Privity of contract is a fundamental concept in the law of contracts, and it is an
essential principle of contract law in India. Privity of contract refers to the
relationship that exists between the parties to a contract, which creates rights
and obligations that are enforceable by law. The Indian Contract Act, 1872,
(hereinafter referred to as Indian Contract Act) defines the rules and principles
related to the privity of a contract, and it is essential for anyone entering into a
contract to understand its implications.
The Indian Contract Act defines a contract as an agreement between two or
more parties that creates legally enforceable obligations. The parties to a
contract are known as the “parties to the contract” and they must have a
contractual relationship to enforce their rights and obligations. The principle of
privity of contract means that only the parties to the contract can enforce their
rights and obligations under the contract. This means that a third party cannot
sue or be sued under the contract, except in certain limited circumstances.
The doctrine of privity of contract is based on the principle that a contract is a
private agreement between two or more parties, and it is not the business of
any third party. Therefore, a third party cannot acquire any rights under the
contract, nor can it be held liable for any breach of the contract. The doctrine
of privity of contract has been developed over the years by courts in India and
other common law countries to protect the interests of parties to the contract.
The Hon’ble Supreme Court in the case MC Chacko V. State of Travancore AIR
1970 SC 504 held that a person not a party to a contract cannot subject to
certain well-recognized exceptions, enforce the terms of the contract.
For example, A makes a promise to deliver the car to B’s place at a particular
time. A fails to deliver the car. In this case, only B can sue A and no third has
the right to sue.
Essentials of Privity of Contract:
1. Valid Contract: The first and foremost essential requirement is a valid
contract. The parties entering into the contract must be competent and there
must be a valid consideration in the contract as defined under Indian Contract
Act.
2. Breach of Contract: There must be a breach of contract by either party.
3. Only parties can sue each other: In the privity of the contract only parties to
the contract can sue each other and no third party has the right to sue parties
in the contract unless they fall in the exceptional area mentioned in the later
part of article.
What are the different exceptions to the doctrine of privity of contract?
There are certain exceptions to the principle of privity of contract under Indian
law. These exceptions have been developed by courts over the years to
address situations where the strict application of the principle of privity of
contract would lead to an unfair or unjust outcome.
Tortious Interference: Under this doctrine, a third party may be held liable for
interfering with the contractual rights of one of the parties to the contract. For
example, if C persuades A not to sell the car to B, C may be held liable for
tortiously interfering with B’s contractual rights.
Beneficiary rights: Under this concept, a third party may acquire certain rights
under a contract if it is clear from the terms of the contract that the parties
intended to confer those rights on the third party. For example, if A agrees to
pay B a sum of money to be held in trust for C, then C may acquire rights under
the contract as a beneficiary. In Pandurang V. Vishwanath AIR 1939 Nag 20,
the court held that the person beneficially entitled under the contract can sue
even though not a party to the contract itself.
In conclusion, the privity of contract is a fundamental principle of contract law
in India, and it is essential for anyone entering into a contract to understand its
implications. The principle of privity of contract means that only parties to a
contract can enforce their rights and obligations under the contract. However,
there are certain exceptions to this principle, which have been developed by
courts over the years to address situations where the strict application of the
principle of privity of contract would lead to an unfair or unjust outcome.
Surbhi Singla
Associate at Aggarwals & Associates,
S.A.S Nagar Mohali
