The interest of a third party in a contract is one of the most debated topics in the law of contracts, section 2(h) of the Indian Contract Act 1872, states that a contract is an agreement between two parties that is enforceable by law.

The doctrine of privity in contract law lays emphasis on the involvement of a third-party or party stranger to the contract, it states that the party stranger to the contract cannot claim damages or impose obligations in a contract between two parties i.e. only the parties involved in the contract can only sue or claim damages in the case of breach of a contract. “Privity of contract^[1]” was pronounced in the case of Tweddle v. Atkinson^[2] , in this case the court stated that no stranger to the consideration has the authority to enforce a contract, even if it was established for his benefit. The court ruled that a promisee can’t sue unless the promise’s consideration has moved away from him.

The above-mentioned case is equally applicable in the Indian courts, however, with time the courts in India have developed certain exceptions to this rule, there have been certain instances where a third party under a family agreement and other laws can sue or enforce his/rights claiming damages to a breach of contract.

• Decisions in favour of the doctrine:

The Hon’ble Supreme court of India ruled in favour of the rule of the privity, stated in the aforementioned Atkinsons case^[3]  in the case of M.C. CHAKO v. State Bank of Travancore^[4] it was observed whether the said charge was enforceable by the bank when it was not a party to the deed itself. The Hon’ble court held that the bank not being party to the said deed cannot enforce the covenants and that it was a settled law that a third party cannot enforce the terms of a contract.

Similarly, in the case of Harman Singh v. Purbi Devi^[5], it was held that the doctrine of the privity of contract creates vinculum juris personal to the parties of the contract, and hence no one except the parties to a contract are entitled under a contract. Hence yet again, eliminating the third party interest in a contract.

• On the contrary, there have been some cases where the High courts laid down the rule that the courts in India are not bound by the rule laid down in the case of Tweddle v. Atkinson^[6].

In the case of M. Naicker v. M. Naicker^[7] the Hon’ble High court of Madras observed that if the contract between the two parties is for the benefit of the third party, in such cases the third party is entitled to sue the party at fault.

Thus the courts have instituted a number of exceptions in which the rule of privity of contract doesn’t restrict the parties stranger to the contract, from claiming damages in the contract made for his/her benefit. In the case of Raymond Woolen Mills Ltd. v. Coal India Ltd.^[8] the court observed that over the years the aforesaid doctrine has gone through a series of changes, and therefore the principal as a beneficiary in a contract can commence a legal action without being a party to the contract itself.

 

Certain exceptions to ‘The Doctrine Of Privity Of Contract’ were also stated in the recent judgment of Delhi High court in the case of Klans Mittelbachert v. East India Hotels Ltd.^[9] where the Hon’ble High court explained the concept of ‘beneficiary^[10]’ as an exception to the doctrine, i.e. a beneficiary to a contract can sue.

 

Hence, it can be concluded that even if a person is absent from the consideration aspect of the contract can enforce the contract if he is a party to it. In India, the doctrine of privity of contract should be extricated from the rule that a stranger to consideration can sue. In simple words, the recent developments in the law have now enabled third parties to sue, in order to protect their personal interests under extraordinary circumstances. The developments adopted by the Indian judiciary have now eliminated the rigidity that was adopted from English law, making the state of law up to par.

 

 

^[1] Lilienthal, Jesse W. “Privity of Contract.” Harvard Law Review 1, no. 5 (1887): 226–32. https://doi.org/10.2307/1321337.

^[2] Tweddle v. Atkinson 30 LJ QB 218

^[3] Supra

^[4] M.C. CHAKO v. State Bank of Travancore AIR 1969 SC 504

^[5] Harman Singh v. Purbi Devi AIR 2000 HP 108

^[6] Supra

^[7] M. Naicker v. M. Naicker AIR 1928 Mad 33

^[8] Raymond Woolen Mills Ltd. v. Coal India Ltd. AIR 1998 Cal

^[9] Klans Mittelbachert v. East India Hotels Ltd. AIR 1997 Del. 230

^[10] Ibid