- Privity’ is the principle followed in contract law which states that terms of a contract are only binding upon the parties to a contract.
- They therefore cannot be enforced by a third party. This means that only parties to the contract can sue or be sued under it. This principle emanates from the English law.
- Privity of contract is one of the most fundamental tenets of the contract law. It prevents vesting of any rights or liabilities with respect to the contract in any third person who is not a party to the contract.
- The ‘Doctrine of Privity’ is based upon the English law principle of ‘Interest theory’.
- Interest theory states that a third party with respect to the contract shall not sue under the provisions of a contract.
Meaning of Privity of Contract
The doctrine of privity of contract is a fundamental principle in contract law that governs the rights and obligations of parties to a contract. It means that only the parties to a contract can enforce the terms of that contract.
This principle ensures that the contract remains a private agreement between the parties and cannot be enforced by anyone else who is not a party to the contract. Therefore, a third party who has not entered into a contract cannot enforce the terms of that contract.
Essentials of Privity of Contract
- A contract has been entered into between two parties: The most important essential is that there has been a contract between two or more parties.
- Parties must be competent and there should be a valid consideration: Competency of parties and the existence of consideration are pre-requisites for application of this doctrine.
- There has been a breach of contract by one party: Breach of contract by one party is the essential requirement for the application of the doctrine of privity of contract.
- Only parties to contract can sue each other: Now after the breach, only parties to a contract are entitled to sue against each other for non-performance of contract.
Status of Privity of Contract under the Indian Contract Act
Privity of contracts is an essential concept under the Indian Contract Act, 1872. Section 2(d) of the Act defines a contract as an agreement that is enforceable by law. This means that only parties to a contract have the right to enforce it, and no third party can claim a right under it.
Under Indian law, the doctrine of privity of contract is a well-established principle. The Act recognizes that only parties to a contract are bound by its terms and are entitled to its benefits. The principle of privity of contract means that no person can acquire any rights under a contract to which he is not a party.
This means that a third party who is not a party to a contract cannot sue for its breach, nor can he enforce any rights or obligations under the contract.
Exception to the ‘Doctrine of Privity of Contract’
- A Beneficiary under a Contract: If a contract has been entered into between two persons for the benefit of a third person not being a party, then in the event of failure by any party to perform his part, the third party can enforce his right against the others.
- Conduct, Acknowledgement or Admission: There can also be situation in which although there may be no privity of contract between the two parties, but if one of them by his conduct or acknowledgment recognizes the right of the other, he may be liable on the basis of law of estoppel.
- Law of estoppel is a legal principle that prevents someone from arguing something or asserting a right that contradicts what they previously said or agreed to by law.
- Provision for Maintenance or Marriage under Family Arrangement: This type of provision is treated as an exception to the doctrine of privity of contract for protecting the rights of family members who are not likely to get a specific share and to give maximum effect to the will of the testator.
Case Laws
- Tweddle v. Atkinson (1861):
- The ‘Doctrine of Privity’ of contract was recognized for the first time under Indian Law.
- Jamna Das v. Pandit Ram Autar Pande (1916):
- The privy council stated that a person who is not a party to the agreement cannot recover the amount owed from another party to the agreement.
The beneficiary under a contract
If a contract is made for the benefit of a third party who is not a party to the contract, that third party can enforce their right against the contracting parties if there is a failure to perform.
For example, if a contract is made between Alex and James and it creates a beneficial right for Robin over some property, Robin can enforce their claim based on this right. This exception has been established in the case of Muhammad Khan v. Husaini Begum.
Conduct, acknowledgement or admission
In situations where there is no privity of contract between two parties, but one of them acknowledges the other’s right or recognizes it through their conduct, they may be liable under the law of estoppel. (Narayani Devi v. Tagore Commercial Corporation Ltd).
For instance, if A enters into a contract with B to pay Rs. 5000 every month during their lifetime, and after that to A’s son C, and A acknowledges this in C’s presence, then C can sue A if they default, despite not being a party to the contract.
