Privity of Contract

Meaning of Privity of Contract

Privity of contract means that generally only the parties to a contract can enforce the rights and obligations created by that contract.

A person who is a stranger to the contract cannot ordinarily sue to enforce the contract, even if the contract was made for that person’s benefit.

In simple terms:

Only a party to a contract can ordinarily enforce the contract.

For example:

A and B enter into a contract under which A promises to pay ₹50,000 to C.

If C is not a party to the contract, C generally cannot sue A for the ₹50,000 merely because the contract was intended to benefit C.

Privity and the Indian Contract Act, 1872

The Indian Contract Act, 1872 does not contain a single section expressly defining the doctrine of privity of contract.

The doctrine has developed through judicial decisions.

It is important to distinguish privity of contract from privity of consideration.

Privity of Contract

A person who is not a party to the contract generally cannot enforce it.

Privity of Consideration

This concerns who provided the consideration.

Under Section 2(d), consideration may move from the promisee or any other person.

Therefore, Indian law allows consideration to move from a third person, but that does not automatically give every third person the right to sue on the contract.

Example of Privity of Contract

A enters into an agreement with B.

A promises to pay B ₹1 lakh.

C is not a party to the agreement.

C generally cannot sue A for payment merely because C claims that the agreement affects his interests.

The reason is that C is a stranger to the contract.

Stranger to Consideration vs Stranger to Contract

This distinction is extremely important in Indian contract law.

Stranger to Consideration

A person who provides consideration but is not the promisee.

Indian law allows this.

For example:

A promises to pay B ₹50,000.

C pays ₹50,000 to A at B’s request.

The consideration has come from C, but B may still be the promisee.

Under Section 2(d), consideration can move from any other person.

Stranger to Contract

A person who is not a party to the contract.

Such a person generally cannot enforce the contract.

Key Rule

Indian law permits a stranger to consideration, but generally does not permit a stranger to contract to sue on the contract.

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

Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. (1915)

This English case is a leading authority on privity.

Dunlop supplied tyres to Dew & Co. subject to an agreement concerning resale prices. Dew sold tyres to Selfridge, but Selfridge did not agree directly with Dunlop.

Dunlop attempted to enforce the resale restriction against Selfridge.

The House of Lords held that Dunlop could not enforce the agreement because there was no contractual relationship between Dunlop and Selfridge.

The case illustrates the principle:

A person who is not a party to a contract generally cannot enforce it.

M.C. Chacko v. State Bank of Travancore

M.C. Chacko v. State Bank of Travancore (1969)

The Supreme Court of India recognized the general rule of privity of contract.

The Court explained that a person who is not a party to a contract generally cannot enforce its terms, subject to recognized exceptions.

This is an important Indian authority for the doctrine of privity.

Exceptions to the Doctrine of Privity

The doctrine is not absolute. Indian courts recognize several situations in which a person who is not an ordinary party to the contract may be able to enforce rights arising from the arrangement.

1. Beneficiary under a Trust

Where a contract creates a trust in favour of a third person, the beneficiary may enforce the trust-related rights even though the beneficiary may not have been a party to the original arrangement.

For example:

A transfers property to B to hold it in trust for C.

C may enforce the rights arising from the trust.

The right arises from the trust relationship rather than simply from ordinary contractual privity.

2. Beneficiary under a Family Settlement or Arrangement

A person who is not formally a party to a family arrangement may, in appropriate circumstances, enforce a benefit conferred upon them under that arrangement.

Family settlements are treated differently because courts seek to uphold arrangements intended to settle family disputes and protect the rights created under them.

For example:

Members of a family enter into a settlement under which property is to be given to C, even though C did not sign the settlement.

C may, depending on the circumstances, enforce the benefit given to C.

3. Acknowledgment or Estoppel

Where a party acknowledges an obligation toward a third person or conducts themselves in a manner that creates an estoppel, the ordinary rule of privity may not prevent enforcement in appropriate circumstances.

The precise facts and legal basis are important.

4. Assignment of Contractual Rights

Contractual rights may, subject to the nature of the right and applicable law, be assigned to another person.

Once a valid assignment takes place, the assignee may enforce the assigned right.

However, contractual obligations involving personal performance generally cannot simply be transferred without the necessary consent.

5. Agency

Under the law of agency, a principal may enforce rights arising from a contract made by an agent on the principal’s behalf.

The agent may negotiate or enter into the contract, but the contractual relationship can arise between the principal and the third party.

The relevant provisions are found in Sections 182 onwards of the Indian Contract Act.

6. Covenants Running with Land

Certain rights and obligations connected with property may be enforceable by persons claiming through the original parties, depending upon the nature of the covenant and applicable property law.

This is more accurately understood as a property-law principle rather than a simple exception to contractual privity.

Privity of Contract vs Privity of Consideration

Basis	Privity of Contract	Privity of Consideration
Meaning	Relationship between parties to the contract	Relationship concerning who provides consideration
Indian law	Generally required for enforcement	Consideration may move from a third person
Main principle	Stranger to contract generally cannot sue	Stranger to consideration may provide consideration
Example	C is not a party and generally cannot sue A	C provides consideration for B’s promise
Key provision	Judicial doctrine	Section 2(d)

Privity and Beneficiary Contracts

A common examination question is whether a third-party beneficiary can sue.

The general answer is:

A mere benefit does not automatically give the beneficiary a right to sue.

There must be a recognized legal basis, such as:

• trust;
• family arrangement;
• assignment;
• agency; or
• another recognized exception.

For example:

A contracts with B that B will pay ₹1 lakh to C.

C is intended to benefit from the contract, but C is not a party.

The mere fact that C benefits does not automatically eliminate the doctrine of privity.

Privity and Section 2(d)

Section 2(d) creates an important distinction.

It provides that consideration may move from:

“the promisee or any other person.”

Therefore, consideration can come from a third person.

Example

A promises B that A will transfer a property to B.

C, at B’s request, pays ₹10 lakh to A.

Here, C has provided the consideration, but C does not become a party to the contract merely because C provided the consideration.

This demonstrates:

A stranger to consideration can exist without becoming a party to the contract.

Privity and Third-Party Rights

A third party may have rights in relation to a transaction without necessarily having a contractual right to sue.

For example, a third party may benefit from:

• a trust;
• a family settlement;
• an assignment; or
• an agency relationship.

The source of the third party’s right must therefore be identified before deciding whether the third party can enforce the arrangement.

Why Does the Doctrine Exist?

The doctrine is based on the idea that contractual obligations arise from the agreement of the parties who entered into the contract.

If a person was not a party to the agreement, that person ordinarily should not be able to enforce contractual promises to which they did not assent.

It also protects parties from unexpected claims by unrelated persons.

Important Points for Exams

1. Privity of contract means a contractual relationship between the parties to an agreement.
2. Generally, only parties to a contract can enforce it.
3. A stranger to the contract generally cannot sue on it.
4. The doctrine is primarily a judge-made principle, not a single statutory provision in the Indian Contract Act.
5. Section 2(d) allows consideration to move from the promisee or any other person.
6. Therefore, Indian law recognizes a stranger to consideration, but generally not a stranger to contract as an enforcing party.
7. Important exceptions include trusts, family arrangements, agency and assignment.
8. M.C. Chacko v. State Bank of Travancore (1969) is an important Indian authority.
9. Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. (1915) is a leading English authority.
10. A third-party beneficiary does not automatically acquire a right to sue merely because the contract benefits them.

Quick Revision

Privity of Contract: Only parties to a contract can ordinarily enforce it.

Stranger to Contract: Generally cannot sue.

Stranger to Consideration: May provide consideration under Section 2(d).

Main statutory provision concerning third-party consideration: Section 2(d)

Leading Indian case: M.C. Chacko v. State Bank of Travancore (1969)

Leading English case: Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. (1915)

Major exceptions: Trust, family arrangement, agency, assignment and recognized third-party rights.

Conclusion

The doctrine of privity of contract provides that a person who is not a party to a contract generally cannot enforce the contractual rights created by it. Although the Indian Contract Act, 1872 does not expressly codify the doctrine in one provision, Indian courts have recognized it subject to several exceptions. It is particularly important to distinguish privity of contract from privity of consideration: under Section 2(d), consideration may come from a person other than the promisee, but that person does not thereby become a party to the contract. M.C. Chacko v. State Bank of Travancore is an important Indian authority on the principle.