The rule of privity of contract is the principle that a third party cannot sue for damages on a contract to which they are not a party. This rule has been strongly criticised in recent times, particularly where the contract is for the benefit of the third party.
Indeed, civil law systems of other States recognise and enforce such contracts, but despite multiple calls for statutory reform, the rule persists in the Indian Law to prevent a third party from enforcing contractual provisions made in their favour. The common law doctrine of privity means that a “contract cannot, generally, confer rights or impose obligations arising under it on any person except the party to it.”
The second part of this doctrine (under which a contract cannot impose liabilities on anyone except the parties to it) is generally regarded as sensible and just, as it would not be fair to subject people to contractual obligations without their consent. But the first part (under which a contract cannot confer rights on anyone except a party to it) has been subjected to much criticism.
Historical Overview
It wasn’t until the mid-19th century that a hard and fast rule developed in which a third party could not enforce a contract to which they were not a party. Prior to this, there were authorities supporting both the views.
In Tweddle v. Atkinson, the Court acknowledged the existence of contrary authorities, but held that the doctrine of privity of contract meant that third party beneficiary could not enforce against the promisor the promise that the promisor had made to the promisee.
The rule was affirmed in Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd where it was accepted that it was a fundamental principle of law that only a party to a contract who had provided consideration could sue on it.
Exceptions To Application Of Principle
If a third party gets a benefit under a contract, it does not have the right to go against the parties to the contract beyond its entitlement to a benefit. An example of this occurs when a manufacturer sells a product to a distributor and the distributor sells the product to a retailer. The retailer then sells the product to a consumer. There is no privity of contract between the manufacturer and the consumer.
But the parties can exercise a different form of action, eg in the Donoghue v. Stevenson case. In this, a friend of Ms Donoghue bought her a bottle of ginger beer, which was defective. Specifically, the ginger beer contained the partially decomposed remains of a snail.
Since the contract was between her friend and the shop owner, Mrs Donoghue could not sue under the contract, but it was established that the manufacturer had a duty of care owed to their consumers and she was awarded damages in tort. Privity is the legal term for a close, mutual, or successive relationship to the same right of property or the power to enforce a promise or warranty. The Consumer Protection Act, 1986, makes the user of the good who has not paid consideration also a consumer that is a deviation from the general rule of privity of contract.
Note: The article was originally published by Legal Aims on their website.