THIRD PARTY RIGHTS

Only a person who is a party to a contract can sue on it’ or’ a stranger to a contract cannot
sue’ is an axiomatic principle of law of contract emanating from such conceptions. This
principle is known as ‘privity of contract ‘, signifying that a contract binds only those that
are privy to it or that there must be contractual privity for the enforcement of contractual
rights and obligations.

The reasons for limiting the operation of the contract to its parties only are many and the
following are the most profound:

The third party did not provide consideration for the promise, even though consideration
was provided for the promise.

It is unjust to permit a person to sue on a contract when he cannot be sued upon it.

If non-contracting parties were permitted to enforce contracts made for their benefit, the
rights of the contracting parties to vary or terminate such contracts would be affected.

It is unfair to call upon the promisor to be liable to two actions, from the promisee as well
as the third party.

It is desirable to limit the potential liability of a contracting party from the possibility of a
wide range of possible third party claimants

The rule laid down in Tweedle v Atkinson laid down the foundation of the doctrine of
“Privity of Contract" which means that a contract is a contract between the parties only
and no stranger to the contract can sue even if the contract is avowedly made for his
benefit. Thus a stranger to the consideration cannot sustain the action on the promise
made between two persons unless he has in some way intervened in the agreement.

In the above case the plaintiff was to be married to the daughter of one G and in
consideration of this intended marriage G and the plaintiff’s father entered into a written
agreement by which it was agreed that each would pay the plaintiff a sum of the money. G
failed to do so and the plaintiff sued his executors. Thus, although the sole object of the
contract was to secure a benefit to the plaintiff, he was not allowed to sue as the contract
was made with his father and not with him.

In Scruttons Ltd v Midland Silicones Ltd, it was observed that the principle is that apart
from special consideration of agency, trust, assignment or statute, a person not a party to
a contract cannot enforce or rely for protection of its provisions. The principle was
reaffirmed in Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd where it was held that as
the plaintiffs were undisclosed principal, no consideration moved from them to the
defendants and that the contract was unenforceable by them. The court held that only a
party to the contract can claim upon it and since Dunlop had not given any consideration
to Selfbridge and so there could be no binding contract between the parties. And Dunlop
was listed as an agent with the contract and so could not be included as a valid third party
who had rights to claim on the contract.

The two basic principles under the English Law as can be ascertained from the above
cases are that firstly consideration should move from the promisee only and secondly that
a contract cannot be enforced by a person who is not a party to the contract even if it is
made for his benefit.

The exceptions to the Rule

Beneficiaries under a trust or charge-Any beneficiary under a trust or when an obligation
under a contract is undertaken for the benefit of a third party, coupled with a charge on
immovable property; the third property beneficiary can enforce it.

Covenants running with the land - It is an accepted principle of the law of transfer of
property that anyone who takes property will be entitled to all the benefits running with
the land. Any covenant imposing an obligation on a party can be enforced by any stranger
who gets that property.

Family Arrangements- Family arrangements between male members and female

members of a family, benefiting female members in the family, such as provisions for
maintenance and marriage expenses, are enforceable by the beneficiaries, i.e., the female
members.

Acknowledgement-When one party to the contract, who has undertaken an obligation,

for example to pay a certain sum of money to a third person that he will be so obliged, the
third person can enforce it

THE REFORM
The law commission in India in its 13th report noted that there has been a conflict of
judicial opinion as to the applicability of this doctrine in India. Some of the areas of conflict
are discussed below .

In some cases the view has been taken that the words ‘any other person in s 2(d), which
depart from the English rule in that the English rule in that consideration must proceed
from the promisee, necessarily implied corresponding deviation from the English rule as to
privity of contract

The preponderating view, however, is that the English rule of privity of contract applies to
India, notwithstanding section 2(d). The privy council in Jamnadas vs Ram autar 34 All
63(pc)applied the rule. In krishnalal vs promila, Rankin CJ, struck a decisive blow to the
argument based on the language of section 2 (d). While conceding that the clause might
be construed as impling a departure from the corresponding English rule, he observed that
the definitions of the promisor and promise in section 2, rigidly excluded the notion that a
stranger to the contract can sue thereon.
At the same time, following English law, numbers of exceptions have been engrafted upon
the doctrine by our courts. Thus, it has been held that a person who is not a party to a
contract may nevertheless sue upon it-

Where the contract implies a trust in favor of the third party, whether any property is
specifically charged or not.

Where money to be paid under the contract is charged on some immovable property

Conclusion
The Act does not specifically provide for the doctrine of Privity of Contract, however
through a series of case laws the doctrine as laid down in Tweedle v Atkinson is now
applicable along with various exceptions.

Under the English law only a party to the contract can pay the consideration. If he doesn’t
pay the consideration he becomes a stranger to the contract.

Though there are no express provisions as to assignment of rights and obligations under a
contract in the Act, the Principle of assignment has been recognized and developed by the
courts through its various decisions.