Explain Privity of Contract and Privity of Consideration.

Question: Explain Privity of Contract and Privity of Consideration. [HPJS 2019]

Find the answer to the mains question of the Law of Contract only on Legal Bites. [Explain Privity of Contract and Privity of Consideration.]

Answer

Under the Law of Contract, the doctrines of privity of contract and privity of consideration play a significant role in determining the enforceability of contractual rights and obligations. Though they are related concepts, they differ in their application and implications.

Doctrine of Privity of Contract states that only parties to a contract are bound by and can enforce its terms. A person who is not a party to the contract, even if the contract is made for their benefit, cannot sue to enforce the contract.

Key Elements:

• A contract creates rights and obligations only between the contracting parties.
• Third parties (strangers to the contract) have no locus standi to sue upon it.

In Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd. (1915) AC 847 (HL), it was held that only a person who is a party to the contract can sue upon it.

There is no explicit provision in the Indian Contract Act, 1872 codifying the rule of privity of contract. It is a judge-made law, derived from English common law, but applied with exceptions by Indian courts. General Rule is that only the parties to a contract can sue and be sued upon it.

Exceptions (recognized by Indian courts):

• Trusts – where a beneficiary can enforce a contract.
• Marriage Settlements – where a person can claim benefits under family arrangements.
• Assignment of Contract – where rights are lawfully transferred.
• Acknowledgement or Estoppel – where a third party is acknowledged.

Privity of consideration means that consideration must move from the promisee. In other words, a person who has not provided consideration cannot enforce the promise. Under English common law, consideration must move from the promisee, and thus, a stranger to the consideration cannot sue.

According to Section 2(d) of the Indian Contract Act, 1872:

“When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing something, such act or abstinence or promise is called a consideration for the promise.”

This implies that consideration can move from a third party, and still, the contract can be valid. Hence, India does not follow the rule of privity of consideration strictly.

In Chinnaya v. Ramaya (1882) ILR 4 Mad 137, A contract made for the benefit of a third party, where consideration moved from another person (not the promisee), was held to be enforceable.

The doctrine of privity of contract is a well-settled principle, but Indian courts have recognized several exceptions allowing third-party enforcement in specific circumstances. The doctrine of privity of consideration, though accepted in English law, is not applicable in India due to the clear wording of Section 2(d) of the Indian Contract Act, 1872.

Indian contract law reflects a more equitable and practical approach, especially in allowing third-party consideration to support valid and enforceable contracts.