The doctrine of privity of contract is a principle of common law that states only the parties involved in a contract can enforce its terms or sue each other for breach. Outsiders, or strangers to the contract, cannot impose obligations or claim benefits, even if the contract was made for their benefit. This rule is based on the “interest theory,” which means only those directly interested in the contract are legally entitled to protect their rights under it.
Indian Law and Privity of Consideration
Under Indian law, the rule of privity of consideration does not apply. This means it doesn’t matter who provides the consideration for a contract, as long as there is some consideration involved. Section 2(d) of the Indian Contract Act, 1872, clarifies this by stating that consideration can be provided by the promisee or even by a third party, as long as it is done at the promisor’s request.
Essentials of Privity of Contract
- A valid contract exists between two parties.
- The parties must be legally competent, and there must be valid consideration.
- A breach of the contract has occurred.
- Only the parties to the contract can sue each other for enforcement or damages.
Exceptions to the Doctrine of Privity of Contract
The doctrine of privity of contract means that only parties to a contract can enforce its terms. However, there are exceptions where third parties can enforce rights under a contract:
- Trust or Charge
If a trust or interest in immovable property is created in favor of someone, they can enforce it even if they are not a party to the contract. Example: In Khwaja Mohd. v. Husaini Begum (1910), A agreed to pay his daughter-in-law ₹5,000 per month after her marriage and secured the payment against property. Although, daughter-in-law was not a party to the contract, the court allowed her to recover the unpaid amount.
2. Marriage Settlements and Family Arrangements
When agreements involve marriage, partition, or family arrangements, and benefit a third party, they can sue to enforce the agreement. Example: In Rose Fernandez v. Joseph Gonsalves, a father promised marriage terms on behalf of his daughter. The daughter, upon reaching adulthood, successfully sued for breach of the promise, even though she was not a direct party to the agreement.
3. Acknowledgment or Estoppel
If the promisor acknowledges or creates a connection with a third party through their actions, that party can sue.
Example: In Davaraja Urs v. Ram Krishnaiah, A sold his house to B and directed B to pay a portion of the sale price to C, a creditor. B partially paid C but failed to pay the rest. The court ruled that B’s acknowledgment created privity, allowing C to sue for the balance.
4. Assignment of Contract
The benefits of a contract can be assigned to a third party, who can then enforce the contract.
Example: In Krishnan Lal Sahu v. Promila Bala (1928), the court held that an assignee could enforce a contract, provided it did not involve personal skills or obligations.
5. Contracts Made Through an Agent
In agency contracts, an agent acts on behalf of the principal. The principal can enforce the terms of the contract even if they were not directly involved in the agreement.
6. Agreements Affecting Land
When land is subject to specific rights and obligations under an agreement, any buyer with notice of these conditions is bound by them.
Example: In Tulk v. Moxhay (1919), the purchaser of land was held responsible for obligations tied to the land under an earlier agreement.
7. Holder in Due Course
A holder in due course of a negotiable instrument (e.g., a check or promissory note) can enforce rights against all prior parties, even if they were not part of the original contract.
8. Funds in Hands of a Party
If a fund is held by one party for the benefit of another, the beneficiary can sue for it.
Example: In M.C. Chacko v. State of Travancore, the Supreme Court acknowledged that exceptions to privity include cases, where allowing the contracting party to retain the fund would lead to unjust enrichment.
Conclusion
The doctrine of privity of contract establishes that only those who are party to a contract can enforce its terms or claim benefits. However, both Indian and English laws recognize certain exceptions where third parties may assert rights under a contract. While English law strictly adheres to the concept of consideration being provided by the contracting parties themselves, Indian law adopts a more flexible approach, allowing third parties to provide consideration and enforce contracts under specific conditions. The exceptions to the doctrine, such as trusts, family arrangements, acknowledgment, and agreements affecting land, ensure justice in cases where strict application of the doctrine would lead to unfair outcomes. This balance highlights the adaptability of contract law to cater to practical needs while respecting foundational principles.
