PRIVITY OF CONTRACT

INTRODUCTION: -
The rule of “privity of contract” which means that a stranger to contract
cannot sue has taken firm roots in the English common Law. But the
principle Has been criticised (1) generally. 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 stated: -
Where a contract by its express terms confers a benefit directly on a
third party. The third party shall be entitled to enforce the provision in his
own name, provided the promisor shall be entitled to raise against the
third party any defence that would have been valid against the promisor
Lord Justice DENNING has also criticised the rule in a number of cases
(2), in one of which his lordship observed.
The privity principle has never been able entirely supplant another
principle whose roots go much deeper. I mean the principle that a man
who makes a deliberate promise which is intended to be binding, under
good consideration, must keep his promise; and the court will hold him to
it not only at the suit of the party who gave the consideration, but also at
the suit of the one who was not a party to the contract, provided that it
was made for his benefit and that he has a sufficient interest to entitle
him to enforce it subject always, of course, to any defences that may be
on the writs.

(1) Professor Corbin, contract for the benefit of third person, (1930) 46 LQR 12. Andrew
Tottenhorn, third party Contracts-Pragmatism from the law commission, 196 JBL
602; Peter Kincaid, privity reform in England, (2000) 116 LQR 43: M.H. Ogilvie,
Privity of Contract in the Supreme Court of Canada: Fare Thee Well or Welcome
Back, 2002 JBL 163.
(2) (2) Smith and Snipes Hall Farm LTD vs River Douglas Catchment Board, (1949) 2
KB 500; Drive yourself hire company(London) vs Strutt, (1954) 1 QB 250;(1953)

In the subsequent case of BESWICK VS BESWICK (4), the court of

appeal adopted the same approach. In this case:
B was a coal merchant. The defendant was assisting him in his
business, B entered into an agreement with the defendant by which the
business was to be transferred to the defendant. B was to be employed
in it as a consultant for his life and after his death the defendant was to
pay to his widow an annuity of 5euro per week, which was to come out
of the business. After B’s death, the defendant paid B’s widow only one
sum of 5euro. The widow brought an action to recover the arrears of the
annuity and also to get specific performance of the agreement.
It was held that she was entitled to enforce the agreement. Thus the
plaintiff was allowed to enforce the agreement in her personal capacity,
although was not a party to it and it was considered not necessary to
infer a trust in favour of the plaintiff. Lord Denning MR concluded with
the words:
Where a contract is made for the benefit of a third person who has a
legitimate interest to enforce it, it can be enforced by the third person in
the name of the contracting party or jointly with him or, if he refuses to
join, by adding him as a defendant. In that sense, and it is very real
sense, the third person has a right arising by way of contract. He has an
interest which will be protected by law. The observations to the
contrary…are in my opinion erroneous. It is different when a third person
has no legitimate interest, as when he is seeking to enforce the
maintenance of prices to the public disadvantage, as in Dunlop
Pneumatic Tyre v Selfridge & Co Ltd (3) or when he is seeking to rely
not on any right given to him by the contract, but on an exemption
clause, seeking to exempt himself from his just liability.
The case shows that a reform, as was recommended by the Law
Revision Committee in 1937, is long overdue and if Parliament takes any
step in this respect that would hardly be revolutionary.
(3) 1915 AC 847
(4) 1968 AC 58: (1967) 3 WLR 932: (1967) 2 A11 ER 1197

DECISSIONS NOT FOLLOWING ENGLISH LAW

There is however, another line in thinking also which is mainly based
upon an observation of the Privy Council in Nawab khwaja Muhammad
Khan vs Nawab Hussaini Begum(14). Their Lordships observed:
I India and among communities circumstanced as the Mahommedans,
Among whom marriages are contracted for minors by parents and
guardians it might be serious injustice if the common law doctrine was
applied to agreements or arrangements entered into in connection with
such contracts.
This statement has been taken by Some High Courts as laying down the
rule that Indian courts are not bound by the rule in Tweddle v Atkinson
(15)
Accordingly, it has been observed by the Madras High court. (16)

There is ample authority for the proposition that in the country, and
indeed in a certain class of cases in England where a contract is made
between A and B for the benefit of C. C is entitled to sue the defaulting
party. It is unnecessary to cite authorities, but the principle is firmly
established for this country by this decision of the Privy Council in
Nawab Khwaja Muhammad khan vs Nawab Hussaini Begum. (17)

Similarly, the Calcutta High Court observed.(18) Nor is there anything in

the Indian Contract Act, which prevents the recognition of a right in a
third party to enforce a contract made by others, which contains a
provision for his benefit.

(14) (1909-10) 37 IA 152: (1909-10) 12 Bom LR 638

(15) 123 ER 762: 1 B&S 23,393: LJ QB 218: LT 46
(16) Munisami Naicker vs Vedachala Naicker, AIR 1928 Mad 23
(17) (1909-10) 37 IA 152: (1909-10) 12 BOM LR 638.
(18) KSHIRODEBIHARI DUTTA VS MANGOBINDA PANDA, ILR (1934) 61 Cal 841: AIR 1934
Cal 682.

Again, JENKINS CJ said in another important case. (19) We now

have ample authority for saying that the administration of justice in
British India is not to be in any way hampered by the doctrine laid
down in Tweddle vs Atkinson.
Supreme court upholds privity
The supreme court of India has expressed itself in favour of the rule in Tweddle vs
Atkinson. In M.C Chacko vs State Bank of Travancore, Shah Ag. CJ (afterwards
CJ) Endorsed the statement of RANKIN CJ in Krishna lal sadhu vs Promila Bala
Dasi (20) and after referring to the observation of LORD HALDANE in Dunlop vs
Selfridge, said:

The Judicial committee applied that rule in Nawab khwaja Muhammad khan vs
Nawab hussaini Begum. In a later case, Jamna Das vs Pandit Ram Autar
Pande, (21) the judicial committee pointed out that the purchaser’s 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 case of the
beneficiary under a trust or in the case of family arrangement, no right may be
enforced by a person who is not a party to contract.

THE FACT OF THE CASE WERE AS FOLLOWS: -

The Highland Bank was indebted to the State Bank of Travancore under an
overdraft. One M was the manager of the Highland Bank and his father K had
guaranteed the repayment of the overdraft. K gifted his properties to the members of
his family. The gift deed provided that the liability, if any, under the guarantee should
be met by M either from the bank or from the share of property gifted to him. The
State Bank attempted to hold M liable under this provision of the deed.
But he was held not liable. “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 I settled
law that a person not a part to contract cannot enforce the terms of the contract.”
The representatives who held the properties of K would have been liable to pay out
of the property if the action against them had not been time barred.

(19) Debnarayan Datt vs Chunilal Ghose, ILR (1914) 41 Cal 137

(20) AIR 1928 Cal 518: ILR (1928) 55 Cal 1315

(21) (1911-12) 39 IA 7: ILR (1911-12) 34 A11 63.

Another such observation is to be seen through the words

of STEYN LJ in Darlington Borough Council v Wiltshire
Northern Limited. (5)
“The case for recognizing a contract for the benefit of a third party is
simple and straightforward. The autonomy of the will of the parties
should be respected. The law of contract should give effect to the
reasonable expectations of contracting parties. Principle certainly
requires that a burden should not be imposed on a third party without his
consent. But there is no doctrinal, logical or policy reason why the law
should deny effectiveness to a contract for the benefit of a third party
where that is the expressed intention of the parties. Moreover, often the
parties, and particularly third parties, organize their affairs on the faith of
the contract. They rely on the contract. It is therefore unjust to deny
effectiveness to such contract. I will not struggle further with a point
since nobody asserts the contrary….”

But, the House of Lords did not approve the approach adopted by Lord
Denning MR and found for the plaintiff on a different ground.(6) Lord
Reid said that the plaintiff - “in her personal capacity has no right to sue,
but she has a right as administrative of her husband’s estate to acquire
the appellant to perform his obligation under the agreement”. Lord
Pearce put it like this: “the estate (though not the widow personally) can
enforce it.”(7)
In some earlier cases also the HOUSE OF LORDS showed no preference for Lord
DENNING’S approach. For example, in Scruttons Ltd Vs Midland Silicones Ltd
referring to the argument that the orthodox view which crystallized a century ago in
Tweddle v Atkinson (1861) and finally established in Dunlop v Selfridge (1915)
should be rejected, Viscount Simond said that “certain statements which appear to
support in recent case such as Smith v River Douglas Catchment Board and
White v John Warwick & Co. Ltd must be rejected. If the principle of jus
quaesitum tertio is to be introduced into our law, it must be done by parliament after
due consideration of its merits and demerits”.

(5) (1995) 3 A11 ER 895 at p. 903-04 (CA)

(6) Beswick v Beswick, 1968 AC 58: (1967) 3 WLR 932: (1967) 2 A11 ER 1197

(7) As stated in Anson, THE LAW OF CONTRACT, 388 (23 RD Edn by A.G. Guest, 1971)

POSITION IN INDIA: Decisions following English Law

In India also there has been a great divergence of opinion in the courts
as to how far a stranger to a contract can enforce it. There are many
decided cases which declare that a contract cannot be enforced by a
person who is not a party to it and that the rule in Tweddle v
Atkinson(8) is a much applicable in India as it is in England. But there is
no provision in the Contract Act either for or against the rule. The Privy
Council extended the rule to India in its decision in Jamna Das v Pandit
Ram Avtar Pande.
A borrowed Rs 40,000 by executing a mortgage of the zamindari in
favour of B. Subsequently she sold the property to C for Rs 44,000 and
allowed C, the purchaser, to retain Rs 40,000 of the price in order to
redeem the mortgage if he thought fit B sued C for the recovery of the
mortgage money, but he could not succeed because he was no party to
the agreement between A and B.
LORD MACNAUGHTAN, in his very short judgement, said that the
undertaking to pay back the mortgagee was given by the defendant to
his vendor. “The mortgagee has no right to avail himself of that. He was
no party to the sale. The purchaser entered into no contract with him,
and the purchaser is not personally bound to pay this mortgage debt.”
Thus, where all that appears is that a person transfers property to
another and stipulates for the payment of money to a third person, a suit
to enforce that stipulation by the third person will not lie.(9) But the party
making a contract may sue for specific performance for the benefit of the
third party. Similarly, where on a lease of certain muafi land, the lessees
undertook, as between themselves and their lessor, to be responsible for
the payment to the zamindar of certain sums which the muafidar was
primarily bound to pay, it was held that the zamindar could not enforce
this covenant by a suit against the lessees.(10) In still another case,(11)
the plaintiff could not get a decree against the appellant for his salary on
the basis of an agreement entered into by the plaintiff with another
person.
(8) 123 ER 762: 1 B&S 23,393: 30 LJ QB 218:4LT 468

(9) Subbu Chetti v Arunachalam Chettiar, ILR (1930) 53 Mad 270; AIR 1930 Mad 382.

(10) Mangal Sen v Mohd Hussain Husain, ILR (1915) 37 A11 115

(11) State of Bihar v Charanjitlal Chadha, AIR 1960 pat 139

In the opinion of RANKIN CJ this seems to be the effect of the

Contract Act itself. Krishna Lal Sadhu v Promila Bala Dasi(12) He
observed:
Not only, however, is there nothing in section 2 to encourage the idea
that contracts can be enforced by a person who is not a party to the
contract, but this notion is rigidly excluded by the definition of “promisor”
and “promisee”.
Consequently, a Hindu assured’s wife’s action to recover the money due
under her deceased husband’s policy was rejected because she though
a nominee under the policy, was not a party to the contract between the
deceased and the insurance company and no interest passed to her
merely because she was named in the policy. (13)

(12) AIR 1928 Cal 518 ILR (1928) 55 Cal 1315

(13) Other example: - Protapmull Rameswar v State of W.B (1956) 61 CWN 78

EXCEPTIONS OF PRIVITY OF CONTRACT: -

In Indian law the absolute application of this doctrine has not been
accepted and therefore there may be some certain exceptions already
created or may be created to this doctrine.
In case of such exception this doctrine shall not apply and the other
person is entitled to enforce the contract.

(1) WHEN THE TRUST OR CHARGE HAS BEEN CREATED: -

A person who is not the party to a contract will be entitled to enforce it if
the trust or charge is created in his favour. In case of khwaja
Mohammad Khan v Hussaini Begum and Rana Uma Nath Baksh
Singh v Jang Bahadur this concept and exception has been recognized
by the court.

(2) AGREEMENT OF MARRIAGE SETTLEMENT: -

In respect of the agreement of marriage settlement the doctrine of privity
of contract does not apply thus an agreement entered into by the
parents or guardian can be enforced by such person for whose marriage
the agreement was made by the parents or guardians.
It means the person for whose marriage an agreement of marriage is
entered into by the parents or guardians cannot be prevented from
enforcing this contract on this basis that he was not the party recognized
in case of Rose Fernandez v Joseph and Draupati v Jaspat Rai
(1905)

(3) PARTITION OF FAMILY AND OTHER FAMILY AGREEMENT: -

Agreement to the family partition or other family settlement constitute an
exception to privity of contract. Thus, if there is partition of family and in
such partition some certain property is reserved or some provisions of it
for the person is made than such person will be entitled to claim for his
benefit, though he was not the party to contract or partition of the family.

(4) COVENENT RUNNING WITH THE LAND: -

If any covenant is attached with the land at the time of transfer of such
land, the transferee will be bound by the contract or shall be entitle for
the benefit of such covenant though they are not the party to the
contract. Section 40 of the TRANSFER OF PROPERTY ACT, Is good
example on this point.

(5) IN CASE OF ACKNOWLEDGEMEMT OR ESTOPPEL: -

If any third person makes acknowledgement for payment of money on
behalf of the debtor to the creditor, creditor will be entitled to recover the
money from him, though such 3rd person was not a party to the contract.
Section 41 of the INDIAN CONTRACT ACT, recognizes this concept. In
case of negotiable instruments (cheque, bill of exchange, promissory
note, etc.). The doctrine of privity to contract is not applicable in case of
negotiable instruments.

(6) IN CASE OF AGENCY: -

The doctrine of privity of contract is not applicable in cases of agency.
Thus, the principal is bound by act done by his agent or he is entitled to
compel the other party with whom his agent entered into the contract.
The principal is bound to perform the contract though he was not directly
part to the contract.

CONTENTS
(1) INTRODUCTION…………………................................. 1
(2) CASE OF BESWICK V BESWICK……………………. 2

(3) CASE OF DARLINGTON BOROUGH COUNCIL V

WILTSHIER NORTHERN LTD………………………… 3

(4) POSITION IN INDIA…………………………………...... 4

(5) DECISSIONS NOT FOLLOWNIG ENGLISH LAW...... 6

(6) SUPREME COURT UPHOLDS PRIVITY……………... 7

(7) EXCEPTIONS TO PRIVITY RULE………………......... 8