Author: Tanya Batra, B.A.LLB(H), O. P. JINDAL GLOBAL UNIVERSITY
The concept of privity of contract first arose in the middle of nineteenth century, when the common law judges reached a decisive conclusion upon the topic of contract which declared that, no one would be entitled to or bound by the terms of a contract who is not an original party. This, then came to be known as ‘The Doctrine Privity of Contract’. The doctrine of privity is a feature strictly under the Common Law. Under the English law, the doctrine of privity of contract makes it clear that no stranger to a contract is neither bound by contractual liabilities, nor can benefit from the contract. This person who is not a party to the contract, can thus not bring action on the contract. Under the Indian law, the doctrine of privity of contract has not been defined under any specific provision of the Indian Contract Act, 1872, but it equally applies in India. Sections 73, 74, and 75 of the Indian Contract Act, 1872, deal with the consequences of breach of contract. The first instance of doctrine of privity of contract was seen in the case Jordan v. Jordon (1594), but was only solidified in the case of Tweedle v. Atkinson (1861). It is to be noted that before the case of Tweedle v. Atkinson (1861), there were cases where the courts allowed a stranger’s claim on a contract, because the English law did not recognize the doctrine of privity of contract. But the doctrine of privity of contract is not limited to only its definition under the Common law, as there are other aspects to it such as its exceptions and its difference from privity of consideration. The sanctity of the contract is preserved if the parties to a contract are bound to each other and not a person outside the contract. If this doctrine were to be abolished, any and every person in our society will be able to bring action to the contract. The likelihood to make contracts will decrease, due to the fear of the person to do so.
The doctrine of privity of contract, in its essence, prevents a stranger from bringing a claim to a contract to which they are not an original party, thus making it difficult for him to benefit from the contract, nor can he be bound by contractual liabilities. The doctrine of privity of contract was established first in 1677, having been adopted by the Court of King’s Bench in Dutton v. Poole. This landmark decision also established an exception to the privity of contract, in appropriate close family relations, which will be further explained in the paper under ‘exceptions to the doctrine of privity of contract’.
In the case, a father decided to sell a piece of wood which he owned, in order to pay some money to his daughter on her marriage. Before he could do that, his son (the defendant) convinced him to refrain from doing so. The son decided to sell the piece of wood on his behalf and promised to pay the sum of £1000 to his sister upon her marriage. The daughter married after her fathers’ death, but her brother did not keep his promise. His sister then sued him for the same amount. The son was held liable on the grounds that it seemed highly inequitable to allow him from keeping the piece of wood to himself and yet deprive the plaintiff of her promised portion. The only person here who established some form of consideration, in the form of love and affection, was the father, who abstained from selling the piece of wood. Though the daughter was neither interested in the consideration nor privy to the contract, it is abundantly clear the entire object of this agreement was to provide her a portion.
The doctrine of privity of contract originated from the Common Law courts as early as the 16th century, although it was crystallized as a rule in the landmark case of Tweddle v. Atkinson (1861), and was only approved by the House of Lords in the landmark case Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd.. John Tweddle and William Guy agreed to pay £100 and £200 respectively to Tweddle’s son William (here on referred to as Tweddle Jr.), who was engaged to William Guy’s daughter, Miss Guy. William Guy died before he could carry out the payment, as well as the estate failed to pay. Mr. Atkinson, the executor of the estate of William Guy, was sued by Tweddle Jr, for the promised sum of £200. Tweddle Jr.’s suit failed as he is a stranger to to the contract, thus making him unfit to enforce the contract, although made for his benefit. Since the consideration did not move from him, the promisee, he cannot bring an action. The question arises whether Tweddle Jr.’s father could bring an action instead, but it was left unanswered. This case laid down the rule that an action cannot be brought by a promise unless the consideration for the promise moved from him, that consideration must only move from one of the contracting parties and that no stranger to a contract can derive benefits or be subject to any burdens imposed by it. Courts in India have faced multiple difference of opinions as to what extent a stranger can enforce a contract. Some believe that a contract cannot be enforced by a stranger to the contract, and wished to uphold the rule laid down in Tweddle v. Atkinson (1861), further stating that this rule should be equally applicable to India, as it is in England. Although, as mentioned earlier, the Indian Contract Act does not consist of any such provision, which could work either for or against the rule. However, in Nawab Khwaja Muhammad Khan v. Nawab Hussaini Begum case, Indian law did not follow the English law. The Lordships of the Pricy Council observed that parents or guardians often contract marriages for minors in India, which may give rise to serious injustice if such agreements entered were to be exposed to the common law rule. On this basis, High Courts in India laid down that the rule in Tweddle v. Atkinson did not bind Indian Courts, although this was later overturned and the same rule was extended to India by the Privy Council in its decision in Jamna Das v. Pandit Ram Autar Pande.
As defined under the common law, the doctrine is a combination of ‘privity’ and ‘contract’, signifying that the contracts are private in nature. It the relationship existing between two contracting parties or more. Under the English Common Law, it is made clear that no stranger can neither benefit nor suffer from a contract of which he is not a party of, implying that he cannot bring an action to the court. Two fundamental propositions were established namely, (a) the consideration must necessarily move from the promise only; (b) a contract is not enforceable by a person who is a stranger to the contract even if it is made for their benefit. As a stranger to the contract, they cannot claim any rights under it.
Although the doctrine of privity of contract is undefined under the Indian Contract Act, it is uniformly applicable in India. The first proposition, as mentioned above, is not applicable in India. There is a distinction between the two expressions, namely the ‘doctrine of privity of contract’ and the ‘doctrine of privity of consideration’. In the latter, the consideration must move from the promisee. The former signifies that person stranger to the contract cannot sue, nor can they be sued in the event of a breach of contract. The two doctrines differ from each other; however, both remain English doctrines. There may arise a situation where one may be a party to the contract but not to the consideration, as well as vice versa. Both doctrines gained significant emphasis in the landmark case of Tweddle v. Atkinson under English Law. It is not enough for the consideration to be given, but more importantly it must be given by the promisee. However, this is not followed in Indian law. Consideration can be given by a third person, as made clear by section 2(d) of the Indian Contract Act, through the expression ‘promisee or any other person’.
This was first noticed in the case of Chinnaya v. Ramayya. Here, an old lady gifted her daughter (the defendant) a property of land, with the conditions, that she (the defendant) must pay an annuity of Rs.653 to her aunt (the plaintiff), the sister of the old lady. The defendant promised to pay the required sum, however, did not do so, and was sued by her aunt who was looking to recover the sum. The only form of consideration here, is the gift of certain lands by the old lady to the defendant, for the promise made by the defendant to pay the annuity. The defendant, in order to defend herself, pointed out that there was no consideration on part of the plaintiff. Here we see that the promisee is the plaintiff, but the consideration was provided by her sister, the old lady. The court found the defendant liable to pay the annuity, as the plaintiff was already receiving the said annuity from her sister out of the estate, before she handed it over to the defendant. This meant, if the defendant failed to keep his promise, it would have deprived the plaintiff of a sum of money which she was already receiving; and not to forget that if a promise is detrimental to the promisee, it is sufficient consideration for the promise. The court thus found the promisee to have given consideration, and rightly entitled to the annuity. Samuel Wilson, American writer, wrote in favor of the rule of privity of consideration, stating that consideration moving from solely the promisee is somewhat technical, and can cause more harm than good. Thus, it was necessary to uphold this doctrine, besides that of privity of contract.
EXCEPTIONS TO THE RULE
There are several exceptions to the doctrine of privity of contract, as briefly touched upon below,
- Trust Beneficiaries:
If some interest in property or charge has been created in favor of a person, the person can enforce the contract even if he may not be party to the contract. The case of Nawab Khwaja Muhammad Khan v. Nawab Hussaini Begum (1910) decided by the Privy Council is illustrative of this principle.
Another example of this exception, under English Law is that of Gregory & Parker v. Williams, where “trust” has been used as a way of making sure a promisor does not back out from fulfilling his promise.
- Family Arrangements (Partition, Marriage)
Here an agreement regarding family arrangements is made and a provision for the person’s benefit. It is not necessary for the person to be a party to the agreement in order to take advantage of it, as was seen in the Rose Fernandez v. Joseph Gonsalves case.
- Estoppel or Acknowledgement
A third person must, as per the terms of a contract, be made payment to and acknowledged by the party as a third person. Thus, creating a biding duty towards him. Cases where the promisor is established as an agent of the third party, by acknowledgement, conduct or otherwise, are covered under this exceptio A good example of this is the case of N. Devaraja Urs v. Ramakrishniah.
- Covenants that run with land
The privity rule is yet again reformed by the principles of transfer of immovable property. Tulk v. Moxhay laid down the principle that any land purchased by a person with notice, the said person is bound by the same duties the owner previously was, created by a covenant or an agreement affecting the land, although the person was not a party to the agreement.
The rule of privity of contract has, in the English Common Law, taken firm roots. However, the doctrine has continuously been criticized on multiple occasions. Back in 1937, the Law Revision Committee criticized the doctrine and proposed it be abolished.
Lord Denning J has often criticized the rule, one of which is Beswick v. Beswick [Peter Beswick was a coal merchant, who lived with his wife, Mrs. Beswick. John Joseph Beswick, his nephew, helped him in his business. Peter Beswich and his wife were a little over 70 years of age, and his health was slowly deteriorating, making it difficult for him to work. His nephew (the defendant) wanted to get a hold of the business before his uncle passed away, so they went to a solicitor who could draw up a contract for them. The business was soon passed on to the nephew, in consideration that his uncle be employed his remaining life, as well as pay Mrs. Beswick an annuity weekly. The nephew refrained from further paying the annuity after the first time, as he did not believe it could be enforceable since Mrs. Beswick was not a party to the contract. Mrs. Beswick sued her nephew, and she was successful too in the Court of Appeal, but it was reversed when heard in the House of Lords, where the judges ruled Mrs. Beswick, as a third party, was acting outside her power. However, it was held that she, as Mr. Beswick’s administratrix, could enforce the nephew’s promise to pay her annuity] and Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd., which further proved that a reformation of the doctrine was long overdue, and reject the orthodox view of Tweddle v. Atkinson.
The second rule laid down by the doctrine of privity of contract has been widely criticized by members of judiciary, academics and even lawyers. The rule states that a contract cannot be enforced by a third party for which no consideration has been provided to him. The Law Commission recommended the doctrine be reformed in 1937 but were only able to propose a new draft bill in 1991 which was introduced to the House of Lords in December 1998, and moved on 14 June 1999 to the House of Commons, after which it received, on 11 November 1999, the Royal Assent, and immediately came into force as Contracts (Rights of Third Parties) Act 1999. The doctrine of privity of contract was reformed significantly through the Act, and with it removing the principles most criticized.
Through this Act, third parties can enforce contracts beneficial to them. A range of remedies are granted to third parties, breach of which, provides a sense of protection to the promisee as well as the promisor in situations relating to disputes with the third party, thus limiting ways which could allow alteration of the contract without the permission of the involved third party, and further allowing parties to the contract to exclude in particular the protection offered under the Act if the involvement of third parties is required to be limited.
The confusion regarding the doctrine of privity of contract has been prevalent for far too long, with mixed opinions from multiple judges, committees, etc. With the introduction of exceptions, both common law and statutory, and the Contracts (Rights of Third Parties) Act, 1999, it has become much easier dealing with the right of third parties. Yet, no change seems to have been made in Indian law. Indian law too needs to be able to recognize this doctrine and introduce a new section under the Indian Contract Act, 1872, which acknowledges the rights of third parties allowing involved third parties to enforce the contract as and when needed.
 Dutton v. Poole, Court of King’s Bench, (1677) 2 Levinz 210: 83 ER 523
 Tweddle v. Atkinson (1861) 123 ER 762
 Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd, 1915 AC 847
 Nawab Khwaja Muhammad Khan v. Nawab Hussaini Begum (1909-10) 37 IA 152
 Jamna Das v. Pandit Ram Autar Pande (1911-12) 39 IA 7: ILR (1911-12) 34 All 63
 Arthur L. Corbin, Contracts for the Benefits of Third Persons, (1930) 46 LQR 12
 Chinnaya v. Ramayya, ILR (1876-82) 4 Mad 137.
 Gregory & Parker v. Williams (1817) 3 Mer 582
 Rose Fernandez v. Joseph Gonsalves ILR (1924) 48 Bom 673
 N. Devaraja Urs v. Ramakrishniah AIR 1952 Mys 109
 Tulk v. Moxhay (1919) 88 LJKB 861 (HL)
 Beswick v. Beswick 1968 AC 58: (1967) 3 WLR 932