The doctrine of privity of Contract by Sesa Gill at LexCliq

Introduction  

The doctrine of privity of contract states that only the parties to the contract can enforce the contract or take action against it. A person who is not a party to the contract but perceives some benefits from the contracts is not entitled to take any enforcement action.

“The doctrine of privity means that a contract cannot, as a general rule confer rights or impose obligations arising under it on any person other than the parties to it.”

For example, if a party ‘A’ promised ‘B’ to pay Rs.100 to the third party ‘C’.  Thus, ‘A’ and ‘B’ can sue each other in case of a breach of contract. However, ‘C’ cannot sue the parties. This is known as the privity of contract.

Different courts in India have different views regarding the concept of privity of contract. There have been cases where the third party is not able to sue in case of a default due to the operation of the rule of privity of contract while there are some cases where the rule of privity of contract is completely disregarded. Hence, the rule of privity of contract is a topic of great debate amongst scholars.

Privity of consideration states that only a person who has provided consideration can enforce the contract and take action against it. In the above case, ‘C’ cannot sue the parties as he has not provided any consideration for the contract.

Essentials of Privity of contract

  1. 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.
  2. 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.
  3. 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.
  4. 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

There are some exceptions to the doctrine of privity which makes the third party capable of enforcing the contract. These are as follows:

  1.   Agency

In case of a principal-agent relationship between the third party and the contracting party, wherein the third party i.e. the principal party has expressly consented that the other has to act on his behalf and the contracting party i.e. the agent consents to act in that manner, the third party, being the principal party, can also enforce the contract.

  1.   Trust

In case one party ‘A’ promises the other party ‘B’ for the benefit of ‘C’, although being the third party, ‘C’ can enforce the contract as ‘B’ is the trustee of ‘C’. ‘A’ person can become a trustee of the other person if he fulfills the following criterion:

The party should have the intention of creating trust.

This intention should be to benefit a particular third party and not all the third parties.

A landmark case for the defense of trust in the privity of contracts is Rana Uma Nath Baksh Singh v. Jang Bahadur. The facts of the case were that Rana Uma Nath Baksh Singh was given the possession of the entire estate by his father. In return, Rana Uma Nath Baksh Singh was required to pay a certain some of the money and a village to Jang Bahadur, the illegitimate child of his father. It was held in this case that a trust was created for the benefit of Jang Bahadur and hence he is entitled to enforce the contract.

  1.   Collateral contract

In case of a contract is accompanied by a collateral contract, then the party to the collateral contract can enforce the contract. For example, when a party ‘A’ purchases goods from ‘B’, there is a contract between A and the manufacturer of that good.

The doctrine of privity of contract is subject to various debates despite being accepted in many jurisdiction. In the case Debnarayan Dutt vs Chunilal Ghose “The Indian Contract Act is unlike the English Contract Act and the limits with which the doctrine of privity of contracts operates in English law cannot, with the same vigor be applicable to the Indian Contract Act.” As given in the definition of consideration in Section 2(d), as long as there is a consideration it does not matter who has furnished it.

Conclusion 

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.

 

 

 

 

 

 

 

 

 

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