The Doctrine of Privity of Contract is a fundamental principle of English Common Law that is also applicable in India. It determines who has the right to enforce a contract in court.
1. Meaning and Principle
The term “Privity” implies a connection or bond. The general rule is: “Only a party to the contract can sue on it.”
- The Principle: A contract is a private relationship between the parties who make it. Therefore, a “stranger to the contract” (third party) cannot sue to enforce it, even if the contract was made for his benefit.
- Distinction: You must distinguish between two concepts:
- Stranger to Consideration: (Allowed in India). Consideration can be paid by a third party (See Chinnaya v. Ramayya).
- Stranger to Contract: (Not Allowed). A person whose name is not in the contract cannot sue.
2. Leading Case Law (General Rule)
The classic authority on this doctrine is an English case.
Case: Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd. (1915)
- Facts:
- Dunlop (Tyre manufacturer) sold tyres to Dew & Co. (Wholesaler) with an agreement that they would not sell below a certain price.
- Dew & Co. sold the tyres to Selfridge (Retailer) with a similar contract that Selfridge would not sell below the list price.
- Selfridge sold the tyres below the list price.
- Dunlop sued Selfridge for breach of contract.
- Issue: Could Dunlop sue Selfridge?
- Ratio Decidendi: There was a contract between Dunlop and Dew, and a separate contract between Dew and Selfridge. There was no direct contract between Dunlop and Selfridge.
- Judgement: The House of Lords held that Dunlop could not sue Selfridge because Dunlop was a stranger to the contract between Dew and Selfridge.
3. Exceptions to the Doctrine
While the general rule is strict, the law has evolved to allow “Strangers” to sue in specific situations to prevent injustice. These are the exceptions:
A. Trust or Beneficiary
If a contract creates a trust in favor of a third party, that third party (beneficiary) can sue the trustee to enforce the trust, even though they were not a party to the contract.
B. Family Settlement / Marriage Expenses
In India, where family arrangements are common, courts allow female members to sue for their rights (like maintenance or marriage expenses) mentioned in a partition deed or family contract, even if they didn’t sign it.
C. Acknowledgement or Estoppel
If a party admits or acknowledges their liability to a third party, they are stopped (estopped) from later denying it.
- Example: A gives money to B to pay to C. B tells C, “I hold this money for you.” If B fails to pay, C can sue B because B acknowledged the debt.
D. Assignment of Contract
If the benefits of a contract are legally assigned (transferred) to a third party (e.g., an insurance policy transferred to a nominee), the assignee can sue.
E. Covenants Running with Land
If a person buys land with notice that the owner is bound by certain duties (e.g., not to build a wall blocking a neighbor’s view), the neighbor can enforce this covenant against the new buyer.
4. Landmark Case Law (Exception)
This Indian case highlights the Beneficiary/Family Settlement exception.
Case: Khwaja Muhammad Khan v. Husaini Begum (1910)
- Facts:
- An agreement was made between the father of the bride and the father of the groom before the marriage.
- The groom’s father (Defendant) agreed to pay ₹500 per month to the bride (Plaintiff) as Kharcha-i-Pandhan (Betel-leaf / Pocket money).
- He also set aside certain properties to cover this cost.
- After marriage, the bride and groom separated. The groom’s father stopped paying. The bride sued him.
- Issue: The bride was not a party to the agreement (it was between the two fathers). Could she sue?
- Ratio Decidendi: The agreement created a specific charge on immovable property for the benefit of the bride. She was the sole beneficiary of that contract.
- Judgement: The Privy Council held that the Doctrine of Privity did not apply here. The bride was entitled to sue and recover the money because a trust was created in her favor.