PRIVITY OF CONTRACT: A STUDY

3.5 Law of Contract-1

Submitted by
Name: Uditanshu Misra
ID: SM0117057
2017-2018, Semester 3
Faculty Advisor: Prof. (Dr.) Yugal Kishore

National Law University, Assam

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 Content

1. Introduction……………………………………………………………...…………
1.1 Objectives ……………………………………………………………………...
1.2 Review of Literature……...………………………………...…………………..
1.3 Research Questions………………………....……………….……………...….
1.4 Research Method………………………………………………………...……..
2. Third Party Rights…………………………………………….…………………….
3. History…………...………..……………..……....................................................
4. Exceptions……...….………………....................................................................
5. Conclusion…...…………………………………………….………………………..
6. Bibliography………...……………………………………….……………….…......

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 CHAPTER ONE
INTRODUCTION

The doctrine of privity of contract is a common law principle which provides that

a contract cannot confer rights or impose obligations upon any person who is not a party to
the contract.

The premise is that only parties to contracts should be able to sue to enforce their rights or
claim damages as such. However, the doctrine has proven problematic because of its
implications upon contracts made for the benefit of third parties who are unable to enforce
the obligations of the contracting parties. In the UK, the doctrine has been substantially
weakened by the Contracts (Rights of third Parties) Act 1999 creating exceptions to privity of
contract.

1.1 LITERATURE REVIEW

 Contract and Specific Relief by Dr. Avtar Singh

It is an authoritative and most sought after book on the subject. The book deals with the
intricacies of contract law in a straightforward and lucid style. The book covers many new
developing areas in contract law which are of practical and academic importance.
 Law of Contract (LL.B. Series) (2018 Edition) byProf. (Dr.) Rajni Malhotra Dhingra

The book Law of Contract present the law in a simple and easy way so that the learner can
understand the basic rationality of each and every statutory provision incorporated in the
Indian Contract Act, 1872 and the Specific Relief Act, 1963. In this book an effort is made to
incorporate the real time examples to clear the concepts of the students. Since ages, this
branch of law is important branch of civil law that makes this subject a very important subject
to understand. The book is divided into two parts. First part of the book succinctly explains
the provisions of the Indian Contract Act, 1872 and the Second part explains the provisions of
the Specific Relief Act, 1963. This book is useful for the students, academicians and

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advocates as an effort has been made to explain the provisions with sufficient clarity by
adding examples as well as recent judgments on the subject.

1.2 SCOPE AND OBJECTIVES

The objective of this project is the following:

1. To understand the meaning of Privity of contract.

2. To trace the development of the concept of privity of contract.
3. To study the cases related to Privity of contract.

1.3 RESEARCH QUESTIONS

1. What is the meaning of Privity of contract?

2. How did the concept of privity of contract develop in India and abroad?
3. What are the relevant cases related to privity of contract?

1.4 RESEARCH METHODOLOGY

The methodology used for this research is exploratory and descriptive as sources collected
were library based. Secondary data in the form of articles, web excerpts, and available books
were heavily relied upon in an attempt to arrive at plausible, explanatory answers. Primary
data was not collected.

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 CHAPTER TWO
THIRD PARTY RIGHTS

Privity of contract occurs only between the parties to the contract, most commonly contract
of sale of goods or services. Horizontal privity arises when the benefits from a contract are to
be given to a third party. Vertical privity involves a contract between two parties, with an
independent contract between one of the parties and another individual or company.

If a third party gets a benefit under a contract, it does not have the right to go against the
parties to the contract beyond its entitlement to a benefit. An example of this occurs when a
manufacturer sells a product to a distributor and the distributor sells the product to a retailer.
The retailer then sells the product to a consumer. There is no privity of contract between the
manufacturer and the consumer.

This, however, does not mean that the parties do not have another form of action: for
instance, in Donoghue v. Stevenson – a friend of Ms. Donoghue bought her a bottle of ginger
beer, which contained the partially decomposed remains of a snail. Since the contract was
between her friend and the shop owner, Mrs. Donoghue could not sue under the contract, but
it was established that the manufacturer was in breach of a duty of care owed to her.
Accordingly, she was awarded damages in the tort of negligence for having suffered
gastroenteritis and "nervous shock".1

The doctrine of Privity of Contract means that only those persons who are the parties to the
contract can enforce a contract.A stranger to the contract has not right to sue the parties for
the enforcement of the contract. Privity of contract is distinguished from privity of
consideration.

2.1 English Law (with relevant case laws)

Privity of Contract is followed under english law.

Tweddle v. Atkinson (1861)2

1
https://www.lawteacher.net/modules/contract-law/privity-of-contract/lecture.php

2
https://www.lawteacher.net/modules/contract-law/privity-of-contract/lecture.php

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 A married a girl B.After the marriage there was a contract between A’s father and B’s Father
that each would pay a certain sum of money to A.After the death of both the fathers A sued
executors of B’s father for the said amount.

 Whether he is entitled for the sum?

Decision- It was held that A is stranger to contract and following the rule of privity of
contract he can’t sue the executors of B’s father.

Dunlop Pneumatic Tyre co. Ltd. v. Selfridge & co ltd. (1915)3

Dunlop & co, who were manufacturer of motor car tyres, sold some tyres to Dew & co. With
an agreement that these tyres will not be sold below the list price. Dew & co. Further sold
these tyres to respondents with same condition. But Selfridge &co. Sold these tyre below the
price mentioned in the list. For this act they were sued by the Dunlop & co.

 Whether suit of Dunlop &Co. Is maintainable or not?

Decision-Court reiterating the doctrine of Privity of contract held that as Dunlop & co is
stranger to the contract between Dew & co and Selfridge & Co, their suit against the
Respondent co. is not valid.

2.2 Indian Law

The rule of privity of contract is applicable under Indian laws as well but with some
exceptions.

Jamna Das v. Ram Avtar (1911)4

A had mortgaged some property to X.A then sold the same property to B, B having agreed
with A to pay off the mortgage money to X.X brought an action against B for the recovery of
mortgage money.Court held that X could not enforce the contract to recover the amount from
B as he is stranger to the contract.

Exception to the rule:

1. Beneficiary under the contract: if any beneficial interest has been created in favour of a
third person. He can sue the parties for the enforcement of the contract so made.

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Ibid.
4
ibid

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Khwaja Mohd. Khan v. Hussaini Begum (1910)i

There was an agreement between a boy’s father and a girl’s father. That if girl married to a
particular boy, boy’s father would pay certain allowance known as by “Kharcha-e-Pandan”.
Some property was set aside out of which this allowance would be paid.Boy’s father failed to
give the said amount and sued by the girl.

Discuss the fate of the suit?

Decision

Court held that she is entitled for the pin money for following two reasons:

1. The said agreement created a charge on the immovable property.

2. Girl being beneficiary to the said agreement, she is entitled to the said allowance.

Klause Mittelbachert v. East India Hotels ltd. (1997)5

There was a contract between Lufthansa Airline and Hotel Oberoi Inter-Continental, New
Delhi that crew of Lufthansa will stay in the latter’s hotel. Plaintiff, a co-pilot of the airline,
got serious head injury when he dived in hotel’s swimming pool.Plaintiff suffered paralysis
and an agony for 13 years, his died. He sued the hotel for damages and hotel contended that
he is stranger to the contract.

What will be the fate of the suit?

Decision

As he was the beneficiary of the contract made between the airlines and hotel, his action
against the suit succeeded for an amount Rs. 50,00000.

5
ibid

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 CHAPTER THREE
HISTORY

Prior to 1861 there existed decisions in English Law allowing provisions of a contract to be
enforced by persons not party to it, usually relatives of a promisee, and decisions disallowing
third party rights. The doctrine of privity emerged alongside the doctrine of consideration, the
rules of which state that consideration must move from the promisee. That is to say that if
nothing is given for the promise of something to be given in return, that promise is not legally
binding unless promised as a deed. 1833 saw the case of Price v. Easton, where a contract
was made for work to be done in exchange for payment to a third party. When the third party
attempted to sue for the payment, he was held to be not privity to the contract, and so his
claim failed. This was fully linked to the doctrine of consideration, and established as such,
with the more famous case of Tweddle v. Atkinson. In this case the plaintiff was unable to sue
the executor of his father-in-law, who had promised to the plaintiff's father to make payment
to the plaintiff, because he had not provided any consideration to the contract. 6The doctrine
6
https://definitions.uslegal.com/p/privity-of-contract/

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was developed further in Dunlop Pneumatic Tyre v. Selfridge and Co. Ltd. through the
judgment of Lord Haldane. Privity of Contract played a key role in the development of
negligence as well. In the first case of Winterbottom v. Wright (1842), in which
Winterbottom, a postal service wagon driver, was injured due to a faulty wheel, attempted to
sue the manufacturer Wright for his injuries. The courts however decided that there was no
privity of contract between manufacturer and consumer.This issue appeared repeatedly
until MacPherson v. Buick Motor Co. (1916), a case analogous to Winterbottom v
Wright involving a car's defective wheel. Judge Cardozo, writing for the New York Court of
Appeals, decided that no privity is required when the manufacturer knows the product is
probably dangerous if defective, third parties (e.g. consumers) will be harmed because of said
defect, and there was no further testing after initial sale. Foreseeable injuries occurred from
foreseeable uses. Cardozo's innovation was to decide that the basis for the claim was that it
was a tort not a breach of contract. In this way he finessed the problems caused by the
doctrine of privity in a modern industrial society. Although his opinion was only law in New
York State, the solution he advanced was widely accepted elsewhere and formed the basis of
the doctrine of product liability.

CHAPTER FOUR
EXCEPTIONS

Common law exceptions

There are exceptions to the general rule, allowing rights to third parties and some impositions
of obligations. These are:

 Collateral Contracts (between the third party and one of the contracting parties)
 Trusts (the beneficiary of a trust may sue the trustee to carry out the contract)
 Land Law (restrictive covenants on land are imposed upon subsequent purchasers if
the covenant benefits neighbouring land)
 Agency and the assignment of contractual rights are permitted.
 Third-party insurance - A third party may claim under an insurance policy made for
their benefit, even though that party did not pay the premiums.

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 Contracts for the benefit of a group where a contract to supply a service is made in
one person's name but is intended to sue at common law if the contract is breached; there is
no privity of contract between them and the supplier of the service.

Attempts have been made to evade the doctrine by implying trusts (with varying success),
constructing the Law of Property Act 1925 s. 56(1) to read the words "other property" as
including contractual rights, and applying the concept of restrictive covenants to property
other than real property (without success).

1. in case of trust/beneficiary
2. in case of family arrangement
3. in case of acknowledgment of debts
4. in case of assignment of contract.7

Statutory exceptions

In the United Kingdom, the Contracts (Rights of Third Parties) Act 1999 provided some
reform for this area of law which has been criticised by judges such as Lord Denning and
academics as unfair in places. The act states:

(1) Subject to the provisions of this act, a person who is not a party to a contract (a "third
party") may in his own right enforce a term of the contract if-

(a) the contract expressly provides that he may, or

(b) subject to subsection (2), the term purports to confer a benefit on him.
(2) Subsection (1)(b) does not apply if on a proper construction of the contract it appears that
the parties did not intend the term to be enforceable by the third party.

This means that a person who is named in the contract as a person authorised to enforce the
contract or a person receiving a benefit from the contract may enforce the contract unless it
appears that the parties intended that he may not.

The Act enables the aim of the parties to be fully adhered to. In Beswick v Beswick, the
agreement was that Peter Beswick assign his business to his nephew in consideration of the
nephew employing him for the rest of his life and then paying a weekly annuity to Mrs.
Beswick. Since the latter term was for the benefit of someone not party to the contract, the
nephew did not believe it was enforceable and so did not perform it, making only one
payment of the agreed weekly amount. Yet the only reason why Mr. Beswick contracted with
7
http://www.busin essdictionary.com/definition/privity-of-contract.html

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 his nephew was for the benefit of Mrs. Beswick. Under the Act, Mrs. Beswick would be able
to enforce the performance of the contract in her own right. Therefore, the Act realises the
intentions of the parties.

The law has been welcomed by many as a relief from the strictness of the doctrine, however
it may still prove ineffective in professionally drafted documents, as the provisions of this
statute may be expressly excluded by the draftsmen.8

Third-party beneficiaries

In Australia, it has been held that third-party beneficiaries may uphold a promise made for its
benefit in a contract of insurance to which it is not a party (Trident General Insurance Co Ltd
v. McNiece Bros Pty Ltd (1988) 165 CLR 107).9 It is important to note that the decision
in Trident had no clear ratio, and did not create a general exemption to the doctrine of privity
in Australia.

Queensland, the Northern Territory and Western Australia have all enacted statutory

provisions to enable third party beneficiaries to enforce contracts, and limited the ability of
contracting parties to vary the contract after the third party has relied on it. In addition,
section 48 of the Insurance Contracts Act 1984 (Cth) allows third-party beneficiaries to
enforce contracts of insurance.

Although damages are the usual remedy for the breach of a contract for the benefit of a third
party, if damages are inadequate, specific performance may be granted (Beswick v.
Beswick [1968] AC 59).

The issue of third-party beneficiaries has appeared in cases where a stevedore has claimed it
is covered under the exclusion clauses in a bill of lading. In order for this to succeed, three
factors must be made out:

 The bill of lading must clearly intend to benefit the third party.

8
http://www.businessdictionary.com/definition/privity-of-contract.html

9
http://www.businessdictionary.com/definition/privity-of-contract.html

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 It is clear that when the carrier contracts with the consignor, it also contracts as
an agent of the stevedore. That is, either the carrier must have had authority by the stevedore
to act on its behalf, or the stevedore must later ratify (endorse) the actions of the carrier.
 Any difficulties with consideration moving from the stevedores must be made out.

The last issue was explored in New Zealand Shipping Co Ltd v. A M Satterthwaite & Co
Ltd [1975] AC 154, where it was held that the stevedores had provided consideration for the
benefit of the exclusion clause by the discharge of goods from the ship.

New Zealand has enacted the Contracts Privity Act 1982, which enables third parties to sue if
they are sufficiently identified as beneficiaries by the contract, and in the contract it is
expressed or implied they should be able to enforce this benefit. An example case of not
being "sufficiently identified" is that of Field v Fitton (1988).

CONCLUSION

The Doctrine

The general rule at common law states that a contract creates rights and obligations only as
between the parties to such contract.  As a corollary, a third party neither acquires a right nor
any liabilities under such contract.  This is what the proclaimed doctrine of “privity of
contract” enunciates and establishes as the overarching rule underlying any contractual
relation.

Rule of Consideration

Consideration must flow from the promise. In other words, “if a person with whom a contract
has been made is to be able to enforce it consideration must have been given by him to the
promisor”- Dunlop Pneumatic Tyre Co Ltd v Selfridge Ltd [1915] AC 847, 853.  Thus, while
this rule of consideration is distinct and separate from the doctrine of privity, as upheld
in Kepong Prospecting Ltd v Schmidt [1968] AC 810, it yields the same result so as to be
closely connected.

Right of Action

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It is worthwhile to highlight that what the doctrine prohibits is the right of action or
enforcement in favour or against a third party, and not beyond.  That is, a contract may
bestow benefits to a third party, although such imposition of liabilities remains a bar.  In the
former case, a breach may be enforced by the other contracting party for and on behalf of the
third party, by way of remedies such as specific performance, stay of proceedings, and
damages, as discussed below.

BIBLIOGRAPHY

 https://www.lawteacher.net/modules/contract-law/privity-of-contract/lecture.php
 http://www.legalservicesindia.com/article/378/Privity-of-contract-&-third-party-

beneficiary-in-a-contract.html

 https://study.com/academy/lesson/privity-of-contract-definition-exception-cases.html
 https://definitions.uslegal.com/p/privity-of-contract/
 http://www.businessdictionary.com/definition/privity-of-contract.html
 https://www.upcounsel.com/privity-of-contract-cases

BOOKS

 Contract and Specific Relief by Dr. Avtar Singh

 Law of Contract (LL.B. Series) (2018 Edition) byProf. (Dr.) Rajni Malhotra Dhingra

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