The doctrine of privity of contract is a common law principle which states that only parties to a contract are allowed to sue or enforce their rights and liabilities and no third person or stranger is allowed to confer obligations upon any person who is not party to the contract even though the contract was in his favor.
This doctrine was based on the concept of ‘interest theory’ which means person having interest in the contract is entitled to protect his rights.
Privity of contract is simply a relationship existing between parties to an agreement or contract. This right came out of the fact that a contract creates a relationship between the parties and not third persons.
This doctrine of privity of contract was first laid down in this case. In this case, two men who were father agreed that if their children got married with each other, both fathers will pay some amount of money to the groom. Their children got married and the groom’s father paid his part of money but the bride’s father failed to do so and subsequently died. The groom took action against his father-in-law’s estate for the recovery of the money. The court held that the contract could not be enforced because the groom was not a party to the contract even the contract was made in his favor.
ESSENTIALS OF PRIVITY OF CONTRACT
- A contract has been entered into between two parties or more parties.
- Parties entered into the contract must be competent.
- Consideration of the contract should be valid.
- There has been a breach of contract by one party, as it is essential for application of this doctrine.
- Only parties to the contract can sue each other.
REASONS FOR EXISTENCE OF THIS DOCTRINE
- Mutuality- unfair to allow third party to sue but not to be sued himself.
- To avoid allowing third parties to restrict the rights of contracting parties to amend or abandon their agreement.
- Third parties usually do not provide consideration- they should not be able to claim a “free ride’’.
CRITICISM TO PRIVITY
Mckendrick argues there are four principle criticism leveled against the doctrine of privity:
- It failed to give effect to the expressed intention of the parties.
- The law was unduly complex and extremely artificial.
- The doctrine of privity was commercial inconvenient
- The application of the doctrine could sometimes lead to results which were regarded fundamentally unjust.
EXCEPTIONS TO THE DOCTRINE OF PRIVITY OF CONTRACT
There are some exceptions to the general doctrine of privity of contract. This exception provides the third parties, especially third-party beneficiaries, the opportunities to enforce a contract. These exceptions are as follows:
- In case of negligence – in the case of personal injury resulting from negligence, the negligent party may generally be sued by third parties who are not parties to any contract with the negligent party.
- Agreement for marriage settlement, partition or other family arrangement – This is done for protecting the rights of family members who not likely to get a specific share and also to give maximum effect to the will of the testator.
- Covenants running with the land – Where a buyer purchases a land with the knowledge that there are existing covenants on the land which binds the seller of the land. Such a buyer shall also be bound by such covenants, notwithstanding the fact that he is a stranger to the agreement which created such covenants. This exception was came out from the case Tulk v/s Moxhay
- Beneficiary of a trust or charge – If a contract has been entered into between two persons for benefit of a third person not being a party. And in the case of failure of performance of the parties, third person can enforce his right against the others.
- Acknowledgement or estoppels – If in a contract one of the parties by his conduct or acknowledgment recognizes the right of the other, he may be liable on the basis of law of estoppels.
Privity of contract means the relationship between the parties to a contract. Parties of the contract have rights and obligations under the contract. So, they can enforce such obligations against each other and thus can sue or be sued.
This doctrine of privity of contract precludes third parties from enforcing a contract as they are strangers to a contract. Even where a third party is made a beneficiary under the contract, the general principal of law laid down that he cannot enforce the contract against the parties. But there are some exceptions to this concept as we have stated. These exceptions provide the third party the opportunities to enforce the contract and right to sue the party.