Principle of privity of contract - Judiciary Exams PDF Download

Introduction

Contract as per Indian Contract Act, 1872

• According to Section 2(h) of the Indian Contract Act of 1872, a "contract" is an agreement that is enforceable by law.
• For an agreement to be enforceable and earn the status of a contract, it must involve two or more parties making promises to each other with consideration.
• A key element of a contract is the promise made by the parties to each other, which establishes a contractual relationship and the basis for enforcing their rights and obligations.

Meaning and scope of privity of contract

Privity of Contract: Key Concepts

• Definition: Privity of contract is a legal principle that means only the parties involved in a contract can enforce its terms or be held responsible for its obligations.
• Interest Theory: This doctrine is based on the idea that only those with an interest in the contract have legal protection. In simpler terms, only the parties to a contract can take legal action or be taken to court.
• Effects of Privity of Contract:
  • Benefit:. third party cannot receive benefits from a contract if they are not a party to it.
  • Liability:. third party cannot be held liable under a contract if they are not a party to it.
  • Enforcement:. third party cannot enforce a contract if they are not a party to it.
• Illustration: To illustrate, let's say Arjun (the seller) makes a contract with Vishal to sell goods, detailing the price, quantity, and delivery date. If Arjun fails to deliver the goods on the agreed date, Vishal can sue him for breach of contract. However, if Kiran, who is not part of the contract, suffers a loss due to this breach, he cannot sue Arjun.

Essentials of privity of contract

1. Valid Contract: For privity of contract to be applicable, there must be a valid contract in place. The parties involved must be competent, there should be free consent, and some consideration must be exchanged to meet the conditions set by the Indian Contract Act, 1872.
2. Breach of Contract: One party must be liable for breach of contract to enable the other party to enforce their rights.
3. Parties Only: Only the parties to a contract can sue each other in case of non-performance, unless a third party falls under specific exceptions.

Privity of contract in English vs Indian law

Introduction to Privity of Contract

• Privity of contract is a legal doctrine that determines who has the right to enforce a contract and who is bound by its terms.
• According to this principle, only the parties involved in the contract can enforce its terms and be held accountable for its obligations.
• This concept is crucial in contract law as it ensures that only those who have a direct interest in the contract can seek legal remedies in case of a breach.

Explanation of Privity of Contract with Examples

• Privity of contract means that only the parties to a contract have the right to enforce its terms and take legal action in case of a breach.
• For example, if A hires B to paint his house and B fails to do so, A can sue B for breach of contract. However, C, who is not a party to the contract, cannot sue B because he has no privity of contract with him.
• This principle protects the integrity of contractual relationships by ensuring that only those who have agreed to the terms of a contract are bound by its provisions.

Importance of Privity of Contract in Legal Context

• Privity of contract is important in legal context because it upholds the freedom of parties to determine the terms of their contractual relationship.
• It also prevents third parties from interfering in contractual agreements to which they are not a party.
• This principle is especially relevant in commercial transactions where parties often seek to limit their liability and obligations to specific individuals or entities.

Tweddle v. Atkinson (1861)

• In this case, the court dealt with the issue of privity of contract and consideration.
• The plaintiff, a son, attempted to enforce a contract between two fathers that promised him money upon his marriage.
• The court ruled that the son could not enforce the contract because he was not a party to it and had not provided any consideration.
• This case highlights the importance of privity and consideration in contract law.

Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge Ltd (1915)

• The court's decision in this case was based on the principles of contract law and privity of contract.
• Dunlop, the manufacturer of tyres, could not claim damages from Selfridge because he was not a party to the contract between Dew and Selfridge.
• The court emphasized that a contract is a binding agreement between parties, and Dunlop was not involved in the contract between Dew and Selfridge.
• Additionally, consideration was a key factor, and Dunlop had not provided any consideration directly to Selfridge.
• This case established the precedent that a third party cannot enforce a contract to which they are not a party and have not provided consideration.

Comparison between English and Indian Law on Privity of Contract

• Under English law, a stranger or third party cannot sue on a contract unless they are a party to it.
• In contrast, Indian law allows a third party to sue on a contract if there is consideration involved, even if they are not a party to the contract.
• This is the main difference between the two legal systems regarding privity of contract.

Jamna Das vs. Ram Autar (1911)

• In this case, the Privy Council ruled that the plaintiff could not sue for damages because he was not a party to the contract between the other party and the plaintiff.
• The court held that there was no contract between the plaintiff and the other party, and therefore, the plaintiff had no legal grounds to claim damages.

Donoghue vs. Stevenson (1932)

• In this case, the principle of privity of contract was applied differently.
• Ms. Donoghue's friend purchased a faulty ginger beer containing a decomposed snail, leading Ms. Donoghue to file a lawsuit for damages.
• Although the contract was between her friend and the shop owner, the court determined that the manufacturer had a duty to care for and commit to his customers.
• As a result, Ms. Donoghue was awarded damages despite being a stranger to the contract.

Consideration in the privity rule of contract law

Difference Between English Law and Indian Law

• Privity of Consideration: In Indian law, a person can sue even if they are a stranger to the consideration, which is not the case in English law. This makes the scope of privity much wider in India.
• Definition of Consideration: Under Indian law, the definition and importance of consideration are broader than in English law. Consideration is seen as any exchange of value among the parties involved in a contract.
• Section 2(d) of the Indian Contract Act, 1872: This section defines consideration as an act that can be established at the desire of the promisor, promise, or any other person. It emphasizes that consideration must benefit all parties involved in the contract.
• Illustration: For example, if Anita promises Ruhi to give her a pair of jeans in exchange for Rs. 500, but the money is given by Sita to Anita, the consideration is still valid even if it comes from a third party.
• Venkata Chinnaya Rau vs. Venkataramaya Garu and Ors. (1882): In this landmark case, the Madras High Court clarified that consideration in a contract does not have to flow solely from the promise made by the promisor. The court interpreted Section 2(d) of the Indian Contract Act, 1872, to mean that consideration can come from a third party or even from the promisor themselves.
• Impact on Indian Contract Law: The ruling in this case broadened the scope of consideration, allowing for more flexible and nuanced contractual arrangements. It recognized that the exchange of value in a contract can take various forms, making it easier for parties to structure their agreements according to their intentions and expectations.
• Adaptability of Indian Contract Law: The court's decision reflects the dynamic nature of Indian contract law, ensuring that it remains adaptable to the changing needs of businesses and individuals. By allowing consideration to flow from multiple sources, the law fosters a more just and equitable contractual environment in India.

Exceptions to the rule of privity to the contract law

Exceptions to the Rule of Privity in Indian Contract Law

Indian contract law traditionally upholds the rule of privity, which means that only parties to a contract can sue for its breach. However, there are exceptions to this rule that have been established by judges through various judgments to adapt to changing market conditions.

1. Beneficiary Trust

• When two parties enter into a contract for the benefit of a third party, the third party (beneficiary) has the right to sue and enforce their rights in case of non-performance.
• Example: Muhammad Rustam Ali Khan vs. Husaini Begum
• In this case, the father and father-in-law of Husaini Begum made an agreement to pay her Rs. 500 per month for Betel-leaf expenses as part of her marriage contract.
• When Husaini Begum filed a suit for recovery, the court held that she was entitled to enforce the contract as a beneficiary, even though she was not a party to it.

2. Provision for Maintenance or Marriage under Family Settlement

• This exception protects the rights of family members who may not receive a specific share of property, emphasizing the will of the testator.
• Example: Raj's Will
• If Raj's will stipulates that his three sons must pay their sister Ruchi Rs. 1 lakh each before receiving their shares of the property, Ruchi has the legal right to sue her brothers if they fail to comply, even though she is not a party to the contract.

3. Agency

• If one party to a contract acts through an agent, either the agent or the principal (but not both) can sue for breach.
• It does not matter whether the other party knew about the agency relationship.

4. Conduct, Acknowledgment, or Admission

• In situations where privity of contract does not exist, if one party acknowledges the contract through their conduct or in any way that recognizes the rights of the other party, they may be liable based on estoppel.
• Example: Narayani Devi vs. Tagore Commercial Corporation Ltd.
• In this case, even though there was no contract between the plaintiff and the defendant, the defendants created privity by their conduct, acknowledgment, and admission, making the plaintiff entitled to her claim.

Conclusion

• Generally, only parties to a contract can sue for breach, and a stranger to the contract does not have this right.
• However, evolving circumstances have led to the recognition of exceptional cases where even a stranger to the contract has the right to file a suit against the parties involved.