A PROJECT SUBMITTED ON:

Doctrine of Privity of
Contract
IN COMPLIANCE TO PARTIAL FULFILLMENT OF THE MARKING
SCHEME, FOR TRIMESTER III OF 2014-2015, IN THE SUBJECT OF
CONTRACT I

SUBMITTED TO FACULTY:

PROF. SUNIL GEORGE

FOR EVALUATION

SUBMITTED BY:

Garima Rathi

B.B.A., LL.B. (Hons.) ROLL NO A048

 Doctrine of Privity of Contract

TABLE OF CONTENTS

SR. NO. CONTENTS PAGE

NO.
Table Of Abbreviations
Table Of Cases And Statutes
Research Methodology
1. Relevance of the topic
2. Object of study
3. Research Questions/ Hypothesis
4. Limitations of study
Chapter 1 Introduction
Chapter 2 Legal Analysis
1. Study of contractual provisions and present legal
framework
2. Issues/ Challenges
Chapter 3 Role of Judiciary
Chapter 4 Comparative study
Chapter 5 Conclusion
Suggestions and recommendations

Bibliography

2
 Doctrine of Privity of Contract

TABLE OF ABBREVIATIONS

Sr. no Key word

1. Sec Section

2. Pg Page

3. v. Versus

4. IPC Indian Penal Code

5. www World wide web

6. i.e. That is

7. Etc. Etcetera

8. USA United states of America

9. Ind India

3
 Doctrine of Privity of Contract

Table of Cases / Statutes

1. Jordan v. Jordan (1594) Cro. Eliz
2. Tweddle v. Atkinson (1861) 1 B. & S. 393
3. Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd., 1915) 1 Q.B.
250
4. M.C. Chacko v. State Bank of Travencorn AIR 1970 SC 504

Statutes

1.The Negotiable Instruments Act, 1881

2. The Indian Partnership Act, 1932
3. Motor Vehicle Act, 1988
4. Life Insurance Corporation Act, 1956
5. Indian Trust Act, 1882
6. Indian Contract Act, 1872

4
 Doctrine of Privity of Contract

Research Methodology
The Researcher has adopted the secondary method of research. In order to
research about the topic of Doctrine of Privity of Contract, researcher went
through books, statistics, internet and articles. To show the validity of the
sources mentioned proper footnoting has been done.

Relevance of the Topic :

This project deals with the doctrine of privity of contract under Indian law. The
credit for emergence of the doctrine of Privity of Contract is attributed to the
common law courts, but now it is applied in many countries like India, England,
Canada, Australia and New Zealand with certain statutory and judicial
exceptions. This doctrine ensures that a stranger to a contract can neither sue
nor be sued by the parties to the contract. However, in course of time, it was
realised that the doctrine is too rigid to cope with the social demands, for a
contract affects not only the parties to it but society at large as well.

Object of study :

The rule that no one except a party to a contract can be made liable under it is
generally regarded as just and sensible. But the rule that no one except a party to
a contract can enforce it may cause inconvenience where it prevents the person
most interested in enforcing the contract from doing so. So , to know

Creating contract means creating rights and obligations for the parties in case
any of the contracting parties fails to perform the contract the other party is
entitled to the rights for the legal remedy. The law of contract has been an
important aspect in our daily life. It has been directed by certain rules and
doctrine of privity is also an important rule of it. This particular rule has been
established since a long time but is not free from exception. This paper thus
aims to study the doctrine of privity of contract and some exceptions attached to
it. Moreover the paper also analyses the Indian context in that regard.

Research Questions :
1. Can a person enforce a contract to which he is not a party ?

2. Can a person set up a defence based on the terms of a contract to which

he is not a party to the relevant contract ?

5
 Doctrine of Privity of Contract

3. Can a contracting party set up a defence based on the terms of his own
contract in order to answer a claim brought by a person who is not a party to the
relevant contract?

4. Can a contracting party enforce his own contract against a person who is
not a party to the relevant contract ?

Limitations of Research
The topic which the researcher chose was vast and dynamic, therefore, more
use of internet was required so as to be relevant with the information.
Information from Books and Journals contributed a lot when it came on
writing about evolution or analyzing and comparing the current situation.
The materials from books were not sufficient so there is use of internet to know
the prevailing situation in order to justify the topic provided. Thus, lot of
effort had to be put in when it came to paraphrase the internet so as to
avoid copy and paste feature material.

6
 Doctrine of Privity of Contract

Chapter 1
Introduction
Evolution
Doctrine of Privity of Contract: Emergence from
ENGLAND to INDIA1:
Position in England :

The doctrine of privity of contract owes its origin to the common law courts.
This doctrine was, for the first time, applied in the case of Jordan v. Jordan2. In
this case the suit of a non party to a promise did not lie. But, in Lever v. Heys3
the court overruled the decision in Jordan v. Jordan and allowed the strangers
suit on a contract. But in Taylor v. Foster4 the court reaffirmed the decision in
Jordans case and applied the doctrine of privity of contract and accordingly, a
stranger to the contract was prevented to maintain his action upon breach of
contract.

Tweddle v. Atkinson5 is the case in which the doctrine of privity of contract

was finally established by the Court of Queens Bench in 1861. In this case
plaintiffs suit was dismissed by the court. It is to be noted that the court in
rejecting plaintiffs claim laid more emphasis on doctrine of privity of
consideration than on the doctrine of privity of contract. Nevertheless, the
doctrine of privity of contract acquired a definite shape in this case.

It is clear from the judicial decision that the doctrine of privity of contract lays
down two general principles of law of contract :

Firstly, it purports to say that a stranger to a contract cannot sue.

Secondly, it states that a stranger to a contract is not bound by the contract.

1
See id at p.108. See also Dr. L.R.singh, The Doctrine of Privity of Contract under the Indian Law, (D. Phil
Thesis, University of Allahabad, 1994 ) ,Global Publication, Allahabad, (1st edn.1999),pp 4- 12.
2
(1594) Cro. Eliz. 369. Cited from Dr.L.R.Singh, supra n. 7 p.4
3
(1598) Cro. Eliz. 619, 652;(1598) Moo. K.B. 550. Cited from Treitel, The Law of Contract, Sweet & Maxwell,
London(12th edn. 2007), pp.624-625
4
(1601) Cro. Eliz. 776,807.Cited from Treitel,i
5
(1861) 1 B. & S. 393. Cited from Robert Fennigan, Privity-The End Of An Era (Error), vol.103, Law Quarterly
Review, (Reprint, 2001) .pp.567-568

7
 Doctrine of Privity of Contract

This doctrine finally got approval by the House of Lords in the leading case of
Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd6., in the year 1915. It is
to be noted that in some subsequent cases efforts were made to abolish the
doctrine. However, the doctrine is not absolute. Certain limitations have also
been imposed upon it. This doctrine has been generally criticised. In 1937, the
Law Revision Committee, under the chairmanship of Lord Wright, also
criticised the doctrine and recommended its abolition. In its Sixth Interim
Report the committee stated7:

Where a contract by its express terms purports to confer a benefit

directly on a third party, the third party shall be entitled to enforce the provision
in his own name, provided that the promisor shall be entitled to raise against the
third party any defence that would have been valid against the promisor...

Underlying Principle:
The Privity of Contract under Indian Law
The term Contract itself envisages that it is a kind of legal agreement between
two individuals and both of them are under the obligation created by contract to
which they are parties. But then a reasonable question comes into mind that
what if a contract itself confers some benefit to the third party? Is it justified
not to allow to third party to sue in case of denial of benefit conferred expressly
under a contract? So it is necessary to consider doctrine of privity in the light of
this question.

This doctrine ensures that a stranger to a contract can neither sue nor be
sued by the parties to the contract. However, in course of time, it was realised
that the doctrine is too rigid to cope with the present social context because a
contract affects not only the parties to it but also society at large. Consequently,
certain limitations (or exceptions) were evolved and were applied to the doctrine
by both legislature and judiciary.

Meaning of the Doctrine of Privity of Contract:

No one may be entitled to or bound by the terms of a contract to which he is

not an original party. In other words, the rights and obligations are strictly, the
private matters of contracting parties and because of this a stranger has no legal

6
(1915) 1 Q.B. 250. Cited from Treitel, supra n.9
7
Avtar Singh, Law of Contract and Specific Relief, Eastern Book Company, Lucknow (9th edn. Reprint 2006), p.
94.

8
 Doctrine of Privity of Contract

access to them. Thus, the doctrine of privity of contract means that a non-party
cannot bring an action on the contract.

Privity of contract has three broad effects8:

1. A third party cannot receive a benefit if he is not party to that contract.

2. A third party cannot be liable under a contract if he is not a party to that

contract.

3. A third party cannot enforce a contract if he is not a party to that contract.

Scheme and Scope of the topic :

This project will be dealt in several parts. In the beginning of project, the
student will try to give justification behind the doctrine of privity of contract
and meaning thereof.

The second part will be dealing with, how it evolved in England with passage of
time? Its application in India will be also dealt in this part. It will also deal with
content and intents of Privity of contract.

The next part of this project deals with the present scenario of this doctrine.

The last part is the criticism of the doctrine of privity of contract with some
suggestions regarding probable reform of it.

In the end of the project researcher concluded by suggesting enactment

of such legislation which will give rights to the stranger to the contract in
certain qualified circumstances or insertion of a new section in Indian Contract
Act, 1872.

8
Ryan Murray, Contract Law The Fundamentals , Sweet & Maxwell, London (1st edn. 2008),p. 75

9
 Doctrine of Privity of Contract

Chapter 2
Legal Analysis
Study of Contractual Provisions & present legal framework
Provisions under Indian Contract which implicitly cover this
doctrine9:
As we know there is no independent enactment on the doctrine of privity of
contract in India but fortunately, unlike England, the law of Contract in India is
codified. It is to be, however, noted that the Indian Contract Act,1872 does not
explicitly contain a single provision relating to the doctrine of privity of
contract. Therefore, the position of the doctrine may be visualised in the light of
various provisions of the Contract Act. Those provisions are:

Ss. 2(a), 2(b), 2(c), 2(e), 2(h), 73, 74, and 75 of the Indian Contract Act, 1872.

Section 2(h) of the Indian Contract Act, 1872 defines the term Contract in the
form of an agreement. It states that an agreement enforceable by law is a
contract. In other words, a contract is nothing but a valid agreement. The
agreement has been defined under Section 2(e) of the Indian Contract Act,
1872. According to Section 2(e), Every promise and every set of promises
forming the consideration for each other is an agreement. Thus, an agreement
is a precondition to the contract. The agreement may be divided into two parts-
promise and consideration of the promise. The term promise has been
defined under Section 2(b) of the Contract Act. According to Section 2(b), a
proposal when accepted becomes a promise. Thus, finally, we find two terms
proposal and acceptance. The proposal has been defined under section 2(a) of
the Contract Act and the acceptance under section 2(b) of the Act. According
to Section 2(a), when a person signifies to another his willingness to do or to
abstain from doing anything, with a view to obtaining the assent of that other to
such act or abstinence, he is said to make a proposal. Section 2(b) of the Act
says that when the person to whom the proposal is made signifies his assent
thereto, the proposal is said to be accepted. It is evident that only that person
can accept the proposal to whom the proposal is addressed. The proposal is
generally regarded as a starting point of the contract and on the other hand, an
acceptance as its concluding point. The person who makes a proposal may be
called the proposer, offeror or promisor and the person to whom a proposal is

9
Dr. L.R.singh,supra n.7,pp. 3-4.

10
 Doctrine of Privity of Contract

made or who accepts the proposal may be said the acceptor, offeree or the
promise. Section 2(c) of the Act defines the term promisor and promisee.
According to it, the person making the proposal is called the promisor and
the person accepting the proposal is called the promisee.

It can, therefore, be inferred from the above provisions of the Contract Act
that the promisor is answerable to the promise and the promisee is answerable
to the promisor. It suggests that only parties to a contract are the appropriate
persons who can enforce the contractual rights and shoulder the contractual
obligations. Thus, there exists a privity of contract between parties to the
contract.

Further, it is obvious from section 73 of the Indian Contract Act, 1872 that
the party who suffers by breach of a contract is entitled to receive damages from
the other party to the contract.

In view of section 74 of the Act, it can be said that if a sum is named in the
contract as the amount to be paid in case of breach of a contract, the party
complaining of breach is entitled to recive a reasonable compensation not
exceeding the amount so named, or as the may be, the penalty stipulated for.
Section 75 of the Act provides that a person who rightfully rescinds a contract is
entitled to compensation for any damages which he has sustained through non-
fulfilment of the contract.

It follows from sections 73, 74 and 75 (which deal with consequences of breach
of contract) that only that person is entitled to sue for breach of the contract who
is a party to the contract and has suffered loss due to such breach. Consequently,
a person who is not a party to the contract i.e. a stranger cannot, therefore, bring
an action for breach of the contract.

Thus, from the provision of Indian Contract Act discussed above it is evident
that the Act, implicitly, incorporates the doctrine of privity of contract.
However, certain statutory and non-statutory exceptions to the doctrine are
accepted in India as well.

Exceptions to the Doctrine of Privity of Contract under

Indian Law10:

10
Dr. L. R. Singh, supra n.7, pp.195-212

11
 Doctrine of Privity of Contract

There are certain number of exceptions introduced by our courts, in which the
doctrine of privity of contract does not prevent a person from enforcing a
contract which has been made for his benefit but without his being a party to it.
Many of the exceptions are concerned with the special branches of the law of
contract, such as negotiable instruments, agency, bill of lading, railway receipts,
transfer of property, etc. Some of the most commonly known exceptions may be
considered here.

1. Exception I to the doctrine: The Benefit Aspect of Contract

The benefit aspect of the doctrine is that a claim for the contractual benefit can
be enforced by that party to the contract who is entitled to it. Here, an important
question arises as to whether a stranger can, in any circumstances, claim the
benefit of a contract.

Judicial Exceptions

(a) Contract creating a trust: Where a contract creates a trust in favour of a

third person, such third person can sue the contract. In the leading case of M. C.
Chacko v. State Bank of Travancore11, the Supreme court held that a
beneficiary, under a contract which creates a trust in his favour can sue the
contract.

(b) Contract involving a Family Arrangement : Members of a family may

confer benefits of a contract to a stranger provided the contract must be related
to some kind of a family arrangement. In the case of M. C. Chacko v. State
Bank of Travancore, the supreme court held that a beneficiary under a contract
which involves a family arrangement can enforce the contract. The decision of
the supreme court in this case seems to be reasonable as it benefits a third
person and reduces his miseries by reducing his/her financial responsibilities.

Statutory Exception: The following are the statutory exceptions to

the privity rule:

(a) Trust: This is the most common statutory exception to the doctrine of
privity of contract. According to Section 56 of the Indian Trust Act, 1882 the
beneficiary is entitled to have the intention of the author of the trust, executed to
the extent of the beneficiarys interest.

11
30 AIR 1970 SC 50

12
 Doctrine of Privity of Contract

(b) Contract of Insurance: A person can take an insurance policy for

anothers benefit. For instance, if a husband takes insurance policy for the
benefit of his wife and children, they can sue the Life Insurance Corporation,
although they are strangers to the contract of insurance as well as consideration.
The corporation is under obligation to pay the sum assured by all the policies
including any bonus. Such policies and bonus shall also be guaranteed by the
Central Government under section 37 of the Life Insurance Corporation Act,
1956. Similarly, section 146(1) of the Motor Vehicle Act, 1988 provides that
the owner of a motor vehicle is bound to get the vehicle insured not only against
his own risk, but also against risk of a third party. Therefore, if a third party, is
injured in an accident involving such a vehicle, he can sue the insurance
company to recover compensation for the loss sustained by him.

(c) Benefit to a minor under the Partnership Act:

Section 30 to the Indian Partnership Act, 1932 is another exception to the

doctrine of privity. A minor is incompetent to make a contract so, he cannot
become a partner to a firm. But section 30(1) of the Partnership Act provides
that with the consent of all the partners a minor may be admitted to the benefits
of partnership. The minor so admitted is entitled to such share of property and
profits of the firm as may be agreed upon, and he may have also access to
inspect accounts of the firm. It is accepted that the above-mentioned exceptions
are just and reasonable as they help in improving the socio-economic condition
of the third party.

2. Exception II to the doctrine: The Burden Aspect of Contract

The burden aspect of contract is another exception to the doctrine of privity.

According to it, there are certain circumstances in which parties to a contract
can mutually agree to transfer contractual burden or liability to a third party and
consequently that third person can be sued. The following are the statutory
exceptions:

(a) The Law of Agency : Under the law of Agency the principal is bound to
fulfil contractual liabilities undertaken by the agent on his/her (principals)
behalf, although the contract is entered into between the agent and the third
person dealing with the agent.

(b) The Indian Partnership Act, 1932 : Section 19 of the Act provides that a
firm is liable for all the acts of a partner done under his express or implied

13
 Doctrine of Privity of Contract

authority. Such liability of the firm extends to even torts of a partner such as
negligence, intentional torts and misapplication of money or property received
from third party provided such torts fall within express or implied authority of
the firm. Section 25 of the Indian Partnership Act speaks of liability of partners
of a firm is joint as well as several. Consequently, an act done by a partner on
behalf of the firm binds all other partners, although they have not directly made
the contract. Section 45(1) of the Indian Partnership Act imposes contractual
liabilities after dissolution of the firm on those partners who have not entered
into the contract with a third person. Such liability can be imposed on other
partners for the contract made by one partner with the third party provided,
firstly, the act is of such a nature that it was commonly done by the firm before
dissolution and secondly, no public notice of the dissolution of the firm is
given12. Section 30(3) of the Indian Partnership Act, provides that although a
minor is not personally liable for the liability of a firm, yet his share in
partnership is liable for the firms act13.

(c) The Negotiable Instruments Act, 1881: Section 31 of the Act provides that
the drawee of a cheque is bound to pay the money mentioned in it to the payee.
The drawee is a stranger to the contract which is made between the drawer and
the payee, but even then he is liable to pay the money to the payee. Section 36
of this Act provides that every prior party is liable to the holder in due course. It
is to be noted that the contract is entered into between an immediate prior party
and holder in due course and the remaining prior parties are strangers to such
contract, but they are held liable until the instrument is duly satisfied. According
to Section 53 of this Act, every prior party is liable to the holder who derives his
title from a holder in due course. It is obvious that as regards the contract
entered into between holder and holder in due course all the prior parties are
liable to the holder until the instrument is duly satisfied, although they are not
party to such contract. From the above it is clear that imposition of contractual
obligations on a third party in certain circumstances appears to be just and
proper as it promotes commercial relations among persons who are not directly
bound by the contract, but are likely to be affected.

3. Exception III to the doctrine: Doctrine of privity of contract under the

Law of Agency
12
C. Assiamma v. State Bank of Mysore & others, AIR (1990) Ker. 157

14
 Doctrine of Privity of Contract

The Law of Agency is another exception to the privity rule. In so far as the
relationship between principal and agent is concerned, there is a privity of
contract between them. The relationship between the agent and the third party
comes into existence when the agent, acting within scope of his authority,
entered into a contract with the third party. The relationship between principal
and third party appears to be an exception to the doctrine of privity of contract.
When there is any express contract or by operation of law (Section 230
(1),(2),(3) of the Indian Contract Act, 1872), an agent can be sued personally by
third party and the agent can himself enforce the contract against the third party.
The whole law of agency cannot be treated as an exception to the doctrine of
privity of contract. It provides only two exceptions. These are:

(a) Where the contract with the third party is made by a sub-agent, and

(b) Where the principal is undisclosed.

In these two cases, although the principal is a stranger to the contract, yet he can
sue and be sued by the third party.

3. Exception IV to the doctrine: Assignment of Contractual Rights

The assignment of contractual rights to a stranger is also one of the

exceptions to the privity rule. Where contractual rights are assignable, the
assignee acquires all the rights of assignor or deceased party. The assignee is,
undoubtedly, a stranger to the contract; nevertheless, he is entitled to sue the
other party to the contract. Thus, a valid assignment of contractual rights
restricts the application of doctrine of privity of contract. Such restrictions are
genuine because they provide an opportunity to a stranger to enforce the
contract and thereby compel the promisor to perform his promise.

4. Exception V to the doctrine: Assignment of Contractual Liabilities

The assignment of contractual liabilities to a stranger is another exception to

the doctrine of privity of contract. The general rule is that contractual liabilities
cannot be assigned by the promisor to the third person without consent of the
promisee. But there are certain circumstances when such assignment may be

15
 Doctrine of Privity of Contract

made. For instance, where a contract is of impersonal nature, the promisor may
employ a third person to perform his promise14.

It may, therefore, be submitted that the exceptions incorporated in various Acts

such as the Indian Contract Act, 1872 and the Indian Partnership Act 1932 have
rightly narrowed down the scope of the doctrine of privity of contract, because
in modern society a strangers rights are likely to be affected by contracts in
different dimensions. Therefore, such limitations on the doctrine of privity of
contract are for the benefit of the stranger.

Issues / Challenges :
The doctrine of privity has come under serious attack for its refusal to recognise
the right of a 3rd party beneficiary to enforce contractual provisions made for
his/her benefit. Law reforms, commentators and judges have pointed the gaps
that sometimes exist between contract theory on the one hand, and commercial
reality and justice on the other. The availability of the above mentioned
exceptions doesnt always correspond with their need.

It is no surprise that law reform bodies in various common law jurisdictions

have critically examined the doctrine and recommended its reform.

The followings are the issues of doctrine of privity:

First, It causes injustice to the third party who may have relied on the contract to
regulate his affairs, and thus upsets the reasonable expectations of the third
party to get benefit under contract.

Secondly, It frustrates the intentions of parties to the contract when they

intended to confer some benefit to the third party.

Thirdly, In case, third party suffers any damage then he has no option to claim
compensation due to this privity rule.

Fourthly, Such a third party who suffers a loss cannot sue, however the
promisee who has suffered no loss can.

14
Section 40, The Indian Contract Act, 1872: Person by whom promise is to be performed: 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 promise must be performed by the promisor.

16
 Doctrine of Privity of Contract

Fifthly, This doctrine is undue complex and uncertain. During the passage of
time, judiciary has made chinks into this doctrine to lessen its rigidity and it has
been reduced into a vulnerable and weak principle.

The courts have developed exceptions to the doctrine to avoid injustice, as we

seen that with the passage of time exceptions are continuously increasing, it
demonstrates its basic deficiencies and shows that the existing exceptions have
not solved the problem in toto and the scope of further amendments are still
lingering, shaking the very existence of this doctrine.

17
 Doctrine of Privity of Contract

Chapter 3
Role of Judiciary
Principles set out by Judiciary
Supreme Court upholds Privity15

The rule in Tweddle v. Atkinson was upheld by the Supreme Court of India in
M.C. Chacko v. State Bank of Travencore16. In this case, SHAH AG. CJ
endorsed the statement of RANKIN CJ in Krishna Lal Sahu v. Promila Bala
Dasi17, and after referring to the observation of Lord HALDANE in Dunlop v.
Selfridge, said: The Judicial Committee applied that rule in Khwaja
Muhammad Khan v. Hussaini Begum18. In a later case, Jamna Das v. Ram
Autar,19 the judicial committee pointed out that the purchasers contract to pay
off a mortgage could not be enforced by the mortgagee who was not a party to
the contract. It must therefore be taken as well- settled that except in the case of
a beneficiary under a trust or in the case of a family arrangement, no right may
be enforced by a person who is not a party to contract. The Supreme Court held
that the State Bank not being a party to the deed was not bound by the
covenants in the deed, nor could it enforce the covenants. It is settled law that a
person not a party to a contract cannot enforce the terms of the contract.

Cases :
1. Chinayya v. Ramayya :- In this case A, an old lady, by deed of g-----
ift ( First document ), made over certain property to her daughter R, with
a direction that the daughter should pay an annuity to As brother C, as
has been done by A. Accordingly, on the same day, R, the daughter,
executed a writing in the favour of her maternal uncle agreeing to pay the
annuity ( Second Document ). Afterwards she declined saying that no
consideration had moved from her uncle i.e. promisee. The court held that
though the uncle was stranger to the consideration (as consideration
indirectly moved from the sister) and there was separate contract between
him and R, the daughter, was entitled to get the annuity.
15
Avtar Singh, supra n.13,p.100
16
AIR 1970 SC 504
17
AIR 1928 Cal 518
18
6 37 IA 152 (PC 1910): 12 B LR 638
19
39 IA 7 (PC 1911): 21 MLJ 1158

18
 Doctrine of Privity of Contract

The maternal uncle could not have sued on the basis of gift deed executed by
A in favor of R because he was not party to that contract i.e. he is stranger to
that contract, but he is party to the separate document made by R in his favor.
For this second document consideration has already moved from A.

2. Narayani Devi v. Tagore Commercial Corporation

Corporation Ltd.- A held various shares of the value of Rs. 40,500. It
was agreed that A would sell his shares in favour of B and in return B
would pay to A Rs. 500 and after his death would pay Rs. 50 per month
to As widow during her life, if she survives her husband. C stood a
surety for B. some payments were made by C to A and after his death to
As widow. Thereafter the payments were stopped. As widow bought an
action against Band C to recover the amount one of the defences pleaded
was that since the plaintiff was not the party to said agreement which was
entered into by her husband and the defendants, she was not legally
entitled to sue in respect of the agreement. Rejecting the contention of the
defendant, the Calcutta High Court held that from the facts and the
circumstances of the case, an obligation in the nature of trust could be
inferred in favour of the plaintiff, and an equity having been created in
her favour she was entitled to sue even though she was not a party to the
contract. A decree was passed in her favour for the arrears of the amount
due.
3. Khwaja Muhammad Khan v. Husaini Begam There was
agreement between the father of a boy and a girl that if the girl (plaintiff
in this case) married a particular boy, the boys father (defendant in this
case ) would pay certain personal allowance known as Kharchi-i-pandan
(bettle-box expenses) or pin money to the plaintiff. It was also mentioned
that a certain property had been set aside by the defendant and this
allowance would be paid out of the income of that property. The plaintiff
married the defendants son but the defendant failed to pay the allowance
agreed to by him. In an action by plaintiff to claim this allowance, the
defendant contended that his contract to pay the allowance had been
made only with the plaintiffs father and not with the plaintiff, she being a
stranger to the contract cannot sue.

19
Doctrine of Privity of Contract

Chapter 4

20
 Doctrine of Privity of Contract

Comparative Study

Privity of Contract in Nepal :

Legal Provision Nepal Contract Act, 2056 is the law dealing with the provisions
regarding the contract. Nepal Contract Act, 2056 has dealt with the provision
regarding the doctrine of Privity of contract.
Section 7820 of NCA, 2056 explicitly mentions that only the contractual
parties have the rights to have the contract performed. It is the basic law
which gives the right of enforceability exclusively to the parties who have
entered into the contract with each other.
However, on the other hand, Nepalese legal provision has also upheld the
exceptions to the doctrine. The provison21 of Section 78 of NCA, 2056 has
ensured the right to a beneficiary of the contract. The person who is benefited
by the contract has the right to enforce the contract. Similarly, Section 7722 of
NCA, 2056 has upheld the exception by allowing the agent, who is a third party
to contract, to perform the contractual liabilities. But, its provison limits such
performance or enforceability by mentioning that it would be done only by
taking the consent of the other party.

New Zealand

The New Zealand Contracts (Privity) Act 1982, does not limit
enforceability by a beneficiary to express promises only. It reverses the onus of
proof by requiring that the parties to the contract have to establish that their
promise was not intended to have the effect of creating a legally enforceable
obligation in favour of the third party. It requires that the third party must be
sufficiently designated in the contract. Parties to the contract cannot vary or
alter the promises benefiting the third person after he has materially altered his
position in reliance on the promise, or has obtained judgment or award on the
promise. A further factor to support the third party rule in English law is the fact
that the legal systems of most of the member states of the European Union
recognise and enforce the rights of third party beneficiaries under contracts.

20
Only a person who is a party to a contract may demand the execution of that contract from other party.
21
Provided that, in case the contract has been signed for the benefit of any person, such person may demand
the execution of that contract even if he/she is not a party to that contract.
22
Person to execute contract: Except when the person concluding contract is under the obligation to execute
the contract, he/she may have it executed by his agent or a person appointed by him/her or any other person
on his/her behalf.

21
 Doctrine of Privity of Contract

United Kingdom

The common law did not recognize third party beneficiary rights. The leading
authority was Beswick V. Beswick. The U.K. recently adopted detailed
legislation, the contracts (Right of Third Parties) Act 1999, abrogating the rule
of privity of contract for third party beneficiaries. The U.K.s 1999 Act was
modeled in part on the New Zealand Contracts (Privity) Act 1982.Calls for
reform in the area; however, date back to at least 1937 with the
recommendations of the English Law Revision Committee. This earlier call for
reform was not implemented. In 1991, the Law Commission (for England and
Wales) put forward for discussion in a consultation paper proposals for
reforming the privity rule and subsequently recommended a detailed legislative
scheme in its final report in 1996.An important consideration behind its
recommendation for detailed legislative reform was the fact that although the
House of Lords had been highly critical of the third party rule in English law it
had declined on a number of occasions to reconsider it. The U.Ks 1999 Act
essentially replicates the recommendations in the Law Commissions 1996
report. The 1999 Act has been generally well-received. In contrast, the U.K. Act
offers a greater balancing of third party interests with those of the contracting
parties. It provides that where a third party right arises under the terms of the
contract, the parties to the contract may not vary or rescind it without the
consent of the third party once:
(i) the third party has communicated his assent to the term to the promisor; or
(ii) the promisor is aware that the third party has relied on the term; (iii) the
promisor could reasonably foresee that the third party would rely on the term
and the third party has relied on the term.

22
 Doctrine of Privity of Contract

Findings and Suggestion:
Need for codification of supplementary principles:
As the preamble of Indian Contract Act, 1872 says, this Act does not profess to
be a complete Code dealing with the law relating to contracts. The legislature,
while enacting this Act, did not intend to exhaustively codify the whole of law
of contract to be applied by Courts. Consequently, matters on which it is silent
the courts have had to resort to the rules of English Common law as principles
of justice, equity and good conscience. According to Law Commission Report
this reliance on the principles of English law to supply the deficiencies of Indian
enactment is not conducive to certainty or simplicity of the law. It is preferable
to add to the Act the English common law principles which have been applied
by our courts for nearly a century, so that it may not be necessary to refer to the
English law in many cases.

From the above discussion we find that there is no reason why the reform
should not be welcomed.

A rigid adherence to the doctrine of privity is bound to cause hardship. The

present state of relevant Indian law is not certain and is still evolving.
Exceptions which have been recognized by our judiciary and legislature do not
cover all cases of hardship and thus enhance the confusion of layman.
According to 13th Law Commission Report, 1958, the better course would be to
adopt a general exception to cover all cases of contracts conferring benefits
upon 3rd parties and dispense with the particular instances where the rule of
privity should not apply40. The student is in consonance with the
recommendation of Law Revision Committee that a separate section be

23
 Doctrine of Privity of Contract

incorporated as section 37 A, which is similar to The Contracts (Rights of Third

Parties) Act, 1999. It should read as follows:

Section 37 A - Benefits conferred on third parties:

1. Where a contract expressly confers a benefit directly on a third party, then,

unless the contract otherwise provides, which shall be enforceable by the third
party in his own name, subject to any defences that would have been valid
between the contracting parties.

2. Where a contract expressly conferring a benefit directly upon a third party

has been adopted, expressly or impliedly, by a third party, the parties to the
contract can not substitute a new contract for it or rescind or alter it so as to
affect the rights of the third party.

There are four possible reform options23:

(a) Judicial Development of circumvention of the privity doctrine.

(b) Legislative exceptions to the privity doctrine to be made in specific

instances.

(c) Adopting a general legislative provision that no third party should be denied
enforcement of a contract made for his benefit on the grounds of lack of privity.

(d) Reform by means of detailed legislative scheme

Each option has its own pros and cons. We are aware that options (a) and (b)
have the advantage of being flexible and can address the needs of specific
circumstances. Their principal shortcoming is that they both do not deal with
the privity doctrine within a comprehensive, systematic and coherent scheme.
The problem is even more delicate in option (a) where the courts would only be
able to act when an appropriate case arises. For option (b), the creation of
specific statutory exceptions will inevitably complicate an area of law which is
already generally regarded as technical, artificial and complex. Option (c) may
be simple to implement, but it is not feasible since it leaves too many
fundamental questions unanswered and would create considerable uncertainty in
its operation.Option (d) which speaks of a comprehensive reform of the privity

23
http://www.hkreform.gov.hk/en/docs/rprivity-e.pdf .These options are taken from Law Commission Report
from various common law countries.

24
 Doctrine of Privity of Contract

doctrine would provide certainty, clarity and coherent body of law, which is not
available under the other options and hence much suited to the issue.

SUGGESTIONS
The student suggests reform of general rule that only the parties to a contract
may enforce rights there under, but not the complete abolition of the rule.

There is a need for a clear and straightforward legislative scheme subject to

the manifest intentions of the parties to an agreement, the parties can confer
legally enforceable rights or benefits on a third party under that agreement.

Conclusion:
During the project the student finds that hypothesis is proved right and it is well
illustrated in the above project. It is hereby concluded that the idea behind the
very concept of Doctrine of Privity of contract is itself vague and not suited to
the modern context . The student is against the retention of the rigours of this
doctrine but simply abolishing the doctrine of privity or to ignore it would not
solve the crisis and instead pose a major challenge to the legal system. So, there
is a strong necessity to redefine it.

Although it has been in existence in many common law systems in the world
since a long time, so challenging and changing it in its entirety wouldnt be
justified. What is required is to modify the provisions by creating

(1) A separate section as per recommendation of the 13th Indian Law

Commission Report which may be helpful to diminish the hardships created by
this doctrine ,or

(2) Enacting a new legislation giving rights to a stranger to the contract in

certain qualified circumstances which might be an alternative to it.

25
 Doctrine of Privity of Contract

Bibliography
Article
Robert Flannigan, Privity-The End Of An Era (Error),vol.103, Law Quarterly
Review, (Reprint, 2001),564-593. In this article, the doctrine of privity is
analysed for its consistency with various theories. Its is determined that the
doctrine cannot be justified on any theory of contract law, so the creation of the
doctrine was an error and it is time now to end the era of its operation.

Books
1. Avtar Singh, Law of Contract and Specific Relief, Eastern Book
Company, Lucknow, (19thedn.Reprint, 2006). This book deals with
the scope and applicability of the provisions of Indian Contract Act,
1872 and a very large number of cases which came before the courts
during all those year. In the absence of any statutory changes, one has
only to look at court decision for finding out any developments and
trends.
2. Dr. L.R. Singh , The Doctrine of Privity of Contract under the
Indian Law, (D.Phil. Thesis, University of Allahabad, 1994),Global
Publication, Allahabad, (1stedn. 1999). This thesis discuss the present
position of the doctrine of privity of contract and exceptions to the
doctrine and the need for redefining it to suit the modern context.
3. Pollock & Mulla, Indian Contract & Specific Relief Acts,
LexisNexis Butterworths, New Delhi (13th edn. 2006). This book
deals with the Law of Contract and its principles which have gone
through changes prompted by a desire of preventing injustice and to
satisfy expectations of parties and demands of commercial
expediency. The student relied to some extent for project on this
book, according to which the doctrine.

Web Resources

26
 Doctrine of Privity of Contract

1. 13th Law Commission Report(Contract Act,1872), 1958 , available at

http://lawcommissionofindia.nic.in/1-50/Report13.pdf (Last visited on Feb. 22,
2015). This report elaborates about the working and development of the Indian
Contract Act,1872 and focuses on the scope of further development of the
anomalies in working of certain areas like doctrine of consideration, doctrine of
privity and quasicontract of it.

2. Neelabh Shreesh et al, Privity of Contract: Logic, Experience and

Expansion, ,available at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1834363 (Last visited on
feb. 28 2015). In this article, it is suggested by the author that there is a need to
clear the ambiguity regarding doctrine of privity. The current statutory
provisions should be modified to diminish the rigidity of doctrine.

3. Subha Narayan ,Privity of Contract,( January 2, 1988), available at

http://jurisonline.in/2008/07/privity-of-contract/ (Last visited on feb. 28,2015).
This article says that the Indian Contract Act,1872 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.

27
Doctrine of Privity of Contract

28