The doctrine of Privity of contract under the Indian Contract Act, 1872
Contracts constitute a daily part of business dealings, whether expressly or impliedly. One of the principles of the contract is the rule on privity of contract, otherwise known as the ‘Doctrine of Privity of Contract’.
In this article, we will be considering the meaning of this doctrine, scope of its application and exceptions to the doctrine, if any. Our discourse in this article will flow in the following order:
- Explaining the Doctrine of Privity of Contract
- Effect of the Doctrine of Privity of Contract on Third Party
- Exceptions to the Doctrine of Privity of Contract
The Black’s Law Dictionary (Sixth Edition) defines privity of contract as ‘That connection or relationship which exists between two or more contracting parties’. It further defines privity as ‘mutual or successive relationships to the same right of property, or such an identification of interest of one person with another as to represent the same legal right’. From the definitions, it is right to conclude that privity of contract is simply a relationship existing between parties to an agreement/contract’.
In light of the above definition, what does the doctrine of privity of contract entail?
Explaining the Doctrine of Privity of Contract-
The general principle of law is that a contract confers rights and imposes obligations on the persons who are parties to the contract i.e. persons who executed the contract. Parties to a contract can enforce such contract against one another.
Consequently, the doctrine of privity of the contract states that only the parties to an agreement have the right to sue or be sued in respect of issues arising from the agreement i.e. only the parties to a contract can enforce the contract. This right arises out of the fact that a contract creates a relationship between the parties and not third persons.
The foundation for the doctrine of privity of contract was laid in Tweedle v. Atknson, 161. In this case, two fathers agreed that if their children got married, both fathers will pay a sum to the groom. The children got married. The groom’s father paid his part of the agreed sum but the bride’s father failed to pay and subsequently died. The groom instituted this action against his father-in-law’s estate for the recovery of the sum. The court held that the contract could not be enforced because the groom was not a party to the contract even though it was made in his favor.
Effect of the Doctrine of Privity of Contract on Third PARTY
A third party is a person who is not a party to an agreement or transaction. In other words, he is a person who did not execute the contract which he seeks to enforce. He does not have rights and obligations under the contract.
Because he is a stranger to a contract which he seeks to enforce, a third party cannot enforce such a contract neither can the contract be enforced against him. Consequently, he cannot sue or be sued in regards to any matter which may arise out of the contract.
Therefore, the effect of the doctrine of privity of contract on third parties is that:
- A third party cannot seek to enforce a contract against parties to the contract. The doctrine precludes third parties from sueing upon a contract even if he is named as a beneficiary of the contract.
Effect of the doctrine on third-party beneficiaries
The most a third party can be is a beneficiary of a contract. A third party beneficiary is one who enjoys benefits from a contract/agreement entered into by two or more parties.
Generally, third-party beneficiaries do not have the right to sue or be sued under the contract. This was established in In Dunlop Pneumatic Tyre & Co. vs. Selfridge & Co., 1915. In this case, the plaintiff was into the manufacturing of tyre. The plaintiff sold some goods to Dew & Co. The companies entered an agreement to the effect that Dew & Co. shall maintain the price list of the goods and shall not sell the goods below the price list.
It was also agreed that Dew & Co. shall obtain an undertaking from any company it sells to the goods to. In the undertaking, such company shall also promise not to sell the goods below the price list. Dew & Co. sold some tyres to the defendant and obtained the required undertaking from the defendants.
However, the defendant reneged on the undertaking by selling the tyres to another customer at price below the price list. The plaintiff sued the defendant for damages and breach of contract. The House Lords dismissed the plaintiff’s suit on the following grounds:
- There was no enforceable contract between the plaintiff and defendants. Even though the plaintiff was a beneficiary under the contract, he is not a party to it. It is a stranger to the contract and cannot claim any right under the contract.
Example: Mr. Dee and Mr. Cee are business partners. Rocky and Dan, are sons of Mr. Dee and Mr. Cee, respectively. Mr. Dee and Mr. Cee agree to transfer majority interest in their business to Rocky and Dan, once they attain the age of thirty. Rocky and Dan are third party beneficiaries. Even though the contract was made to benefit them, Rocky and Dan cannot enforce the contract against their fathers if their fathers do not keep to the agreement.
Some jurisdictions, however, have statutory provisions which enable a third-party beneficiary overcome the doctrine of privity of contract. To be able to successfully sue under a contract, a third party beneficiary must be an ‘intended beneficiary’ not an ‘incidental beneficiary’.
Exceptions to the Doctrine of privity of contract-
The general principles of law often have exceptions. There are exceptions to the general doctrine of privity of contract. These exceptions afford third parties, especially third-party beneficiaries, the opportunity to enforce a contract. We shall consider these exceptions seriatim.
- Agreement between a third party and Agent of a Disclosed Principal: Where an agent enters into a contractual relationship with a third party, the agent’s principal has the right to enforce such a contract against the agent and/or third party. However, to successfully enforce such an action, two conditions must be present
- The agent must have entered into such agreement in the name of the principal.
- The agreement is not outside the scope of the agent’s authority.
- Agreement for Marriage Settlement, Partition or Other Family Arrangement: A person who is a beneficiary under an agreement for marriage settlement, partition or other family arrangement, can enforce such an agreement as if he is a party to the agreement.
In Dutton vs. Poole, 1677, the plaintiff’s father decided to sell some portion of his forest land to raise money for the marriage expenses of the plaintiff. Before he could sell his land, the plaintiff’s brother, who is the defendant in this case, made a promise that he would cater for the marriage expenses by giving the plaintiff 1000 pounds. The plaintiff’s father died and the defendant refused to pay the agreed sum to his sister.
The plaintiff instituted this lawsuit to enforce the agreement. The defendant argued that the contract was made between himself and their father, and the plaintiff was not a party to the contract and so could not claim. The Court of King’s Bench held that since the plaintiff was a beneficiary to the agreement she is entitled to claim the amount.
- Covenants Running with the Land: Where a buyer purchases a land with the knowledge that there are existing covenants on the land which binds the seller of the land, such a buyer shall also be bound by such covenants, notwithstanding the fact that he is a stranger to the agreement which created such covenants. This exception was created in the case of Tulk vs. Moxhay, 1919.
- Beneficiary of a Trust or Charge: A beneficiary under a charge or trust can enforce such a trust or charge even though he is not a party to the contract creating such trust or charge.
- Acknowledgment or Estoppel: Where an agreement requires a party to carry out an act for a third party and such party acknowledges or conducts himself in a manner which amounts to an acknowledgment, he is bound to carry out such act. Where he fails to do so, such a third party can sue him.
Example: Miss A handed over three pairs of shoes to Mr. C and asked Mr. C to deliver the shoes to Miss D. Mr. C agreed but has failed to deliver the said items to Miss D. Miss D can enforce the agreement against Mr. C even though she was not a party to the agreement.
Privity of contract means the relationship between parties to a contract. Parties to a contract have rights and obligations under the contract. They can enforce such obligations against each other and thus can sue or be sued.
The doctrine of privity of contract grants the right to sue and be sued in a contract to parties in a contract. The doctrine precludes third parties from enforcing a contract as they are strangers to a contract. Even where a third party is made a beneficiary under a contract, the general principle of law is that he cannot enforce the contract against the parties. However, there are exceptions to the doctrine.
These exceptions afford the third party the opportunity to enforce the contract and sue a party who acts in a manner adverse to the interest of the third-party beneficiary.
Ques: A principal can automatically enforce a contract between his agent and a third party. True or False?
Ans: False. For a principal to enforce a contract executed between his agent and a third party, the principal must ensure that the contract was made within the agent’s scope of authority and the contract was made in the principal’s name.