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Law of Contract

Privity of contract

Imageby Yukta Kumarkar

1. Introduction:

The doctrine of Privity of contract is a principle which states that only parties to the contract have the right to sue each other and enforce their rights or obligations arising out of the contract. No third party i.e. stranger to a contract can sue upon it even if the contract has been entered into for his/her benefit. Only the person who is a party to the contract is entitled to protect the rights.

2. English law and Indian law:

As per the English law, a stranger to contract cannot sue upon it. In Twiddle v. Atkinson [(1861) 1 B & S 393], it was held that only parties to the contract can sue each other. A and B were the bridegroom and bride. After the marriage, there was a contract in writing between A’s father and B’s father that each would pay a certain sum of money to A and that he would have power to sue for each sums. After the death of both the fathers, A bought an action against the executors of B’s father to recover the promised amount. It was held that A could not sue for the same as he was a stranger to the contract as well as the consideration.

According to the Contract Act, consideration for an agreement may proceed from a third party but the third party who is a stranger to the agreement cannot sue on the agreement. The definition of consideration under the Indian Contract Act is wider than the English law but the common law principle of privity of contract is applicable in India and it states that only a party to the contract is entitled to enforce the same.

In Advertising Bureau v. C.T. Devaraj [AIR 1995 SC 2251], the circus owner had placed order with the plaintiff- appellant for making advertisements for circus. The plaintiff- advertiser did not make any agreement with the financer of circus. The advertiser being a stranger to the contract and no privity of contract existing between the advertiser and the financer, the suit by the advertiser against the financer was therefore dismissed.

3. Exceptions to the Doctrine of Privity of contract:

a) Trust of contractual rights or beneficiary under contract –

If two parties enter into a contract for the benefit of a third party who is not part of that contract then in the failure of any party not performing his actions, the third party can enforce his rights against others.

In Klause Mittelbachert v. East India Hotels Ltd [AIR 1997 Delhi 201], a German Airline called Lufthansa had entered into a contract with Hotel Oberoi Inter-Continental, New Delhi stating that crew of Lufthansa will be staying in the latter’s hotel. The plaintiff, a co-pilot of the Airline who stayed in the 5-star hotel got severe head injuries when he dived in the hotel’s swimming pool. The plaintiff suffered from paralysis and after an agony for 13 years, he died. Although he himself did not make the contract for stay in the hotel, he was held to be beneficiary to the contract and was awarded compensation for the damage caused to him due to the defective structure of the swimming pool.

b) Conduct, acknowledgment or admission –

It might happen that there may be no privity of contract between two parties, but if one of them by his conduct, acknowledgment or admission recognizes the right of the other to sue him then he may be liable to perform it on the basis of the law of estoppel.

Case law – Narayani Devi v. Tagore Commercial Corporation Ltd

In this case, there was no contract between the plaintiff and the defendants but the defendants in their agreement with the plaintiff’s husband had agreed to pay a certain amount to the plaintiff’s husband during his lifetime and thereafter to the plaintiff. The defendants paid certain amounts to the plaintiff after her husband’s death. It was held that, the defendants had created such privity with the plaintiff by their conduct, acknowledgment and admission therefore the plaintiff was entitled to her action even though when there was no privity of contract entered into between the plaintiff and defendants.

c) Provision for marriage or maintenance under family arrangement –

Where, under a family arrangement the contract is intended to secure a benefit to a third party he may sue in his own right as a beneficiary.

Case law – Veeramma v. Appayya [AIR 1957 AP 965]

In this case, under a family arrangement the father’s house was to be conveyed to his daughter and the daughter undertook to maintain him in his lifetime. The daughter being a beneficiary under the compromise arrangement, it was held that she was entitled to sue for the specific performance in her favour.

d) Charge created on specific immovable property –

If a charge on a specific immovable property is created for the benefit of a third party then in such a case even though the third party is a stranger to the contract, he/she can still enforce it.

e) Assignee of a contract –

The assignee of a contract can enforce the benefits of a contract though he is not a party to it.

Eg: A husband assigns his insurance policy in favour of his wife. The wife can enforce it even though she is not part of it.

f) Collateral contracts –

A contract between a third party and one of the parties to a main contract who are associated with the main contract is known as collateral contract. This type of contract may enable a third party to enforce the main contract.

In Shanklin Pier Ltd v. Detel Products Ltd, A employed B as a painting contractor and instructed him to buy paint made by C. B gave this instruction on the basis of a statement of C to A that the paint would last for seven years. The paint lasted for only three months. Although the contract was between A and B, it was held that there was a collateral contract between A and C.