not a party to the agreement, she was entitled to enforce her claim being the beneficiary.

Family Settlement (Marriage/Partition):

  • If a contract is made under a family arrangement to benefit a stranger (person not a party to the contract), then the stranger can sue in his own right as a beneficiary of the contract.
  • In Rose Fernandez v. Joseph Gonsalves (1924) ILR 48 Bom 673 case, The girl’s (plaintiff’s) father entered into an agreement for her marriage with the defendant. The defendant married someone else. The plaintiff sued the defendant on attaining maturity. The court held that the girl after attaining majority could sue the defendant for damages for breach of the promise of marriage and the defendant could not take the plea that she was not a party to the agreement because she was beneficiary to the contract.
  • In Daropti v. Jaspat Rai (1905) PR 171. 2, case, the defendant’s wife left him because of his ill-treatment. He then executed an agreement with her father, promising him to treat her properly, and if he failed to do so, to pay her monthly maintenance and to provide her with a dwelling. Subsequently, she was again ill-treated by the defendant and also driven out of the house. She sued her husband. The Court Held that she was entitled to enforce the promise made by the defendant to her father as she is beneficiary of the contract between the two.
  • In Shuppu Ammal Vs. Subramaniyam 4 Ind Cas 1083 case, At the time of partition of HUF the brothers, agreed to invest a certain sum of money in equal shares for maintenance of their mother. But subsequently refused to do so. Mother sued them in the court of law. The court held that the mother is beneficiary to the contract between the brothers and hence entitled to require her sons to make the investment.

Contract through an Agent:

  • If a person enters into a contract through an agent, where the agent acts within the scope of his authority and in the name of the person (principal). In this case, the Principal gets rights and obligations under contracts entered through agent provided agent acts within the authority and on behalf of the principal.
  • In Wakefield v Duckworth [1915] 1 KB 218 case, Mr Wakefield was a professional photographer. Mr Duckworth, a solicitor, attended his studio to purchase photographs for use in defending his client on manslaughter charges. Mr Wakefield knew the photographs were required for use in the litigation, and Mr Duckworth requested as low a price as possible for the photographs because his client was not a wealthy man. Mr Wakefield sought to recover the cost of the photographs from the solicitor. The Court held that Mr Wakefield was unsuccessful in his claim. The solicitor was acting on behalf of his client and the photographer knew he was, therefore, an agent of his client, the principal. Mr Wakefield, therefore, had recourse only against the principal. The transaction did not amount to a cash transaction and there was no custom under which a solicitor should incur personal liabilities in this context.

Acknowledgment or Estoppel:

  • If a contract requires that a party pays a certain amount to a third-party and he/she acknowledges it, then it becomes a binding obligation for the party to pay the third-party. The acknowledgment can also be implied
  • Example: A gives Rs 1,000 to B to pay C. B acknowledges the receipt of funds to be paid to C. However, B fails to pay C. Now C can sue B for recovery of the amount.
  • Example: A sold his house to B. A real estate broker, C, facilitated the deal. Out of the sale price, C was to be paid Rs 25,000 as his professional charges. B promised to pay C the amount before taking possession of the property. B made three payments of Rs 5,000 each and then stopped paying him. C filed a suit against B which was held by the Court because B had acknowledged her liability by conduct.
  • In N. devaraja urs v. Ramkrishnah AIR 1952 Mys 109 case, A sold his house to B under a registered sale deed and left part of the sale price in his hands desiring him to pay this amount to C, his creditor. Subsequently, B made part payments to C informing that they were out of the sale price left with him and that balance would be remitted immediately. Subsequently, B failed to remit the balance amount and C sued him for the same. The court held that the sit is maintainable in the Court. Actually, there is no privity contract between B and C initially, but by paying some amount and explaining it to C, B has acknowledged his liability towards C. Hence C is entitled to sue B for the recovery of the amount.
  • In similar case Kshirodebihari Datta VMangobinda Panda (1934) I.L.R. 61 Cal. 841, The court held that B has acknowledged his liability towards C by his conduct. C is entitled to sue B for the recovery of the amount.

A Covenant running with the Land

  • When a person purchases a piece of land with the notice that the owner of the land will be bound by all duties and liabilities affecting the land, then he can sue upon a contract between the previous land-owner and a settler even if he was not a party to the contract.
  • In Tulk v Moxhay [1848] 41 ER 1143 case, A owned a piece of land which he sold to B under a covenant that a certain part of the land will be maintained as a public park. B abided by the covenant and eventually sold the land to C. Though C was aware of the covenant, he built a house in the specific plot. When A came to know of it, he filed a suit against C. Although C denied liability since he was not a party to the contract, the Court held him responsible for violating the covenant.
  • In Smith and Snipes Hall Farm Ltd v River Douglas Catchment Board [1949] 2 KB 500  Case, The defendant was a catchment board and covenanted with the owner of the land on the banks of river Douglas, which was subject to flooding. The defendant agreed to replace the outfall and to enlarge the banks of the river as well as maintain this once the work was complete. Two years later, one of the covenantees under the agreement transferred her land to the first plaintiff. The second plaintiff was a company that rented the land from the first plaintiff. Subsequently, the banks of the river burst and caused significant flooding to the plaintiff’s land. The plaintiffs subsequently claimed against the defendant for damages for breach of contract and in tort. The court held that the defendant board had breached the contract and this breach had caused the damage to the plaintiff’s land that had been complained of. The court looked to the language of the agreement between the original landowner and the catchment board and found intention that the obligation to maintain the land would pass to all future owners. On this basis, the plaintiffs could enforce their rights under the original covenant.

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