You are on page 1of 6

Privity of Contract A contract is an agreement between two or more parties that creates an obligation to do or not to do something.

The parties to the contract are under an obligation to perform the terms and conditions as laid down in the contract. Thus a contract can confer rights or impose obligations arising under the contract on the parties to the contract. Third parties cannot be under such an obligation to perform or demand performance under a contract. This is referred to as Privity of contract. The Doctrine of Privity of Contract under English Law The rule laid down in Tweedle v Atkinson laid down the foundation of the doctrine of Privity of Contract which means that a contract is a contract between the parties only and no stranger to the contract can sue even if the contract is avowedly made for his benefit .Thus a stranger to the consideration cannot sustain the action on the promise made between two persons unless he has in some way intervened in the agreement. In the above case the plaintiff was to be married to the daughter of one G and inconsideration of this intended marriage G and the plaintiffs father entered into a written agreement by which it was agreed that each would pay the plaintiff a sum of the money. G failed to do so and the plaintiff sued his executors. Thus, although the sole object of the contract was to secure a benefit to the plaintiff, he was not allowed to sue as the contract was made with his father and not with him. In Scruttons Ltd v Midland Silicones Ltd. 4 [3] it was observed that the principle is that apart from special consideration of agency, trust, assignment or statute , a person not a party to a contract cannot enforce or rely for protection of its provisions. The principle was reaffirmed in Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd 5[4] where it was held that as the plaintiffs were undisclosed principal, no consideration moved from them to the defendants and that the contract was unenforceable by them. The two basic principles under the English Law as can be ascertained from the above cases are that firstly consideration should move from the promisee only and secondly that a contract cannot be enforced by a person who is not a party to the contract even if it is made for his benefit. The Doctrine in India There has been a divergence of opinion in India as to whether the Doctrine of Privity of Contract, which prevails in the English Courts, is applicable to the Indian Courts. The Indian Contract Act, 1872 (hereinafter referred to as the Act) codifies the methods of entering into a contract, executing a contract; rules to implement provisions of a contract and effects of breach of a contract. The provisions of the Act prevail over any usage or custom or trade however the same will be valid as long as it is not inconsistent with provisions of the Act. Section 2(d) of the Act says that when, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise It is clear from this section that the consideration for a contract can proceed from any person and not necessarily the parties to the contract. A promise is enforceable if there is some consideration for it and it is quite immaterial whether it moves from the promisee or any other person. However there is no specific provision in the Act which either for or against the Doctrine of Privity of Contact. It is through a series of case laws that the Doctrine has evolved. In Debnarayan Dutt v Ramsadhan 6 [5]

it was observed that the doctrine in Tweedle vAtkinson is inapplicable in India and that The aim of the Mofussil Courts of Justice in British India is to do complete justice according to the principles of Justice, equity and good conscience. The decision in Debnarayan Dutt v Ramsadhan was followed in N. Devaraja v M.Ramakrishnan 7[6].The facts of the case in brief are that A sold a house to B under a registered sale deed under the terms that a certain sum will be paid to A and the remaining to C, As creditor. B subsequently made part- payments to C informing that the amount was in respect of the sale and that he would pay the remaining amount, B failed to make the payment and C sued B for the same. It was held that the suit was maintainable as B promised to pay the amount to C and hence C was entitled to bring a suit against B for recovery of the amount. However in Jamna Das v Ram Autar 8 [7] the Privy Council extended the doctrine to India and held that the person not party to the agreement cannot recover the amount due from one party. This decision has been followed in few cases later like Babu Ram Budhu Mal vDhan Singh Bhishan Singh 9 [8] where the mortgagee was not allowed to recover the money retained by the second mortgagee under an agreement between the owner and the second mortgagee. Subbu Chetti v Arunachalam 10 [9] considers in detail the development of the Doctrine of Privity of Contract with reference to the decisions of the English Court. The court considering the decision in various English cases held that where all that appears is that a person transfers property to another and stipulates for the payment of money to a third persona suit to enforce that stipulation by the third party will not lie. The Supreme Court has by its decision in M.C. Chacko v State of Travancore 11 [10] expressed itself in favour of the rule in Tweedle v Atkinson thus clearing the ambiguities in the application of the doctrine of Privity of Contract. There are two aspects of this doctrine. Firstly, no one but the parties to the contract is entitled under it. Rights or benefits may be conferred upon a third party but such a third party can neither sue under the contract nor rely on defences based on the contract. The second aspect is that the parties to a contract cannot impose liabilities on a third party. Remedies Available to the promisee for the benefit of the Third Party Specific Performance Third Parties for whose benefit a contract has been made may not sue on the contract but the party making the contract may sue for specific performance for the benefit for the third party even where the damages obtainable will be nominal. Damages In a suit for damages, the plaintiff cannot recover more than the amount required compensating him for his own loss, and not that of third party. Exceptions to the principle Over a period of time the Courts have through the various judgements laid down few exceptions to the principle. The exceptions are as follows: Trust Where a person acts as a trustee and enters into a contract the beneficiary of the contractcan sue if the promise has not been performed. In M.C.Chacko v State of Travancore 12 [11] it was observed that a trust does not arise simply because a party to the contract undertakes to confer a benefit on the stranger .For this exception of Trust to be applicable it has to be established that there

was an intention to enter into the contract as a trustee like use of express words like trust or trustee establish the intention. The facts of the case are relevant to understand the exception of trust in Privity of Contract. The appellant, manager of High Land Bank, Kottayam had an overdraft account with Kottayam Bank. The father of appellant executed a guarantee in favour of Kottayam Bank agreeing to pay amounts due by High Lands Bank under overdraft arrangement. Kottayam Bank filed a suit in Court of subordinate judge of Kottayam against High Land Bank for a decree for amount due in account .Five more defendants impleaded of which one defendant on letter of guarantee and four other under a deed. The father of appellant died during pendency and suit was instituted against his widow daughter and sons. The Trial Court decreed a suit against High Land Bank and appellant. The Trial Court held that the claim against father of appellant was barred by law of limitation and not enforceable against his heirs and legal representatives. The Trial Court also rejected claim that appellant has personally undertaken to pay the amount due under an overdraft arrangement. An appeal filed in High Court also confirmed the lower courts order and cross-objection filed by respondent with Kottayam Bank merged with the claim that appellant was personally liable were dismissed . An appeal was filed by special leave as to whether under Ext D-1 deed of partition a charge is created in favour of Kottayam Bank to satisfy the debt arising under the letter of guarantee and whether charge is enforceable by Bank when it was not a party to the deed Ext D-1 - letter of guarantee created merely a personal obligation. The Court observed that no particular form of words is needed for creating a charge on immovable property .Kottayam Bank not being a party to deed was not bound by covenants in deed nor could it enforce covenants. The person not a party to a contract cannot enforce terms of a contract subject to certain well recognized exceptions like beneficiaries under terms of contract or where contract is a part of a family arrangement may enforce a covenant. It was held that, Kottayam Bank was not a beneficiary and appellant not personally liable for debt due under letter of guarantee executed by father of appellant nor the properties under deed liable to satisfy debt due to Kottayam Bank under letter of guarantee. When an obligation in equity amounting to a trust arising out of the contract exists, the beneficiary has a right to sue 13[12] In Narayani Devi v Tagore Commercial Corpn Ltd 14[13]a bargain between the husband of the plaintiff and the defendants, where the shares belonging to the plaintiffs husband were sold to the defendant and the share money remained charge for payment of monthly sums both to the husband and after his lifetime to the wife, could be enforced by the wife since an obligation was in the nature of Trust. Insurance The principle of privity has been applied to insurance policies affected for the benefit of third parties. Where a policy of insurance is effected by the assured for his own life, and the policy is expressed to be for the benefit of his wife she cannot sue the insurance company on the policy unless it is assigned in writing or a trust has been declared by the assured. 15[14] Family Arrangements and Marriage Settlements The Specific Relief Act under Section 15 (c) enables specific performance of a contract being a settlement on marriage and a family arrangement by any person beneficially entitled there under, and creates an exception to the rule of privity of contract. It is settled law that a person not a party to a contract cannot subject to certain well recognised exceptions, enforce the terms

of the contract: the recognised exceptions are that beneficiaries under the terms of the contract or where the contract is a part of the family arrangement may enforce the covenant.16[15] Creation of a Charge A stranger to a contract can sue for the money made payable to him by it where the money is charged on immovable properties, or also where the specific money in suit is allocated by the promisor in favour of such third party. Covenants running with the land The doctrine of privity of contract has been relaxed to allow certain positive and negative covenants to run with the land so as to benefit or burden persons not party to the contract imposing such covenants. Collateral Contracts A collateral contract between a third party and one of the parties to a main contract may be associated with the main contract. This contract may enable a third party to enforce the first contract. Multilateral Contracts When a person joins a club or an unincorporated association, one member joining the club is deemed to contract with other members.

Acknowledgement and Estoppel A promisor may create privity between himself and the third party by conduct, by acknowledgement or by otherwise, constituting himself as an agent of the third party, entitling the third party to sue. 17[16] Contract for the benefit of the third person A person not a party to the contract cannot sue on the contract unless the case comes within one of the recognized exceptions. 18[17] Assignment of rights and obligations under a Contract Another important aspect related to the doctrine of Privity of Contract is Assignment of rights and obligations under a Contract. An assignment in law is an act by which one person transfers to another, or causes to vest in another his right or title to something before the object of the transfer has become a property in possession of the assignor. There is no specific section of the Act dealing with assignment of contracts. Section 37 of the Act provides that in the event of death of the promisor before the performance of his obligations, the promises bind the representatives of the promisor unless a contrary intention appears from the contract. Certain Statutes provide for assignment like the Transfer of Property Act 1882 in the form of actionable claims, Copyright Act, Insurance Act etc. In these cases the statutory provisions should be complied with in respect to the manner and it will be subject to the provisions of that statute.

A notice to the debtor is desirable as it would prevent further equities from attaching to the debt, or may affect priorities. An assignee cannot sue in his own name and without joining the assignor as a party unless he has a right under the statute providing for the assignment. 19[18] The rights under a contract can be assigned but not the obligations. In Khardah Company Ltd, V Raymon & Co Ltd 20 [19] it was observed by the Court that an assignment of a contract might result by transfer either of the rights or of the obligations there under. But there is a well recognized distinction between these two classes of assignment. As a rule obligations under a contract cannot be assigned except with the consent of the promisee, and when such consent is given, it is really a innovation resulting in substitution of liabilities. On the other hand, rights, under a contract are assignable unless the contract is personal in its nature or the rights are incapable of assignment either under the law or under an agreement between the parties. It was further observed in the above case that there is a clear distinction between assignment of rights under a contract by a party who has performed his obligations there under, and assignment of a claim for compensation which one party has against the other for breach of contract. The latter is a mere claim for damages which cannot be assigned in law; the former is a benefit under an agreement, which is capable of assignment. A novation is a contract between a debtor, a creditor and a third party that the debt owed by the debtor shall henceforth be owed by the third party. It is not strictly assignment, as the consent of all three parties is needed, whereas generally, assignment does not require the consent of the other contracting party. Moreover, the third partys right against the debtor is based on a new contract between him and the debtor. Ordinarily an assignment does not require a new or separate contract to be signed with the third party.

The observation of the Supreme Court in the above case was relied upon in Indu Kakkar vs Haryana State Industrial Development Corporation Ltd and Anr 21 [20] and the decision was upheld by the Supreme Court. Whether a contract can be transferred or not depends upon the nature of the contract. A Contract of a personal nature cannot be assigned. Section 40 of the Act recognizes this principle and provides that if it appears from the nature of the case that it was the intention of the parties to any contract that any promise contained in it should be performed by the promisor himself, such promises must be performed by the promisor. In other cases, the promisor or his representative may employ a competent person to perform. In Tolhurst V Associated Portland Cement Manufacturers (1900) Ltd 22 [21] it was observed that The benefit of a contract is assignable in cases where it can make no difference to the person on whom the obligation lies to which of two persons he is to discharge it. Arbitration Clause cannot be the subject matter of assignment but presence of arbitration clause per se does not affect the assign ability of the contract. In Hindustan steel Works Const Ltd v Bart Spun Pipe Co 23 [22] the Court observed that Mainly relying upon these observations Counsel urged that the arbitration clause could not be the subject-matter of assignment as it involved personal confidence and mutual trust. Therefore, without the consent and concurrence of the petitioner which, it was urged, were not present in this case, there could not have been any assignment or transfer of the arbitration agreement. It was further observed that the correct position in law seems to be that whether the contract is assignable or not depends upon the nature of the contract. A

contract in the nature of a personal covenant cannot be assigned. Secondly, the rights under a contract can be assigned, but the obligations under a contract lawfully cannot be assigned. Thirdly, the intention about assign ability would depend upon, the terms and the language used in a contract. Fourthly, and this is important for our purpose, existence of an arbitration clause per se does make neither the contract non-assignable or assignable. But in a particular case the arbitration clause may be so worded as to afford an Indication about the contract being personal or not. But apart from that the existence of arbitration clause does not in my opinion; affect either the rights or the assign ability of the contract if it is otherwise assignable. Restriction against Assignment of Contract The parties to a contract may expressly prohibit assignment of a contract. In such a case the benefits of a contract are not assignable. The terms of a contract could be expressed, or may be implied from what has been expressed. Section 15(b) of the Specific Relief Act provides that where there is a prohibition to assign a contract; the legal representatives of a deceased party cannot enforce the contract unless the deceased had performed part of his contract In Habiba Khatoon v Ubaidul Huq and Ors. 24 [23] the Court observed that the benefits of a contract of repurchase must be assignable, unless the terms of the contract are such as to show that the right of repurchase is personal to the vendor. In the latter case it will be for the person who pleads that the contract is not enforceable, to show that the intention of the parties thereto was that it was to be enforced only by the persons named therein and not by the assignee. Conclusion The Act does not specifically provide for the doctrine of Privity of Contract; however through a series of case laws the doctrine as laid down in Tweedle v Atkinson is now applicable in India along with various exceptions. With reference to consideration of a contract the position in India and England are however different. Under the English law only a party to the contract can pay the consideration. If he doesnt pay the consideration he becomes a stranger to the contract. Under the Indian Law, it is not necessary that consideration should be paid by the promisee. Though there are no express provisions as to assignment of rights and obligations under a contract in the Act, the Principle of assignment has been recognized and developed by the courts through its various decisions