Doctrine Of Privity Of Contract Case Law: Should It Be Discarded Or Not? 

Author: Advocate Karthik Raghavan and Associate Shreya Negandhi

The ‘Doctrine of Privity of Contract’ is a long established principle of English Law which provides that no one may be entitled to or bound by the terms of the contract to which he is not an original party. In other words, it is a common law principle, which stipulates that rights or obligations can only be imposed on parties to a contract. The doctrine of  privity of contract in India prevents a third party from having any legal right to enforce the contract or to have contractual liabilities imposed as a result of the contract, and that contractual remedies are for the contracting parties alone. Essentially, it prevents a third party from enforcing the terms of a contract. Therefore, the doctrine has proven to be problematic for third parties as they are not in a position to enforce obligations of the contracting parties.

It is to be noted that the Indian Contract Act, 1872 does not contain a single provision relating to doctrine of privity of contract in india. It has been widely accepted in India through a series of case laws. Section 2(h) of the Act 1872, defines a contract as being an agreement between two parties enforceable by law backed by some consideration. In other words, a contract is nothing but a valid agreement. The term ‘agreement’ has been defined under Section 2(e) of the Act. According to this section, every promise and every set of promises, forming the consideration for each other, is an agreement. Section 2(d) defines consideration as an act that must have been done at the desire or request of the promiser. One of the notable features of this section is that the act which is to constitute a consideration may be done by the promisee or any other person. This means that as long as there is consideration for the promise, it is immaterial who has furnished it. This principle has been laid down in the case of Dutton v Poole.

The doctrine of privity of contract was firmly established in the case of Tweddle v Atkinson. The Court held: no legal entitlement is conferred upon the third party to an agreement and promisee cannot initiate any legal action unless the consideration from the promise moved from him. Consideration must move from the party entitled to sue upon the contract. This was further affirmed in the case of Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd.

The two underlying principles that can be ascertained from the cases in English law which led to the advent of Doctrine of privity of contract in india, are

• A contract cannot be enforced by a person who is not a party to the contract, even if it has been made for his benefit.

• Consideration moves from the promisee only.

Even though under the Indian Contract Act, 1872 the definition of consideration is wider than that of English Law, and consideration can very well be given by a non-contracting party, the common law principle of Doctrine of Privity is generally accepted in India. For instance, in the case of Jamna Das v. Ram Avtar, the Privy Council case doctrine of privity of contract was introduced in india. It was congruously held that a person who is not a party to the agreement cannot recover the amount due from a party to the agreement. In 1970, the Supreme Court cleared the obscurity surrounding this doctrine of privity of contract. In the case of M.C. Chacko v. State Bank of Travancore, the Supreme Court case is a privity of contract case law manifested itself in favour of the Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd case. Macpherson v. Buick Motor Co, is another privity of contract case law famous under the New York Court of Appeals opinionated by Judge Benjamin N. Cardozo. This privity of contract case laid down the rule which acted as a pioneer for the rule of product liability. It also removed the requirement of privity of contract for duty in negligence actions. The Court held that it is the duty of the manufacturer to construct carefully, anything which might be dangerous to the user of the product. If the manufacturer is proved to be negligent, then irrespective of the contract the liability will fall on the maker.

Exceptions to the rule:

The common law exceptions to the above said rule are based on the premise of statutory exceptions. In case of Trust, when a contract is made between a trustee and another party, the beneficiary has the right to sue to enforce his rights attached to the trust formed. In case, when a contract is made for the benefit of a person, he can sue the parties even if he is not a party to the contract. In case, when a contract requires a party to pay a certain amount to a third-party and it is acknowledged by the party, the third-party can sue the party who has acknowledged the enforcement of the contract. Contract made through an agent is also an exception to the above said rule. In case of defective goods, a third party may sue the seller if he/she has been affected by the flaws. Consumer protection laws are an example of this exception. In case of personal injury, the third parties who are not a party to the contract may sue the negligent party. In case of a family settlement, when certain provisions are made for a particular family member, then such person may sue to enforce the contract. In case of multilateral and collateral contracts, the third party has the right to sue in order to enforce his or her rights.

Contracts (Rights of Third Parties) Act, 1999:

The Contracts (Rights of Third Parties) Act, 1999, an Act of the Parliament of the United Kingdom which aimed at reforming the common law of Doctrine of Privity of Contract. This Act came into existence due to the widespread criticism of the doctrine by jurists, lawyers and academicians. It provides for the insertion of arbitration clauses in terms of an agreement & for protection of the promisor from the cases of double liability and envisages the promisor's defenses. The Act also provides for the extent of effectiveness of the rights of third parties, so that they are not misused. The Act, in order to reform the doctrine provides for two statutory exceptions to the above said rule, namely where the contract expressly provides for it, or when the contract purports to confer a benefit on such a person. The Contracts (Rights of Third Parties) Act 1999 enforced in the United Kingdom in order to reform the doctrine provides for two statutory exceptions to the above said rule, namely where the contract expressly provides for it, or when the contract purports to confer a benefit on such a person.

Conclusion:

The doctrine though lays to rest the rights of third parties, it is vague in nature and lacks clarity. Abatement of the doctrine is required to enable a third party to sue on a contract made for his benefit under certain circumstances as per recommendations of 13th Commission Report i.e. a more clear cut definition or a statutory provision must be inserted or a separate legislation must be passed for third party rights under certain qualified circumstances akin to Contracts (Rights of Third Parties) Act, 1999.