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Privity of Contract and Consideration (Contract Act)

Updated: May 12


Privity of Contract and Consideration (Contract Act)
Privity of Contract and Consideration (Contract Act)

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Privity


The doctrine of privity of contract establishes that a contract is exclusively an agreement between the parties involved, and no third party can sue based on the contract, even if it is made for their benefit.


This principle is deeply rooted in English common law, notably illustrated in cases such as Tweddle v Atkinson (1861) and Dunlop Pneumatic Tyre Co. Ltd. v Selfridge & Co. (1915). 



In the latter, despite the indirect involvement of the plaintiffs in the agreement terms, the lack of direct contract and consideration with the defendants led to the enforcement of the doctrine, emphasising that contractual benefits or obligations cannot extend to non-participants.

 
 

Criticisms


This traditional rule has faced criticism, particularly regarding its limitation to the form of remedy rather than addressing substantive rights. Notable dissent came from Lord Denning in Beswick v Beswick (1966), advocating that contracts intended for third-party benefits should be enforceable when such parties have a legitimate interest.



However, the broader legal community and decisions like in the House of Lords have shown reluctance to diverge from established norms without legislative intervention.



Privity of Contract in Indian Law


In India, despite a broader definition of consideration in the Indian Contract Act, the doctrine of privity still prevails largely due to precedents set by cases such as Jamna Das v Ram Avtar (1911) and subsequent rulings which reinforce that only parties to a contract can enforce or be bound by its terms. 



The notable case of M.C.Chacko v State Bank of Travancore (AIR 1970 SC 504) reaffirmed this, highlighting that any exceptions would require explicit intentions and legal provisions, which were absent.




Exceptions to Privity of Contract


1. Trust Beneficiaries:

The individual designated to benefit from a trust is known as its beneficiary. Remarkably, in trust arrangements, the beneficiary holds the authority to enforce the contract, even without formal participation in its formation.



Illustration:

Philip establishes a trust and appoints T as its trustee, stipulating that the generated income from the trust's assets would be allocated to B. Here, B assumes the role of the beneficiary.


Consequently, in the event of T's non-compliance with the agreed arrangement, B, despite being an outsider to the contract, possesses the right to institute legal action against T to recover the owed amount (as evidenced in Rana Uma Nath Baksh Singh vs Jang Bahadur, 1938 AIR PC 245).



2. Beneficiaries of Implied Trusts:

It is notable that such trusts need not necessarily be formalised; they can manifest as implied (or constructive) trusts, where similar provisions apply.

 
 

Illustration:

Suppose an individual dispatches a registered and insured parcel via postal services to the specified recipient. If the parcel fails to reach the intended recipient, said recipient becomes the beneficiary of the implied trust between the sender and the postal authorities, enabling them to pursue compensation through legal means (as observed in Chaudhry Amir Ullah vs Central Government, 1959 All IJ 271).



3. Family Settlement Scenarios:

(a) During the partition of a joint Hindu family's assets, male members may agree to allocate a portion for specific purposes, such as funding a female child's education or supporting elderly members.



In such instances, those identified beneficiaries retain the right to initiate legal action to claim their respective entitlements (per Sundararaja vs Lakshmi Ammal, 1914 38 Mad 788).



(b) Similarly, if a daughter agrees with her father to financially support her mother in exchange for property rights, the mother holds the right to file a suit when necessary (per Veeramma vs Appaya, 1957 AIR AP 965).



(c) In cases where a wife departs from her husband's residence due to mistreatment, and an agreement is made between the husband and her father to ensure her welfare, including a monthly maintenance allowance and separate housing, the wife is entitled to seek legal recourse against her husband if the need arises (per Daropti vs Jaspat Rai, 1905 PR 171).



4. Marriage Contract Scenarios:

When a father contracts his minor daughter's marriage to an individual who subsequently breaches the agreement, the daughter, upon reaching adulthood, holds the right to sue the breaching party, despite her non-involvement in the original contract (per Rose Fernandez vs Joseph Gonsalves, 1924 ILR 48 Bom 673).



5. Assignment of Rights:

In cases where rights are transferred from one party to another, the assignee possesses the authority to enforce those rights, even if not a direct party to the original contract.



For instance, if an insured individual assigns their life insurance policy to a bank as collateral for a loan, the bank, despite being external to the initial contract between the insured and the insurance company, retains the ability to enforce the insured individual's rights as the assignee. This principle also applies to the official assignee of an insolvent individual.



Privity of Consideration

The principle of privity of consideration dictates the parameters within which consideration, the bargained-for exchange in a contract, must operate.


An essential distinction lies between the origination of initial consideration, which must stem solely from the promisor's desire, and reciprocal consideration, which can be provided by the promisee or even a third party unrelated to the agreement.



This distinction finds expression in Section 2(d) of relevant legal statutes, wherein the wording elucidates that consideration may arise "at the desire of the promisor, the promisee or any other person."


Notably, the placement of the phrase "or any other person" subsequent to "promisee" indicates a deliberate separation, clarifying that consideration can indeed be furnished by entities beyond the promisor or promisee.



An illustrative example, emblematic of this legal principle, is the case of Chinnaya vs Ramayya [(1882) 4 Mad.137]. Herein, an elderly individual, referred to as Amma, transferred a portion of her property to her daughter,


Ramayya, under the condition that Ramayya would provide an annual maintenance allowance to her aunt, Chinnaya, akin to the support previously extended by Amma herself. Ramayya, in turn, formalised this commitment through a written agreement with Chinnaya.



However, when Ramayya failed to fulfil her obligation, contending that Chinnaya had not reciprocated with consideration, her argument was rebuffed.


The legal rationale mirrored the aforementioned principle, affirming that consideration could indeed emanate from the promisee, in this instance, Chinnaya, or from any other involved party, such as Amma.


It's notable that under English Law, the participation of a third-party stranger's consideration is typically deemed invalid, yet such restriction is not mirrored in the legal framework discussed.

 
 

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