The Privity of Contract Doctrine

Definition:
The privity of contract doctrine dictates that only persons who are parties to a contract are
entitled to take action to enforce it. A person who stands to gain a benefit from the contract (a
third party beneficiary) is not entitled to take any enforcement action if he or she is denied the
promised benefit.
Introduction:
In layman's language the "Doctrine of Privity" can be worded so as to mean that a contract
cannot confer rights or impose those obligations arising under it, on any person except the parties
to it. However, whenever there are third party beneficiaries in a contract, it may become
necessary to determine as to, who, in the eyes of the law should be liable or should be protected
in event of inexorable breaches that may occur from time to time. From here arises the whole
debate about the significance, practical hassles and debates created by this doctrine.
The Indian Contract Act, 1872 (hereinafter referred to as the Act) Section 2(d) says that when,
at the desire of the promisor, the promisee or any other person has done or abstained from doing,
or does or abstains from doing, or promises to do or to abstain from doing, something, such act
or abstinence or promise is called a consideration for the promise
One of the most notable features of Section 2(d) is that the act which is to constitute a
consideration may be done by the promisee or any other person. It means therefore, that as
long as there is a consideration for a promise, it is immaterial who has furnished it. It may move
from the promisee or, if the promisor has no objection, then from any other person. This is the
principle as established by the English Courts in as early as 1677 in the case of Dutton v. Poole.
Judicial Interpretation of the Doctrine:
It is generally agreed that the Tweddle v Atkinson has laid down "the true common law doctrine"
of the modern third party rule. In Tweddle v. Atkinson, the Court acknowledged the existence of
contrary authorities, but held that the Doctrine of Privity of contract meant that third party
beneficiary could not enforce against the promisor the promise that the promisor had made to the
promisee. The rule was affirmed in Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd and
subsequently been reaffirmed in numerous cases.
There are two aspects of this doctrine. Firstly, no one but the parties to the contract is entitled
under it. Rights or benefits may be conferred upon a third party but such a third party can neither

sue under the contract nor rely on defenses based on the contract. The second aspect is that the
parties to a contract cannot impose liabilities on a third party.
Concept of 'Beneficiary" as an exception to the Doctrine of Privity:
a) Beneficiaries under a trust or charge - Any beneficiary under a trust or when an obligation
under a contract is undertaken for the benefit of a third party, coupled with a charge on
immovable property; the third property beneficiary can enforce it.
b) Covenants running with the land - It is an accepted principle of the law of transfer of
property that anyone who takes property will be entitled to all the benefits running with the
land. Any covenant imposing an obligation on a party can be enforced by any stranger who
gets that property.
c) Family Arrangements - Family arrangements between male members and female members
of a family, benefiting female members in the family, such as provisions for maintenance and
marriage expenses, are enforceable by the beneficiaries, i.e., the female members.
d) Acknowledgement - When one party to the contract, who has undertaken an obligation, for
example to pay a certain sum of money to a third person that he will be so obliged, the third
person can enforce it
CASE INDEX:
1. Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd. [1915] AC 847 FACTS:
Dunlop & co. were the plaintiffs. They sold some goods to one Dew &co. with an undertaking and written
agreement that Dew & co. would sell the tires on listed price only, and if they sold them to any third party, they
would obtain similar undertaking to maintain the price list. Dew & co. sold the motor tires to defendant co. The
defendant company sold the tires below the list price. The plaintiff company brought an action against the
defendants. The House of Lords held that assuming the plaintiffs were undisclosed principals, no consideration
moved from them to the defendants and that the contract was unenforceable by them.
2. Chinnaya Rau v. Ramaya (1882) I.L.R. 4 Mad. 137
A case is Chinnayya (Vs) Ramayya. In this case A has a daughter namely B and a brother namely
C. A makes an offer to B according to which A will transfer certain property to B and B has to
pay annuity to C. Thus a Contract gets formed in between them. There after B promises to C to
pay annuity. Afterwards B gets failed in paying annuity to C on the ground that she (B) has no
Consideration from C. Here Court decides that consideration is obtained by B from A. Thus it is
held that B has to pay annuity to C. - See more at:
3. Nawab Khwaja Muhammad Khan v. Nawab Husaini Begam (1910) LR 37 I.A. 152

Khawaja Muhammad Khan was the father of bridegroom. Hussaini Begum was the bride. Both
the bride and bridegroom were minors at the time at the time of marriage. Khawaja Muhammad
Khan and Hussaini Begums father entered into an agreement at the time of marriage.
(According to Muslim law. Marriage are contracts) Khawaja Muhammad Khan executed an
agreement with Hussaini Begums father that in consideration of the respondents marriage with
his son, he would pay to her a sum of Rs.500 every month in perpetuity for the betel-leaf
expenses. Healso charged certain properties with the payment giving the power to Hussaini
Begum to enforce it. The marriage took place. After some years, Hussaini Begum and her
husband separated due to the differences, quarrels between them. She sued Khawaja Muhammad
Khan for the recovery of the difference, quarrels between them. She sued Khawaja Muhammad
Khan for the recovery of the arrears of annuity @ Rs. 500 per month. The appellant Khawaja
Muhammad Khan argued that Hussaini Begum was not a party to the contract entered by him
with the father of Hussaini Begum.
Judgment: The Privy Council gave the judgment in favour of Hussaini Begum. It held that
Hussaini Begum, although no party to the agreement, was clearly entitled to proceed in equity.
Being she was the beneficiary of the contract, she could enforce her claim. The Privy Council
held that A stranger to contract is different from a stranger to consideration. Here Hussaini
Begum was a stranger to the contract, but she was concerned with the consideration. Hence the
famous rule A stranger to a contract cannot sue would not apply in her case and also in similar
cases.
4. Tweddle v Atkinson [1861] EWHC QB J57
A and B were the bridegroom and bride. There was a contract between As father and Bs father that each would
pay a certain sum of money to A and that A would have the power to sue for such sums. After the death of As
father and Bs father, A brought an action against the executors of the Bs father to recover the promised amount.
Court of appeal held that A had no right to claim, as he was the third person (stranger) to the contract. Since the
decision of Tweddle vs. Atkinson (1861), the rule of privity contract (stranger has no right to sue) came into
existence. The same was affirmed in Dunlops case.
5. Jamuna Das v. Ram Avtar [Citation (1912) 14 BOMLR 1]
This is a perfectly plain case. The action is brought by a mortgagee to enforce against a
purchaser of the mortgaged property an undertaking that he entered into with his vendor. 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. Therefore, he is not a person from whom, in the words of the 90th section of the Transfer of
Property Act, u the balance is legally recoverable. The appeal was dismissed by the judge with
costs.
6. M.C. Chacko v. State Bank of Travancore 1970 AIR 500
H bank had an overdraft account with State Bank. MC Chacko was the manager of H bank and
his father K had guaranteed the repayment of debt. K gifted his properties to members of his
family. The gift deed provided that liability if any under the said guarantee should be met either
by MC personally or through property gifted to him under the said deed. State Bank sued all the

heirs under the deed along with MC; albeit limitation period to sue on letter of guarantee had
already passed.
In present case, no such charge was created in favor of State Bankthe deed merely set out an
internal arrangement between the donor and members of family which conferred a right of
indemnity upon them against M.C. Chacko and his inherited propertyhowever, no intention to
convert a personal debt into a secured debt in favor of the bank could not be inferred. Since it
was a debt of K such that he was personally liable under the debt; after his death all his inheritors
were liable to satisfy the debt out of his estate, inherited by them. However, in such a case, other
members would have been indemnified by M.C. Chacko for any share of debt paid by them.
Even if charge would have been created in favour of State Bank, it wouldnt have been able to
enforce it since it is not a party to the deed and, was a complete stranger to it: it wasnt a
beneficiary under the contract. Since limitation period has passed, State Bank couldnt claim
anything under the letter of guarantee either from MC Chacko (who personally never guaranteed
payment) and or from any other heir of K.
Conclusion:
The Act does not specifically provide for the doctrine of Privity of Contract; however through a
series of case laws the doctrine as laid down in Tweedle v Atkinson is now applicable in India
along with various exceptions.
With reference to consideration of a contract the position in India and England are however
different. Under the English law only a party to the contract can pay the consideration. If he
doesnt pay the consideration he becomes a stranger to the contract. Under the Indian Law, it is
not necessary that consideration should be paid by the promisee.
Though there are no express provisions as to assignment of rights and obligations under a
contract in the Act, the Principle of assignment has been recognized and developed by the courts
through its various decisions.
The current relaxed requirements of modern contract law and non-conventional approach of the
judiciary in relation to Doctrine of Privity have provided an avenue for redress to genuinely
affected persons who the strict interpretation of Doctrine of Privity might have been deprived of
rights as such. Under the current operation of the law, a stranger could be awarded damages if
the infringement is proved. However the stranger should be included under the scope of
"intended beneficiary" who has reciprocal obligations under the contract.

Reference
http://en.wikipedia.org/wiki/Privity_of_contract

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