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NATIONAL LAW UNIVERSITY ODISHA

SUBJECT: CONTRACT LAW- I

TOPIC: PRIVITY OF CONTRACT AND PRIVITY OF CONSIDERATION

SUBMITTED TO:

NANDITTA BATRA

Assistant Professor of Law

SUBMITTED BY:

MUNDARY SUVARNA REKHA

(2016/BBA LLB/034)

1st year

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Contents
Table of Cases............................................................................................................................3
Introduction................................................................................................................................4
Research Methodology...............................................................................................................5
Research Objective.....................................................................................................................5
Research Questions....................................................................................................................5
CHAPTER 1-Judicial Development of the Doctrine of Privity of Consideration and Privity of
Contract......................................................................................................................................6
CHAPTER-2 Doctorine of privity of contract in India..............................................................9
CHAPTER-3 Exception to Law of Privity of Contract............................................................11
Conclusion................................................................................................................................13
Bibliography.............................................................................................................................14

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Table of Cases

Tweddle v/s Atkinson 8

Dutton v/s Poole 6

Chinnaya v/s Ramayya 6

Jordan v/s Jordan 7

Levett v/s Hawes 7

Bourne v/s Mason 7

Dunlop Pneumatic Tyre Co. v Selfridge & Co. Ltd 7

Drive Yourself Hire Co, Ltd. London V. Strutt 8

Lala Jamna Das v. Ram Autar 9

MC Chacko V State Bank of Travancore 10

Krishna Lal Sahu v/s Promila Bala Dasi 10

Khwaja Muammad Khan v. Hussaini Begum 11

Shappu v/s Amaal 11

Kshirodebihari Datta v/s Mangobinda Panda 11

Tulk v/s Moxhay 12

Besvick v/s Beswick 12

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Introduction

The prime highlight drawn by the concept of Privity of Contract is regarding the rights
provided to the third parties in a contract and in Consideration, the price of the promise.
Though the position in different countries is comparative in every aspect possible, it was
never similar when the rule came into existence. The most imperative inquiries were
considered to whether a third party could earn rights, or incur obligations, to a contract to
which he/she is not a party to contract?
The questions regarding the doctrine of privity and consideration were profoundly prevalent
in other countries from late seventeenth to the twentieth century. It was very later construed
in the late nineteenth century that the third parties in a contract were necessarily strangers to
the contractual agreements and therefore could neither sustain obligation on any party to a
contract nor obtain rights from them whereas the reason that both privities of contract and
consideration under the jurisdictions of common law proved to be the result of the combining
by 19th century judges of two distinct threads: first, the need for consideration in a contract
was at the action of assumpsit which grew in medieval times and continued in action for
breach of contract; secondly, the concept of agreement between two or more parties, the
essential moral and legal foundation of contract in all legal systems was promoted.
The understudies have tried to build up with how the above-mentioned settings were
achieved and the conditions and the situation that cleared the way for the present position of
the third parties and consideration. Also, comparative analysis of Privity of contract and
consideration has been done in detail precisely with the help of landmark case laws of India
and other countries, changing the course of the rule despite the very high impact of the
English Laws and cultures on the Indian laws.

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Research Methodology

Instead of going for empirical research, I have limited the scope of the research to doctrinal
study. This project work has been carried out following the descriptive and analytical
approach. It is largely based on the concept of doctrine of privity of contract. Efforts have
been made to trace the origin of the doctrine, analyze it and then look at its implementation.
For giving required shape to the project excerpts from secondary sources like books, journals
and articles of various authors have been used. Primary sources have also been used.

Research Objective

1. To determine the position of the Common Law System with regard to the doctrine of
privity of contract.
2. To find out the difference in application of the doctrine between English law and
Indian law.
3. To find out the position of third party in contract law of other common law countries.

Research Questions

1. What is the development of the doctrine of privity of consideration and privity of


contract?
2. How the English doctrine i.e. doctrine of privity to contract is applied in India?
3. Whether the right to privity of contract is absolute or rigid ie whether it has some
exception attached to it?

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CHAPTER 1-Judicial Development of the Doctrine of Privity of
Consideration and Privity of Contract

It all started with the concept of Consideration. Under English Law, consideration has to
move from the promisee and if any other person moves it, it becomes a stranger to
consideration and cannot enforce the promise.1 The act to which is to constitute a
consideration may be done by “the promisee or any other person”. Therefore it means as long
as there is a consideration for a promise, it is immaterial who has furnished it. It may move
from the promisee, or, if the promisor has no objection from any other person.
This principle was adopted from the case Dutton v/s Poole2 .
A man had to marry his daughter and in order to acquire money for her marriage he intends to sell a
piece of wood that he was in possession of. His son (defendant) promised that if ‘the father
would forbear to sell at his request he would pay £1000’. The father accordingly agreed but
the defendant did not pay. The daughter and her husband sued the defendant for the amount.
In this case the son was held liable because the court saw it to be unfair to allow the son to keep the
wood and deny her sister of her portion. As the court saw it the contract was to provide a
portion to the plaintiff not withstanding that the consideration was furnished by the father
making her daughter the third party to the contact.

If a consideration moves from promisee or any other person on his behalf it will be a valid
consideration. In Chinnaya v/s Ramayya3, An Old Lady gifted certain landed property to her
daughter. By the terms of the deed, which was registered, it was stipulated that an annuity of
Rs 653 should be paid every year to plaintiff, who was the sister of the old woman. The
defendant agreed but was not paid. The plaintiff sued to it. In this situation the defendant’s
promise was given to the plaintiff, but consideration was furnished by the plaintiff’s sister.
The court held plaintiff can recover the annuity, as consideration given by “any other person”
is equally effective.

1 Stephen A Smith , ‘Contracts for the Benefit of Third Parties: In Defence of the Third-Party Rule’, (1997)
17(4) 644.
2 (1677) 2 Levinz 210: 83 ER 523.
3 ILR (1876-82)4 Mad 137.

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A person becomes a stranger to a contract when he not a party to the contract even though it
is made for his benefit. He is a stranger to the contract and cannot claim any rights under it.
Stranger to consideration and stranger to contract are called Privity of consideration and
Privity of contract.
In India Privity of consideration is not applicable because Section 2(d) 4 has the provision that
provides that the promisee or any other person can move a contract. Accordingly in India a
stranger to consideration can sue and enforce an agreement if he is a party to the contract.
The doctrine of Privity of Contract originated from the Common Law System. The period
between 1500 and 1680 is identified as the “formative period” of the doctrine of privity of
contract.5
For the first time the doctrine was applied in Jordan v/s Jordan6. In this case the suit of a
party who was not a party to the contract at all did not lie. However, in Levett v/s Hawes7 the
decision of Jordan v/s Jordan8 was overruled. In this case the girl’s father promised the boy’s
father that if he gave his consent to the marriage of the boy with the girl and give 40 pounds
to the son, he would pay around 200 pounds to the son with whom the marriage is fixed. The
son brought an action when the promise was breached. The court held that the son could sue.
But, in Bourne v/s Mason9 the court gain held that the doctrine was applicable. In this case
there was one Parry who was indebted to Bourne, Mason and Robinson (the co-defendant).
Chanter was indebted to Parry. Mason, in consideration that Parry would allow Mason to sue
Chanter promised to pay to Bourne a part of the sum owed to him by Parry. The plaintiff's
action to sue the contract failed. It was held that the plaintiff was not an eligible person to
sue. It said that the plaintiff was no one but a stranger and no meritorious cause could move
from him.
However, in Dutton v/s Poole10 the King's Bench again overruled the decision of Bourne v/s
Manson’s case and held that the stranger can sue but on a different ground. The court did not
follow the doctrine of privity of contract in a strict way here. The court concluded that the
stranger was having very close relations to the promise. He could, therefore, maintain an
action on a contract as a beneficiary. In this case the father of the defendant wanted to sell
some timber trees. The defendant gave his promise of (in thought that his dad would forgo

4 Section-2(d) of Indian Contract Act, 1872.


5 N.G. Jones, ‘Uses, Trusts and a Path to Privity’ (1997) 56(1) Cambridge Law Journal 175
6 (1594) Cro Eliz 369.
7 (1598) Cro Eliz 619, 652; (1598) Moo. K.B. 550.
8 (1861) 1 B&S 393, 121 ER 762
9 (1669) 1 Vent 6, 86 E R 5.
10 (1678) 2 Lev 210.

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chopping down the trees ) payment of 1000 pounds to his sister Grizil (as Mrs. Dutton) and
her husband sued from breach of the promise. It was held that the action was viable. It seems
that the prime ground in this case for ignoring the doctrine was the very near and affectionate
relation which was there between the plaintiff and the plaintiff’s father who was the
promisee. According to the court natural love and affection could form a valid consideration.
So, the consideration and the promise to the father could extend to the children as natural
love and affection exists between them. The plaintiff was of course a stranger to the contract,
but not a stranger to the consideration and as she was deemed to have provided consideration,
so she was eligible to sue. After this there were many cases where the indecisiveness of the
English law courts became evident in relation to this doctrine.
The case of Tweddle v. Atkinson11 is that case which finally laid down the doctrine of privity
of contract in 1861. In the case the plaintiff married the daughter of G. The consideration for
this marriage was a written agreement through which it was agreed that each party would pay
the plaintiff a certain sum of money. G was not able to do so and the plaintiff sued the
executers. Whitman J held that it was an established principle ‘that no stranger to the
consideration can take advantage of a contract, although made for his benefit’. This principle
was strengthened in the case of Dunlop Pneumatic Tyre Co. v Selfridge & Co. Ltd12. In this
case Dunlop & Co sold some particular goods to Dew & Co and an agreement was made
between them that goods should not be sold below the list price and if goods were sold to
another businessman or company a similar undertaking of maintaining the price list would be
obtained from them. However, Dew & Co sold the motor tyres to Selfridge & Co who agreed
that they would not sell the tyres to private party at a price which is less than the list prices.
The plaintiff sued for the breach of the contract. Lord Viscount Haldane said that in
England’s law certain principles are universal and fundamental and the rule that only a person
who is a party to the contract can sue is one of them.
In some cases which were decided latter some efforts were made to get rid of this doctrine.
For instance, in Drive Yourself Hire Co, Ltd. London V. Strutt13, Lord Denning (who opposed
this doctrine) observed, ‘For the last two hundred years before 1861 it was settled law that, if
a promise in a single contract was made for the benefit of a third person in such
circumstances that, was intended to be enforced by him, then the common law would enforce
the promise at his instance, although he was not a party to the contract.’

11 (1861) 1 B&S 393, 121 ER 762


12 (1915) A C 847.
13 (1954) 1 Q B 250.

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In Beswick v. Beswick14, Lord Denning and Dankwerts L.J. in the court of Appeal were of the
opinion that the doctrine of privity of contract is not applicable. But, the House of Lords,
rejected the views of Lord Denning and Dankwerts, L.J. It unanimously stressed the utility of
the doctrine of privity of contract.
The major difference between English law which was established in 1915 and other systems
which are there was that the third party would not derive contractual rights even if the
contracting parties clearly had the intention to confer certain benefits on the third party. It is
clear that in Tweddle v/s Atkinson15 the major purpose of the contract was to confer
enforceable rights on the husband and that in Dunlop v. Selfridge one of the major purposes
was to confer rights which were enforceable on Dunlop. English law laid down that even if
the parties intended by a contract to confer a right on a third party it is not possible for them
to succeed. This is the only thing was unique to the English law and this distinguished it
from the other systems. But this principle has been generally criticised and the Law Revision
Committee in 1937 under Lord Wright’s chairmanship criticized this doctrine immensely and
suggested its termination. However, the contracts (Rights of third parties) Act 1999 makes it
possible for the third party to enforce a contract when the parties to the contract intend.
While the 1999 Act creates a general and wide exception to the first aspect of the privity
principle, it does not demolish it and keeps it untouched for cases not covered under the Act.
It also protects the statutory and common law exceptions of the doctrine. Moreover, the Act
does not enable a term of the contract to be directly imposed against a third party and so the
rule’s second aspect under which a burden cannot be imposed on a third party does not alter.

14 (1968) A C 58.
15 (1861) 1 B&S 393, 121 ER 762

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CHAPTER-2 Doctrine of privity of contract in India

The Indian Contract Act 1872 does not clearly state anything about the doctrine nor are there
any specific provisions for the same. Lack of clarity in the concerned statutes and various
dissenting judgment add to the controversial study of the doctrine of privity of contract in
India.
Section 2 (d) says that, when, at the desire of the promisor, the promise or any other person
has done or abstained from doing, or does or abstains from doing, or promises to do or to
abstain from doing, something, such act or abstinence or promise is called a consideration for
the promise.16
As seen in earlier chapters the concept was well established in the case of Tweddle vs.
Atkinson17 and was laid down as “true common law doctrine” and was further concreted by
the law in the case of Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd 18. The former
case had two aspects first privity of consideration second privity of contract. The concept of
privity of consideration has been explicitly discussed in the Indian Contract Act 1872 and has
been given wider scope than the English law. The English law restricts the flow of
consideration from any other person except the parties to the contract whereas the Indian
Contract Act under section 2(d) states the consideration may come from promisor or any
other person. But in the latter doctrine i.e. privity of contract the basic common law principles
regarding the doctrine are followed in the Indian courts.
In the case of Lala Jamna Das v. Ram Autar19 the Privy Council extended the doctrine to
Indian court. In this case ‘A’ borrowed ₹40,000 by executing a mortgage of her zamindari in
favour of B. Subsequently she sold her property to C for ₹44,000 and allowed C, the
purchaser, to retain ₹400,000 of the price in order to redeem the mortgage if he thought fit. B
sued C for the recovery of the mortgage money, but he could not succeed because he was no
party to the agreement between A and B. In a very short judgement of two paragraphs by
Lord MacNaughtan it was held that “The mortgagee has no right to avail himself of that. He
was no party to the sale. The purchaser entered into no contract with him, and the purchaser is
not personally bound to pay this mortgage debt.”

16 Indian Contract Act 1872.


17 (1861) 1 B&S 393, 121 ER 762
18 1915 A C 847
19 (1911) 39 IA; 21 MLJ 1158

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However the Indian law has not completely accepted the doctrine as it is in the English law.
Various courts have given different diverging opinion about the doctrine. According to
Jenkins CJ “That Indian Contract Act is unlike the English Contract Act and the limits with
which the doctrine of privity of contract operates in English law cannot with same vigour be
applicable to Indian Contract Act”. Hence it can be said that the doctrine has been subjected
to various reforms depending upon the facts and circumstances and jurisdiction of the case.
The Indian Judiciary in many cases has harped on that the dispensation of justice and equity
should not be hampered by the precedent of the Tweddle v/s Atkinson20. It has reiterated that
the judiciary must remain free from such restrictions and should be guided by the rules of
justice equity and good conscience.
With this view in mind the doctrine of privity of contract has been accepted and applied with
some exceptions in mind to upheld equity and justice if the third party has any actual right or
is in need of the enforcement of the contract. The exceptions such as beneficiaries of a trust,
family arrangement and marriage settlements, tort, collateral contracts, creation of charge or
covenants running with land are recognised in the Indian courts. The given list of exceptions
is not exhaustive and time and again other exceptions evolve and are recognized by the
courts.
The Supreme Court of India in the case of MC Chacko V State Bank of Travancore 21
supported the rule in Tweedle vs. Atkinson22 and held that a person not a party to a contract
cannot subject to certain well recognized exceptions, enforce the terms of the contract. The
exception mentioned in the above stated judgement is recognised in the Indian courts as
precedent and are also worded efficiently to cover the beneficiaries under terms of the
contract. The facts of the case are as follows:
“The Highland Bank was indebted to the State Bank of Travancore under an overdraft. One
M was manager of the Highland Bank and his father K had guaranteed the repayment of the
overdraft. K gifted his properties to the members of his family. The gift deed provided that
the liability, if any, under the guarantee should be met by M either from the bank or from the
share of property gifted to him. The State Bank attempted to hold M liable under this
provision of the deed.”

20 (1861) 1 B&S 393, 121 ER 762


21 AIR 1970 SC 504
22(1861) 1 B&S 393, 121 ER 762

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The court held that the plaintiff i.e. the state bank was not party to the deed and was not
bound by the covenants in the deed and could not enforce the covenants. A person not party
to the contract cannot enforce the terms of the contract.
The judgement of the case given by Shah AG, CJ supported the statement in the judgement of
the case Krishna Lal Sahu v/s Promila Bala Dasi23 after referring to the pronouncement of
Lord Haldane in Dunlop v. Selfridge24 said:
“The Judicial Committee applied that rule in Khwaja Muammad Khan v. Hussaini Begum. In
a later case, Jamna Das v. Ram Autar25, the Judicial Committee pointed out that the
purchaser’s contract to pay off a mortgage could not be enforced by a mortgagee who was not
a party to the contract. It must be therefore taken as well-settled that except in the case of a
beneficiary under a trust or in the case of a family arrangement, no right may be enforced by
a person who is not a party to the contract.”
There is modern relaxed and progressive approach to the doctrine by the Indian courts unlike
the English Law. Indian Judiciary does not strictly follow the English doctrine of privity of
contract. It levies the rule of Tweddle vs Atkinson in case of beneficiary to the contract. This
has been accepted as a general rule across the country. This non-conventional approach of the
court resolves the conflicts regarding affected third party with justice and equity who may
have to face injustice if strict interpretation would had been done.

23 AIR 1928 Cal 518


24 (1915) UKHL 1, (1915) AC 847
25 (1916) ILR 38 All 209

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CHAPTER-3 Exception to Law of Privity of Contract

In courts have introduced a number of exceptions in which the rule of prvity of contract does
not prevent a person from enforcing a contract which have been made for his benefit but
without his being a party to it.
The basic premise of all the exception is that the third party should be beneficiary in the
contract to sue for the enforcement of the given contract. To be more precise the third party
should be ‘intended beneficiary’ to the contract and not ‘incidental beneficiary’ (The burden
of proof lies on the party suing to prove that they were intended beneficiary).
1) Trust or Beneficiary:
A person in whose favour a charge or other interest in some specific property has been
created may enforce it though he is not a party to contract.
In Nawab Khwaja Muhammad Khan v/s Hussaini Begum26, His Lordship Ameer Ali, J. in
Paragraph 10 of the judgment stated that “Their Lordships desire to observe that in India and
among communities circumstanced as the Mahommedans, among whom marriages are
contracted for minors by parents and guardians, it might occasion serious injustice if the
common-law doctrine was applied to agreements or arrangements entered into in connection
with such contracts.” The Lordships also observed that “Here the agreement executed by the
himself to pay to the plaintiff she is the only person beneficially entitled under it. In their
Lordships' judgment, although no party to the document, she is clearly entitled to proceed in
equity to enforce her claim.”
2) Social or domestic arrangement:
In Shappu v/s Amaal27, two brothers, on a partition of joint properties, agreed to invest in
equal shares a certain sum of money for the maintenance of their mother she was held entitled
to require them to make the investment.
3) Acknowledgment or Estoppel:
In Kshirodebihari Datta v/s Mangobinda Panda28 The tenant and the sub-tenant of a piece of
land agreed between themselves that the sub-tenant would pay the tenant’s rent direct to the
landlord. The agreement was acted upon by all the parties interested. Under these

26 (1909-10) 37 IA 152: (1909-10) 12 Bom LR 638.


27 ILR (1910) 33 Mad 238.
28 ILR (1934) 61 Cal 841: AIR 1934 Cal 682.

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circumstances the sub-tenant was estopped from denying his liability to pay the tenant’s rent
on the ground that there was no such contract between him and the landlord.
4) Convenance running with land:
In Tulk v/s Moxhay29 , a person who purchases a land with notice that the owner of the land is
bound by certain duties created by an agreement or covenant affecting the land shall be bound
by them although he was not a party to the agreement.
5) Assignee in Insurance Policy:
In Besvick v/s Beswick30 , PB was in poor health and agreed with the defendant, his nephew,
that he would transfer the trade and good will of his coal business to him on the basis that the
nephew employed him as a consultant for the rest of his life and paid him for this. The
nephew also agreed to pay PBs wife after PB died for the rest of her life. She was not a party
to the agreement. Upon the death of PB, the nephew paid PB’s wife once but then not again.
PBs widow brought an action as administrator of PB’s estate and also in her personal capacity
claiming for specific performance.

29 (1843-60) All ER Rep 9: (1919) 88 LJKB 861 (HL).


30 (1968) A C 58.

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Conclusion

The convention of privity is exceptionally valuable, for it helps in safeguarding the


sacredness of the agreement. The sacredness of the agreement is saved if the parties to an
agreement are held responsible to each other and not a third individual. It would be
nonsensical and uncalled for to nullify this doctrine completely. In the event that it is
annulled, every single individual of society will be free to sue the contracting parties.
Subsequently it will result in chaos and the social texture and obligation of fraternity might
be debilitated. So inculcation of the doctrine of privity of contract in the Common Law
System is justified and logical.

The Act has not explicitly said anything about the doctrine, however through a series of case
laws it can be seen that the Indian Judiciary has developed its own way of applying the rule in
the courts which shall also uphold equity and justice. The doctrine is applicable to the Indian
courts but is subjected to some exceptions primarily “intended beneficiary” as discussed
above. But the views of the various courts and also the academicians regarding scope of the
term ‘beneficiary’ and also the applicability of the doctrine is not uniform and probability of
conflicts and controversy cannot be ignored . This can specially be seen in the present context
where very complex agreements are singed between the parties including various aspects of
the contract act and ‘n’ number of parties which also included various obligations from the
third parties such as agents, consultants etc. Here it becomes difficult in case of dispute to
determine who actually the intended beneficiary for the contract is. Keeping this in mind
many contracts are now days signed with a clause who are the intended beneficiaries and who
can enforce their rights according to it, but however same can be used by the parties as
defence in case of conflict.

Doctrine of privity of contract states that a party stranger to the contract can’t sue the other
parties, but this rule however has some exception attached to it. Where is can be implied that
the party had some vested interest or the harm suffered by one party was due to the
negligence of other and if the same fact can be proven then the third party becomes illegible
to sue the promise in case of breach of contract.

The two rules. reflect separate issues. of policy and the first one. primarily is associated. with
doctrine of privity. and relates to who. can enforce a. contract and the second one. is
associated with. consideration, and concerns types. of promises that can. be enforced.
However, there can be a problem of consideration moving from the promise.

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Bibliography

I. Articles:

1. Stephen A Smith , ‘Contracts for the Benefit of Third Parties: In Defence of the
Third-Party Rule’, (1997) 17(4) 644.

This article explains the widespread view that the common law 'third-party rule'-
the rule that only the parties to a contract can enforce the contract'-is an
indefensible anachronism.

2. N.G. Jones, ‘Uses, Trusts and a Path to Privity’ (1997) 56(1) Cambridge Law
Journal 175

This article explains the development and basis for the formation of privity of
contract.

II. Books:

1. Avtar Singh, “Contract and Specific Relief” 11th 2013.


2. J. Beatson “Anson Contract of law” 28th 2010.
3. Pollock & Mulla “Indian Contract and Specific Relief Acts” 1 12th

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