CHAPTER - 6

THE IMPOSITION OF CONTRACTUAL LIABILITIES UPON

THIRD PARTIES

The 'burden of contract' is second aspect of the doctrine of privity of

contract1. The expression 'burden of contract' signifies the obligation or

liability created by a contract. The contract creates right in one party and

corresponding duty in other party. The duty or liability so created may

also be called as burden of that party upon whom it is imposed with his

consent. The question which may normally arise is when a stranger can be

allowed to reap the benefits of a contract and why can the contractual

obligations be not imposed upon him?

It is to be noted that, as a general rule, the parties to a contract

cannot impose contractual burden upon a third party without his consent.

The reason is very simple. Since the third party has not given his consent

to the contract, therefore, it would be unjust to impose contractual burden

upon him. However, there are certain cases, where contractual liabilities

can be imposed upon a stranger. As a general rule, two persons cannot, by

any contract into which they may enter, thereby impose contractual

liabilities upon a third party. This principle may be illustrated by reference

to building contracts, where a person (the employer) engages a contractor

to carry out certain building work. The contractor frequently sub-contracts

1 Ernest H. Scammel (1955) 8 Current Legal Problems, 131.

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parts of the work to sub-contractors. A sub-contractor has no cause of

action against the employer for work done or materials supplied under the

sub-contract, since the employer is not a party to that contract2. Even if

the employer has nominated the sub-contractor and taken the benefit of

the sub-contractor's work, the employer will not be liable to the sub-

contractor for the price, as there is no privity of contract between them.

Conversely, the employer has no claim in contract3 against the sub-

contractor4, since the sub-contractor is not a party to the main contract

between the employer and the contractor.

There are certain situations where contractual liabilities may affect

third parties.

Firstly a contract concerning property may impose liabilities on third

parties who subsequently acquire the property with notice of the contract.

The property may be tangible, as where a contract is made concerning land

or goods, or it may be intangible, as where the contract concerns

intellectual property such as a patent or copyright. A similar principle may

apply where information subject to a contractual obligation of

confidentiality comes to the knowledge of a third party with notice of the

contract5, although confidential information does not have all the

attributes of a property interest, and it is not generally treated as such6.

A Second situation arises under the law of bailment. Where the

2 Hempton v. Glamorgan C.,C. [1917] A.C. 13. See also Schmaling v. Tomlinson (1815) Taunt 147 principal
and sub-agent.
3 But a claim may lie in tort
4 Unless there is a collateral warranty: see ante, p. 130.
5 See Gurry. Breach of Confidence (1984), pp. 271-82; Gornish Intellectual property, 4th edn. (1999), pp. 305-06.
6 Boardman v. Phipps [1962] 2 A.C. 46, at pp.127-8; ornish, op cit., p. 330, Cf. Gurry op. cit., pp. 46-56.

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owner of goods transfers possession to another (i.e. bails the goods), and

the bailee then sub-bails them to another, the owner may be bound by

exemption clauses contained in the contract of sub-bailment although not

a party to it. Thirdly, the land law doctrine of restrictive covenant has

been said to apply to chattels but, although there is some support in the

cases, this approach has been much criticized. Fourthly, a person who

knowingly interferes with contractual rights without justification will be

liable in tort and may be restrained from doing so by an injunction.

6.1 POSITION UNDER THE ENGLISH LAW

The English Law, ordinarily, presents the contracting parties from

enforcing contractual obligation against stranger to the contract, but, there

are some exceptional circumstances when a stranger to contract can be

sued, they relate to (I) Contract Concerning Land & (II) Contract Relating to

Chattels.

6.1.1 CONTRACT CONCERNING LAND

The doctrine of privity, while in principle at least it prevents a third

party beneficiary from suing on a contract, operates with equal topic to

forbid the contracting parties to enforce obligations against a stranger. It

has long been an axiom of the common law that a contract between A and

B cannot impose a liability upon C.

This rule, however, was found to be so inconvenient in the case of

contracts concerning land that counter-measures had to be devised to

meet it. It has already been seen that, where a lease was concerned, such

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measures originated at an early date in the common law itself and were

subsequently extended by statute. A second modification is due entirely to

equity, and it did not emerge until 1848, when the case of Tulk v.

Moxhay7 was decided. The problem in that case was this: will a restrictive

covenant, voluntarily accepted by the purchaser of land as part of the

contract of sale, bind persons who later acquire that land? The facts of the

case itself afford a simple illustration.The plaintiff, the owner of several

plots of land in Leicester Square, sold the garden in the centre to one Elms,

who agreed not to build upon it but to preserve it in its existing condition.

After a number of conveyances the garden was sold to the defendant

Moxhay, who, though he knew of the restriction, proposed to build. The

plaintiff, accepting his inability at common law to recover damages from

one who was not a party to the contract, sought an injunction against the

erection of the proposed buildings, from the court.

The injunction was granted. The decisive factor in the view of the

court was the knowledge by the defendant of existence of the covenant. A

court of equity, being a court of conscience, could not permit him to

disregard a contractual obligation affecting the land of which he had notice

at the time of his purchase.

It is establish doctrine that a restrictive covenant, binding a

purchaser not to perform certain acts of ownership upon the land bought,

may be enforced, not only against him as the contracting party, but also

against third parties who later acquire the land. It is undesirable to specify

7 (1848) 2 Ph. 774.

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the conditions upon which enforcement depends, but it is essential to

observe that the liability of the third party soon ceased to be based

exclusively on notice. There has been a radical development in the

doctrine initiated by Tulk v. Moxhay, 1848, 2 Ph. 774 Past, P.453 and it

has been established since the later years of the nineteenth century that

something more than mere notice by the third party of the existence of the

covenant is necessary to render him liable. In particular it is essential that

the covenanted, i.e. the original vendor, should have retained other land in

the neighborhood for the benefit and protection of which the restrictive

covenant was taken. If an owner sells only a portion of his property, the

selling value of what he retains will often depreciate unless restrictions are

placed upon the enjoyment of the part sold and it is only where the

covenantee has retained land of being benefited in this way that equity will

enforce a restrictive covenant against a third party8.

The question now arises whether this equitable doctrine may be

applied where the subject matter of the contract is property other than

land. The relevant cases and statutes suggest that there are two different

situations which require, or at least have received, different treatment9.

(i) Attempts to enforce against third parties restrictions upon the use of

goods.

(ii) Attempts to enforce against third parties restrictions upon the price

at which goods may be resold.

These situations will be considered separately.

8 See formby v. Barker [1903] 2 Ch. 539, and LCC v. Atten [1914] 3 KB 642.

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(i) Restrictions upon the use of goods

It was a restriction upon use of goods that the court enforced in Tulk

v. Moxhay 1848, 2 Ph. 774 Past, P.453 and within a few years of this

decision the propriety of a similar restriction was canvassed in the case of

a ship. In De Mattos v. Gibson in 1858.

A Chartered a ship from X. During the currency of the charter-party

X mortgaged the ship to B, who knew at the time that this charter party

existed. A alleged that B now threatened, as mortgagee, to sell the ship in

disregard of his contract rights and he applied for an interlocutory

injunction to restrain B from doing so.

The application was refused by Vice-Chancellor Wood, but allowed

on appeal by Knight Bruce and Turner L.JJ. Knight Burce L.J observed:

Reason and justice seem to prescribe that, at least as a general rule, where

a man by gift or purchase acquires property from another, with knowledge

of a previous contract lawfully and for valuable consideration made by him

with a third person to use and employ the property for a particular purpose

in a specified manner, the acquirer shall not, to the material damage of the

third person, in opposition to the contract and inconsistently with it, use

and employ the property in a manner not allowable to the giver or seller.

Turner L.J was careful not to be involved in so comprehensive a

principle. He would not go further than to grant an interlocutory injunction

'until the hearing of the cause' because of the 'difficult and important

questions to be tried at the hearing'. The case then went back to Wood V-C

9 This distinction was taken by Wade 44 L. Q.R. 51.

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for the cause to be heard; and he ruled that, on the facts before him, no

injunction should be granted. This ruling was upheld by the Lord

Chancellor, Lord Chelmsford, and the plaintiff's application thus finally

failed. Lord Chelmsford emphasised. However, that his decision was based

on finding that the defendant had not in fact interfered with the

performance of the charter party. Had he done so, an injunction might

well have been granted.

Five years later the same court was faced with similar facts in

Messageries Imperiales Co. v. Baines 10.

The plaintiff had chartered a ship from X. During the currency of the

charter, X sold the ship to the defendant who knew at the time of the

existence of the charter but declined to allow the ship to fulil the charter-

obligations. Weed V-C now felt constrained by the observation of his

brothers in the superior courts and granted the injunctions for which the

plaintiff asked.For the next fifty years the sweeping assertion of Lord

Justice knight Bruce was cited from time to time but in 1914 the Court of

Appeal refused to accept it as offering a catholic principle upon which it

was safe to depend.

Notwithstanding what was said by Knight Burce L.J in De Mattos v.

Gibson, it is not true as a general proposition that a purchaser of property

with notice of a restrictive covenant affecting the property is bound by the

covenant11. However, in 1926 the case of the Lord Strathcona Steamship

Co. v. Dominion Coal Co. came before the Judicial Committee of the

10 (1863) 7 L.T. 763.

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Privy Council12.

B, the owner of the steamer Lord Strathcona, chartered her to A on

the terms that, for a period of years, A should be free to use her on the St.

Lawrence river for the summer season and should surrender her to B in

November of each year. During the currency of the charter party, but while

the ship was in B's possessions, B sold and delivered her to C, who in turn

resold her to D.D, though he knew of the charter party, refused to deliver

the ship to A for the summer season. A obtained an injunction against D in

the courts of Nova Scotia restraining him from using the ship in any way

inconsistent with the charter party, and D's appeal to the Privy Council

was dismissed. The Privy Council quoted with approval the familiar words

of Knight Bruce L.J. The advice of the Board has often been read as

deciding in effect that the defendant in the case before them was caught by

the rule in Tulk v. Moxhay on the basis that he had bought a ship with

notice that she was affected by a restrictive covenant favour of the plaintiff

and was therefore, in their view, in the same position if he had bought an

estate in land with notice of a similar restriction.

It must be remembered, however, that in the years that had elapsed

since the case of De Mattos v. Gibson 1858 the rule in Tulk v. Moxhay

1848, 2 Ph, 774 Past, P.453 had been radically developed by the courts

and had ceased to be based solely upon notice. A restrictive covenant

imposed on land could no longer be enforced against later purchasers

unless the original covenantee had retained a proprietary interest in other

11 London County Council v. Allen [1914] 3 KB 642 at 658, See also Barker v. Stickney [1919] 1
KB 121.

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land for the benefit of which the covenant was taken. Where was the

proprietary interest in the Strathcona case? The Privy Council recognised

the necessity for its existence, but they could only assert that A enjoyed the

necessity for its existence, and an interest in the ship for the period

covered by the charter party. But this interest was no more than that

conferred by the very contract which A sought to enforce against the third

party; it was certainly not the independent proprietary interest which

enquiry requires in the case of restrictive covenants over land. Moreover, it

is well established that a charter party creates no right of property in a

ship13.Whether the decision in the Strathcona case should be accepted as

valid and worthy to command the assent of English courts has been the

subject of much debate.

In 1936 the Court of Appeal thought that it must in any event be

confined 'to the very special case of a ship under a charter-party'14, and the

decision itself was challenged in Port Line Ltd. v. Ben Line Steamers

Ltd15.'

In March 1955, the plaintiffs chartered a ship from X the owner, for

a period of 30 months. The ship was to remain in X's possession but to

be4 at the complete disposal of the plaintiffs. In February 1956, X sold the

ship to the defendants. The defendants at once chartered it back to X so

that it never ceased to be in X's possession. The plaintiffs knew of the sale

12 [1926] AC. 108.

13 See Bailhache J in Federated Coal and Shipping Co. v. R [1922] 2 KB 42 at 46, and cases there cited,
Expect in the case of a charter party by demise, Baumwoll Manufacturer Von Carl Scheibler v. Furness [1893]
AC 8.
14 Clore v. Theatrical Properties Ltd. [1936] 3 All ER 483.
15 [1958] 2 QB 146, [1958] 1 All ER 787.

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and acquiesced in it since the ship was to remain available under their own

charter. The charter between X and the defendants contained a clause

that 'if the ship is requisitioned, the charter shall thereupon cease'. No

such clause existed in the plaintiffs' charter. The defendants, when they

bought the ship, knew of the existence of the plaintiffs' charter but not of

its terms.

In August 1956, the Ministry of Transport requisitioned the ship and

paid compensation to the defendants as owners. In November 1956, the

requisition ended. The plaintiffs now sued the defendants to obtain this

compensation money and relied, inter alia, on the Strathcona case and the

dictum in De Mattos v. Gibson (1858).Diplock J gave judgment for the

defendants. He thought, in the first place, that the Strathcona case was

not good law.The difficulty I have found in ascertaining its ratio decidendi

right, the impossibility which I find of reconciling the actual decision with

well-established principles of law, the unsolved and, to me, insoluble

problems which that decision raises combine to satisfy me that it was

wrongly decided.

He stressed, in particular, the necessity, in the twentieth century, of

finding some proprietary interest to support a claim based on Tulk v.

Moxhay 1848, 2 Ph, 774 Past, P.453 and the absence of any such

interest in the Strathcona case. In the second place, he was of opinion

that, even assuming it possible to support it he Strathcona case in

principle, the facts before him did not fall within its scope. The

defendants, when they bought the ship, had no actual knowledge of the

plaintiffs' rights: though they knew that a charter existed, they did not

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know its terms. Nor were they in breach of any duty. It was not by their

act but by the act of the Crown that the ship had been used inconsistently

with the plaintiffs' charter. Finally, the only remedy possible under the

doctrine of Tulk v. Moxhay 1848, 2 Ph, 774 Past, P.453 and therefore

under the Strathcona case was the grant of an injunction. No damages or

money compensation could be obtained.

However in Swiss Bank Corpn. v. Lloyds Bank Ltd16. Browne-

Wilkinson J thought both De mattors v. Gibson, 1859(4) De G & J 276

and the Strathcona case correctly decided, though he found some of the

reasoning in the latter case difficult to follow. He found two lines of

reasoning which might be applicable in addition to the restrictive covenant

argument which might be applicable in addition to the restrictive covenant

argument which he thought generally not to the point. One approach is

that a purchaser who takes expressly subject17 to the terms of an earlier

contract as to the use of the property may be held to be a constructive

trustee18. He gave greater weight to a second approach which arises out of

the tort of inducting breach of contract19. He considered that the granting

of the injunction in De Mattos v. Gibson20 1859(4) De G & J 276 was 'the

counterpart in equity of the tort of knowing interference with contractual

16 [1979] Ch. 548, [1979] 2 All ER 853; the judgment of Browne Wilkinson J was varied by the Court of
Appeal (1980) 2 All ER 419 but in such a way that Court did not need to consider the correctness of his
judgment on the present issues.
17 That is, not only knowing of, but agreeing to be bound by, the earlier contract.
18 He thought this certainly one of the grounds of decision in the Stratheona case, though he expressed no
conclusion as to the correctness of this reason. It derives some support from cases such as Binions v. Evans
[1972] Ch. 359, [1972] 2 All ER 70.
19 See e.g. Winfield and Jolowiez on Tort (11th edn) pp. 479-488
20 (1859) 4 De G & J 276.

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rights' 21 It is perhaps unfortunate that discussion of the application of real

property analogies to personal property has concentrated on restrictive

covenants to the exclusion of other interests, perhaps more readily

applicable to chattels. Thus it is clear that an option to purchase land

creates an equitable interest in the land capable of being enforced against a

purchaser of the land22 and there is authority for the application of the

same principle to options to purchase chattels 23 and chooses in action,

such as copy rights24.

A question, potentially of great practical importance, is whether a

contract under which possession of a chattel is transferred for a fixed term

creates property rights analogous to a lease25. Such contracts, e.g. for the

rental of television sets or for hire or hire purchase26 of motor vehicles, are

extremely common and it is difficult to see any good reason why the owner

of the goods should be able to convert the hirer's right to possession into a

right to damages by selling the goods over his head. Holdsworth saw the

position with his usual clarity over forty years ago when he said;27

"It is obvious that if A has let or pledged his chattel to B and has

transferred its possession to B and If he then sells it to C, C can only take

22 See e.g. London and South Western Rly Co. v. Gomm. (1882) 20 Ch.D. 562.
23 Falcke v. Gray (1859) 4 Drew 651.
24 Mac Donald v. Eyles [1921] 1 Ch. 631. Quaere whether this depends on the contract being specifically
enforceable.
25 This was not the case in The Strathcona since the charterer does not ordinarily get possession of the
chartered ship but merely a contractual right to control its use. In the special case of a charterparty by demise,
the charterer does get possession and in the leading authority on such charterparties, Baumwoll Manufacturer
Von Carl Scheibler v. Furness [1893] AC 8, extensive use was made of analogies from the law of leases.
26 A hire-purchase contract also contains an option to purchase, see p. 120, above.
27 49 L.Q.R. 576 at 579; see also Gutteridge 51 L.Q.R. 91 at 98; Thornely 13 JSPTL 150 at 151; Lawson
The Law of Property pp. 71-73.

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it subject to B's legal rights, and since they are legal rights whether C has

notice to those rights or not28."

(ii) Restrictions upon the price

An attempt to enforce a price restriction against a third party was

made in 1904 in the case of Taddy v. Sterious29. The plaintiffs, who were

manufacturers of 'Myrtle Grove' tobacco, sought to prevent retailers from

selling it below a minimum price. They attached to each packet a printed

sheet, stating that the tobacco was sold 'on the express condition that

retail dealers do not sell it below the prices above set forth' and adding that

'acceptance of the goods will be deemed a contract between the purchaser

and Messrs Taddy & Co. that he will observe these stipulations. In the

case of a purchase by a retail dealer through a wholesale dealer, the latter

shall be deemed to be the agent of Taddy & Co.' The plaintiffs sold tobacco

under these conditions to Messrs Nutter, wholesale dealers, who resold it

to the defendant, retail tobacconists. The defendants, though they had

notice of the conditions, resold below the minimum price.

The plaintiffs sued in the Chancery Division for a declaration that

the defendants were bound by the conditions. They put their case on two

grounds. First, they maintained that the printed sheet constituted a

contract between themselves and the defendants and that Messrs Nutter

were their agents. The court dismissed this attempt to create a contract by

ultimatum. There was in truth no contract between Taddy and Sterious,

Messrs Nutter were not Taddy's agents, and no unilateral declaration,

28 In practice C will very often have notice since A will not have possession.

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however peremptory, could alter the legal position. Secondly, the plaintiffs

invited the court to extend to them the protection of the rule in Tulk v.

Moxhay 1848, 2 Ph, 774 Past, P.453. The invitation was summarily

rejected. In the words of Swinfen Eady J:

Conditions of this kind do not run with goods and cannot be imposed

upon them. Subsequent purchasers, therefore, do not take subject to any

conditions which the court can enforce. Another attempt to enforce a price

restriction against a third party, made later in the same year, was met by

the Court of Appeal with the same uncompromising refusal30.

The legal position remained unchanged for half a century, but then

became the subject of somewhat irresolute legislation. By section 24 of the

Restrictive Trade Practices Act 195631 agreements for the collective

enforcement of stipulations as to resale prices were declared unlawful. But

this declaration was balanced by a new sanction given by section 25(1) of

that Act to the individual enforcement of such stipulations. The practical

importance of this provision was greatly reduced, however, some eight

years later when legislation was introduced to restrict individual minimum

resale price maintenance32.Section 25 (1) of the 1956 Act had provided that

where goods were sold by a supplier subject to a condition as to the resale

price of those goods, the condition was (with certain exceptions)33,

enforceable by the supplier against any person not party to the sale who

29 [1904] 1 Ch. 354.

30 Mc. Gruther v. Pitcher [1904] 2 Ch. 306.
31 The provisions of this section were re-enacted by the consolidation legislation of 1976. See Resale Prices Act 1976,
Part 1, ss. 1 to 4.
32 Resale Prices Act 1964, s. 1.
33 Thus the condition was not enforceable in respect of the resale of any goods by a person acquiriing those goods
otherwise than for the purpose of resale in the course of business. I bid, s. 25 (2). See now Resale Prices Act 1976, s. 26 (3)

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subsequently acquired the goods with notice of the condition as if he had

been a party to the sale; but, with the application of the Resale Prices Act

1964 (in the light of which section 25(1) had thereafter to be read), there

was little scope for its further implementation.

By Section 1 (1) of the Resale Prices Act 1964, any term or condition

of a contract for the sale of goods by a supplier to a dealer for the

establishment of minimum resale prices was void; and the inclusion of

such a term or condition in a contract of sale was unlawful. It was,

accordingly, unenforceable by the supplier, either against his own dealer or

against a third party to the contract. The subsection was, however, subject

to provisions for exemption by the Restrictive Practices Court of particular

classes of goods. The combined effect of section 25 (1) of the 1956 Act and

section 1(1) of the 1964 Act, is reflected in the consolidation legislation of

197634. By section 26(i) and (ii) of the Resale Prices Act 1976, it is declared

that The provisions of this section shall be

Sec. 26, (i) Apply where goods are sold by a supplier subject to a

condition which is not unlawful under this Act as to the price at which

those goods may be resold; and(ii) be interpreted as if they were provisions

of Part 1 of this Act35.Sec. 26, (ii) Where goods are sold by a supplier

subject to such a condition, either generally or by or to a specified class or

person, that condition may be enforced by the supplier against any person

(a) Who is not a party to the sale, and (b) Who subsequently acquires the

(a).
34 Resale Prices Act 1976, Part III, s. 26.
35 Resale Prices Act 1976, s. 8 of which relates to he interpretation of Part 1 of the Act.

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goods with notice 36 of the condition, as if that person had been party to the

sale In only two cases under the 1964 Act did the Restrictive Practices

Court exercise its powers to exempt any classes of goods from the scope of

the Act. Each of these cases is one in which, in the words of section 26 (1)

of the 1976 Act, goods may be sold subject to a condition which is not

unlawful under the Act. Whether or not there will be any further cases

depends initially on the success of any new applications to the Court for

exemption of goods under the 1976 Act37.

6.1.2 CONTRACT CONCERNING CHATTELS AND OTHER PERSONAL

PROPERTY

English law has always drawn a distinction between the principles

applicable to real and personal property38. The general rule set out above is

subject to statutory exceptions. It does not apply where a contract or an

option to transfer a chattel or an intangible interest creates an equitable

interest in property or a possessory interest in the transferee, and the

Courts may protect this interest against a third party39. It has also been

said that :

Reason and justice seem to prescribe that, at least as a general rule,

where a man, by gift or purchase, acquires property from another, with

knowledge of a previous contract, lawfully and for valuable consideration

made by him with a third person, to use and employ the property for a

37 Resale Prices Act 1976, ss. 14 to 17. Maximum resale price conditions would also be enforceable under
s. 26 of the Act, but such conditions are seldom encountered in practice.

39 Falke v. Grey (1859) 4 Drew 651; Erskine Macdonald Ltd. v. Eyles [1921] 1 Ch. 631, 641, See also Swiss
Bank Corp. v. Lloyd's Bank Ltd. [1982] A.C. 584, at pp. 598, 613 (Contract did not create charge over

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particular purpose in a specified manner, the acquirer shall not, to the

material damage of the third person, in opposition to the contract and

inconsistently with it, use and employ the property in a manner not

allowable to the giver or seller40.Although the generalization in this dictum

has been influential, it will be seen that there are formidable difficulties in

regarding it as sound in principle. It is also not entirely clear why it

applied to some types of contract (time charters) but not to others (resale

price maintenance agreements)41

(i) Resale price maintenance

Normally, at common law, a seller of goods cannot impose liability

upon subsequent purchasers to purchase goods at a fixed price or not to

purchase the goods below certain price. For example, in Taddy & Co. Vs.

Sterious & Co.42 the plaintiffs, manufacturers of tobacco, sold the tobacco

packers to Messrs Nutter, a whole-sale dealer. A condition was printed on

each packet that the tobacco would not be resold below a certain price.

The whole-sale dealer resold them to defendants who resold it below the

fixed price. The plaintiffs' action for injunction against defendants failed.

It was held that the condition of this kind could not run with the goods.

Such condition could not be enforced against subsequent purchasers.

Manufactures may try to prevent price cutting by imposing a

condition on the wholesalers with whom they contract that the goods are

not to be re-sold at less than a fixed or minimum price. In this way they

property)
40 De Mattos v. Gibson (1858) 4 DeG. & J. 276, per knight Bruce L.J. at p. 282.
41 Law Debenture Trust Cpn. v. Ural Caspian Oil Cpn. Ltd. [1993] 1 W.L.R., 138, per Hoffmann L.J. at p.
144 rev'd on other grounds [1995] Ch. 152.

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attempt to bind retailers and others with whom they have no contractual

relationship. Restrictions in such agreements between undertakings which

operate at a different level of the production or distribution chain are

known as 'vertical' restrictions. At common law such restrictions were

inflective against subsequent purchasers who did not take subject to the

price maintenance conditions even where notice of the conditions was

attached to the goods43.

Resale price maintenance (RPM) is the policy by which a supplier

ensure that his product shall be sold to the customer at a price which has

been fixed in advance by him. Resale price maintenance (RPM) is

sometimes referred to as retail price maintenance, but the two terms are

not synonymous. Sometimes, the supplier fixes only the price to be

charged from the retail customer, but where goods are handled by

wholesalers as well as by retailers, the resale price frequently includes both

the retail price to be paid by the retailer to the wholesaler. Under these

arrangements, a product is sold at the same price in all outlets. The

arrangement may be contractual or may consists in a policy of withholding

supplies of goods (whether the price-controlled goods or other goods) from

dealers, who do not maintain the specified prices. They may be individual,

i.e., enforced separately by each manufacturer or supplier in respect of his

own goods, or collective, so that failure to maintain the specified prices

may expose a dealer to loss of supplies from a group of manufacturers or

42 (1904) 1 Ch. 354.

43 Mc Gruther v. Pitcher [1904] 2 Ch. 306. See also tAddy v. Sterious & Co. [1904] 1 Ch. 354.

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suppliers44.

The Committee on Resale Price maintenance in the U.K., popularly

known as Lloyd-Jacob Committee, made a detailed investigation into the

whole system of RPM. The practice of RPM was described in the report of

the Committee as being “designed to ensure that, whatever the channels of

distribution through which a particular article has passed, it shall be sold

to the retail customer at a price which has been fixed in advance by the

“manufacturer, producer, wholesaler, importer, or other supplier”. The

resale price so determined in advance may be a minimum price, or a fixed

specific price, or a maximum, or a recommended price. The practice has

almost always been associated with branded goods, goods carrying a trade

mark or some other identification with their manufacturer or supplier.

Where the manufacturer may make them for some other supplier, and the

goods may carry the mark or brand of the goods they are identified with

him; but the manufacturer may make them for some other supplier, and

the goods may carry the mark or brand of that supplier and so be identified

with him. Or, where the goods are imported, the importer may have his

brand put on them. Where the manufacturer is fully integrated forwards,

and has his own distribution chain down to and including the retail

outlets, he can determine the retail selling price. For the manufacturer who

has to reply upon a distribution chain which is independent of him, resale

price maintenance give him to same result. It enables him to prescribe the

price, and so the margins. In the case of technical goods, i.e., goods which

may require extensive after sales service, the margin can be fixed to give

44 The Law of Restrictive Trade Practices and Monopolies, by Lord Wilberforce, Alan Campbell and Neil Elles, Second
Edition, p. 404.

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sufficient allowance for that service.There are two separate methods of

operating a resale price maintenance system- individual resale price

maintenance and collective resale price maintenance :

1. Individual resale price maintenance describes the situation

where the individual manufacturer establishes and seeks to enforce his

own resale price maintenance system by his own separate efforts, using

whatever lawful weapons, legal or otherwise; are available to him, either by

enforcement through the Courts, where possible, or by other means, such

as economic pressure. Under the general principles of common law such a

system was valid, but enforceable only where there was privity of contract.

This was decided in Dunlop Pneumatic Tyre co. Ltd. v. Selfridge & Co.

Ltd.45 Dunlops sold tyres to a distributor subject to two conditions, that

the distributor would not resell below Dunlops’ resale price and would only

resell to a trade buyer on condition that the latter would observe Dunlops’

resale price. Selfridges bought the tyres from the distributor, accepting that

condition and agreeing to pay Dunlops £5 for each tyre sold by them in

breach of the condition. Dunlops sued Selfridges, but without success.

With stable trading relations and a limited number of outlets, these

difficulties could be overcome by having tripartite agreements (and

consideration moving from the manufacturer), but its limitations prevented

this solution from being widely adopted

2. Collective resale price maintenance is the system where a

number of manufactures act collectively. Each would prescribe the prices

at which his products should be resold at the various stages down to retail

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sale-the prices were not necessarily the same as between each

manufacturer, although the margin allowed at each stage would normally

be the same. If any distributor failed to comply with the resale price

condition, his name would be put on a “stop list” and all the

manufacturers would refuse so supply him. In highly organized trade, the

stop list might be operated not only by the manufacturers but also by the

other distributors, so that the offender would unable to draw supplies at

trade terms from anywhere, supplies not only of the particular

manufacturer’s goods but of all other goods in the trade46.

There is a separate enactment, the Resale Prices Act, 1964 which

governs the RPM in U.K. (See also Resale Prices Act, 1976). The general

purpose of this Act is to prevent suppliers goods (manufacturers and other)

from fixing minimum prices at which the goods are to be resold and to

prohibit the withholding of supplies from dealers who sell at a price below

the minimum so fixed. The Restrictive Practices Court is empowered to

exempt particular classes of goods from the general prohibition of RPM on

any of the following grounds (which The Court have substantially adopted

in section 41 of the Act) (a) That abolishing price maintenance would

reduce the quality or variety of goods available; (b) That abolition would

reduce the number of shop (c) That abolition would lead in general to

higher prices in the long run; (d) That abolition would create danger to

health ; or (e) That abolition would interfere with proper pre-sales or post-

sales services.

45 (1915) AC. 847

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 In addition, there is a tailpiece requiring that any detriment to

consumers resulting from abolition should outweigh the detriment

resulting from the continuation of resale price maintenance. Manufacturers

seeking exemption under the Act are, however, permitted to continue to fix

and enforce resale price until the case had been decided by the Restrictive

Practices Court. Once a case has been decided, the decision applies to all

goods of a particular class, not merely those of the manufacturer

concerned in the representative case.

Originally only collective administration of RPM was actionable, but

after the passing of the 1964 Act, even individual RPMs were brought

under the purview of the Act. In re footwear reference (No.2)47, it was held

that act of was susceptible of interlocutory enforcement and injunction

issued under it will be of mandatory effect and that the whole scheme to

the act was to order people actually to supply goods that they may be

unwilling to supply ant this was within the ordinary sphere in which

injunctions operated in . Comet radio vision services Ltd. v. Farnell

Tandberg Ltd.48, supplier of tape recording and other equipment refused to

make dealer had issued advertisements showing the below recommended

prices. The dealer had suppliers’ goods as being available at lower than

recommended prices and it had been so after that objected . the dealer

sought an interlocutory injunction restraining the withholding of the

supplier and claimed that the suppliers was granted but it was held that

the act being a disabling act a restricted interpretation should be given to

46 The fair Trading Act, 1973 by James P. Cunningham (1974), p. 383, 385-6.

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its language so that the withholding of the supplies on some grounds other

grounds is of resale price maintenance would be lawful. The existence of

other grounds is enough if the supplier can say that on the strength of this

ground alone he would have withheld supplies.

Section 5 of the Resale Prices Act, 196449 provides power to the

Restrictive Practices Court to exempt classes of goods on a reference made

by the Director-General. The U.K. law justifies exemptions also if the goods

sold by retail may cause danger to pubic health or the number of

establishments in which the goods are sold by retail would be substantially

reduced to the detriment of the pubic. When exemption has been granted,

the supplier is free to exercise both his common law rights and also the

rights conferred by section 25 of Restrictive Trade3 Practices Act, 1956* for

individual enforcement by legal proceedings of conditions as to resale

prices.

In Medicaments Reference (No. 2)50, it was held by the Court that

“when medicines were prescribed under the National Health Scheme of

U.K. they were neither sold nor sold by retail within the meaning of section

5(2) of the U.K. law. Nevertheless, all ethical drugs which a chemist held in

stock were available for sale within section 5(2)(a) so that a reduction in the

varieties of ethicals was a reduction in the varieties of goods available for

sale under section 2(a). Any service which was closely associated with a

retail sale was “provided in connection with” it, so that a reduction in

47 (1968) L.R. 6 R.P. 398.

48 (1971) L.R. 7 R.P. 168.
49 RTP Enquiry No. 30/1979, Order dated 2-9-1981.* Also refer to the Restrictire Trade Practices Act, 1976
and 1977.

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wholesalers’ deliveries of ethicals. Without resale price maintenance on

ethicals, short range distributors who emerge, would stock and sell only

fast moving ethicals. Because of their low overheads they would offer

substantial discounts to chemists so as to divert their trade from existing

wholesalers. The wholesalers would retaliated by countervailing discounts

paid for by a drastic reduction in their service whereby they would restrict

their stockist and deliveries. As a result there would be substantial

reduction in the variety of ethicals available for sale in delivery services

provided in connection with their sale. In respect of proprietary drugs, it

was held that without resale price maintenance super markets would cut

the prices of the most popular proprietaries thereby capturing a

substantial part of the chemists trade in proprietaries and leading to a loss

of the chemist’s other trade because fewer customers would visit chemist’s

shops. There would be a substantial decline in the number of chemists

shop and there would be a substantial reduction in the outlets in which

the less popular proprietaries could be obtained to the detriment of the

public who consume or sue proprietaries”.

In Chocolate and Sugar Confectionary Reference51, five largest

manufacturers of chocolate and confectionary sought exemption from the

general ban on the resale price maintenance on the grounds that without

fixing the resale prices there would, as a result of price cutting, be

substantial shift of trade from the confectionary shops to the super

markets and selfservice grocers resulting in a substantial reduction of (i)

50 (1970) L.R. 7 R.P. 267.

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variety, (ii) retail establishment, and (iii) necessary services like stocking,

display, and weighing out and that it would necessary to increase the trade

margins to save confectionary shops from extinction and this would be

reflected in higher retail prices. It was held that the burden of establishing

the case for exemption rested on the Respondents who applied for

exemption and the standard of proof required on all issues was that of the

balance of probabilities. It was also held that the public who purchased

confectionaries for small amounts would not travel more than a short

distance to obtain confectionary at reduced prices. The abrogation of re-

sale prices maintenance would not lead to a drastic diversion of trade from

confectionary shops to super markets and self-service grocery, that such

diversion of trade which did occur would result in the closure of no more

than ten per cent of confectionary shops in close proximity to super

markets and these reductions would not materially affect the public

whether as respects the variety of confectionary or the location of shopping

outlets or the retail price of the confectionary. It was, therefore, held that

the manufactures has failed to make out the case for exemption.

The matter is now governed by section 2 of the Competition Act 1998

which contains a general prohibition on restrictive agreements, subject to

limited exceptions. The Competition Act seeks to harmonize UK law with

EC competition law, and section 2 has broadly the same effect as the

prohibition in Article 81 (ex Article 85) of the EC Treaty which applies

51 (1967) L.R. 6 R.P. 338.

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where a restriction affects trade between members of the EU 52.An

agreement operating between wholesalers providing for the fixing of resale

prices falls within the prohibition53. Although there are block exemptions in

both UK and EC legislation for certain vertical restrictions54, they do not

apply to vertical agreements that have as their direct or indirect object the

fixing of resale prices. Recommended prices and maximum prices are,

however, allowed55. Vertical restraints imposed by firms in a dominant

market position may also fall within the UK and EC controls on the abuse

of such a market position56.

(ii) Intellectual property

(a) Patents

A patentee has by statute the sole right to make, use, exercise, and

vend an invention; and no other person has the right to sell the patented

article except under license from the patentee, and subject to any

conditions attached to the license57. But the rights of a patentee to attach

resale price maintenance conditions to goods have now been substantially

curtailed by section 2 of the Competition Act 1998 and Article 81 (ex.

Article 85) of the EC Treaty. Certain other restrictive conditions, in

agreements for sales by a direct licensee or assignee. for instance 'tie-in'

clauses providing that the patented article is only to be used for

52 Ante, p. 383. For a full discussion, see Whish, Competition Law, 4th edn. (2001); Albors. Llorens EC.
Competition Law and Policy (2002).
53 Case 243/83 Binon v. Agencie et messagerie de la presse [1985] E.C.R. 2015, at para, 44; Case 27/87
Lovis Erauw-lacquery v. La Hesbignonne [1988] E.C.R. 1919 at para, 15.
54
55 Competition Act 1998 (Land and Vertical Agreements Exclusion) Order 2000, S.I. 2000 No. 310;
Regulation 2790/99 O.I. [1999] 1, 336/21, Art.-4.
56 Case 161/84Promptid de Paris Gmbl v. Prompna de Paris Irmgard Schillgallis [1986] E.C.R. 353.
57 Columbia Graphophone Ltd. v. Murray [1922] 39 R.P.C. 239, Dunlop Rubber Co. Ltd. v. Long Life

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manufacture with supplies purchased form the patentee, are rendered void

by section 44 of the Patent Act 1977 unless the patentee is willing to

supply or license the patented article on reasonable terms and without any

such condition58.

(b) Copyright

The owner of the copyright in literary, dramatic, musical or artistic

works has a statutory right to prevent it being copied, published,

broadcast, or intrigued in certain other ways by any unauthorized

person59. A signed agreement to transfer the copyright in a work not yet in

existence will vest legal ownership in the transferee as soon as the work is

created if there is no other person with a superior equity60. It has been held

that a publisher who is granted a contractual option in respect of the

future work of an author may restrain another publisher who, although not

a party to the contract, with knowledge of the circumstances subsequently

contracts with the author to publish the work61.

(iii) Bailment

Bailment involves the transfer of possession (or an agreement to

transfer possession) of goods to a person (the 'bailee') who holds (or agrees

to hold) the goods either for or at the direction of the bailor, to whom they

will be returned62. Bailee as is the dry cleaning firm which takes in a

customer's clothes for cleaning. In many situations there will be a series of

Battery Depot [1958] 1 W.L.R. 1033.

58 The person supplied or licensee may receive himself of liability by payment of reasonable compensation;
s. 44(4).
59 Copyright, Designs and Patents Act 1988. See generally Cornish, Intellectual Property, 4th edn. (1999).
60 Copyright, Designs and Patents Act 1988. See generally Cornish, Intellectual Property, 4th edn. (1999).
Part IV.

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bailments and the question is whether, if the ultimate sub-bailee loses or

damages the goods and is sued by the bailor either in tort of for breach of

duties arising from the bailment63. It can rely on the terms of the contract

it made with its immediate bailor as a defence. In Morris v. C.W. Martin

& Sons Ltd64.

Morris sent a mink stole to a furrier to be cleaned. The furrier did

not clean furs himself, so, with the Morris's consent, he delivered it for

cleaning to the defendant, one of whose servants later stole it. The

contract between the furrier and the defendant contained exemption

clause, on which the defendant sought to rely when sued by Morris.

On the facts the exemption clause was held not to apply, but Lord

Denning M.R. said that, had it applied, in principle the defendant could

have relied on it. Morris would be bound by the conditions if she had

expressly or impliedly consented to the furrier making a sub-bailment

containing those conditions. Since she had agreed that the furrier should

send the stole to the defendant, she impliedly consented to his making a

contract for cleaning on the terms current in the trade65.

In K.H. Enterprise v. Pioneer Container66 this principle was

applied to a contract for the carriage of goods by seal;K.H.E. contracted for

the carriage of goods from Taiwan to Hong Kong. The carrier was

permitted to sub-contract 'on any terms' and did so to the defendant who

61 Erskine Macdonald Ltd. v. Eyles [1921] 1 Ch. 631.

62 Palmer on Bailment, 2nd edn. {1991); Chity on Contracts, 28th edn. (1999), para. 33-001 ff.
63 For instance, only to deal with the goods in the manner authorized.
64 [1966] 1 Q.B. 716.
65 I bid., at p. 729, See also Salmon L.J. at p. 741. See also Singer Co. (U.K.) Ltd. v. Tees and Hartlepool
Port Authority [1988] 2 Lloyd's Rep. 164; The Captain Gregos (No. 2) [1990] 2 Lloyd's Rep. 395, at p. 405

- 225 -
took possession of the goods under bills of lading providing that any

dispute was exclusively to be determined in Taiwan. The goods were lost

and K.H.E. sued in Hong Kong, contending that it was not bound by the

exclusive jurisdiction clause because there was no contract between it and

the defendants. The Judicial Committee of the Privy Council stated that a

person who voluntarily takes another person's goods into its custody holds

them as bailee of that person (the owner) even if it does so without the

owner's consent, but can only invoke the terms of the sub-bailment under

which it received the goods from an intermediate bailee (the carrier) as

qualifying its responsibility if the owner consented to them67. It held that

consent to sub-contract and therefore to sub-bail 'on any terms' was wide

enough to constitute express consent to the clause and K.H.E. was bound

by it.

(iv) Ships under charter-party

In Lord Strathcona Steamship Co. Ltd. v. Dominion Coal Co.

Ltd68.The D. Co. had a long-term time charter party of a ship. The owners

sold the ship, which eventually came into the possession of the L.S. Co.,

who took it with notice of the charter-party and on the under-standing that

the agreement should be honoured. They did not honour the agreement,

and when sued by the charterers, D.Co. pleaded that they were not bound

by the charter-party as there was no privity of contract between them. The

66 [1994] 2 A.C. 324.

67 I bid., at p.342 disapproving Johnson Matthey & Co. Ltd. v. Constantine Terminals Ltd. [1976] 2 Lloyd's
Rep. 215. The principles in 'The pioneer Container' were applied in Soni care International Ltd. v. East Anglia
Freight Terminal Ltd. [1997] 2 Lloyd's Rep. 48 and Spectra International plc v. Hayesoak Ltd. [1997] 1
Lloyd.s Rep. 153.
68 [1926] A.C. 108.

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judicial Committee of the Privy Council upheld the decision of the Courts

in Nova Scotia granting the chatterers, D.Co. pleaded that they were not

bound by the charter-party as there was no privity of contract between

them.

The Judicial Committee of the Privy Council upheld the decision of

the Courts in Nova Scotia granting the chatterers an injunction restraining

the L.S. Co. from using the ship inconsistently with the charter-party. The

Board relied upon the dictum of Knight Bruce L.J in De Mattos v. Gibson

quoted above. The case was said to fall under the rule in Tulk v. Moxhay

relating to the use of land; whether the subject matter was land or a

chattel, the principle is the same; 'the remedy is a remedy in equity by way

of injunction against acts inconsistent with the covenant, with notice of

which the land was acquired69.'

This reasoning has, however, been the subject of considerable

criticism70, and it has been said that the case was wrongly decided71. In the

first place, it is argued that reliance should not have been placed on the

dictum of Knight Bruce L.J. In Dc Mattos v. Gibson an interlocutory

injunction was granted to restrain the mortgagee o a ship, who had

acquired his mortgage with knowledge of an existing voyage charter-party,

from interfering with the performance of the charter. Knight Burce L.J's

reasoning did not, however, form part of the concurring judgment of Turner

L.J. and has been doubted72. When the case came before Lord Chelmsford

69 {1926} A.C. 108, at p. 119.

70 Greenhalgh v. Mallard [1943] 2 All E.R. 234, at 239.
71 Port Line Ltd. v. Ben Line Steamers Ltd. [1958] 2 Q.B. 146, at p. 168.
72 London C.C.v. Allen [1914] 3 K.B.642, at p.658; Barker v.Stickney[1919] 1K.B121, at p. 132

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L.C.73, a final injunction was refused74. Although the Lord Chancellor

expressed the opinion that the mortgagee was bound to abstain from any

act which would have the immediate effect of preventing performance of the

charter, he appeared to do so on the ground that any right to an injunction

was based on an extension of the principle whereby a person who

knowingly induces one party to break his contract with another is liable to

that other in tort in respect of any loss which may have been suffered by

the breach75.

In so far as the Judicial Committee in the Strathcoan case drew an

analogy with the rule in Tulk v. Moxhay, this too will not bear examination.

We have seen that the Talk v. Moxhay rule is not now dependent upon

notice of the restrictive covenant alone, but upon the ownership of

neighboring land for the benefit of which the covenant was imposed: the

person seeking to enforce the covenant must have a continuing proprietary

interest in its enforcement. But character under a voyage or time charter-

party (even if of long duration) only has a personal right that the ship-

owner should continue to use the ship to perform the services which he

has covenanted to perform. The charterer has no proprietary interest in

the subject-matter of the contract, the ship76.

Although the principle stated by Knight Bruce L.J. in De Mattors v.

73 [1859] 4 De G. & J. 288.

74 On the ground that the mortgagee had not interfered with performance of the charter until it was evident
that the ship-owner was wholly unable to perform it (at pp. 299-300).
75 Lumley v. Gye [1853] 3 E. & B. 216. See also Wade (1926) 42 L.Q.R. 139; The Lord Strathcona [1925]
P. 143; post, p. 458, n. 285.
76 Port Line Ltd. v. Ben line Steamers Ltd. [1958] 2 Q.B. 146, per Diplock J, at p.166. Unless it is a
charterparty by demise. when the charter could be said to acquire a 'possessory interest' in the vessel: See
Baumwoll Manufacturer Von Carl Schcibler v. Furness [1893] A.C., 8 See also Lorentzen v. White Shipping
Co. Ltd. (1943) 74 LJ L.R. 161.

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Gibson has subsequently been applied in cases of the mortgage of ships

subject to a charter-party77 these are open to the same criticisms. The

better view is that any right of the charterer to an injunction to restrain a

use of the ship inconsistent with his charter-party arises if, the conduct of

the purchaser is such as to constitute the tort of knowing interference with

the charterer's contractual rights78.

There may, moreover, be alternative explanations for the decision in

the Strathcona case. One is that there was an implied contract between

the third party and the charterers, or a 'notation' of the original agreement,

for the Board pointed out; 'This is not a mere case of notice of the existence

of a covenant affecting the use of the property sold, but it is the case of the

acceptance of their property expressly sub condition.79' Alternatively, there

is some ground for saying that the third party was in the position of a

'constructive trustee' with obligations which a Court of Equity would not

permit it to violate80.

With these reservations in mind, we have now to consider the scope

of the decision. This was considered in Port Line Ltd. v. Ben Line

Steamers Ltd81. The M.V. Part Stephens was chartered to Port Line by its

owner, Silver Line Ltd., on a gross time charter for 30 months from march

77 Messageries Imperiales v. Baines {1863} 7 L.T. 763; The Celtic King [1894] p. 175.
78 Lumley v. Wagner [1852] 1 De G.M. & G. 604, See also Torquay Hotel Co. Ltd. v. Cousins [1969] 2 Ch.
106; Acrow Ltd. v. Rex Chaiubelt Inc. [1971] 1 W.L.R. 1676; La Debenture Trust Cpn. v. Ural Caspian Oil
Cpn. Ltd. [1995] 152. In Swiss Bank Cpn. v. Lloyd's Bank Ltd. [1979] Ch. 548, at p. 573 (rev'd [1982] A.C.
584), Browne-Wilkinson J. stated that the principle of Knight Bruce L.J. represented 'the counteraprt in equity
of the tort of knowing interference with contractual rights'. But although they may cover the same ground they
are doctrinally distinct and subject to different requirements: see Cohen-Grabelsky (1982) 45 Mod. L.R. 241,
at pp. 265-7; Gardner (1982) 98 L.Q.R. 279, at pp. 289-93; Tettenborn [1982] C.L.J. 58, at p. 82.
79 [1926] A.C. 108, at p. 116..
80 [1926] A.C. 108, at p. 125. See also Swiss Bank Cpn. v. Lloyd's bank Ltd. [1979] Ch. 548, at p. 573 (rev'd
[1982] A.C. 584).

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1955. In February 1956, Silver Line sold the vessel to the defendant, it

being agreed that the defendant should immediately charter the ship back

to Silver Line by demise in order that it might fulfil its contract with Port

Line. Unfortunately, this second charter-party contained the term that 'If

the ship be requisitioned this charter shall thereupon cease', although no

such clause appeared in the original time charter-party. The defendant

was unaware of this disparity. In August 1956 the ship was requisitioned

by the Crown, and as a result Port Line lost the use of the vessel. Its claim

against Silver Line was settled, but it then brought an action against the

defendant to recover the whole or part of the compensation received by the

defendant from the Crown in respect of the period of requisition.

Diplock J. stated that the Strathcona case was wrongly decided, but

held that even if it was correct Port Line could not bring its claim within its

principles, as the defendant had no knowledge at the time of its purchase

of Port Line's rights under the time charter. The Principle in the

Strathcona case thus only applies where there is actual knowledge by the

subsequent purchaser at the time of the purchase of the charterer's

rights82. Constructive notice is insufficient83. Moreover, Diplock J.

considered that, even if notice had been shown, (a) the defendant was in no

breach of duty to Port Line since it was by no act of its that the vessel

during the period of requisition was used inconsistently with the terms of

Port Line's charter – it was by act of the Crown by title paramount – and (b)

81 [1958] 1 Q.B. 146.

82 [1958] 2 Q.B. 146, at p. 168.
83 The doctrine of constructive notice does not apply to chattels (Josehp v. Lyons (1884) 15 Q.B.D. 280, at
p. 287) nor to the contents of documents in commercial transactions (Manchester Trust v. Furness [1895] 2

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Port Line was not entitled to any remedy against the defendant except an

injunction to restrain the defendant from using the vessel in a manner

inconsistent with the terms of the charter84.

The charterer cannot obtain specific performance of the contract85.

nor, it seems, damages or monetary compensation86. It would also seem

that the Court will not be prepared to grant an injunction if the situation is

such that, in any case, the vendor was incapable of further performing the

charter-party87. or if, in the case of the mortgage of a vessel, the charter is

such as substantially to impair the security88.

(v) Restrictions on the use of other chattels

There is even more doubt as to whether the principle stated by

Knight Bruce L.J. in De Mattos v. Gibson, and the decision in the

Strathcona case, would apply to contracts under which the owner of a

particular chattel, other than a ship, undertakes to use the chattel to

perform its obligations to the other contracting party: for example, where

the owner of a costly machine 89 agrees to use the machine to manufacture

goods for the other party over a certain period. In De Mattos v. Gibson

Lord Chelmsford L.C. stressed that'a vessel engaged under a charter-party

ought to be regarded as a chattel of peculiar value to the charterer and it

has been said that the Strathcona decision may be confined to 'the very

Q.B. 539, at p. 545).

84 Port Line Ltd. v. Ben Line Steamers Ltd. [1958] 2 Q.B. 146, at p. 167.
85 De Mattos v. Gibson (1859) 4 De G. & J. 277, at p. 297.
86 Although the form of the order made in the Strathcona case would seem to indicate that damages could be
awarded, cf. Port Line Ltd. v. Ben Line Steamers Ltd. (supra), at p. 169; Law Dcbeniture Trust Cpn. v. Ural
Caspian Oil Cpn. Ltd. [1993] 1 W.L.R. 138, at pp. 144; rev'd on another ground [1995] Ch. 152.
87 Lord Strathcona [1925] p. 143. See also ante, p. 457, n. 280.
88 The Celtic King [1894] P. 175.
89 De Mattos v. Gibson (1858) 4 De G. & 288, per Knight Bruce L.J. at P. 283.

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special case of ship under charter-party'90 Never the less, there would seem

to be no reason why the immediate purchaser of a chattel should not be

restrained by injunction if it commits or threatens to commit the tort of

knowing interference with such a contract91. The same would probably

apply to any covenant by the owner of a chattel to use92 or not to use93 the

chattel in a particular manner. But the relief granted against the third

party purchaser would depend upon the fact of tortuous interference, and

not upon notice of any 'interest' in the chattel.

Moreover, it is highly unlikely that any covenant affecting the use of

a chattel would be held to 'run with the goods' so as to bind all persons

who subsequently purchased the chattel with notice of the covenant 94.

There are good reasons why land-owners should be entitled to prevent

neighboring land from being put to a use that would be prejudicial to their

property. But no such reasons would justify the imposition of

incumbrances on chattels.

(vi) Hire-purchase and hire

There is no authority as to whether a hire-purchase agreement,

under which a chattel is bailed to the hirer with an option to purchase the

chattel once all the installments have been fully paid, will be binding on a

90 Clore v. Theatrical Properties Ltd. [1936] 3 A;; E/R/ 483, per Lord Wright M.R. at p. 490.
91 See Cohen Grabelsky (1982) 98 L.Q.R. 279; Tettenborn [1982] C.L.I. 58.
92 Sefton v. Tophams Ltd. [1965] Ch. 1140 (land). But see Clarke v. Price (1819) 2 Wils. Ch. 157;
Haywood v. Brunswick Permanent Benefit Building Socy. (1876) 3 Ch. D. 694.
93 British Motor Trade Association v. Salvadori [1949] Ch. 556 (covenant not to re-sell chattel). See also
Esso Petrolcum Co. Ltd. v. Kingswood Motors (Addlestone) Ltd. [1974] Q.B. 142 (land); Law Debenture
Turst Cpn. v. Ural Caspian Oil Cpn. Ltd. [1995] Ch. 152 (shares).
94. Taddy v. Sterious & Co. [1904] 1 Ch. 354; Mc Gruther v. Pitcher [1904] 2 Ch. 306; ante, p. 453.

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third party purchaser of the chattel from its owner. But since such an

agreement confers upon the hirer a possessory interest in the chattel and

has been said to confer a proprietary interest,95 the better view is that the

purchaser is bound, at least if he or she has notice of the agreement but

possibly where there is no such notice96. The same principle could possibly

apply to a simple bailment for hire.

6.2 THE POSITION UNDER THE INDIAN LAW

Under the Indian Law contractual liability can also be imposed upon

third parties. A policy of insurance effected by any married man on his own

life, expressed on the fact of it to be for the benefit of his wife, or children,

shall be deemed to be a trust for the benefit of his wife or such children 97.

An insurer issuing a policy under the Motor Vehicles Act covering third

party liability is liable to satisfy any judgment or decree which may be

passed in favour of the third party against the insured in respect of

compensation for loss to the third party against the insured in respect of

compensation for loss to the third party arising in an accident involving a

motor vehicle98. Where an insured under such a policy becomes insolvent

or makes composition or arrangement with creditors, or the insurance

company is wound up, the rights of the insured against the insurer stand

transferred to such third party to whom such liability is incurred99. Where

95 Whiteley Ltd. v. Hilt [1918] 2 K.B. 808, at pp.817, 818, 822.

96 Goode, Hire Purchase Law and Practice, 2nd edn., p.35.
97 The Married Women's Property Act 1874, s 6.
98 The Motor Vehicles Act 1988, s 149; see also the Inland Vessels Act 1917, s 54C.
99 The Motor Vehicles Act 1988, s 150; for similar provision the Workmens' Compensation Act 1923, s 14:

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a person (Principal employer) employs a contractor for execution of any

work involved in his business or trade, such principal employer is liable to

pay compensation under the Workmen's Compensation Act arising out of

accidents to the workmen employed by the contractor in doing such work

(subject to being indemnified by the contractor)100. A mortgagee, consignee

of other person having an interest in the subject matter insured may

insure on behalf of and for the benefit of other persons insured as well as

for his own benefit101.

A holder of a promissory note, bill of exchange or cheque is entitled

to recover the amount due thereon102. Every consignee of goods under a

bill of lading and every endorsee of a bill of lading has the right of suit and

is subject to the same liabilities as if he were a party to the bill of lading103.

A consignee of goods covered by railway receipt or the endorsee shall have

all rights and liabilities of the consignor on delivery of railway receipt to

him104. For the extent to which any other assignees may sue on a contract,

see 'Assignment' under s 37 of Indian Contract Act.

Although, a principal is a party to the contract made by the agent on

his behalf, the position of an undisclosed principal requires consideration.

If an agent makes a contract with a person who neither knows, nor has

reason to suspect that he is an agent, his principal may require the

New India Assurance Co Ltd. Rula AIR 2000 SC 1082 (third party entitled to amount although the policy may
be cancelled on the ground of non-payment of premium later).
100 The Workmen's Compensation Act 1923, s 12; for similar provision regarding payment of contribution
by the principal employer, the Employees' State Insurance Act 1948, s 40..
101 The Marine Insurance Act 1963, s 17.
102 The Negotiable Instruments Act 1881, s 8.
103 The Indian Bills of Lading Act 1856, s 1.
104 The Railways Act 1989, s 74.

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performance of the contract105. A user of goods or beneficiary of services

using or taking benefit with the consent of the person who has purchased

the goods or hired the services, is a consumer, and can file a complaint

and obtain relief for defect in goods or deficiency in services106.

Specific performance may be obtained by a person beneficially

entitled under a marriage settlement and family arrangement, a new

company arising out of amalgamation of a contracting party (company)

with another company, and a new company in respect of contracts entered

into before its incorporation107.

On receiving the assent of the conciliation officer, the settlement of

industrial disputes binds not only the parties to that disputes, but also

binds all the workmen in the establishment, who are employed at the date

of the dispute and all persons who subsequently become employed in that

establishment108.

6.2.1 INDUSTRIAL DISPUTE ACT, 1947

Section 18 of the Industrial dispute Act, 1947 contains under its

different clauses, following provisions in this regard

Section 18(1) provides that a settlement arrived at by agreement

between the employer and workmen otherwise than in the course of

conciliation proceedings shall be binding on the parties to the agreement. It

applies where the agreement is arrived at without assistance of authorities

105 Section 231 of the Indian Contract Act.

106 The Consumer Protection Act 1986, ss 2(d)(1) and (11); (provisions of the Act apply to certain types of
goods and services only).
107 The Specific Relief Act 1963, s.15.
108 The Industrial Disputes Act 1947, s 18(3); Tobacco Friends Union v. State of Uttar Pradesh AIR 1958
All 688; BK Jobanputra v. BS Kalelkar AIR 1965 Bom 146. (1990) 2 SSC 106.

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under this Act. It has been observed by the Supreme Court in Tata

Engineering and Locomotive Co. Ltd. v. Their Workmen,109 that if the

settlement has been arrived at between the company and the union of the

workmen by a vast majority of the concerned workmen with their eyes open

and has also been accepted by them in its totality it must be presumed to

be just and fair and not liable to be ignored merely because a small

number of workmen were not parties to it or refused to accept it or the

tribunal was of the opinion that the workmen deserved marginally higher

emoluments tan they themselves thought they did. A settlement cannot be

weighted in any golden scale and the question whether it is just and fair

has to be answered on the basis of principles different from those which

come into play when an industrial dispute is under adjudication.

In ITC Ltd. Workers welfare Association and & Others v.

Management of ITC Ltd and others110 the Supreme Court observed that

admittedly, the settlement arrived at in the instant case was in the course

of conciliation proceeding and therefore it carries a presumption that is

just and fair. It becomes binding on all the parties to the relates and all

other persons who may subsequently be employed in that establishment.

An individual employee cannot seek to wriggle out of the settlement merely

because it does not suit him.

The Supreme Court further ruled that the next principle to be borne

in mind is that in a case where the validity of the settlement is assailed, the

109 (1990) 2 SSC 106.

110 2002 SCC (L&S) 399; Barauni Refinery Pragatisheel Shramik Praishad v. Indian Oil Corpn. Ltd., 1991
SSC (L&S) 1, G.M. Security Paper Mill. V. R.S. Sharma, 1986 SCC (L&S) 220; Herberstons Ltd. workmen
1977 SCC (L&S) 48; KCP Ltd. v. Presiding Officer, 1996 SSC (L&S) 1410, Tata Engg. and Locomotive Co.

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limited scope of enquiry would be whether settlement arrived at in

accordance with sub-section (1) to (3) of section 12, is on the whole just

and fair and reached bonafide. An unjust, unfair or malafide settlement

militates against the spirit and basic postulate of the agreement reached as

a result of conciliation and, therefore, such settlement will not be given

effect to while deciding an industrial dispute, Of course, the issue has to be

examined keeping in view the presumption that is attached to the

settlement under section 12(3). The settlement has to be taken as a

package deal and it should no be scanned "in bits and pieces" to hold some

parts goods and acceptable and others bad. The settlement has to be

accepted or rejected as a whole. The Supreme Court considered various

decisions and observed that what follows from a conspectus of these

decisions is that a settlement which is product of collective bargaining is

entitled to due weight and consideration, more so when a settlement is

arrived at in the course of conciliation proceedings. The settlement can

only be ignored in exceptional circumstances viz. if it is demonstrably

unjust, unfair or the result of malafides such as corrupt motives on the

part of those who were instrumental in effecting the settlement. That apart,

the settlement has to be judged as a whole, taking an overall view. The

various terms and clauses of settlement cannot be examined in piecemeal

and in vacuum.

In Jhagrakhand Collierries (P) Ltd. v. Agarwal, Presiding

Ltd. v. Workmen, 1982 SCC (L&S) 1 (all the above cases relied on).

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Officer111 it was observed by the Supreme Court that from a persual of

Section 18, it would be clear that a settlement arrived at in the course of

conciliation proceedings is binding not only on the actual parties to the

industrial dispute but also on the heir, successors or assignees of the

employer on the one hand, and all the workmen in the establishment,

present or future, on the other. In extending the operation of such a

settlement beyond the parties thereto, subsection (3) departs from the

ordinary law of contract and gives effect to the principle of collective

bargaining. But sub-section (3) cannot be involved where it is a finding of

the High Court that a settlement arrived at between the employer and the

workman is not deemed a settlement arrived at in the conciliation

proceedings. According to the scheme of Section 18read with Section 2(P) ,

an agreement, made otherwise than in the course of conciliation

proceedings, to be settlement within the meaning of the Act must be a

written agreement signed in the manner prescribed by the rules framed

under the Act. An implied agreement by acquiescene, or conduct such as

acceptance of a benefit under an agreement to which the worker

acquiescing or accepting the benefit was not a party, outside the purview of

the Act, is not binding on such a worker either under sub-section (1) or

under sub-section (3) of Section 18.In Wellman india Pvt. Ltd. v. ESI

Corporation,112 it has been held that a settlement arrived in course of

conciliation proceedings before the Conciliation Officer under Section 12 (3)

of the Act is binding on all parties to the dispute as well as the successors

111 AIR 1975 SC 171.

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and assignees and the subsequently employed workmen under Section 18

(3) of the Act. The settlement could not be put to an end to by any of the

parties unilaterally. Thus bonus scheme had become an express contract

of employment since the date of settlement.

In Ram Pukar Singh and other v. Heavy Engineering Corporation

and others113, the contention of the appellants was that they were not

members of the union with which the settlement dated 14.05.1987 and

13.09.1990 were entered into and, therefore, the said settlements were not

binding on them. It was observed by the Supreme Court that the

settlement dated 13.09.1990 was admittedly under Section 12 (3) read wit

Section 18 and other provisions of the Industrial Disputes Act. The

Settlement, was, therefore, binding on settlement is binding on the

appellants. Under the said settlement it is solemnly agreed that they will

not claim any arrears of the salary till 13.10.1990 on which day they were

appointed to the post of Asstt. Personnel Officer.It has been held in Sunder

Dass v. Asthetic Exports pvt. Ltd114. that the award of the Labour Court

would be binding on the parties to the industrial dispute as well as to the

transferee of the establishment to which that dispute relates in view of

Section 18 (3) (a) and (c) of the Industrial Disputes Act.

The legal effects of both kinds of settlements are not identical. Under

Section 18(3) of the Act a settlement arrived at in the course of conciliation

proceedings will be binding on all parties to the industrial dispute referred

in clause (a) to (d) of Section 18 (3) which in the case of workmen will

112 (1994) I LLJ 545 SC.

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include all persons who are employed in the establishment or part of the

establishment to which that dispute relates on the date of dispute and all

persons who subsequently become employed in the establishment or part.

But a settlement arrived at between the management and workmen

otherwise than in the course of conciliation proceedings will bind only the

actual parties to the agreement in accordance with Section 18 (1) Act115.

6.2 .2 THE MRTP (AMENDMENT) ACT, 1984

Sanchar Committee made the following recommendation in regard to

the provisions on re-sale price maintenance contained in section 39 to 41

of the Act :L "As regards the restrictive trade practices arising out of

bilateral agreement, we recommend that the following restrictive trade

practices should be prohibited

Minimum Re-sale Price Maintenance

Any agreement or arrangement or practice (i) purporting to

charge, or providing for the charging of, minimum price of resale of the

goods in India; or (ii) withholding supplies of goods from any person

seeking to obtain them for resale in India on the ground that he (a) Has

sold in India at a price below the resale price, goods obtained either directly

or indirectly, from that supplier or has supplied such goods indirectly to a

third party who had done so; or (b) Is likely, if the goods are supplied to

him, to sell them in India at a price below that price or supply them either

directly or indirectly to a third party who would be likely to do so.

113 (1995) I LLJ 214 SC.

114 (1983) II LLJ 245 (Delhi).
115 Britannia Biscuit Co. Ltd. Employees Union v. Asstt. Commr. of Labour, (1983) I LLJ 181 (Mad) Kerala Minerals
Employees Congress v. Astt. Labour Commr. (1983) I LLJ 424 (Ker).

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 Nothing contained in clause (b) shall render it unlawful for a supplier

to withhold supplies of goods or to cause or procure another suppler to do

so if he had reasonable cause to believe that the person seeking supplies of

goods has been using as loss leaders any goods of the same or similar

description whether obtained from the supplier or not. MRTP

(Amendment) Act, 1984 has, however, not introduced any change in the

resale price maintenance provisions of the Act, contained in section 39 to

41, except some verbal changes, viz. , the substitution of the words "trade

mark or by a licensee of paten or trade mark" for the words "trade mark by

a licensee under any such license" in the proviso to sub-0sectin (3) of

section 39* of the Act.

Section 39 gives special treatment to contracts which seek to

establish minimum resale price (in contra-distinction to 'resale price' as

understood with reference to provisions of clause (f) of section 33(1)]. Such

arrangements are void ab intitio and illegal per se. On the other hand, any

agreement to sell goods on the condition that the prices to be charged on

resale by the purchaser shall be the prices stipulated by the seller though

restrictive in nature, is not per se illegal. The distinction appears to be that

in the type of agreements covered by section 33(1)(f), no minimum price, as

such, is prescribed for resale of the goods by the buyer. In other words, the

arrangements falling under section 33(1)(f), inter alia, would be those

where under a fixed or maximum resale price or a recommended retail

price or a recommended retail price is prescribed; such arrangements,

though deemed to be in the nature of restrictive trade practice, would still

be permissible till they are subjected to a 'crease and desist' order of the

commission. In the course of inquiry by the commission, before cease and

desist order is passed, the respondent may even plead any of the gateways

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specified in section 38(1). An arrangement, though fixing a fixed or

maximum resale price or recommended retail price, would not be treated

as relating to restrictive trade practice within the meaning of section 33(1)

and/or section 2(0), provided it is clearly stipulated that prices lower than

those prices may be charged.

Under Sub- section (3), the prohibition or RPM applies also to

articles protected by patent or trade mark. A dealer is free to sell to product

at any price he likes even thought he had notice of any terms or conditions

as regards the price of patented article. However, the validity of any term or

condition of license granted by proprietor or the license or assignee of a

patent, in so far as it regulates the prices of any patented articles as

between themselves, is not affected by this provision.

In Dunlop Rubber Co. Ltd. v. Long life Battery Depot,116 it was held

that "ever since the decision in Incandescent Gas Light Co. Ltd. v. Brodgen

there has been no question that a purchaser who buys with knowledge of

the conditions under which the vendor is authorised to deal in a patented

article is bound by such conditions, not because such conditions are

contractual, but because they are incidental to and a limitation upon the

grant of the license to deal in the patented article, so that if the conditions

are not complied with, there is no grant at all," In dunlop v. Longlife

battery, Dunlops made the tyres under a patent and sold them subject to a

license which prohibited resale below Dunlop' current price list. Longlife

Battery, who had notice of the condition, resold below Dunlops, prices. An

injunction was granted against Longlife Battery.

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Prohibition of other measures for maintaining resale price

Without prejudice to the provisions of this Act with respect to

registrationand to any of the powers of the Commission or of the Central

Government under this Act, no supplier shall withhold supplies of any

goods from any wholesaler or retailer seeking to obtain them for re-sale in

India on the ground that the wholesaler or retailer-Has sold in India at a

price below re-sale price, goods obtained, either directly or indirectly, from

that supplier, or has supplied such goods, either directly or indirectly, to a

third party who had done so; or Is likely if the goods are supplied to him to

sell them in India at a price below that price or supply them, wither directly

or indirectly, to a third party who would be likely to do so. Nothing

contained in sub-section (1) shall render it unlawful for a supplier to

withhold supplies of goods from any wholesaler or retailer or to cause or

procure another supplier to do so if he has reasonable cause to believe that

the wholesaler or the retailer, as the case may be, has been using as loss

leaders any goods of the same or a similar description whether obtained

from that supplier or no. A supplier of goods shall be deemed to be

withholding supplies of goods from a dealer if heRefuses or fails to supply

those goods to the order of the dealer;Refuses to supply those goods to the

dealer except at prices, or on terms or conditions as to credit, discount or

other matters which are less favorable than those at or on which he

normally supplies those goods to other dealers carrying on business in

similar circumstances; or Treats a dealer, in spite of a contract with such

116 (1958) L.R. 1 R.P. 65.

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dealer for the supply of goods, in a manner less favorable than that in

which he normally treats other dealers in respect of time or methods of

delivery or other matters arising in the performance of the contract.

A supplier shall not be deemed to be withholding supplies of goods

on any of the grounds mentioned in sub-section (1), if, in addition to that

ground, he has any other ground which alone would entitle him to

withhold such supplies. Explanation I- "Re-sale price", in relation to sale of

goods of any description, means any price notified to the dealer or

otherwise published by or on behalf of the supplier of the goods in question

(whether lawfully or not) as the price or minimum price which is to be

charged on, or is recommended as appropriate for a sale of that description

or any price prescribed or purporting to be prescribed for that purpose by

any contract or agreement between the wholesaler or retailer and any such

supplier.

Explanation II- A wholesaler or retailer is said to use goods as loss

leaders when he re-sells them otherwise than in a genuine seasonal or

clearance sale not for the purpose of making a profit on the re-sale but for

the purpose of attracting to the establishment at which the goods are sold,

customer likely to purchase other goods or otherwise for the purpose of

advertising is business.

6.2.3 THE TRUSTS ACT, 1882117

The beneficiary under a trust enjoys certain privileges and rights.

But, at the same time. he has certain liabilities too under the Trust Act

117
The Indian Trusts Act,

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which are stated as : The first part of Section of the 33 of the Indian Trusts

Act, provides that a person other than trustee who has gained an

advantage from breach of a trust, must indemnify the trustee to the extent

of the amount actually received by such person under the breach of trust;

and where he is beneficiary the trustee has a charge on his interest for

such amount. This section, thus, lays down two principles of law : Firstly,

it makes it clear that any one who receives advantage from breach of a

trust is liable to compensate the trustee. This is the general principle.

Secondly, it emphasises beneficiary's liability in case of such breach. It

provides that if the beneficiary receives any benefit from such breach he is

liable to compensate the trustee. The trustee, in such case, will have a

charge on beneficiary's interest. It is evident that the beneficiary does not

give his consent to the formation of trust. The consents are exchanged

between the settler and the trustee only. The beneficiary is, thus, a

stranger to the trust even, he is held liable to the trustee. However, the

second part of Section 33 of the Indian Trusts Act provides that where the

trustee is guilty of fraud and the breach of trust is a consequence of such

fraud, the beneficiary is not liable to compensate the trustee.

Similarly, Section 68 of the Act provides that where one of the several

beneficiaries (i) joins in committing breach of trust, or (ii) knowingly

obtains any advantage therefore, without the consent of the other

beneficiaries, or (iii) becomes aware of breach of trust committed or

intended to be committed and either actually conceals it, or does not within

a reasonable time, take proper steps to protect the interests of other

beneficiaries, or (iv) has deceived the trustee and thereby induced him to

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commit a breach of trust, the other beneficiaries are entitled to have all his

beneficial interests impounded as against him and all who claim under him

(otherwise than as transferees for consideration without notice of breach)

until the loss caused by the breach has been compensated. This section

defines the liability of a beneficiary. But, it applies only when there are co-

beneficiaries. It provides for liability of a beneficiary against other co-

beneficiaries. It does not deal with a beneficiary's liabilities towards

trustee. It provides for an alternative remedy to aggrieved beneficiaries

against guilty beneficiary. It is to be noted that such remedy may,

primarily, be sought against the trustee who has caused breach of trust. As

mentioned above, section 68 of the Indian Trusts Act prescribes four

grounds on which the guilty beneficiary is liable to the other beneficiaries,

who have suffered loss due to breach of trust by the trustee. The right to

compensation available under this section to innocent beneficiaries is so

important that they can even impound beneficial interest of the defaulting

beneficiary to compensate the whole loss. It is, thus, evident that liabilities

can be imposed upon a beneficiary, although he is stranger to the trust

and has not given his consent to the creation of a trust.

6.2.4 THE INDIAN PARTNERSHIP ACT, 1932

The question may, naturally, arise as to who is a stranger to a

partnership. There are two categories of strangers as regards the

partnership. The first category includes those persons who have not given

their consent to the partnership. The second category may be inferred

from Section 18 of the Partnership Act. This section provides that 'subject

to provisions of the Act, a partner is the agent of the firm for purpose of

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business of the firm.' Consequently, the firm on which behalf a partner

makes contract with another person can be treated as a principal. The

principal (i.e. the firm) is a stranger as regards the contract made between

acting partner and third person. Similarly, other partners may be regarded

as strangers to the contract which is entered into between the acting

partner and third person. It is, therefore, necessary to examine the liability

of the firm and other partners including a minor.

(i) Firm's liability for partner's act

A firm is not, in fact, a legal entity as distinct from its partners. A

firm is nothing but a collective name of partners118. Consequently, liability

of a firm means liability of all partners. Therefore, no suit can be brought

against a firm119. But, in practice for mercantile purposes a firm can sue

and be sued120. A firm can be sued by disclosing names of all the partners

in plaint. Similarly, for assessment of income for income tax purposes, a

firm whether registered or not, is treated as a separate entity as distinct

from its members. It is, therefore, useful to examine how far a firm (as a

principal) is liable to a third person with whom a partner contracts in the

name of the firm.

(a) Liability for acts done by a partner under his implied authority

The general rule is that the firm is liable for acts done by a partner

on firm's behalf within the scope of his implied authority 121. Clause (1) of

Section 19 of the Partnership Act provides that 'subject to provisions of

118 Section 4, The Indian Partnership Act, 1932.

119 The position under the English Law is the same.
120 Code of Civil Procedure 1908, Order XXX.
121 'Implied Authority' is also called as 'general', 'ordinary', apparent or 'ostensible' authority.

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Section 22, the act of a partner which is done to carry on, in the usual

way, the business of the kind carried on by the firm binds the firm.' An

implied authority depends upon the nature of the business of firm. For

acts which are to be covered within implied authority, following essentials

are needed : (1) The act must be done in relation to partnership business;

(2) The act must be done for carrying on the business of the firm in the

usual way ; and (3) The act must be done by the partner on behalf of the

firm122 i.e. in firm's name and not in the same of a partner.In Devji v.

Magan Lal & Others123, the Supreme Court has held that where a partner

takes a lease of premises (sublease of colliery) in his name, he cannot be

regarded as having acted on behalf of the firm.

(b) Liability for tort

Section 26 of the Partnership Act deals with the liability of the firm

for torts committed by a partner. The firm is bound for wrongful act of a

partner provided that (1) it has been done in the ordinary course of the

business of the firm i.e., it is committed within implied authority of the

partner, or (2) with the authority (express) of his co-partners. The firm is

liable for both negligent and intentional tort. Thus, where a partner, for

instance, had received stolen goods and credited the proceeds of their sale

to the account of the firm all partners were held liable to the plaintiff124.

(c) Liability for specific tort

Section 27 of the Partnership Act provides that a firm is liable for

mis-application of money or property received from a third party. For this

122 Section 22, The Indian Partnership Act, 1932.

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purpose, it makes no difference that money or property has been received

by the partner or the firm. What is required is that the partner must be

guilty of committing wrong of misuse of money or property. If such wrong

is committed by a partner it is the firm which is liable to compensate the

person wronged.

Thus, the combined effect of the principles embodied under Section

19, 26 and 27 of the Partnership Act is that the firm is liable for acts and

wrongs of its partners done within the scope of express or implied

authority of the partners. A contract with a third person is made by a

partner acting on behalf of the firm. As the contract is made by the

partner in the firm's name, he acts only as an agent of the firm.

Consequently, the firm is held liable to third person under the contract.

(ii) Partner's liability for firm's act

The partners are made jointly and severally liable for the act of the

firm by Section 25 of the Act125. This section provides that every partner is

liable jointly with all other partners and also severally for acts of the firm

done while he is a partner. When a partner does an act of the firm the act

is considered the act of the firm and not only of the acting partner. It

means even those partners are held liable under this section who have not

made the contract directly. All such partners who have not given their

consent to the contract are liable, although, in one sense, they are stranger

to the contract.

Section 45 clause (i) of the Partnership Act provides that

123 A.I.R. (1965) S. C. 139.

124 Hurruck Chand v. Govind Lal, (1906) 10 Cal. W.N. 1083.

- 249 -
notwithstanding the dissolution of a firm the partners continue to be liable

as such to third parties for any act done by any of them which would have

been an act of the firm if done before dissolution, until public notice is

given of the dissolution. Thus, if no public notice regarding the dissolution

of the firm is given, all the partners will be bound for acts of a partner done

after dissolution of the firm. But, the act must be of the kind which the

firm was usually doing before dissolution. It is clear that the act of a

partner is deemed an act of the firm. The partners who have actually not

contracted with third person are held liable for acts of contracting partner.

Thus, section 45 imposes contractual burden on those who have not,

indeed, entered into the contract with the third person. The privity rule is

accordingly defeated by the provisions of this section. In such a case, the

partner who has retired from partnership as a result of dissolution would,

nevertheless, be liable for transaction of the firm.

In C. Assiamma v. State Bank of Mysore and others126 the plaintiff

Bank filed a suit for recovery of money from the firm after firm's dissolution

by an agreement. The notice of dissolution was not given to the Registrar

of Firms. It was given only in a local newspaper. The firm continued its

business even after dissolution. It was held that mere publication of notice

in local newspaper was not sufficient to absolve retired partner from his

liability to third person. There was no public notice as contemplated in

Sections 45(1) and 72 of the Partnership Act. The Court, further, held that

in the circumstances retirement of defendant (appellant) even if it be true,

125 The Indian Partnership Act, 1932.

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could not affect rights of the plaintiff Bank who was a third party in view of

Section 32(3) of the Partnership Act. However, the proviso to the section

45(1) of the Partnership Act provides that the estate of a deceased or an

insolvent partner or of a retired partner not known to the person dealing

with the firm to be a partner, is not liable for acts done after the date on

which he ceases to be a partner.

It is, thus, clear that in order to absolve the retired partner from

further liability, the requirement of proper notice is necessary. In absence

of such notice, he cannot escape the liability. It is obvious that as regards

the contract between firm and a third person, the retired partner is a

stranger even though he is held liable. It is, therefore, clear that burden of

a contract can be imposed upon a retired partner, who is, in fact, a

stranger to the firm's contract.

(iii) Minor's liability

Section 30 sub section (i) of the Indian Partnership Act provides that

although a minor may not be a partner in a firm but he may be admitted to

the benefits of partnership. Sub-section 3 of Section 30 of the Act, lays

down two general principles. The first is that a minor is, personally, not

liable for firm's act. It is because a partnership with a minor is void127. In

Sri Rama Mohan Motor Service v. C.I.T.128, the Supreme Court held that

where partnership deed disclosed that one of five partners was a minor, the

partnership was void.

The Second principle is that the share of a minor in the firm is liable

126 A.I.R. (1990) Ker. 157.

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for firm's act. That is, a minor is liable to third person to the extent of his

share in the firm but he is not liable personally. It follows from this that

the second principle is an exception to the privity rule.

6.2.5 NEGOTIABLE INSTRUMENTS ACT, 1881129

There are certain provisions under the Negotiable Instruments Act

which provide that contractual liabilities can be imposed on a stranger to a

contract. These instances are discussed below :

(i) Liability of drawee of a cheque

In the general sense, a cheque and a bill of exchange are regarded as

means of transfer of obligation from drawer to drawee to pay a certain sum

of money to the payee. Section 31 of the Negotiable Instruments Act, 1881

deals with the liability of a drawee to the payee when cheque is presented

to him. It provides that 'the drawee of a cheque' having sufficient funds of

the drawer in his hands, properly applicable to the payment of such

cheque must pay the cheque when duly required to do so. This section

makes it compulsory that the drawee must have sufficient funds of the

drawer, otherwise he will not be bound.

Regarding the two requirements: acceptance of cheque and

availability of sufficient funds, the Supreme Court has emphasised the

second one. In the case of jagjivan Mauji v. Messrs Ranchhod Das

Meghji130, the Supreme Court held that the liability of drawee arises even

without acceptance of cheque, provided that he has sufficient funds in his

127 Mohori Bibi v. Dharmodas Ghosh, I.L.R. (1903) 30 Cal. 539.

128 A.I.R. (1973) S.C. 1445.
129 The Negotiable Instruments Act, 1881.
130 A.I.R. (1954) S.C. 554.

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hands. However, the Court, further, observed that under Section 32 of the

Negotiable Instruments Act the liability of the drawee of a bill of exchange

arises only when he accepts the bill.

It is, thus, evident that the drawer transfers his liability to the

drawee enabling the payee to receive payment from him (drawee).

Originally, it is drawer, who is indebted to the payee and, therefore, he has

primary duty to pay the payee. There is, in fact, a contract between the

drawer and the payee. But, when a cheque is drawer are assigned to the

drawee. Consequently, the payee receives payment from drawee, i.e. a

person who is a stranger to the contract between drawer and payee.

(ii) Liability of prior party to holder in due course

Section 36 of the Act provides that 'every party to a Negotiable

Instrument is liable to a holder in due course until the instrument is duly

satisfied.' The expression 'prior party' means the maker or drawer, acceptor

and all the intervening endorsers. The general rule is that every prior party

is liable to every subsequent party. 'A holder in due course is a person

who possesses the instrument after furnishing consideration before the

payable date and without having sufficient cause to believe that any defect

existed in the title of the person from whom he derived his title131.' When

the instrument is duly satisfied, liability of all prior parties is

discharged.The principle underlying this section is that not only the

immediate prior party but all the prior parties are liable to holder in due

course. This principle, thus, approves that a stranger (i.e. prior parties) to

131 Section 9, The Negotiable Instruments Act, 1881.

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the contract can be sued.

(iii) Holder deriving title from holder in due course

The holder of a promissory note, bill of exchange or cheque means

any person entitled in his own name to the possession thereof, and to

receive or recover the amount due thereon from the parties

thereof132.Section 53 of the Act provides that a holder of a negotiable

instrument, who derives title from a holder in due course has the right

thereon of that holder in due course. Thus, by this process the holder

acquires right equal to the rights o a holder in due course. The result is

that the holder may sue all prior parties in the same way as the holder in

due course could have133. In other words, logically, not only immediate, but

all the prior parties are liable to holder until the instrument is duly

satisfied.

6.2.6 INDIAN CONTRACT ACT, 1872

Sec. 182, of the Indian Contract Act The relationship between agent

and the third party arises when the agent acting within the scope of his

authority enters into a contract with the third party. According to first part

of section 230 of the Indian Contract Act, the general rule is that the agent

can neither sue nor be sued by the third party on the contract made by

him with the third party. But, when there is a contract between the

principal and the agent to the effect that the agent would be, personally,

entitled to sue or bound by the contract, the agent can sue or be sued. The

second part of section 230 of the Act provides that in the following cases an

132 Section 8, The Negotiable Instruments Act, 1881.

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agent can sue the third party : (a) Where contact is made by an agent for

the sale or purchase of goods of a merchant residing abroad134. (b) Where

the agent does not disclose the name of the principal.135 (c) where the

principal though disclosed, cannot be sued e.g. where the principal is non-

existent or incompetent136. Besides, an agent can enforce a contract which

he makes with third party in his own name, even though he discloses his

principal's name. An agent can also sue the third party in his own name

where he has an interest in subject-matter of the contract 137. For example,

if an agent has a lien upon the subject-matter of the contract, he is entitled

to enforce the contract personally.

Similarly, an agent can also be sued by the third party in the

following two cases :

Firstly, the personal liability can be imposed upon an agent by an

'express contract' made between principal and agent138. The agent may also

contract with third party to undertake personal liability139. For example,

when an agent signs his name to a negotiable instrument, without

indicating thereon that he signs as an agent or that he does not intend

thereby to incur personal liability, he can be sued. Similarly, where

auctioneer signs the contract of sale of property in his own name, it must

be understood that he is contracting, personally, and not as

133 Section 36, The Negotiable Instruments Act, 1881.

134 Section 230 (1), The Indian Contract Act, 1872.
135 Section 230 (2), The Indian Contract Act, 1872.
136 Section 230 (3), The Indian Contract Act, 1872.
137 Hardyal V. Krishan Gopal, A.I.R. (1936) Lah. 673. See also R.P. Kharas v. Bawanji Narsi, A.I.R.
(1925) Sind 6.
138 Inferred from the expression 'the absence of any contract to that effect' under section 230 of the Indian
Contract Act, 1872.
139 Section 28, The Negotiable Instruments Act, 1881. See also Mookan Servai v. Muthayya Servai A.I.R.

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agent140.Secondly, an agent can be held liable by 'operation of law'. The

cases where an agent can be sued by third person by operation of law are

as follows : (a) where contract is made by an agent for the sale or

purchase of goods for a merchant resident abroad141. (b) where the agent

does not disclose the name of his principal142. (c) where the principal

though disclosed, cannot be sued143 (e.g. where the principal is non-

existent, such as a company which is yet to come into existence 144 or is

incompetent).

It is to be noted that in all the above cases (i.e. where an agent can

be personally sued) the third party has a right of election to hold the agent

or his principal or both of them liable145. However, there is differences

between Indian law and English law on the point. Under the English law,

the third party has no right to sue both the principal and the agent. He

can only sue either the principal or the agent146.

It is to be noted that in all the above cases where an agent can

personally sue or be sued, there is a privity of contract between such agent

and the third party. Section 226 of the Indian Contract Act provides that

the obligation arising form acts done by an agent may be enforced in the

same manner and will have the same legal consequences as if the contracts

(1938) Mad. 146.

140 Moula Bulksh v. Dharmchand Raniwal 65 C.W.N. 881. See also Gubhoy v. Avetoom, I.L.R. (1890) 17
Cal. 449.
141 Section 230(1), The Indian Contract Act, 1872. See also corporation of madras v. Ratanlal form (1973) 2 M.L.J. 8;
Sivadutta Rai v. Tyeballi Dawoodbhai, A.I.R. (1962). S.C. 538.
142 Section 230(2), The Indian Contract Act, 1872. See also Pudukottah Textile v. R.R. Adityan, (1975) 1 M.L.J. 356;
Trilokchand Jain v. Rameshwarial Tulsiyan, A.I.R. (1975). Pat. 196; Bhojbhai v. Hayen Samuel (1898) 2 Bom. 754;
Alliance Mills (Lessees) Pvt. Ltd. v. India Cements Ltd., A.I.R. (1989) Cal. 59.
143 Section 230(3), The Indian Contract Act, 1872.
144 Mahabir Prasad Mawandia v. Satyanarsin Kotriwala, A.I.R. (1963) Pat. 131.
145 Section 233, The Indian Act, 1872.
146 Priestley v. Fernie (1879) 4 A.C. 504; Collins v. Associated Greyhound Raceourses, Ltd. (1930) 1 Ch. 1; Anson's

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had been entered into and acts done by the principal in person.

This section makes it clear that as a general rule a contract made by

an agent, within scope of his authority, with third party confers rights and

imposes liabilities upon the principal.

An agent acting within the scope of his authority confers rights and

imposes liabilities of a contract upon the principal. Where the agent makes

a contract with a third person, acting on behalf of his principal, normally,

the agent incurs no personal liability under the contract so entered into.

Further, the agent also does not acquire contractual rights. That is, the

contracts entered into through an agent and obligations arising from acts

done by an agent may be enforced in the same manner and will have the

same legal consequences, as if the contracts had been entered into and

acts done by the principal in person147. Thus, generally, it is the principal

who can sue and be sued on the contract. It is evident that the principal,

is in fact, not a party to the contract made by the agent with the third

person, Nevertheless, he (the principal) can sue and be sued by the third

person. It is from this standpoint that the contract of agency is an

exception to the doctrine of privity of contract. However, it is also obvious

that on termination of agency, the existing interest of the agent and that of

third party should be protected. It is submitted that the third party is not

instrumental in causing termination of agency: an agency is terminated

either by act of parties or by operation of law. Therefore, the interest of

third party should not be allowed to suffer by termination.

Law of Contract 26th Ed. (1984) at 557.

147 Section 231, 232, The Indian Act, 1872

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 Further, there are three aspects of agency The first aspect creates a

'relation between principal and agent' and this aspect is regarded

fundamental aspect of the contract of agency. So far as this aspect is

concerned, it approves without any doubt, the doctrine of privity of

contract. On the basis of this relationship the principal can sue and be

sued by the agent. A stranger cannot sue either the principal or the agent.

The 'relationship between the agent and third party' may be treated

as the second aspect of agency. A privity of contract is established

between agent and third party especially, in those cases where the agent is,

personally, liable148. In other cases, rights are conferred and liabilities are

imposed upon the principal.

Lastly, the third aspect of agency is the 'relationship between

principal and third party.' This relationship arises when the agent, in

furtherance of agency, makes contract with third person. The main object

of agency centers around this aspect. The mutual rights and duties of the

principal and the agent are determined by this aspect. Accordingly, the

principal can sue and be sued by the third party 149. It is submitted that

although the principal appears to be a stranger to the contract entered into

between the agent and the third party, yet it is not the correct position. In

fact, the principal is represented through his agent to the outside world.

That is, the agent's job is to make contracts with third persons on behalf of

the principal and not on his own account. The agent signs the contract

made with third person showing that he is singing on his principal's behalf.

148 Sections 193, 227, 228 230(1), 230(2), 230(3), 233, 234, 235 and 238, The Indian Contract Act, 1872.

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However, the principal can be regarded as a stranger to the contract

entered into between the agent and the third party only in two cases : (i)

where the contract is made by a sub-agent150. (ii) where he is

undisclosed151. In these two cases he can sue and be sued by the third

party, although he is a stranger to the contract.

Section 37 which enables parties to dispense, with performance

should also enable them to assign their contractual obligation.

"Assignment" means transfer of contractual rights or obligations by a party

to the contract to some other person who is not a party.

ASSIGNMENT OF LIABILITY

An important principle is that the burden of or liability under a

contract can't be assigned. The promisor has the right to insist that

performance shall be the responsibility of the promisee. The promisor may

have contracted with him by reason of the personal confidante which he

reposed in him and, therefore, the promisor can object to the contract

being performed by any other person. A vicarious performance is not an

assignment in the real sense of the word.The contractual liabilities may be

assigned in the following two ways :

(i) By act of party

(a) Assignment by mutual consent of parties

This kind of assignment is based on English doctrine 'Novation'.

This doctrine means that – when the parts to a contract agree to substitute

the existing contract with new contract. Indian contract Act Section 62

149 Section 226, 230, The Indian Act, 1872.

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provides for a similar rule to the English rule of Novation of contract. Sec.

62 provides : "If the parties to a contract agree to substitute a New

Contract for it, or to rescind or alter it, the original contract need not be

performed." The section embodies three principle of law of contract. First

parties to a contract may agree to substitute a new contract for the existing

contract.Second parties to a contract may agree to rescind the contract.

Third, the parties to a contract. It makes dear that Novation, rescission

and alteration of a contract may take effect by mutual consent.

The original contract becomes unenforceable, and therefore, the

parties are discharged from the original contract.

The first rule contained in Sec. 62 of the Contract Act provides for

freedom to parties for the substitution of a new contract for original

contract.

In Union of India Vs. Kishori Lal A.I.R. 1959 Supreme Court held

that a clause in a contract that the earlier contract would be finally

concluded in the term of the new, and that the substituted contract

cancels the earlier one and the arbitrator clause in the old contract

perishes along with it. It is must that the substituted agreement must be

valid.

(b) Assignment with consent of other party, but without consent

of assignee.

In certain cases contractual liability can be assigned on a stranger by

mutual consent of the parties to a contract but without consent of

150 Section 192, The Indian Act, 1872.

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stranger.

(c) Voluntary assignment

A voluntary assignment of contractual liabilities means the transfer

of contractual liabilities by one party to a stranger, without consent of the

other party to the contract. The general rule is that the contractual

liabilities cannot be assigned to a stranger voluntarily. The Section 37 of

the Indian Contract Act provides that 'the parties to a contract must either

perform, their respective promises, unless such performance is dispensed

with or excused under the provisions of this Act, or of any other law.' This

section, thus, makes it clear that only parties to a contract are bound to

perform their respective promises. Consequently, a party to a contract

cannot voluntarily transfer his contractual liabilities to a stranger, In

Khardah Co. Ltd. v. Raymon & Co. (India) Pvt., Ltd.152, the Supreme Court

has approved this rule and held that the contractual liabilities cannot be

assigned voluntarily by a party to contract.

Exceptions to the above Rule

There are certain statutory exceptions to the above rule which are as

follows.

(a) Assignment of impersonal obligation Section 40 of the Indian

Contract Act lays down two general principles. The first principle is that

where parties intend that the contract should be performed by the

promisor personally and no other person can perform such promise, the

promisor is only bound to perform it. He cannot delegate his contractual

151 Sections 230(2), 231, 232, 233, The Indian Act, 1872.

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obligations to a third person without consent of the promisee. Such

contract is called a personal contract. A personal contract involves some

consideration, such as, knowledge, skill, qualification so, on and so forth,

of the promisor. Therefore, it requires that the promisor must himself

perform his promise. His obligation cannot be performed by a stranger.

The Second principle permits the delegation of contractual obligation

to a third person. According to it if performance of a promise does not

involve some personal element it may be performed by the promisor, or his

legal heirs or even by a third person who is employed by the promisor or

his legal heirs to perform such promise.

(b) Vicarious performance

Section 41 of the Contract Act provides that when a promisee

accepts performance of the promise from a third person he cannot,

afterwards, enforce it against the promisor. This section permits

performance of a contract by a stranger also. It, further, makes it clear that

once performance of a contract by a stranger is accepted by the promisee

the promise stands discharged and the promisee cannot, afterwards, sue

the promisor.

It may be noted that the promisee cannot be compelled to accept

performance of the promise by a stranger. He is at liberty to accept or not

to accept. The rule contained in section 41 provides that if the promisee

accepts performance made by a third party, the primisor becomes free from

his obligation; and he cannot be held liable for not performing the promise.

152 Supra note 4. See also M/s Keshari Engineering Works v. Bank of India, A.I.R. (1991) Pat. 194.

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However, this section does not apply where the third person has not

performed the promisor's promise, but has merely agreed to perform it.

The view expressed by the Privy Council in Harcharan Lal's Case

and followed by the Indian Courts153 is correct because the promisor is

discharged from his obligations when a third person has actually

performed such obligations and the performance so made is accepted by

the promisee.The third party must perform the whole promise.

Performance of the promise in part would be of no effect. For instance, in

Chandrashekhar Hebbar v. Vittala Bhandari154, the Court held that what

is required by this section is that the promise should be performed in full.

It is, thus, evident that performance of the promisor's promise in part by

the stranger in not enough to discharge the promisor from his obligation.

The Supreme Court held that since the appellants (plaintiffs) had

accepted the payment in full satisfaction of their claim, they were not

entitled to sue the respondent for the balance. The Court, further, held

that according to section 41 of the Contract Act when promisee accepts

performance of a promise from a third person, he cannot, afterwards,

enforce the promise against the promisor.

Following significant points emerge from this view of the Supreme

Court Firstly, a promise may voluntarily be performed by a stranger.

Secondary, on acceptance by the promisee of such performance, the

promise is discharged and accordingly, the promisor becomes free to

perform the promise. Thirdly, even a part performance of the promise by a

153 Chegamull Suganmull Sowear v. V. Govindaswami Chetti and others, A.I.R. (1928) Mad. 972; Union of India v.
Gangabishan Bansilal, A.I.R. (1973) Cal. 141.

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stranger will have the effect of discharging the promisor provided such part

performance is accepted by the promisee in full satisfaction of his demand

i.e. the promisee loses his claim against the promisor if he accepts a part

performance of promise by stranger instead of the whole promise.Now it is

clear that the burdens of a contract can voluntarily be discharged by a

stranger.

(c) Liability for actionable claim

The principle embodied in section 132 makes it amply clear that the

transferee of an actionable claim is liable. In other words, where transferee

of an actionable claim is indebted to the other party to the contract, and

without discharging his obligation he transfers the benefit to a stranger,

the stranger (transferee) can sue the other party to recover such benefits of

contract. But, his claim is subject to such contractual burdens which the

transferor owed to the other party. Thus, where an actionable claim is

coupled with liability; the assignee cannot enforce the actionable claim

unless he discharges the liability; the other party is entitled to get the

liability of assignor adjusted against the assignee. The word 'liabilities'

under section 132 of the Transfer of Property Act only shows that the

assignee can acquire no better title than the assignor i.e. if nothing is due

to the assignor the assignee gets nothing155. The term 'equities'156 under

section 132 of the Transfer of the Property Act means counter-claims which

the debtor is entitled to set off against the assignee and such counter-

claims which the debtor is entitled to set off against the assignee and such

154 A.I.R. (1966) Mys. 84.

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counter-claims could have been enforced by the debtor against the

assignor if the assignment had not been made 157. For example, A transfers

to C a debt due to him by B, A being then indebted to B. C sues B for the

debt due by B to A. In such suit B is entitled to set off the debt due by A to

him, although C was unaware of it at the date of such transfer.158 Thus, it

was held in Kristo Ramani v. Kedarnath159 that a judgment debtor has a

right to set off a cross decree under order 21, Rule 18 of the Code of Civil

Procedure, and he has this right also against an assignee of the decree

holder.

Similarly, in Arunachellam Chetti & Others v. Subramaniam160.

the assignee of the right to rents had sued the lessees for the rents. The

assignor was indebted to lessees under a separate contract and to secure

the debt he had mortgage certain property. The Court allowed the debtor

to set off such mortgage debt against the asignee. This decision makes it

clear that when a debtor is sued by the assignee of his creditor, he (i.e. the

debtor) is entitled to set off a debt due to him by the assignor on a contract

independent of the debt assigned.Thus though the assignee of an

actionable claim which is liable for burden, is a stranger to the original

contract existing between assignor and debtor, yet he is liable to the debtor

for the liabilities or equities to which the assignor was bound to the debtor

on the date of assignment.

155 Mulla, The Transfer to Property Act, 7th Ed. (1985) at 822.
156 Section 49, Code of Civil Procedure 1908.
157 S. M. Shah, Principles of The Law of Transfer, 5th Ed. (1982) at 326.
158 Illustration(i) to section 132 of The Transfer of Property Act, 1882.
159 (1889) 16 Cal. 619. See also Sinno v. Santhoji (1903) 26 Mad. 428.
160 (1907) 30 Mad. 235.

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(ii) By Operation of Law

The operation of law is another mode of a valid assignment of

contractual liabilities to a stranger. Such assignment is also called an

'involuntary assignment' or an 'automatic assignment' of contractual

burden of obligations. Such assignment may take place in the following

circumstances

(a) On death of promisor

A promise depending upon personal consideration terminates on

death of the promisor. The second paragraph of section 37 of the Indian

Contract Act provides that in case of death of promisors before

performance of their promise, representatives of the promisors are bound

to perform the promise. The principle which this section incorporates is

that when promisors die without fulfilling their obligations, the obligations

will devolve on their personal representatives. In case of death of

promisors before performance of obligation, their personal representatives

are bound to fulfill such obligations because the obligations are assigned to

them by operation of Law mentioned under the section. The limitation is

'unless a contract is of personal nature161.' Such personal contract is

discharged automatically, under section 56 of the Contract Act as soon as

the promisors die or become incapable to perform the promise.

Consequently, their legal heirs cannot be called upon to perform such

promise. In other cases, where contractual obligation is of impersonal skill

of the promisors, the personal representatives of promisors are bound to

161 Ram Baran Prasad v. Ram Moti Hazara and others, A.I.R. (1967) S.C. 744; Pyarchand Kesrimal Bidi

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perform such obligation, if promisors die without performing their

obligation. The well-known maxim, "actio personalis moritur cum persona"

(i.e. 'the principle that a personal action dies with the person') has no

application to an action on contract except in cases of those contracts

which are of personal nature.

The Supreme Court held that the presumption clause was binding

upon assignees or successors in interest of the original contracting parties.

The Supreme Court, thus, makes it clear that contractual obligations

devolve on personal representatives of the promisor when the promisor dies

before performing his contractual duties and in absence of a contrary

intention a contract is enforceable by or against the parties and their legal

representatives including assignees and transferees.

It is evident from the above discussion that the legal representatives

of a promisor are bound to perform impersonal obligations (under a

contract) of the promisor which is left unfulfilled due to death or

disablement of such promisor. The legal representatives of the promisor

are strangers to the contract entered into between promisor and promisee.

But, contractual liabilities of the promisor devolve upon them by operation

of law in case of the death or incapability of such promisor before

performance of the liabilities.

Section 42 of the Indian Contract Act deals with devolution of joint

liabilities to perform a joint promise. This section lays down two principles.

The first is that if there is a joint promise, all the promisors are bound to

Factory v. Onkar Kaxman, A.I.R. (1970) S.C. 823.

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perform such promise jointly. Unless, a contrary intention appears by the

contract they cannot perform it separately. The second principle is that

after death of any of the joint promisors, his legal representative, jointly

with other surviving promisors will have to perform the promise. Thus, it

is clear that the assignment of contractual liabilities takes place by

operation of law on legal representatives of joint promisors. These legal

representatives are bound to discharge the obligations of such contract to

which they are stranger.

(b) On retirement of a partner

The public notice may either by given by retired partner or by any

continuing partner162. The retired partner is a stranger as regards the

contract of firm with third parties made subsequent to his retirement.

Nevertheless, he is liable to the third parties i.e. contractual duties are

assigned to him by operation of law. But, where third party contracts with

the firm without knowing that the retired partner was a partner, the retired

partner is not liable to third party for such contract which the firm makes

after his retirement163.

Clause 3 of section 32 of the Indian Partnership Act provides that

notwithstanding the retirement of a partner from a firm, he and the other

partners continue to be liable as partners to third parties for any act done

by any of them which would have been an act of the firm if done before his

retirement, until public notice is given of the retirement.

(c) On insolvency of promisor

162 Sections 32 (4), 72 The Indian Partnership Act, 1932.

163 Proviso to section 32 (3), The Indian Partnership Act, 1932.

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 The general rule is that when a person becomes insolvent, the

assignment of his rights and duties takes effect by operation of law.

Therefore, when the promisor is adjudged insolvent before fulfillment of his

contractual obligation, his contractual obligation passes on the receiver.

Section 59 of the provincial Insolvency Act, 1920 provides that the receiver

shall distribute insolvent's property among the creditors entitled thereto164.

The estate of insolvent debtor is, however, liable to discharge his debts

which he owned till the date on which he was adjudged insolvent by court

of law. His estate is not liable for such debts which he incurs after an

order of adjudication is passed. For example, where a partner, in a firm, is

adjudged insolvent, he ceases to be a partner in the firm just on the date

on which the order of adjudication is made, whether or not the firm is

thereby dissolved165. The estate of such partner is not liable for any act of

the firm done after the date on which the order of adjudication is made166.

His estate is liable only for those acts of the firm which were done till the

date of adjudication. The main object of law of insolvency is to ensure a

fair distribution of debtor's property among creditors. An unperformed

contract does not ipso facto terminate only because of the fact that one of

parties to the contract has become insolvent. Normally, benefit and

liabilities of insolvent party under a contract pass on to the official assignee

(or official receiver)167 by operation of law. The receiver who is entrusted

with property of the insolvent is like a trustee and is liable to the creditors

164 The Provincial Insolvency Act, 1920. See also section 68, The Presidency Towns Insolvency Act, 1909.
165 Section 34(1), The Indian Partnership Act, 1932. See also Sections 41(a), 42(d) and 47, The Indian Partnership Act,
1932.
166 Section 34(2), The Indian Partnership Act, 1932.

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of insolvent debtor.

(d) On winding up of a company

The Liquidator is, thus, a stranger as regards the contracts which

are entered into between company and its members or company and its

creditors. But, by virtue of law he is liable to such members and creditors

of the company.The general rule is that contractual liabilities cannot be

assigned by the promisor to a third person without consent of the

promisee. But, there are certain circumstances when such assignment

may be made.

6.3 POSITION IN OTHER COMMON LAW COUNTRIES

6.3.1 UNITED KINGDOM

Statues similar to those discussed above confer rights or impose

liabilities on third parities in the UK168

6.3.2 UNITED STATES

There is vast literature on third party rights in the United States. The

New York Court of appeal in Lawrence v. Fox 20 NY 268 (1859) it has

become generally accepted that the third party is liable to enforce a

contractual obligation made for his benefit.

6.3.3 WESTERN AUSTRALIA

Section 11 Western Australia Property Law Act 1969, Section 11

of the Western Australia Property Law Act 1969 enables the enforcement of

167 Section 57(1), Provincial Insolvency Act, 1920. (This section empowers the State Government to appoint Official
receiver for prosperity of insolvent debtor.)
168 Chitty on Contracts, 28th end, pp 1017-23, paras 19-103 to 19-114

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a contract by the third party on whom benefit is conferred expressly by the

contract. All parties to the contract must be joined in an action by the third

party. It permits variation or cancellation of the contract by the parties

until the third party adopts the transaction, either expressly or by conduct.

6.3.4 QUEENSLAND

Section 55 Queensland Property Act 1974, Section 55 of the

Queensland Property Act 1974, provides that the promisor shall be subject

to a duty enforceable by the (third party) beneficiary to perform that

promise upon acceptance by the beneficiary ; variation or discharge by the

parties to the contract being possible without consent of the third party

before such acceptance. On acceptance, the beneficiary is bound to

perform any acts tat may be required of him by the terms of the promise.

Defences normally raised against an action to enforce a promissory duty

can be raised by the promisor against the beneficiary.

6.3.5 NEW ZEALAND

The New Zealand Contracts (Privity) Act 1982, The New Zealand

Contracts (Privity) Act 1982, does not limit enforceability by a beneficiary to

express promises only. It reverses the onus of proof by requiring that the

parties to the contract have to establish that their promise was not

intended to have the effect of creating a legally enforceable obligation in

favour of the third party. It requires that the third party must be

sufficiently designated in the contract. Parties to the contract cannot vary

or alter the promise benefiting the third person after he has materially

altered his position in reliance on the promise, or has obtained judgement

or award on the promise.

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 The most important difficulties concern the test of enforceable

benefit, the validity of defences that would have been available had the

promisee such, and whether the contracting parties should have power to

vary or cancel the contract. The way that these issues are dealt with by the

Contracts (Rights of Third Parties) Act 1999, which substantially

implemented the Law Commission's Report169.

CONCLUSION

Under the English Law the general rule is that contractual liabilities

cannot be imposed upon a stranger to the contract. Normally parties to a

contract cannot transfer contractual burdens to a stranger to the contract.

However, there are certain cases, e.g., contract relating to land, contract

relating to chattels (i.e. restriction upon resale price, patents, ships under

charter-party, other chattels, hire-purchase) where contractual liabilities

can be transferred to a stranger to the contract.

The general rule of law of contract in our country is that a promise

must be performed by promisor. But, where promisor dies, his promise is

required to be fulfilled by his legal representatives who are not party to the

contract. Thus, it is clear that contractual obligation depends on the

personal qualification or service of the promisors, it cannot be performed

by personal representatives of such promisors, if promisors die before

performance.

169 For commentary on the Act see Andrews (2001) C.I.J. 353; Bridge (2001) 5 Edin. L. Rev. 85; Burrows
(2000) L.M.C.L.Q. 540; Merkin, Provity of Contract, Ch. 5 (Usefully containing the Law Commission
Consultation paper report and the Parliamentary debates on the bill in appendices).

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