Doctrine of Privity of Contract

The very meaning of Privity in the Doctrine of Privity of Contract is that only the two parties to a contract have the right to sue each other if the contract has not been performed or discharged. This Doctrine is one of the important doctrines in the ambit of Contract Law. A contract is an acceptance of an offer forwarded by one party to another and a contract brings with it liabilities and promises which should be followed by both parties, non-performance of which will lead to a breach of contract.

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This Story also Contains

1. Meaning of Privity of Contract
2. Origin of the Doctrine of Privity of Contract
3. Essential Elements of the Doctrine of Privity of Contract
4. Types of Privity of Contracts
5. The English View on the Doctrine of Privity of Contract
6. The Indian View on The Doctrine of Privity of Contract
7. Importance of Consideration in the Doctrine of Privity of Contract
8. Exceptions to the Doctrine of Privity of Contract
9. The Doctrine of Privity of Contract Case Law
10. Conclusion

Meaning of Privity of Contract

According to the Doctrine of Privity of Contracts, only the parties that are involved in a contract have the right to sue another party or compel them to perform the liabilities and obligations that have been mentioned in a contract. No other party or a stranger or third party has the right to interfere in a contract which is between the parties and cannot compel any party to perform the promises made in a contract. The interest theory is the base of the doctrine of privity to a contract, which implies that only the party who has an interest in a contract has all the rights to protect their interest in a contract.

Illustration

A has come into a contract with B to deliver some essential goods. Now if A fails to deliver the essential goods in the required time, in this case only B has the right to take action against A and no other third party has the right to sue A as the contract of delivery of goods was between A and B.

Origin of the Doctrine of Privity of Contract

The origin of the Doctrine of Privity of Contract can be traced back to the English Common Law. the Doctrine of Consideration and the Doctrine of Privity of Contract were developed simultaneously, which says that consideration is one of the essential conditions to form a valid contract missing this will lead to a void contract. In the case of Price v. Easton 1833 where there was a contract made for completion of work for which the payment had to be done to a third party. And later when the third party tried to sue for non-payment of the dues the third party couldn’t sue as he was declared privy to the contract.

The Doctrine of Privity of Contract was fully developed and given a wider approach in the famous case of Dunlop Pneumatic Tyre v. Selfridge and Co. Ltd. through a judgment delivered by Lord Haldane. The Doctrine of Privity of Contract played a very important role in giving way to many other important doctrines one of them was the Doctrine of Negligence.

Essential Elements of the Doctrine of Privity of Contract

The essential elements to constitute the Doctrine of Privity of Contract are given below-

• There should be a valid contract between both parties

• The parties to the Contract should be competent enough to enter into a contract. This means neither of the parties to a contract should be a minor, a person of unsound mind, etc.

• There should be a valid offer and acceptance followed by a valid consideration.

• Either party to a contract have to fail to perform the promises or obligations that were made in a contract. This will lead to a breach of contract, as a breach of contract is one of the essential conditions that give the othe party the power to use the provisions of the Doctrine of privity of Contract.

• The last and the most important element of the privity of Contract is that only the participating party to a contract has the right to sue another party or compel them to perform the contract, no third party has the right to enter or interfere.

Types of Privity of Contracts

There are two types of Privity of Contracts-

Horizontal Privity of Contracts

The meaning of Horizontal Privity of Contracts means two parties in a contract having legal relationships between them and one party to the contract can sue another party on non-performance of a contract if a contract is breached.

Vertical Privity of Contracts

Vertical privity of Contracts is usually used in business contracts. It is a contract between two business partners or companies like a manufacturer and a distributor. The party to business contracts are responsible for any loss in business or defective product

The English View on the Doctrine of Privity of Contract

According to the idea of the Doctrine of privity of contract, an agreement can only be enforced by the parties that are involved in a contract, no third party can impose on the contract or interfere with it The concept of privity has been slightly undermined in recent years, allowing third-party beneficiaries to recover damages for breaches of contracts in which they were not parties. However, only parties to a contract may file a lawsuit for breach of that contract.

In the case of Tweddle v. Atkinson, the Doctrine of Privity of Contract was established. Atkinson and Tweddle's father-in-law agreed to provide $100 every month to support Tweddle and his wife. Tweddle's father-in-law fulfilled part of the agreement, but Atkinson died before he could complete the payment. He, therefore, did not perform.

Tweddle filed a lawsuit against Atkinson's estate. However, the court rejected his claim since Tweddle's father-in-law didn't consider Atkinson. Moreover, Tweddle was left out of the contract. Tweddle was not a party to the contract or the consideration, thus the court rejected the claim even though he stood to benefit from it.

Furthermore, the Doctrine of Privity of Contract was applied more broadly in the Dunlop Pneumatic Tyre Co. Ltd v. Self Ridge & Co. case, where Dunlop Limited sought to sell its tires for less than the resale price. Dew & Co., however, pledged not to sell the tyres for less than what they would retail for. Dunlop appears to be a third party in the contract between Self Ridge and Dew & Co. and when Selfridge sold the tyres not in the amount decided, Dunlop sued and claimed damages. The judge, in this case, delivered judgment in favour of Dunlop saying that Selfridge could not be made bound.

The Indian View on The Doctrine of Privity of Contract

In India, the privity of contract rule has also been in effect. The common law concept of privity of contract has been broadly applicable in India, even if the definition of consideration is broader under the Indian Contract Act than it is under English law. This means that only a party to the contract is authorized to enforce the same.

The Privy Council's ruling in Jamna Das v. Ram Avtar, wherein A borrowed Rs. 40,000 by executing a mortgage on her Zamindari in favour of B, provides the authority for the rule's applicability in India. A then sold the property to C for 44,000 of the purchase price so that C might, if he saw fit, repay the mortgage. A & B's agreement did not include C, hence B's attempt to recoup the mortgage money was unsuccessful.

The defendant allegedly assured his vendor that he would reimburse the mortgagee, according to the Privy Council. The mortgagee might not use something to which he was not a party. He and the buyer did not agree, and the buyer is not obligated to settle B's mortgage debt right away.

The proprietor of the circus lodged an order with the plaintiff-appellant in another case, Advertising Bureau v. C. T. Devaraj, asking the plaintiff to create advertisements for the circus. There was no agreement between the plaintiff advertiser and the circus financier. The agreement between the financier and the owner of the circus did not include the advertisement. The advertiser's complaint against the financer was dismissed due to the lack of privity of contract between the two parties.

Importance of Consideration in the Doctrine of Privity of Contract

The existence of a valid Contract is one of the most important elements that is required in the Doctrine of Privity of Contract. According to Section 2(d) of the Indian Contract Act 1872 consideration is considered to the base to form a valid contract. A contract without a valid consideration is void from the very beginning. According to the Doctrine of Privity of Contract, a party who has provided valid consideration only has the right to sue or to compel another party to discharge the promises of a contract.

Exceptions to the Doctrine of Privity of Contract

According to the Doctrine of Privity of Contract, only the two parties that are involved in a contract are allowed to sue the other party for non-performance of the liabilities and obligations that are discussed in the contract, but there are also exceptions to under which a third party can also sue for breach of contract. The exceptions to the Doctrine of Privity of Contract are given below-

1. A person who is a beneficiary of a contract

If a contract is been made between two parties with a valid consideration and acceptance with a motive to benefit a third party, in a situation when the contract fails to be performed by either party to a contract then the third party for whose benefit the contract was entered into can sue the others for breach of contract.

This exception was best explained in the case of Muhammad Rustam Ali Khan v. Husaini Begum

In this case, the plaintiff Husainin Begum was married to Khwaja Muhammad Khan, son of the defendant. And the plaintiff has to be paid Rs. 500 as Kharch-i-pandan as given under the Mohammedan law. The defendant enforced the agreement at the time of the marriage. And the date to execute the agreement was within 6 years of their marriage.

Where the plaintiff, namely Husaini Begam, who was a Mohammedan lady, married the son of the defendant, namely Khwaja Muhammad Khan. As per Islamic customs, the plaintiff was to be given Rs. 500 as Kharch-i-Pandan. The agreement was enforced by the defendant at the time of marriage. And after 13 years of being married she abandoned her husband’s house. The plaintiff then sued the defendant for Kharch-i-Pandan.

The Court in this case delivered that the plaintiff has the right to enforce the contract. The court in this case said that the Doctrine of Privity of Contract would not apply as the circumstances of the cases are not the same.

2. Conduct, Acknowledgement or Admission

Under the Doctrine of Estoppel, there are situations under which one party to a contract can be held liable for the actions done by them. If he acknowledges the claims of others. This was used in the case of Narayani Devi v. Tagore Commercial Corporation Ltd.

3. Provisions for marriage or maintenance

When the rights of family members come into consideration this acts as an exception to the Doctrine of Privity of Contract. This comes into effect when a family member does not get any specific share from the testator.

Illustration

If A owner of the property writes in his will and divides his property in equal shares to three of his sons on the condition that after A dies the sons have to pay an amount of Rs. 10000 to the daughter of A that is C and later if the sons fails to pay the amount to C monthly than in this case C can sue the three sons.

4. Provisions under Family Settlement

A stranger who is not a party to a contract and who receives benefits from it under a family arrangement may bring a claim on his behalf as a beneficiary of the agreement.

5. Provision of Estoppel

Promissory estoppel principles may allow a third party to pursue remedies against a promisor. The third party would have to prove each of the components of promissory estoppels to prevail. If permitted by statute, an individual who is not a party to the contract may continue to pursue legal action. Therefore, if third-party risks are covered by the insurance policy, a third party who is not a party to the contract may obtain compensation from the insurance company under the insurance statutes.

6. Invovlemment of Agency

The ruling in this case is that if one of the parties enters into a contract acting as an agent, the principal or the agent, but not both, may file a lawsuit to enforce the terms of the agreement.

The Doctrine of Privity of Contract Case Law

Tweddle vs. Atkinson

Fact about the Case; In the classic case of Tweddle vs. Atkinson, the court rejected the plaintiff's breach of contract claim. The key issue was the legality of a contract between two families in which the son of one parent was promised an amount of money if he married the daughter of the other father.

Judgement of the Case; The court determined that the plaintiff, the son, lacked legal standing to enforce the contract. The basis for this finding was that he was not a party to the contract. The arrangement was reached only between the two dads, with the son not privy to the conversations or negotiations. As a result, he was unable to assert his contract-related rights and benefits.

Conclusion

This article talks about the Doctrine of Privity of Contract, according to which only a party to a contract can sue the other party for non-performance of promises and obligations that have been decided in a contract. Also, the articles mentioned the exceptions to the doctrine under some circumstances the third party who is not a partner to a contract can sue the parties to a contract if they have a link to the objective of the contract or the contract is in the ambit of family laws.