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CONTRACT LAW WITH REGARD TO PRIVITY OF CONTRACT

Authored by: Archit Mittal

INTRODUCTION-

The Indian Contract Act brings within its ambit the Contractual rights that have been granted to the citizens of India. The act contains rights, duties and obligations on the Contracting parties to help them to successfully conclude business- from everyday life transactions to evidencing the businesses of multi-national companies. The Indian Contract Act, 1872 was enacted on 25th April, 1872 and subsequently came into force on the first day of September 1872. The essence of the India Contract Act has been modeled on that of the English Common Law. It is one of the most important legislation ever drafted by Britishers and the principles enacted therein are nothing but the codification of the general principle governing transactional relationship because of which it has seen seldom amendments.

History of Contract Law in India-

The history of the Act brings to light the very origin of the economic processes and in this regard, the importance of Contracting in order to conduct one’s business in everyday life. The prevalent system in the ancient times was barter and it was based on the mutual principle of give and take. This was confined to commodities as there was no medium of exchange as is seen in the form of money today and this system can be traced back in time to the Indus Valley Civilization (the earliest human civilization). The system still finds relevance in the contemporary world, where it can be found in commercially and economically underdeveloped areas.

What is a Contract?

Section 2 (d) of the Indian Contract act defines the Contract. A Contract is a legal binding between two parties, companies and businesses that unites them in an agreement which is protected by law. A contact between the parties can be created verbally, in writing, by conduct or by all means. This contact becomes a valid Contract if it has all the essentials that make up a Contract. The most essential element for building up a Contract is ‘Enforceability by the law’. The Indian Contract Act codifies the way we enter into a Contract, execute a Contract and implement provisions of a Contract and effects of breach of a Contract. The Contractual capacity is restricted in certain situations otherwise it is the prerogative of the individual to Contract.

What is Privity of Contract?

The “Doctrine of Privity of Contract” is a general rule of law of Contract. According to this doctrine ‘no one but the parties to a Contract are bound by it. A third person cannot be entitled to demand the performance of an obligation under a Contract even though he has a direct interest in such performance.’ The Privity of a Contract explains that no third to the Contract can be sued who is not party to the Contract. But there are some exceptions to the doctrine that provides the opportunity to the stranger to sue the party to a particular Contract that are explained above.  Now the laws have changed with the time period and stranger can also sue the party who is in the Contract.

Definition of Privity of Contract

Privity of Contract is the relationship that exists between parties to an agreement.

G.H Trietel defines Privity as “The common law doctrine of Privity means that a person can’t acquire rights or subject to liabilities arising under a Contract to which he is not a party”. 

Hence Privity of Contract consists of two distinct rules:-

  • A person who is not a party cannot claim the benefit of it although the Contract was entered into with the object of benefiting that third party.
  • A third party cannot be subjected to a burden by Contract to which he is not a party. Thus, a person cannot acquire right under Contract to which He/ She is not a party.

Let’s understand this doctrine by an Illustration-

  1. Marry has borrowed some money from John. Marry owns a property and decides to sell it to Bobby. Arjun promises to pay Bobby on behalf of Marry.  However, if Arjun fails to pay, then Bobby cannot sue since Arjun is a stranger to the Contract.
  2. Lina has to pay her debt to Renu.  Lina sold her car to Ansh and instead of paying her money he promised lina that he will pay her debt money to Renu. Ansh didn’t fulfill his promise and Renu sued Lina. However, Renu could not sue Ansh as he is Stranger to a Contract.

By these illustrations we can conclude whether it is a mistake of the third person but still only that person will be sued to whom the promise was made. It is important to note that the Doctrine of Privity has exceptions which allow a stranger to enforce a claim as given below

Exceptions to the Doctrine of Privity of Contract

A stranger or a person who is not a party to a Contract can sue on a Contract in the following cases:

  • Trust
  • Family Settlement
  • Assignment of a Contract
  • Contract through an agent
  • Estoppel or acknowledgment
  • Collateral Contract
  • Vicarious immunity
  • Trust

Trust is a well-established exception to the rule of Privity. If a Contract is made between the trustee of a trust and another party, then the beneficiary of the trust can sue by enforcing his right under the trust, even if he is a stranger to the Contract. This means that if A makes a promise to B for the benefit of C, C can enforce this promise if B has constituted himself trustee of A’s promise for C. But this rule is subject to certain restrictions. A promisee can be a trustee for a third party only if he has the intention to create a trust and this  intention must be to benefit the particular third party and not third parties generally. Also, the intention to benefit the third party must be irrevocable. And a mere intention to grant a benefit is not enough, there must be an intention to create a trust. An intention to create a trust is clearly distinguishable from a mere intention to make a gift.

Illustration-  Dalni’s father had an illegitimate son, Ravi. Before he died, he put Dalni in possession of his estate with a condition that Dalni would pay Ravi an amount of Rs 500,000 and transfer half of the estate in Ravi’s name, once he becomes 21 years old. After attaining that age when Ravi didn’t receive the money and asked Dalni about it, he denied giving him his share. Ravi filed a suit for recovery. The Court held that a trust was formed with Ravi as the beneficiary for a certain amount and share of the estate. Hence, Ravi had the right to sue upon the Contract between Dalni and his father, even though he was not a party to it.

Let’s understand this by a famous case law.

Dunlop Pneumatic Tyre Co Ltd v Selfridge Ltd [1915] AC 847

Dunlop was a tire manufacturer who agreed with their dealer to not sell the tires below a recommended retail price. As part of the agreement, Dunlop also required their dealers to gain the same agreement with their retailers, who in this instance was Selfridge. The agreement held that if tires were sold below the RRP, they would be required to pay £5 per tire in damages to Dunlop. This was agreed between the dealer and Selfridges, which effectively made Dunlop a third-party to that agreement. Sometime after this, Selfridge sold the tires below the agreed price and Dunlop sued for damages and an injunction to prevent them from continuing this activity. 

  • Family Settlement

If a Contract is made under a family arrangement to benefit a stranger (person not a party to the Contract), then the stranger can sue in his own right as a beneficiary of the Contract. There can be agreement made in connection with marriage, partition or other family arrangements and a provision is made for the benefit of some person. In such cases, a person, for whose benefit the provision is made, can enforce the agreement though he is not a party to

Let’s understand this with help of an illustration-

Illustration 1- Abhrahm promised Nancy’s father that he would marry Nancy else would pay Rs 50,000 as damages. Eventually, he married someone else, thereby breaching the Contract. Nancy filed a case against Abhrahm which was held by the Court since the Contract was a family arrangement with Nancy as the beneficiary.

Illustration 2- Ritika was living in a Hindu Undivided Family. The family had made a provision for her marriage. Eventually, the family went through a partition and Ritika filed a suit to claim her marriage expenses. The Court held the case because Ritika was the beneficiary of the provision despite being a stranger to the Contract.

A Contracting party can assign his rights (not liabilities, except by way of consent) under the Contract to a third person.  Having said that, a mere right to litigate or sue for damages cannot be so assigned, unless the third person has a commercial interest in assuming such right, as in Trendtex Trading Corporation v Credit Suisse [1982] AC 679. Moreover, defences of the promisor and the extent of remedy available to the third person would be as what was contemplated and applicable under the original Contract.

Trendtex Trading Corporation v Credit Suisse [1982] AC 679

Trendtex had a claim in England against the Central Bank of Nigeria [‘CBN’] for damages amounting to approximately USD 14 million. CBN sought the assistance of Credit Suisse for the recovery of this debt, which Credit Suisse was also going to use in order to aid it to help it recover its own debt from Trendtex. The primary question arose as to the legal assignment of the debt and as to whether It is void as offending the English laws against champerty and maintenance.

Contract through an agent

This exception can be explained from the Dunlop Pneumatic Tyre Company Ltd case, i.e., a principal not named in the Contract may sue  if the promisee Contracted as his agent, and consideration was directed personally or through the promisee in the capacity of an agent.  In other words, the real right of action then rests with the principal as the Contracting party, as the agent (promisee) then moves out of the arrangement so as not to sue or be sued.

Wakefield v Duckworth [1915]

Mr Wakefield was a professional photographer. Mr Duckworth, a solicitor, attended his studio to purchase photographs for use in defending his client on manslaughter charges. Mr Wakefield knew the photographs were required for use in the litigation, and Mr Duckworth requested as low a price as possible for the photographs because his client was not a wealthy man. Mr Wakefield sought to recover the cost of the photographs from the solicitor.

  • Estoppel or Acknowledgment

 Where by the terms of a Contract a party is required to make a payment to a third person and he acknowledges it to that third person, a binding obligation is thereby incurred towards him. Acknowledgment may be express or implied. This exception covers cases where the promisor by his conduct, acknowledgment, or otherwise, constitutes himself an agent of the third party.

Illustration 1- sold his house to under a registered sale deed and left a part of the sale price in his hands desiring him to pay this amount to C, his creditor. Subsequently made part-payments to c informing him that they were out of the sale price left with him and that the balance would be remitted immediately. B, however, failed to remit the balance and C sued him for the same.

The suit was held to be maintainable. Though originally there was no Privity of Contract between B and C, B having subsequently acknowledged his liability, C was entitled to sue him for recovery of the amount.”

 A Contract between two parties may be accompanied by a collateral Contract between one of them and a third party. A collateral Contract may in effect allow a third party to enforce the main Contract (between A and B). For instance, where C buys goods from B, there may be a collateral Contract between C and the manufacturer in the form of a guarantee. Collateral Contracts have been used as a means of rendering exclusion clauses enforceable by a third party; and are extensively used in the construction industry as a way of extending to subsequent owners or tenants the benefits of a builder’s or architect’s or engineer’s Contractual obligations. Strictly speaking, of course, a collateral Contract is not an exception to the third party rule in that the ‘third party’ is a party to the collateral Contract albeit not a party to the main Contract.

Shanklin Pier v. Detel

Facts- the plaintiff had employed Contractors to paint their pier, and instructed them to use a paint made by the defendants. This instruction was given in reliance on a representation made by the defendants to the plaintiffs that the paint would last seven years. It lasted for only 3 months. It was held that the defendants’ representation gave rise to a collateral Contract that the paint would last seven years.

  • Vicarious Immunity

 The principle vicarious immunity is illustrated by the case of  Elder, Dempster Ltd v Paterson Zochonis& Co Ltd.  In this case, the House of Lords held that the owners of a vessel were entitled to rely on the limitations contained in a bill of lading issued pursuant to a Contract between the cargo owners and the charterers of the vessel, when they (owners of the vessel) were sued by the cargo owners in respect of the damage caused by bad stowage.

Perhaps the most significant point is that some of their Lordships seemed to accept a principle of vicarious immunity, according to which a servant or agent who performs a Contract is entitled to any immunity from liability which his employer or principal would have had. Hence, although the ship-owners may not have been privy to the Contract of carriage (between shipper and charterer) they took possession of the goods on behalf of, and as agents for, the charterers and so could claim the same protection as their principals.

CONCLUSION

The Privity of a Contract generally means a common law doctrine which prevents a person who is not a party to a Contract from enforcing a term of that Contract, even where the Contract was made for the purpose of conferring a benefit on the third party.  From the above discussion, we have seen that although only parties to Contract can sue each other and no stranger is allowed to enter between the parties to sue. But with the development of time, the law has also developed and now even a stranger is permitted to sue to safeguard his interest under exceptional circumstances.

This disclaimer informs readers that the views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author’s employer, organization, committee or other group or individual.

REFERENCE

1. The Indian Contract Act, 1872 by R.K. Bangia.

2. Law of Contract by Dr. Avtar Singh

3. https://webstroke.co.uk/law/cases/dunlop-v-selfridge-1915

4. www.lawteacher.net/cases/trendtex-trading-corporation-v-credit-suisse.php

5. https://www.lawteacher.net/cases/wakefield-v-duckworth.php

6. https://wikivisually.com/wiki/Shanklin_Pier_Ltd_v_Detel_Products_Ltd

7. https://www.lawteacher.net/cases/elder-v-paterson.php

8. The Indian Contract Act, 1872 by S.T Desia

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