PRIVITY

SWAST GUPTA
SWASTI GUPTA
NISHTHA PANT
(AND NISHTHA PANT)
 Third-Party Consideration & Privity
 When two people are parties to a contract, they are said to be in privity
of contract.
 Courts have struggled to decide what rights or duties a third party
might have under the contract.
 Two separate questions:
1: Can the consideration for a promise flow from a third party, rather
than from the promisee? (Privity of Consideration)
2: Can a third party sue to enforce the promises made in a contract?
(Privity of Contract)
 Three English cases establish the background for this issue.
1: Dutton v. Poole (1677).
2: Tweddle v. Atkinson (1861).
3. Dunlop v Selfridges (1961).
 Dutton v Poole (1677)

promise not to cut timber on estate

SIR EDWARD SIR EDWARD’S

POOLE ELDEST SON
promise to pay Grisel once she is
married

Sir Edward Poole passed away Sir Edward’s Daughter: Grisel Can Grisel sue to
before Grisel was married. At Dutton enforce the contract
the time of her marriage, the between Sir Edward
son refused to pay. and his son?
Third-Party Consideration
Dutton v Poole (1677)
The court held that Grisel could sue to enforce her father’s promise, even though
A) she was not a party to the contract, and
B) she had not provided any consideration.
C) owing to the family relationship between the father and the daughter,
the daughter shall become a party to the agreement entered into by the father with
his son.
Tweddle v Atkinson (1861)

We’ll pay Tweddle after the wedding.

Tweddle’s parents Tweddle’s parents

We’ll pay Tweddle after the wedding.

Can Tweddle sue

to enforce the
contract between
Tweddle his parents and the
Atkinsons?
Third-Party Consideration
Tweddle v Atkinson (1861)
Main Argument: The intention of the agreement between the fathers was for
the couple to derive a benefit from the payment of the money. (Relying on
Dutton v. Poole)
Held:
The court overturns Dutton v. Poole.
Tweddle has no right to sue because:
A) He was not a party to the agreement, and
B) He did not furnish any consideration for the Atkinsons’ promise.
The case laid the foundation of the rule – Privity of Contract i.e., a stranger
to contract cannot enforce the contract.
* Under English Law consideration must move from the promisor
Doctrine of Privity of Contract

A person who is not privy to a contract, that is, a third party,

can neither sue not be sued on that contract.
 “A contract is a contract between the parties only and no
third person (stranger) can sue upon it even if it is made for
his benefit” (Tweddle v. Atkinson)
Dunlop Pneumatic Tyre Co. v. Selfridge Co. Ltd (1951)
 Dunlop, wholesale distributors of tyres, sold tyres to Dew
and Co. at a discounted price on the condition that they
would not resell the tyres at less than the listed price and that
any reseller who wanted to buy them from Dew had to agree
not to sell at the lower price either. Dew sold some tyres to
Selfridge Co. Ltd. who retailed them below the list price.
Dunlop sued Selfridge for injunction and damages.
 Is it lawful for Dunlop to sue Selfridge even though no contractual
relationship exists between them?
 Held: There was no contract between Dunlop and Selfridge
and therefore Dunlop cannot sue. Relied on Tweddle v.
Atkinson (1861)
Few significant considerations underpinning this decision:
- Privity of contract - it states that only a party to a contract can sue in
breach of the contract.
- Privity of consideration - it would require Dunlop to give
consideration to Selfridge for the contract to be completed.
- Exception of Agency - a principal ,not named in a contract, can be
sued if he acts through an agent who enters into a contract with the
third party on behalf of the principal (who is privy to the contract).
- Dew was not acting as an agent for Dunlop, therefore this does not
apply in this case. If Dew were Dunlop's agent, then the effect of the
two deals would really be one deal. In an agency agreement, the Agent
disappears and the contract is between the principal (Dunlop) and the
third party (Selfridges)
FUNDAMENTAL PROVISIONS OF ENGLISH LAW
(1) Consideration must move from the promisee and the promisee only.
If it be furnished by any other person, the promisee becomes a stranger to
the consideration and, therefore, cannot enforce the promise.
(2) A contract cannot been forced by a person who is not a party to it even
though it is made for his benefit. He is a stranger to the contract and can
claim no rights under it.'
CRITICISM?
A contract between A and B is intended to confer a benefit on a third party. In
such a situation C cannot enforce a contract because:
They are not privy to the contract; C has not provided consideration
“where a contract is made for the benefit of a third person who has a
legitimate interest to enforce it, can be enforced by the third person in the
name of the contracting party or jointly with him … because the 3rd person
has an interest which the law should protect” [Lord Denning in Beswick v.
Beswick, 1949]
 INDIA

 A promise is enforceable if there is some consideration for it and

it is quite immaterial whether it moves from the promisee or
any other person. {Read Section 2(d)}

 The leading authority is the decision of the Madras High Court in

Chinnaya v Ramayya.
POSITION IN INDIA
Chinnaya v Ramaya (Madras High Court 1881)
Transferred a piece of
her property

Lakshmi Venkana Rau Ramaya Garu (R)

To pay annuity to L’s

sister C
Agreement: “I hereby agree to
pay the money as directed by
my mother”
Chinnaya (C )

After the death of the R’s mother, R refused to make the payment to C. C sued R.
 R contended that she was not under an obligation to pay money to C since no consideration
was moved from C to her.

 On the other hand, as regards the transfer of property was concerned, C contended that the
consideration for getting the property was a promise to pay the amount annually to the
plaintiff.

Held:
 The court holds that C is entitled to sue to enforce the contract.
 § 2(d): Consideration can flow from “the promisee, or any other person”.
 The consideration furnished by C’s sister (the defendant’s mother) was enough to
enforce the contract between C and R. It constituted sufficient consideration for the plaintiff to
sue the defendant on her promise.
 • The defendant was obligated to pay the amount promised in the contract as the
consideration for the same was given to her by the plaintiff ’s sister, i.e., the defendant’s
mother
 Can the consideration in a contract flow from a third party?

 England : NO
 India : YES
PRIVITY OF CONTRACT: INDIA

In India also there has been a great divergence of opinion in the courts as to how far a
stranger to a contract can enforce it. There are many decided cases which declare that a
contract cannot be enforced by a person who is not a party to it and that the rule in Tweddle v
Atkinson is as much applicable in India as it is in England.

However, there are also several decisions which have taken a different view.
Nawab Khwaja Muhammad Khan v Nawab Hussaini Begum
In India and among communities circumstanced as the Mahommedans, among whom
marriages are contracted for minors by parents and guardians it might occasion serious
injustice if the common law doctrine was applied to agreements or arrangements entered into
in connection with such contracts.
This statement has been taken by some High Courts as laying down the rule that Indian courts
are not bound by the rule in Tweddle v Atkinson
Isswaram Pillai v Sonivaveru Taragan 61[1914]

Sheik Tharagan Plaintiff (had given money

(Debtor) to plaintiff)

Executed the hypothecation bond to defendants Can the plaintiff sue the
–asking the defendants to pay off the sum of Rs. defendant to enforce this contract
450, which was due from Sheik Uduman (between his debtor and
Tharagan himself to the plaintiff. defendant) to which he was not a
party?
Contention of the defendant:
Plaintiff being a stranger to the contract could not sue on it.

Contention of the plaintiff:

General rule of law that a person who is not a party to a contract cannot become entitled
by that contract to demand the performance of any duty under it was no more applicable in
India after the decision of the Privy Gounoil in Nawab Khwaja Mahommad Khan v. Nawab
Husaini Begam.

Held: Present case distinguished from the Indian cases where the Tweddle vs Atkinson was
held to be not applicable.

Thus, reiterated the applicability of the general rule as established in Tweddle Case.
The National Petroleum Company vs Popatlal Mulji (1936)
Another clause : Plaintiff as
Defendant 2
selling agents had to deposit a Carried on business
fixed sum of Rs 1000 – to be under the name of
returned to the plaintiff on Entered into contracts National Petroleum and
termination of agreement. with plaintiff and Co.
others as selling agents
Meanwhile, deposit was to
carry interest at the rate of
6%, if made in cash, but if
In the meanwhile, there is an agreement between
made in Govt Securities, the Defendant Co. 2 and Defendant Co. 1 wherein the
actual interest collected from latter undertakes to pay, satisfy and discharge and
such securities was to be paid fulfill all the debts and liabilities.
to the plaintiff.
Def was entitled to utilize and
use the deposit, whether in
cash or security.
Plaintiff deposited the sum. Gave notice terminating the
agreement. Sues for claiming Rs 1000 deposit amongst
other sums.
Whether the plaintiff can sue on this agreement to which he was not a
party, but under which he took a benefit?
The rule of English law is clearly established that the only persons who can sue
upon a contract are the parties to that contract. No doubt there are many cases
in the books in which persons who are not in terms parties to a contract have
been allowed to sue upon it. But those cases are based on the view that the
plaintiff is claiming through a party to the contract, that he is in the position of
a cestui que trust or of a principal suing through an agent, that under the old
procedure he could have filed a suit in equity, even if he could not have sued at
common law. Those cases are a recognized exception to the general principle
that only parties to a contract can sue upon it. There seems to me to be nothing
in the Indian Contract Act which suggests that that principle does not apply in
India. It is true that the definition of ' consideration' in Section 2 of the Indian
Contract Act gives a wider meaning to that term than is accepted in English law,
because it includes consideration moving from the promisee or any other
person. But the fact that consideration may move from a third party does not
involve the proposition that a third party may sue upon a contract.
MC Chacko v State Bank of Travancore (Supreme Court of India 1969)

Deed of gift of property

K.C. Chacko M.C. Chacko

executed a letter of
guarantee making Any liability that arises in the enactment of letter of
himself liable as a surety guarantee, SBT must be paid by M.C. Chacko or else
for the amounts due by his property share to be answerable. Director of
the Highland bank to the Highland Bank
State bank.

Can State Bank of

State Bank of
Travancore sue to enforce
Travancore
the contract?
The Supreme Court holds: “It is settled law that a person not a party to a contract cannot …
enforce the terms of the contract.”

Does §2(d) of the ICA change this result?

The Court says no.

The definition of consideration allows for consideration to flow from a third party, but it does
not allow a contract to be enforced by a third party…
…there nothing in Section 2 to encourage the idea that contracts can be enforced by a person
who is not a party to the contract, but this notion is rightly excluded by the definition of
'promisor' and 'promisee'.

Supreme Court upholds privity

EXCEPTIONS TO PRIVITY OF CONTRACT
1. Trust
 Author appoints a trustee for the benefit of a beneficiary
 Beneficiary although not a party to the contract has equitable rights if not contractual
rights

Eg: A transferred certain properties to B to be held by him in trust for the benefit of C.
In this case, C although not a party to the trust, can sue A or B for the benefits available to him
under the trust. (Nawab Khwaja Muhammad Khan v. Nawab Husaini Begam)
2. On grounds of love and affection

England: Dutton v Poole (Good law?)

India: Family Arrangements (Read: Nawab Khwaja Muhammad Khan v. Nawab Husaini
Begam)
Provision of marriage expenses of female members of a Joint Hindu Family, entitles the
female member to sue for such expenses on a partition between male members.
Two brothers, on partition of family joint properties, agreed to invest in equal shares for
their mother’s maintenance. Held, the mother was entitled to require her sons to make the
investment.

3. Assignment of Contracts (Under Transfer of Property Act not ICA)

 Assignor – Assignee – Assignment Deed (to assign means to transfer) - Assignee (the
person to whom benefits of contract are assigned) can enforce upon the contract. - Can
be in favour of anyone. Eg: X purchases an insurance policy. Later assigns it to the bank
as a guarantee for availing a loan. Bank can claim the money from the Insurers.
4. Agency (Contracts Law II) –
Governed by Principal-Agent Relationship |Auctioner, Broker, Property Agent
Refer to previous discussion on Dunlop v. Selfridge
Section 182: ‘Agent’ and ‘principal’ defined.—An ‘agent’ is a person employed to do any act for
another, or to represent another in dealings with third person. The person for whom such act is
done, or who is so represented, is called the ‘principal’.
5. Covenants running with land i.e. conditions attached to the use of land
Covenants also transferred to future purchasers.
X sells a house to Y with the condition that the garden should always be maintained and should
never be used for commercial purposes. 10 years later, Y sells the house to Z who demolished
the house and the garden to construct a commercial building. X can sue Z.
6. Acknowledgement by the Promisor of obligation to Third Party (Chinnaya v
Rammaya)
Where by the terms of a contract a party is required to make a payment to a third person and
he acknowledgesit to that third person, a binding obli gation is thereby incurred towards him.
Acknowledgment may be express or implied.