DR.

RAM MANOHAR LOHIYA NATIONAL LAW UNVERSITY, LUCKNOW

SESSION 2021-22

CONTRACT ACT I: FINAL DRAFT

TITLE: PRIVITY OF CONTRACT AND ITS LEGAL POSITION IN

INDIA

SUBMITTED BY: SUBMITTED TO:

NAME: KALPNA NAME: DR. PRIYA ANURAGINI

ENROLLMENT NO.: 210101061 POSITION: ASSISSTANT

PROFFESSOR LAW
SECTION: A
INSTITUTE: DR. RAM MANOHAR
2ND SEMESTER (1ST YEAR) LOHIYA NATIONAL LAW
2021-2026 UNVERSITY, LUCKNOW
 DECLARATION

I declare that the project entitled “privity of contract and its legal position in India”
is the outcome of my work conducted under the supervision of Ms. Priya
Anuragini at Dr. Ram Manohar Lohiya National law University, Lucknow. I
further declare that to the best of my knowledge the project doesn’t contain any
part of the submitted work, which has been submitted for the award of any degree
or diploma either in this university or in any other university without proper
citation. I am fully responsible for the contents of my project report.

Kalpna
AIM:

To understand the “Privity of Contract” Doctrine and its legal applications in India

RESEARCH METHODOLOGY:

For the purpose of this research secondary literature has been reviewed.

RESEARCH QUESTIONS:

1. What do we mean by privity of contract?

2. What is the legal position of privity of contract in India?
3. Is privity of contract doctrine is suitable for the current scenario or it needs
some reforms?
 PRIVITY OF CONTRACT AND ITS
LEGAL APPLICATION IN INDIA

INTRODUCTION

T
his paper deals with the privity of contract and its legal application in India. The
doctrine of privity of contract is a common law rule that holds that a stranger to a
contract cannot exist. It is one of the contentious principles in contract law. Despite the
fact that the judicial declaration was very well decided, there is still a controversy between
academia and the Judiciary. According to this doctrine, it is rather typical for a third party or
stranger to be burdened with duty or responsibilities based on the failure of contract parties to
execute their duties and obligations. The Privity Doctrines states that the scope of the contract is
limited and only the contracting or interested party is accountable for obligations and
responsibilities towards the contract. However, as the concept evolves, there is a specific
exception to the idea where the stranger can be held accountable for the responsibilities or the
duties towards the contracting party or the stranger can also sue one of the parties upon the non-
fulfillment of the duties or responsibilities by the party.

This project would be divided into several different sections. First section would deal with the
definition and meaning of privity of contract. Second section would look into its development in
England and then in India. The third part would essentially deal with the legal application of this
doctrine in India. In this part we will also deal with the exceptions to the privity of contract. The
last part deals with the criticisms associated with this doctrine and also some suggestions to
overcome these criticisms.
 WHAT IS PRIVITY OF CONTRACT?

As a requirement for a legal contract, the party should have the intent to engage into the contract.
As a result, only the contracting parties may sue or be sued for breach of contract or non-
performance of the contract. In English law, this notion is known as Privity of Contract and is
considered a common law principle. It expressly permits the contract's only party to sue or be
sued and expressly bans them from enforcing their rights and responsibilities against outsiders. It
also precludes suing a third party who profits from the arrangement. From a legal standpoint, it
may be argued that privity of contract is founded on the interest principle, which states that only
parties to the contract have the right to safeguard their rights and responsibilities against each
other.

An illustration can help to explain it better:

If A promises to provide products to B in exchange for Rs. 500 and if any of them fails to follow
through on their pledges, then they both have the right to sue each other for non-performance or
violation of contract and no one else (C) can sue or be sued.

A B

PRODUCT Rs. 500

C
This theory assures that a stranger to a contract cannot sue or be sued by the contract's parties.
However, over time, it became clear that the concept is too inflexible to deal with today's social
environment, because a contract impacts not just the parties to it, but also society as a whole. As
a result, various restrictions (or exceptions) were developed and applied to the theory by both the
legislature and the judiciary.

ASPECTS OF THIS DOCTRINE

There are two important aspects of this doctrine which are as follows:

1. BURDERN ASPECT: this aspect implies that parties to the contract cannot impose their
liabilities on the third person.
2. BENEFIT ASPECT: this aspect implies that a third party cannot take advantage of the
benefit arising out of the contract and also could not sue any of the parties of that
contract. This aspect has been subjected to many criticisms.

HISTORY OF DOCTRINE OF PRIVITY TO CONTRACT

This doctrine originally came from England. This theory was utilized for the first time in the case
of Jordan v. Jordan1. The suit of a nonparty to a pledge did not lie in this case. However, in
Lever v. Heys2, the court reversed Jordan v. Jordan's ruling and accepted the stranger's claim on
a contract. However, in Taylor v. Foster3, the court reiterated Jordan's ruling and applied the law
of privity of contract, preventing a stranger to the relationship from bringing an action for breach
of contract.

1
(1594) Cro. Eliz. 369. Cited from Dr.L.R.Singh, supra n. 7 p.4.
2
(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
3
(1601) Cro. Eliz. 776,807.Cited from Treitel,id
Tweddle v. Atkinson4 was the case in which the Court of Queen's Bench ultimately established
the law of privity of contract in 1861. In this case, the idea of contract privity took on a more
concrete form.

The court ruling makes it obvious that the idea of privity of contract establishes two broad rules
of contract law.

1. To begin, it attempts to state that a stranger to a contract cannot sue.

2. Second, it specifies that a stranger to a contract is not bound by it.

In the case Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd5, this doctrine was finally
approved by the House of Lords in England and this became a precedent for the cases there on.
However this doctrine was not absolute and certain limitations can be put on this doctrine.

POSITION IN INDIA

In India, there is no provision in the Contract Act that supports or opposes the norm. In Indian
courts, there has been a great deal of disagreement on how far a stranger to a contract may
enforce it. There are several determined instances that state that a contract cannot be enforced by
someone who is not a party to it, and that the rule established in Tweddle v. Atkinson 6 (Supra)
applies equally in India and in England. However, the courts in India have introduced several
exceptions to the norm throughout time, and there are numerous decisions in which it was held
that a beneficiary (3rd person) under a trust, family arrangement, and under numerous laws, he
has the right to sue or enforce his rights.

Decisions in Favor of the Contract of privity Rule:

4
(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
5
(1915) 1 Q.B. 250. Cited from Treitel, supra n.9.
6
(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
The Privy Council first applied the rule in Jamna Das v. Ram Avtar7 [(1911) ILR 34 AII 63],
where A borrowed Rs. 40,000 by mortgaging her Zamindari in favour of B. Following that, A
sold the property to C for Rs. 44,000 of the purchase amount in order to repay the mortgage if he
saw fit. B sued C to collect the mortgage funds, but he was unable to prevail since he was not a
party to the arrangement between A and B.

The Privy Council ruled that the defendant gave his vendor a promise to repay the mortgagee.
The mortgagee has no authority to take advantage of anything to which he was not a party. The
purchaser made no contract with him, and the purchaser is not personally obligated to pay B his
mortgage debt (LORD MACNAUGHTAN).

This line of thought has been pursued in a number of situations. As a result, a wife's action to
recover money due under her deceased husband's insurance policy was dismissed because she,
despite being a nominee under the policy, was not a party to the contract between the insurance
company and the deceased, and no interest passed to her simply because she was named in the
policy (Pratapmull v. State of west Bengal8 [(1957) 61 Cal WN 78]).

According to BANKIN CJ, this appears to be the impact of the Contract Act itself. His lordships
stated in Krishna v. Pamila Bala9 (AIR 1928 Cal 518): "Not only is there nothing in Section 2d
to foster the concept that contracts might be enforced by a person who is not a party to the
contract, but this notion is strictly precluded by the definition of 'promisor' and 'promisee'...

In M. C. CHAKO v. State Bank of Travancore10, the Supreme Court of India ruled in support of
the Privity rule established in the Atkinson case (Supra) (AIR 1969 SC 504). In this case, the
Highland Bank was owed to the S. B. of Travancore on account of an overdraft. The Highland
Bank's manager, M, and his father, K, had guaranteed the repayment of the overdraft.

He bequeathed his holdings to members of his family. The gift deed stipulated that "any
responsibility, if any, should be fulfilled." by M, either from the bank or from a gift of property."

7
[(1911) ILR 34 AII 63],
8
[(1957) 61 Cal WN 78]
9
AIR 1928 Cal 518
10
1970 AIR 500
M was held accountable by the State Bank. However, M was not responsible under this term of
the deed. According to the Supreme Court:

"S. B. of Travancore, as a non-party to the transaction, cannot enforce the covenants and is
bound by them." It is a well-established legal principle that a person who is not a party to the
contract cannot enforce its provisions."

DECISIONS NOT FOLLOWING ENGLISH RULES:

Another school of thought is based on a comment made by the Privy Council in Khwaja
Muhammad Khan v. Husaini Begum11. Their Lordships remarked that in India and among
societies such as the mahommedans, where weddings are formed for children by parents and
guardians, applying common law doctrine to agreements or arrangements entered into in
conjunction with such contracts might result in great injustice.

Some High Courts saw this comment as establishing the norm that Indian Courts are not bound
by the ruling in Tweddle v. Atkinson.

THE SUPREME COURT AFFIRMS THE RIGHT TO PRIVACY:

In M.C. Chako v. State Bank of Travancore12, the Supreme Court of India affirmed the ruling in
Tweddle v. Atkinson. In this case, SHAH AG, CJ agreed with RANKIN CJ's remark in Krishna
Lal Sahu v. Promila Bala Dasi13, and after citing to Lord HALDANE's comment in Dunlop v.
Selfridge14, said: "The Judicial Committee applied that ruling in Khwaja Muhammad Khan v.
Husaini Begum."

The judicial committee pointed out in a subsequent case, Jamna Das v. Ram Autar,15 that the
purchaser's promise to pay off a mortgage could not be enforced by the mortgagee, who was not

11
(1910) 37 IA 152: 12 Bom LR 638
12
1970 AIR 500
13
AIR 1928 Cal 518.
14
Supra n.12.
15
39 IA 7 (PC 1911): 21 MLJ 1158.
a party to the transaction. It must thus be assumed that, save in the event of a beneficiary under a
trust or a family arrangement, no claim may be asserted by a person who is not a party to the
contract.

The Supreme Court ruled that because the State Bank was not a party to the deed, it was not
obligated by the covenants in the deed and could not enforce them. It is well established that a
person who is not a party to a contract cannot enforce the contract's provisions.

CRITICISMS

The theory of privity has been criticized in the following ways:

 First, it causes unfairness to a third party who may have depended on the contract to
govern his affairs, upsetting the reasonable expectations of the third party to get benefit
under the arrangement.
 Second, it defies the contracting parties' intents when they meant to provide some
advantage to the third party.
 Thirdly, In case, third party suffers any loss then he has no choice to demand
compensation due to this privity regulation.
 Fourth, while such a third party who suffers a loss cannot sue, the promisee who has
incurred no loss may.
 Fifthly, this doctrine is very complicated and ambiguous. The judiciary has made chinks
in this doctrine throughout time to weaken its rigidity, and it has been reduced to a
susceptible and weak premise.

To avoid injustice, the courts have developed exceptions to the doctrine, as we can see that with
the passage of time, exceptions are continuously increasing, demonstrating its basic deficiencies
and demonstrating that the existing exceptions have not solved the problem in its entirety, and
the scope of further amendments is still lingering, threatening the very existence of this doctrine.

EXCEPTION:
The notion of contract privity is neither rigid nor absolute, and it is open to specific exceptions.
The exceptions are divided into two categories: non-statutory and statutory.

NON-STATUATORY EXCEPTIONS:

[1]. TRUST

Trust is the most typical exception. When trust is developed in a contract in favour of third
persons, he might be held accountable for contract violation. However, while dealing with cases,
the court did not enter to determine the existence of trust based on the parties' intentions. The
circumstantial evidences must be drawn to show that trust has been formed in his favour.

[2]. AGENCY

When an agent enters into a contract with a third party, the principal is bound to that third party.
As already stated above are some laws that are founded on the law of agency and were
developed through any means. It describes the scenario in which an agent enters into a contract
with a third party on behalf of the principal. Without going into too much detail, the principal is
the real portion of the contract signed into. His agent pushed him into it. Despite being a third
party to the contract, the agency is the principal.

STATUATORY EXCEPTIONS:

There are many statutory exception in India like Indian trust act, 1882, Indian partnership act,
1932, etc.

SUGGESTIONS

Firstly, We can reform the general rule that only the parties to a contract may pursue their rights
under it, rather than completely abolishing the law.
Secondly, there is a need for a clear and transparent legislative structure under which the parties
to an agreement can transfer legally enforceable rights or advantages on a third party under that
agreement.

CONCLUSION

According to the preceding discussion, only the contracting parties are permitted to sue or be
sued, and it is expressly forbidden to exercise their rights and duties against outsiders. It also
precludes suing a third party who profits from the arrangement. We have also seen the doctrine's
two sides, namely the Benefit Aspect and the Burden Aspect.

Furthermore, we can observe that the idea has been used by courts from the early 17th century;
nonetheless, it was acknowledged in the Tweddle v. Atkinson case. The histpry of of privity of
contract and its position in India was analyzed.

The exception to the contract's privity theory was explained in the following section. The
exceptions were classified into two categories: statutory exceptions and non-statutory exceptions.
From the preceding explanation, it is clear that the concept has four major exceptions. They are
the laws of agency, trust, negligence, and partnership.

As previously stated, doctrine was implemented in England; however, the Law Revision
Committee of 1937 overturned the concept in its sixth report. With the passage of the Contracts
Act in 1999, the situation altered. As of today, strangers in England can sue or be sued for breach
of contract. In India, only the contracting parties can sue or be sued, and it is expressly forbidden
to pursue their rights and duties against strangers.