Doctrine of Privity of Contracts & Its Exceptions- A Brief Overview

This article is written by Siddhi P. Nagwekar, a student of Karnataka State Law University’s Law School. This article goes on to entail what Doctrine of Privity is & its exceptions by referring to the relevant case laws and jurisprudence.

INTRODUCTION

As defined by D. M. Walker “ A contract is an agreement between two or more persons intended to generate a legal obligation between them to be legally enforceable.”1 Creating contract means creating rights and obligations for the parties just in case any of the contracting parties fails to perform the contract the opposite party is entitled to the rights for the legal remedy. The law of contract has been a crucial aspect in our everyday life. It has been directed by certain rules and doctrine of privity is also a core rule of it. This particular rule has been established since a long time but is not free from limitations.

P.S. Atiyah observes that, Privity of contact means- ‘a person cannot enforce a right arising under a contract if he was no party to it, even where it was intended that he should have a right. Likewise, a person cannot have any obligation enforced against him/ her where the obligation arises under a contact to which he was no party’.

G.H. Tretel says “The common law doctrine of privity means that a person can’t acquire rights or be subject to liabilities arising under a contract to which he is not a party.

The core of the doctrine of privity is the notion that only such parties related to the contract can have the rights or liabilities under it. It is closely linked to the rule that consideration must move from promise, but can be shown to be distinct from it.

Therefore, the doctrine of privity comprises of two prominent rules:

A person who is not a party to a contract cannot claim the benefit of it even though the contract was entered into with the object of benefiting that third party.
A third party cannot be subjected to a burden by contract to which he is not a party.

Accordingly, a person cannot acquire rights under contract to which s/he is not a party.

In 1861, the seminal case of Tweddle v. Atkinson established the rule privity of contract as a mainstay in English law. Here Where the fathers of a bride and groom agreed with each other to pay certain sums to the groom, adding that the groom should have the power to recover those sums by action if either failed to pay. The bride’s father defaulted and the groom sued, but his action failed on the grounds that he was not a party to the contract. Prior to the Tweddle decision, English law had no clear position regarding whether a third party could enforce a contractual term. The rule of privity of contract set forth by Tweddle was solidified in a case decided in 1915: Dunlop Pneumatic Tyre case. In the case, Viscount Haldane, L.C., viewed the rule of privity of contract as a fundamental principle of English law. He stated that a benefit could be conferred on a third party but not to the point that the third party could enforce the contract in person. Lord Sumner added that “undisclosed principals” to a contract cannot sue on a contract. The court as a whole did not discuss the rule of privity at any length; instead, the court assumed that privity of contract was well established in English law and was therefore uncontroversial. The privity of contract doctrine may be invoked as a matter of substantive or procedural law. In the common-law tradition, the doctrine is fundamental in all contractual relationships. By operation of the doctrine, only parties to an agreement can enforce it. This prevents a party or parties to a contract from imposing an obligation on a third party. A third party is also prevented from enforcing a right in a transaction though it may have an interest.

While applying the rule of privity, English Court has considered these two propositions:

Consideration must move from the promisee and the promisee only. If it is furnished by any other person, the promisee becomes a stranger to the consideration and, therefore, cannot enforce the promise.
A contract cannot be enforced by a person who is not a party to it even though it is made for his benefit. He is a stranger to the contract and can claim no rights under it.

Exceptions/Limitations to the Privity Contract

Acknowledgement or Estoppel: where by the terms of a contract is required to make a payment to a third person and he acknowledges it to that third person, a binding obligation is thereby incurred towards him. Acknowledgement may be expressed or implied. In the case of Khirod Behari Datta vs. Man Gobinda acknowledgement had generated the right to third parties to enforce the contract between the parties. In this case, the tenant and the sub-tenant of a piece of land agreed between themselves that the sub-tenant would pay the tenant’s rent directly to the landlord. Later, the landlord was allowed to get a decree for his rent directly against sub-tenant i.e. the sub-tenant was stopped from denying his liability to pay the tenant’s rent for the reason that there was no such contract between him and the landlord. Moreover, a third party could also be able to seek relief against a promisor on the basis of promissory estoppel principles. To succeed the third party would need to establish the elements of promissory estoppels.

Agency: The contract between the principal and the third party is recognized if an agent enters into an authorized contract with a third party on behalf of his/her principal. When the agent makes a contract with a third party on behalf of his principal, that contract is regarded by law as having been made by the principal himself/herself. Thus, s/he can sue on it and be sued on it.

Beneficiaries under trust or charge or other arrangements: a person in whose favour a charge or interest in some specific property has been created may enforce it though he is not a party to the contract. The beneficiary under the trust can sue the trustees in the situation even if s/he was not a party to the original agreement. It was established founded in the case of Klans Miltelbachert vs. East India Hotels Ltd where a beneficiary was allowed to take action directly against the hotel keeper who was injured by the negligent maintenance of the hotel premises. Similarly, in England, “trust” has been used as a device for holding the promisor to his promise. In case of Gregory & Parker vs. Williams Williams was made liable to the debt to Gregory as the promise he made, to do so with Parker.

Covenants on land: The rule of Privity may also be adapted by the principles concerning the transfer of immovable property. The principle of the famous case of Tulk vs. Moxhay is that a person who purchases a land with notice that the owner of the land is bound by certain duties created by an agreement or covenant affecting the land, shall be obligated by them even though he was not a party to the agreement. For instance, A transfers his land to B who covenants (promises) not to erect a piggery on the land. Subject to proper legal formalities, B’s promise will bind future owners of the land. So, if B sells the land to C, C is bound by B’s promise. A or A’s successors in title can legally enforce the covenant.

Insurance: according to the doctrine of privity no one except the parties to contract can claim for rights and be burdened with liabilities. However, in case of insurance contract, though the person who has insured one’s life, if dies then his /her relatives can claim the insured amount though they were not the party to contract. In the case of Tattersall v Drysdale it was decided that the driver of a motor vehicle is granted the benefit of an insurance policy made with an insurance company by the owner of the vehicle and which seems to cover the driver. Thus, this implies that insurance is another exception of the Privity of contract.

Marriage settlements, partition or other family arrangements: In the cases where a contract is made relating to the marriage, partition or other family arrangement and a provision is made in the interest of the person, such person may/can take advantage of the agreement though s/he is not the party to it. In the case of Daropti v Jaspat Rai the defendant’s wife was permitted to get benefit from the promise made between her husband and her father. Similarly, in another case of Veeramma vs. Appayya the mother was allowed to maintain a suit for the specific performance even though the contract was made among the father, daughter and daughter’s husband to keep the mother safe if the father’s property was inherited by the daughter.

Conclusion

The doctrine, whose main theme is preventing any rights or obligations to the third parties arising from the contract is now accepted as one of the foundations of the law of contracts. It was also held that ‘no stranger to the consideration can take advantage of a contract, although made for his benefit’. Entering into a contract creates interest in each party that the contract will be performed. The parties are bound to fulfil the promises done in the contract. However, the promises are only for the parties and any other person apart from them are exempted from the duties and rights conferred by the contract. This very principle which is one of the pillars of the law of contract is ensured by the doctrine of privity which is also accepted in our legal system.

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