According to Section 2(h) of the Indian contract act 1872, a contract is an agreement between two parties enforceable by law backed by some consideration. The essence of the law of contract lies in the promise which both parties have made towards each other for fulfilling their part of the contract.
Privity of contract Meaning and scope
The doctrine of privity of a contract is a common law principle which implies that only parties to a contract are allowed to sue each other to enforce their rights and liabilities and no stranger is allowed to confer obligations upon any person who is not a party to contract even though contract the contract have been entered into for his benefit. The rule of privity is basically based on the ‘interest theory’ which implies that the only person having an interest in the contract is entitled as per law to protect his rights.
A contract has been entered into between two parties, the most important essential is that there has been a contract between 2 or more parties.
Parties must be competent and there should be a valid consideration, Competency of parties and the existence of consideration are pre-requisites for application of this doctrine.
There has been a breach of contract by one party, Breach of contract by one Party is the essential requirement for the application of the doctrine of privity of contract.
Only parties to contract can sue each other. Now after the breach, only Parties to a contract are entitled to sue against each other for non-performance of contract.
Exceptions to the Doctrine of Privity of contract
As a general rule only parties to contract are entitled to sue each other, but now with the passage of time exceptions to this general rule have come, allowing even strangers to contract to prosecute. These exceptions are,a beneficiary under a contract, If a contract has been entered into between 2 persons for the benefit of a third person not being a party, then in the event of failure by any party to perform his part, the third party can enforce his right against the others. For eg. In a contract between Alex and James, beneficial right in respect of some property may be created in favor of Robin and in that case, Robin can enforce his claim on the basis of this right. This concept of a beneficiary under a contract has been highlighted in the case of Muhammad Khan v. Husaini Begum.
Conduct, Acknowledgement or Admission, there can also be situation in which although there may be no privity of contract between the two parties, but if one of them by his conduct or acknowledgment recognizes the right of the other, he may be liable on the basis of law of estoppel ( Narayani Devi v. Tagore Commercial Corporation Ltd). For eg., If A enters into a contract with B that A will pay Rs 5000 every month to B during his lifetime and after that to his Son C. A also acknowledges this transaction in the presence of C. Now if A defaults C can sue to him, although not being directly a party to contract. These type of provisions is treated as an exception to the doctrine of privity of contract for protecting the rights of family members who not likely to get a specific share and also to give maximum effect to the will of the testator. For eg., If A gives his property in equal portions to his 3 sons with a condition that after his death all 3 of them will give Rs 10,000 each to C, the daughter of A. Now C can prosecute if any one of them fails to obey this.
From the above discussion, we have seen that although only parties to contract can sue each other and no stranger is allowed to enter between the parties to sue. But with the development of time, the law has also developed and now even a stranger is permitted to sue to safeguard his interest under exceptional circumstances.