The Doctrine of Privity and its Exceptions

In the previous article of #TuesdayTeachings we understood aspects of consideration under section 2(d) and section 25 of the Indian Contract Act. In today’s article we will discuss the concept of The Doctine of Privity.

The doctrine of privity of contract states that the rights conferred and obligations imposed by a contract are confined to the parties of a contract. Any third person is not entitled or bound by it. Therefore, no one except the parties to a contract can sue or be sued for enforcement or breach of contract.

The doctrine has two aspects;

Firstly, no third party is entitled to receive the benefits of a contract entered into by two or more than two parties. The contract may confer some rights or benefits to any third party but that party cannot sue for claiming those rights or benefits.

For example, A makes a contract with B to pay C Rs. 1000 every month if B signs the power of attorney of his land in the name of A. Then subject to the exceptions of the doctrine, C is not entitled to recover any damages from A because C was not a party to the contract.

Secondly, no third party is liable under a contract entered into by two or more than two parties. The parties to a contract cannot impose a liability on a third party to fulfill the contract. For example, C has no liability for a contract between A and B and thus cannot be sued by either of them for the same.

This doctrine of privity was laid down in the case of Tweddle v. Atkinson. In this case, the daughter of one D was supposed to marry the plaintiff. In consideration of this intended matrimony, the plaintiff’s father and D entered into a written agreement that stated that both of them would give a certain amount to the plaintiff. D failed to do so and consequently, the plaintiff initiated action against him. It was held by the Court of Queen’s Bench that “no stranger to the consideration can take advantage of a contract although made for his benefit”. Although the sole object was the benefit of the plaintiff, he was not permitted to initiate charge because the contract was not made with him but his father.

This principle was further affirmed in Dunlop Pneumatic Tyre Co v. Selfridge & Co Ltd. Dunlop who was a tyre manufacturer made a contract with Dew, a trade purchaser for the sale of tyres at a discounted price which required that they would not resell the tyres than a listed price. The agreement also required that if any reseller intended to buy the tyres from Dew then they had to agree to a similar condition. Dew sold the tyres to Selfridge and made an agreement with them that they will not sell the tyres below the listed price or they will be liable to pay damages. Selfridge failed to fulfill the terms of the agreement and sold the tyres at a price lower than the listed price. Dunlop initiated action to receive damages. It was held by the court that Dunlop cannot recover damages from Selfridge. The court stated two reasons for the decision;

1.     Only a person who is a party to a contract can sue on it.

2.     If a person with whom a contract not in writing has been made, then to be able to enforce it, consideration must have been given by him.

The contract was made between Dew and Selfridge and thus Dunlop could not recover damages for it. This principle is applicable in India subject to certain exceptions which are discussed further in the article. The second reason is related to the doctrine of consideration which has already been discussed in the previous articles.

Position in India:

Initial cases which ultimately established the position of the doctrine of privity in India are;

 

1.     Jamna Das v. Pandit Ram Autar Pande.

X was lent Rs 40,000 by Y on the guarantee of her zamindari to Y. Consequently, the property was sold to  Z by her for Rs 44,000 wherein she allowed Z to retain Rs 40,000 of the price to repay the loan. Y sued Z for recovering the loan money. It has held by the privy council that he can not recover money from Z as he was not a party to the contract between X and Y. Lord McNaughten in his judgment said,

"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."

A similar rationale behind decisions was also seen in numerous cases of the high courts in India before Independence.

For example, State of Bihar v Charanjitlal Chadha, AIR 1960 Pat 139, Krishna Lal Sadhu v Promila Bala Dasi, etc.

 

2.     M.C. Chacko v. State Bank of Travancore

The appellant was the managing director of the Highland Bank. The appellant’s father guaranteed to pay any due amount to Kottayam Bank on behalf of Highland Bank concerning an overdraft arrangement between the two banks. He gifted all his properties to his children by way of a gift deed according to which any liability to Kottayam Bank should be met by the appellant either from the bank or from the share of the property gifted to him. The Kottayam Bank attempted to hold the appellant and his family members liable under the provisions of the deed.

It was held by the Supreme Court,

“Kottayam 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 the contract cannot subject to certain well recognised exceptions, enforce the terms of the contract: the recognised exceptions are that beneficiaries under the terms of the contract or where the contract is a part of the family arrangement may enforce the covenant.”

Exceptions

The doctrine of privity has been applicable in India although with some exceptions which have been introduced by the courts over time. Some well recognised exceptions are-

1.     Trust-

The main exception of the doctrine of privity of contract is an obligation like trust created for the benefit of another person.

For example, X started a college and made Y the trustee. The provisions of the agreement specify that the trustee would deliver the proceeds to X during his lifetime and after his death to his wife Z. After X’s death the trustee did not make good on this agreement and assumed ownership of the college. The beneficiary i.e. Z can enforce the contract to the extent of her rights in the trust deed.

To establish that trust has been created, it is important to authenticate that the promisee had an intention to enter into the contract as a trustee. Such intention might be inferred by the use of express words like trust or trustee, nearness of relationship between the promisee and the beneficiary. A charge must be created in favour of the third party.

A person in whose favour, interest, or charge in some specific property has been created through a contract may execute the contract although he is not a party to the contract. A case in point is Nawab Khwaja Muhammad Khan v. Nawab Hussaini Begum. In this case, the appellant had promised the father of the respondent to pay the respondent an allowance called kharch-i-pandan (personal allowance)- Rs500 a month in perpetuity if she marries his son. He also charged certain properties with the payment granting power to Hussaini Begum to effectuate it. The respondent and her husband separated after some time and she sued the appellant to recover her allowance. It was held that although the respondent is not a party to the contract, she is capable of enforcing her claim. In the exact words of the bench,

“the agreement executed by the defendant(appellant) specifically charges immovable property for the allowance by which he binds himself to pay to the plaintiff(respondent); she is the only person beneficially entitled under it.”

This exception was also recognized by the supreme court in the case of M.C. Chacko v. State Bank of Travancore.

 

2.     Marriage settlement, partition, or other family arrangements

A stranger to a contract may sue to enforce a benefit due under an agreement created during marriage, partition, or any other family arrangement.

For example, A makes an agreement with B regarding the marriage of A’s daughter (who has not yet attained majority) with B. Then, A’s daughter after attaining the majority can sue B for damages if he does not abide by the agreement. 

A landmark case regarding this exception is Shappu Ammal v. Subramaniyam, ILR (1910) 33 Mad 238. Two brothers entered into a contract after the partition of joint property to invest a certain amount in equal shares the maintenance of their mother. The mother was held entitled to sue her sons to have them invest in the shares in her interest even though she was not a party to a contract.

3.     Collateral Contract

A collateral contract is a contract between a third party and one of the parties of the main contract which may associate with the main contract and enable the third party liable to sue and be sued under the main contract. These kinds of contracts are used to impose obligations on any third party which is not involved in the main contract.

In a case, Charnock v. Liverpool Corpn., the plaintiff’s car was damaged and was sent to a garage by the insurance company for repairs. The repair usually takes 5 weeks however the garage took 8 weeks to repair the car. The plaintiff sued the garage and it was contended by the garage owner that the contract was with the insurance company and the plaintiff has no right to sue. It was held by the court that there was a collateral contract between the insurance company and the plaintiff and thus the plaintiff was entitled to sue the garage owner.

 

4.     Acknowledgment and Estoppel

A third party to a contract can sue a party to a contract where that particular party is supposed to pay the third party and he/she acknowledges it to that third party thereby creating a legal obligation upon him.

For example, A sells a property to B under a registered sale deed and requests B to pay a certain amount of money to C as he is A’s creditor. B makes part-payments in the starting and informs C that he/she is not able to pay the whole amount currently and it will be paid in due course of time. However, B fails to do so. C can sue B on this account. Had B not initiated payment against C then C would not have been entitled to bring action against B, but B acknowledged the promise to C by initiating payment and further informing that the remaining arrears will be paid in due time. Therefore, C is entitled to sue B for non-performance.

Another illustration in this regard, where acknowledgment by conduct can be observed is the case of Kshirode Behari Dutta v. Mangobinda Panda. In this case, the tenant and sub-tenant of a piece of land entered into an agreement according to which the sub-tenant shall pay the tenant’s rent to the owner directly. All the parties acted according to the agreement. It was held that the sub-tenant had acknowledged the agreement by conduct by acting according to it and thus now he was estopped from taking the defense that there was no direct contract between the sub-tenant and the landlord to deny his liability of paying the rent to the owner.

 

5.     Covenants running with the land

The doctrine of privity may also be relaxed in regards to principles of property law, specifically the transfer of immovable property. A person who purchases land with notice that any owner of such property is obliged to perform certain responsibilities due to an agreement or covenant shall be liable for such duties even though he might not be a party to such agreement or covenant. This principle was laid down in Tulk v. Muxhay.

This principle can be seen illustrated in the case of Smith & Snipes Hall Farm Ltd v. River Douglas Catchment Board. The board i.e. the defendants made an agreement with certain landowners adjoining the stream to maintain the banks of the stream in a good condition. The landowners paid their proportionate share. Subsequently one of the landowners sold his land to another (the first plaintiff) who in turn sold it to another person (the second plaintiff). The negligence of the board in maintaining the banks resulted in them bursting and flooding the lands. Both the plaintiffs were strangers to contracts but the court of appeal allowed them to sue the board as the whole arrangement was for the owners of the land whoever they might be.

A close study of all the cases mentioned above helps greatly in understanding this particular doctrine in detail- its elements/requirements. The next article will deal with the provisions relating to the competence of parties. Stay tuned for it!

If you have any query please feel free to contact us at lawvastutah@gmail.com.

 

BY,

LAWVASTUTAH

References:

1.     Indian Contract Act, 1872.

2.     Pollock & Mulla, The Indian Contract and Specific Relief Acts, 16th edition.

3.     Avtar Singh, Contract and Specific Relief, 12th edition.

4.     Anson’s Law of Contract, 29th edition.

5.     Halsbury’s Laws of India Contract, 2e 2015.

6.   Tweddle v. Atkinson [1861] EWHC J57, 1 B&S 393

7.   Dunlop Pneumatic Tyre Co Ltd v. Selfridge & Co Ltd [1915] UKHL 1, [1915] AC 847

8.   Jamna Das v. Pandit Ram Autar Pande (1916) ILR 38 All 209

9.   M.C. Chacko v. State Bank of Travancore (1970) AIR 500, 1970 SCR (1) 658

10.  Nawab Khwaja Muhammad Khan v. Nawab Hussaini Begum (1910) 12 BOMLR 638

11.  Charnock v. Liverpool Corpn. 3 AII ER 473; 1 WLR 1498 at 1507, CA

12.  Kshirode Behari Dutta v. Mangobinda Panda AIR 1934 Cal 682, 152 Ind Cas 351

13.  Tulk v. Muxhay, EWHC Ch J34; (1848) 41 ER 1143

14.  Smith and Snipes Hall Farm Ltd v. River Douglas Catchment Board [1949] 2 KB 500