Introduction:

Privity of contract refers to the principle that only the parties to a contract have rights and obligations under the contract. In other words, only those who are parties to a contract can sue or be sued under the contract. The doctrine of privity of contract is a fundamental principle of contract law, and it is recognized in various legal systems including India.

Essentials of Privity of Contract:

The essentials of privity of contract can be summarized as follows:

• Only parties to a contract have rights and obligations under it.
• A third party cannot enforce the contract or claim any rights under it.
• A third party cannot be held liable for any breach of contract by the parties to the contract.

Exceptions to the Privity of Contract:

Although privity of contract is a general rule, there are certain exceptions to it. The Indian Contract Act recognizes the following exceptions to the principle of privity of contract:

Contracts for the benefit of third parties: A contract may be entered into for the benefit of a third party, in which case the third party may have the right to enforce the contract.
For example, A contracts with B to deliver goods to C. In this case, C may enforce the contract against A and B.

Agency: Where an agent enters into a contract on behalf of his principal, the principal can sue and be sued under the contract. For example, if A authorizes B to sell goods on his behalf, and B enters into a contract with C to sell the goods, A can sue C for breach of contract.

Trusts: In a trust, the trustee holds the property for the benefit of the beneficiary. The beneficiary may have the right to enforce the terms of the trust, which may include a contract.
Example: Ravi was an illegitimate offspring of Arjun’s father. Prior to his passing, he granted Arjun control of his estate on the understanding that Arjun would give Ravi Rs 500,000 and transfer half of the estate into Ravi’s name once Ravi turned 21.

When Ravi reached that age and inquired about why he hadn’t received the money, Arjun denied providing him his share. Ravi brought a claim for compensation. The judge ruled that Ravi was named as the beneficiary of a trust with a specific sum and percentage of the inheritance. As a result, even though he was not a party to the contract between Arjun and his father, Ravi had the right to suit based on it.

Assignment of rights: A party to a contract may assign his rights under the contract to a third party. In this case, the third party may have the right to enforce the contract against the other party. For example, if A owes money to B, and B assigns his right to receive the money to C, C may enforce the contract against A.

Legal representatives: Where a party to a contract dies, his legal representatives may be bound by the terms of the contract, and may have the right to enforce it.

Acknowledgment of liability: Where a person acknowledges liability for a debt, he may be held liable even if he was not a party to the original contract. For example, if A owes money to B, and C acknowledges that he will pay the debt on A’s behalf, C may be held liable for the debt.
Example : John receives Rs. 1,000 from Peter to compensate Arjun. John confirms receiving the money that will be given to Arjun. He does not, however, compensate him. Arjun has the option of suing John to reclaim the money.

Marriage Settlement: In a marriage settlement, the parties to the contract agree to make provisions for the financial security of the wife. If the husband breaches the terms of the contract, the wife can enforce the terms of the contract against him.
Example : Peter vowed to marry Nancy or pay Rs. 50,000 in damages, according to Nancy’s father. He eventually wed another person, breaking the agreement. Nancy brought a lawsuit against Peter, which the court dismissed because the agreement was a family one with Nancy as the recipient.

Covenants Running with the Land: A covenant running with the land is a promise made between two parties with regard to a piece of land. If the land is sold, the promise made between the two parties remains in force, and the new owner of the land is bound by the terms of the promise.
Example: Peter sold John a piece of property he held with a promise that a specific area would be kept as a public park. Following the terms of the agreement, John ultimately sold the land to Arjun. Even though Arjun was informed of the covenant, he still chose to live there. When Peter learned about it, he accuses Arjun in court. Despite Arjun’s denial of responsibility because he was not a signatory to the contract, the Court found that he had broken the covenant.

Statutory Exceptions: There are certain statutes that provide for third-party enforcement of contracts. For example, the Contracts (Rights of Third Parties) Act, 1999 allows a third party to enforce the terms of a contract if the contract expressly provides for this.
Case laws related to Privity of Contract:

Tweddle v. Atkinson (1861):

In this case, the plaintiff’s father, the groom, and the bride’s father entered into a contract to pay the plaintiff a sum of money on the marriage of the plaintiff and the bride. After the marriage, the defendants refused to pay the plaintiff. The court held that the plaintiff was not a party to the contract, and therefore had no right to sue the defendants.

Shankarlal Narayandas v. Chimandas (1961): 

In this case, the plaintiff entered into a contract with the defendants for the sale of goods. The contract provided that the goods would be shipped by the plaintiff to a third party. The third party paid the defendants for the goods, but the plaintiff did not receive payment. The court held that the third party was a beneficiary under the contract, and had the right to enforce it against the defendants.

Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd. (1915): 

In this case, the plaintiff, a tire manufacturer, entered into a contract with a retailer to sell its tires at a discounted price, with the condition that the retailer would not sell the tires below a certain price. The retailer then sold the tires to the defendant, who resold them at a lower price. The plaintiff sued the defendant for breach of contract, but the court held that the plaintiff could not sue the defendant as there was no privity of contract between them.

Conclusion:

In conclusion, the doctrine of privity of contract states that only the parties to a contract can enforce its terms. However, there are certain exceptions to this rule, which allow third parties to enforce the terms of a contract. It is important for parties to a contract to be aware of these exceptions, as they can have a significant impact on their rights and obligations under the contract.