PRIVITY OF CONTRACT

Explain the Doctrine of Privity of Contract.

The “doctrine of Privity of a contract” is a common law principle that implies that only parties to a contract are allowed to sue each other to enforce their rights and liabilities and no stranger is allowed to confer obligations upon any person who is not a party to contract.

The rule of Privity is basically based on the ‘interest theory’ which implies that the only person having an interest in the contract is entitled as per law to protect his rights.
This rule of Privity of Contract applies both in English law as well as Indian law. It has also been applied in the leading case of Tweddle v. Atkinson.

Example- If A makes a promise to deliver goods to B. Then in this case, if A breaches the contract then only B has a right to prosecute him and no other person can prosecute him.

Exceptions to this general rule of Privity of contract is as follows-

1. A beneficiary under a contract (Trust):- If a contract is made between the trustee of a trust and another party, then the beneficiary of the trust can sue by enforcing his right under the trust, even if he is a stranger to the contract.
2. Family settlement- If a contract is made under a family arrangement to benefit a stranger (person not a party to the contract), then the stranger can sue in his own right as a beneficiary of the contract.
3. Assignment of contractual right- Under certain circumstances, both in equity and under the statute, it is possible for a party to a contract to transfer all his rights under a contract to a third party to step into the shoes of the transferor and enforce the rights transferred. This transfer of rights is called an assignment. Here, a third party, to whom contractual powers were transferred to, can sue and be liable in a contract.
4. Acknowledgment or Estoppel- Although there may be no Privity of contract between the two parties, but if one of them by his conduct or acknowledgement recognizes the right of the other, he may be liable on the basis of law of estoppel.
5. A Covenant Running with the Land- Any person may take an immediate or other interest in land or other property or the benefit of any condition, right or entry, covenant or agreement over or affecting land or other property, although he may not be named as a party to the conveyance or other instrument.
6. Contract through an Agent- Under the law of agency, it is possible to avoid the doctrine of Privity. What an agency does, is to regard the agent as being in the eyes of the law, the principal person so that rights and liabilities which the agent acquired under a contract are regarded as rights and liabilities of the principal.