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BRIEF ANALYSIS OF PRIVITY OF CONTRACT AND PRIVITY OF CONSIDERATION

Author: Aditi Vyas, II year of B.B.A.,LL.B. from BM Law College

Co-author: Vipul Solanki, II year of B.B.A.,LL.B. from BM Law College


Introduction

A contract has been defined as “an agreement enforceable by law”[i]. Also, the section 2(d) represents consideration, “When at the desire of the promisor, promisee or any other person has done or abstained from doing or does or abstains from doing or promises to do or to abstain from doing something, such act or abstinence, or promise is called a consideration for the promise.” If a contract fulfilled by the promise in favour of any other person other than the parties to the contract the other person would be a stranger to the contract.” In English law, consideration must not move from the promise, which means a stranger to the consideration cannot sue. This is known as privity of consideration. The scenario for the same is different in India; a stranger to the consideration can also sue as defined under section 2(d) of the Indian contract act. The rule of privity of contract is equally applicable in India and England.


Privity of Consideration

The rule of Privity of consideration doesn’t apply in India. When at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the contract.[ii]The promisee or any other person may give consideration. In England, the position differs from India’s; the consideration rule must move from the promisee to nobody else. Unlike India, consideration may move not from the promisee but a third person, who may not be a party to the contract.


To better understand the concept here’s and example, A promises to sell his Mobile Phone to B and the consideration of Rs. 10,000 for the same is given to A by B’s son X, who is not a party to the contract. This will not be a valid contract in England as the consideration for the phone was given by a third party and not the promise; meanwhile, in India, it will constitute a valid contract as under Section 2 (d) [iii]of The Indian Contract Act.


Furthermore, in a leading case of Chinmaya v. Ramayya[iv]: A, an old lady gifted her property to her daughter (defendant) by a gift deed with a consideration of her paying an annuity of Rs. 653 to A’s brothers(plaintiffs). The defendant promised to fulfil the same to pay the grant to the plaintiffs. But, the defendant was unable to complete the consideration. In action against the defendant, she resisted that they had no right of action since the plaintiff had given no consideration. The Madras High Court held that the defendant’s mother provided the review, which was enough to enforce the promise between the two parties.


In the above case law, it has been shown that the plaintiffs themselves did not give the consideration but a third party. According to the rule under Indian Law, a review can be provided either by the promisee or any other person. Meanwhile in England, the government is different. A stranger to a contract cannot enforce the agreement.[v]


Privity of Contract

Privity of contract is defined as “A contract cannot be enforced by a person who is not a party to it even though it is made for his benefit. He is a ‘stranger to the contract’ and can claim no right under it”.[vi]


This ruleis also based on “interest theory”, this theory says that a person having an interest in the agreement is entitled to sue as per the law to protect his rights.

The principle is generally applicable in India, and only a party to the contract can enforce the agreement or file a suit for the enforcement of the deal.


The principle of privity of contract can be distinguished from the privity of consideration; in the rule of privity of consideration, it has been stated that a person who has himself not given any consideration can take measures to enforce a contract if he is a party to the contract as consideration can be either provided by the promise or any other person.[vii]


The rule of privity of contract is equally applicable in Indian and English Law. The rule of privity of contract was based upon the law laid down in the case of Tweddle v. Atkinson in England, which was further developed[viii].

In the case of Tweddle v. Atkinson, A married to a girl B, after the marriage, there was a contract between the father of A and the father of B, that both of them would individually pay a certain amount to A. A will be able to sue each of them in case of non-fulfilment of the payment. After the death of both the father’s a bought a suit against the executors of B’s father for the sum of money. In the suit, it was held that A could not sue as he was a stranger to the contract and a stranger to consideration for the same.


After this case, there was another case of Dunlop Pneumatic Tyre Co Ltd. V. Selfridge & Co. Ltd.,[ix]in this case, Dunlop & Co. (appellants) was a manufacturer co. of tyres, they made a contract with Dew & co. for certain tyres, and in the contract, it was stated that dew and tyres must not sell any tyre below the given price list. Dew & Co. sold some of these tyres to Selfridge and Co.(respondents) with the condition of the price list being fulfilled and a penalty of 5 Euros for each tyre sold below the price list. Selfridge & Co. sold some tyres below the price list. In a suit bought by the appellants against the respondents, it was held that the respondent was not liable since they were strangers to the contract of the appellant and Dew & co. Along with that, respondents were also stranger to consideration in the contract made between the appellants and Dew & Co. Ltd.


Position of privity of contract in India

The rule of privity of contract is equally applicable in India as it is applicable in the case of England, given that the definition of consideration is extensive in the Indian Contract Act. This rule is applicable in India in almost every circumstance.


Let us explain this example further with a real-life incident, A mortgages his property to B in consideration of B’s promise to Manis that he shall pay A’s debt to X, X cannot file a suit against B to enforce his promise because X was not a party to the contract made between A and B.[x]


To better understand, let us look into a case law of Advertising Bureau v. C.T. Devaraj[xi], in which a circus owner made a deal with the financer who would make an advertisement for the circus. The advertiser(plaintiff) did not make any contract with the financer for the advertising of the circus. Since the advertiser was a stranger to the contract and there was no contract between him and the financer, a suit brought against the financer by the advertiser, it was held that the suit was dismissed on the basis, there being no contract between the advertiser and financer and the advertiser being a third party to the contract between the circus owner and the financer.


Exceptions to privity of contract

1) Trust of contractual rights or beneficiary under the contract

Under this exception, a beneficiary of a trust can sue by enforcing his right under the trust in a contract made between a trustee of a trust and another party, even if the person suing is a stranger to the contract.


In Indian law, this exception is recognised in the case of Khwaja Muhammad khan v. Huasini Begum[xii]. In the suit brought, there existed an agreement between a father of a girl and the father of a boy that if the girl marries a particular boy, the defendant will pay certain personal allowances known as kharchi-i-pandan[xiii]. The contract also mentioned that certain property was kept aside by the defendant and the allowances had to be paid out of the income generated out of the property. The girl married the defendant’s son but the defendant is unable to fulfil the personal allowances. In an action bought by the plaintiff, the defendant argued that the contract has been made with the plaintiff’s father and not with the plaintiff, therefore, being a stranger to the contract she cannot sue. The argument made by the defendant was in reference to the case of Tweddle v. Atkinson[xiv]. It was held that the plaintiff was entitled to claim the same since she was a beneficiary to the contract.


In another case of KalusMittlebachert v. East India Hotels Ltd.,[xv] Klaus Mittlebachert was a pilot in the Lufthansa airlines, and her landed his flight in Delhi the owners of Lufthansa airlines had a contract with the Hotel Oberoi Inter-continental(defendants) that the crew members of the Lufthansa airlines will stay in the hotel for their lay over. In the hotel there was swimming pool which had a diving board. The plaintiff, one day went to the pool and used the diving board to dive into the pool got injuries as his head got an accident with floor of the pool. The plaintiff suffered serious injuries and was paralyzed, and after suffering for 13 years he died. In a suit brought against the hotel management the hotel was held liable. In defence, the hotel pleaded that the plaintiff was not a party to the contract and he could not sue. But it was held that the plaintiff was a beneficiary to the contract so he could sue and he succeeded.


2) Conduct, acknowledgement, or admission

Sometimes there may be no privity of contract between the two parties, but if one of them by his conduct, acknowledgement, or admission recognizes the right of the other to sue him, he may be liable on the basis of the law of estoppel.


This exception could be seen in the case of Narayani Devi vs. Tagore Commercial Corporation Ltd[xvi]. Here there was an agreement made between the plaintiff’s husband and the defendants that the defendants need to pay a particular amount to the plaintiff’s husband during his lifetime and thereafter to the plaintiff. After, the death of the plaintiff the defendants had made certain payments to the plaintiff but after sometime the defendant asked for extension of time to pay. Apart from that the defendants by their admission had call upon the plaintiff to execute some documents which implies that the plaintiff to be entitled to certain rights. It was held that the defendants had created the privity with the plaintiff by their conduct and acknowledgement that the plaintiff was entitled to her action even though there was no privity to contract between the defendants and the plaintiff


3) Marriage expenses or maintenance under family arrangements

In a family arrangement or a marriage if a contract is made to give a benefit to the third party he can sue to claim for the same as the beneficiary. Such actions are allowed in many cases on the partition of joint family property between the male members, a provision is made for the maintenance of the female members of the family. The rule laid down in the case of Khawaja Muhammad khan v. Huasini Begum[xvii] is the basis for the recognition of such an action.


In the case of Veeramma v. appayya[xviii], under a family agreement, the father’s house was to be given to his daughter and the daughter undertook to maintain him in his lifetime. The daughter is a beneficiary under the arrangement it was held that she was entitled to sue for the specific performance in her favour.

[i]Section 2(h), Indian Contract Act [ii]S. 2(d), The Indian Contract Act, 1872 [iii]Krishan Lal Sadhu v. Pramila BalaDasi, A.I.R 1928 Cal. 518. [iv](1882) 4 Mad. 137 [v]Thomas v. Thomas, (1842) 2 Q.B. 851 [vi]Tweddle v. Atkinson (30 LJ QB 218) [vii]Section 2(d), The Indian Contract Act, 1873 [viii]Dunlop Pneumatic Tyre Co Ltd. V. Selfridge & Co. Ltd. [ix](1915) A.C. 847, at 853, per Lord Haldane. [x]Jamna Das v. Ram Avtar (1911) 30 I.A. 7. [xi]A.I.R. 1995 S.C. 2251 [xii]I.L.R (1910) 32 All. 410: (1910) 37 I.A 152. [xiii]Betel-box expenses or pin money [xiv] [1861] EWHC J57 (QB), (1861) 1 B&S 393 [xv](1861) B & S 393. [xvi]A.I.R 1973 Cal. 401. [xvii]I.L.R (1910) 32 All. 410: (1910) 37 I.A 152. [xviii]A.I.R. 1957 A.P. 965.