PRIVITY RULE IN CONTRACT – INTRODUCTION
Section 2(h) of the Indian Contract Act,1872 defines the term “Contract” as An agreement which is enforceable by law. The formation of contract takes place in two stages. First there should be an agreement and secondly, the agreement should be enforceable by the law. Agreement is also defined under section 2(e) which says every promise or set of promises which forms consideration for each other is an agreement.
An agreement becomes contract when it is enforceable by law. There should be both party’s consent for formation of contract. Consent can be either expressed or implied. Further, discussing about the topic “Privity Rule in Contract”, this topic explores about whether the third person can be a party to a contract or not or they can sue the party to a contract or not.
Explanation of the topic
In common law, there is a general rule that no one other than the parties to a contract can be entitled to privity of contract. The principle that the parties which can sue or sued upon in a contract is called privity of contract. There exist two different visions to privity of contract which has to be considered. The first one is acquisition of rights by a third party and second is the imposition of liabilities on third party to contract. Considering the second aspect, two parties which are entering into contract can’t impose any type of contractual liabilities in any third party.
This principle can be easily understood through the case Gujrat bottling v. Coca cola case. Doctrine of privity of contract. As per this rule, the parties to contract can sue each other. In Aries advertising beaureu vs. C.T. Devraj, a circus owner Balkrishna placed order with plaintiff for making advertisements of circus. But the advertiser did not make any agreement with the financer of the circus. He sued financer for recovering his dues. In this case, Supreme Court held that because financer is not a party acc. To the privity of contract so he is not entitled to pay any type of compensation.
Exceptions to the privity of contract–
Situations in which stranger is treated as deemed party.
- Beneficiary of a trust or beneficiary under a contract.
In Klause Mittelbachert Vs East India hotels Ltd, there was a contract between Lufthansa, a German airlines and Hotel Oberoi, New Delhi that crew will stay in that hotel. Klause Mittelbachert, one of the Co-Pilot of the airlines stayed at the hotel and got badly injured from swimming pool of the hotel. He sued hotel for compensation. In this case court has held that though there was no contract between Co-Pilot and Hotel but because he is beneficiary to the contract there fore he is entitled for compensation.
- Beneficiaries of family settlements, marriage settlements, family partition, etc. such settlements should be in writing.
- When a person acknowledges receipt of money or confirms that he will pay liability of other then he will be bound by such acknowledgements
- In all contracts entered through agents, principal/ company shall be deemed to be a party
- Assignee of interest/rights. For example, Assignee of life insurance policy or official assignee in liquidation proceedings
- Previous agreements (covenants) connected with the land. New owner will be bound by Such agreements. For example, land for Mela.
Privity of Contract a Stranger to consideration can sue. However, a stranger to contract cannot. A Stranger to a consideration Section 2 provides that consideration may move from promise of any other person strangers means that a stranger to consideration can we provided he is a party to the contract.
A Stranger to contract: A person who is not a party to the contract called a stranger to a contract. Such person cannot claim rights under the contract. This is called Doctrine of Privity of contract
The following case Law explains this point-
In Dunlop Pneumatic Tyre Co. v. Selfridge Ltd., Supplied tyres to a wholesales X, on condition that anyretailer to whom X supplied the tyres should promise not to sell them to the public below Ds it price x supplied tyres to s upon this condition, but nevertheless S sold the tyres below the list price Held There was a contract between D and X and a contract between X and Therefore, could not obtain damages from as D had not given any consideration for a promise to X or waste party to the contract between D and X.
Thus the person who is not party to contract cannot even sue though the contract is forbenefit. Exception to the doctrine of privity of contract both the Indian w and the English law recognize certain exceptions to the rule that a manager to a contract cannot the contract. In the following person who is not party to a contract can enforce the contract.
In the following cases, a person who is not a party to contract can enforce the contract
(1.) Covenants it means a lawful debt that goes along with the land. Such debt has to be filled by future successors
A person who purchases and with notice that the owner of the land is bound to certain obligations created by agreement relating to land shall be bound by them although he was not a party to the original covenants.
For example: A owns a piece of land on which is staying as a tenant. The lease agreement has still not expired wants to purchase A and will have to gulf entertainment Lease Agreement.
(2.) Assignment: In case of assignment, two parties are involved. Assignor and assignee
Assignor is the person who gets the work done. Assignee is the person who will do the work the rights of assignee are getting affected, he can file a case against defaulting party. OR, because of the assignor or assignee, the rights of third party stranger) are getting affected, then the stranger can file a case against the defaulting party.
(3.) Marriage- When an arrangement is made in connection with marriage and a provision is made for the benefit of a person, he may sue although he is not a party to the arrangement. Case: Rose Fernandez v joseph Gonsalves in this case, father of the girl entered into an agreement with Joveph for her marriage. Subsequently, Joseph refused to marry. Held, after attaining majority, she could see joseph for damages for breach of promise of marriage and joseph could not take the plea that she was not a party to that.
(4.) Estoppel- Acknowledgement estoppel means denying of a statement which has been made earlier. As a general rule, in the field of professionalism, a person cannot deny refuse/ prevent from fulfilling the earlier lawful obligation. Where the promisor by his conduct, acknowledges or otherwise constitutes himself as an agent of a third party, he shall be estopped from denying his liability to the third party arising from the contract.
Example A gives Rs. 5,000 to B to be given to in this example, a contract has been made between A and B wherein, Chappens to be a stranger to the contract. It does not get his money, in spite of being a stranger, in order to save his rights, he will file a case against defaulting party.
(5.) Family settlement: Family settlement here refers to partition while making the will, two people enter into contract will maker and will writer. In case, a person whose name has been mentioned in the will has been prevented from getting his share, in order to prevent is rights from getting violated, he will sue the party who is committing such a default person filing the case stranger to a contract. Case Law: Shuppu Ammal vs Subramanian (1910).
(6.) Trust / charge – where the trust is created for the benefit of beneficiary even though he was not a party to the contract between the settler and the trustees to the contract yet he can file a suit to enforce his rights. A trust is headed by a trustee. In case, the trustee enters into any secret dealing with the client because of which the rights of beneficiary are getting affected, then stranger to the contract can file case against the trustee.
Privity rule of contract is one of the most important rules that has shaped the way contract litigation works in India. The rule has saved the Indian courts from a plethora of unnecessary litigation. Also it has prevented people from taking undue advantage of breaches of contract.
All in all, this rule has had a number of ramifications ranging across the board.
Author: KUNAL SINGH,
SYMBIOSIS LAW SCHOOL NOIDA