A stranger to a consideration cannot move the court to enforce the contract. In Swain v Law Society[c], Lord Diplock referred to the general non-recognition of third party rights as “an anachronistic shortcoming that has for many years been regarded as a reproach to English private law”. Also, an agent may be the agent of both the contracting parties. Thought the position in various countries is now similar, if not the same, it was not the same when the rule came into being. 1872, allows the ‘consideration’ for an agreement to proceed from a third-party. B.) Thus with the help of essential legislative actions and decisions in various countries, especially those of England and India, this study has established the very basis of the Doctrine of Privity. In this case, Shah AG. [xxv]Re Sinclair’s Life Policy  Ch 799; Re Burgess’ Business Policy (1915) 113 LT 443; Re Schebsman Ch 83. The court in Dutton v. Poole did not consider this principle. But in these cases, it can be seen that the Courts rather decided upon them by keeping in mind the so-called ‘Interest Theory’. Also, the intention to benefit the third party must be irrevocable. 2. The economics arena has always been my strength and in my career, I would like to link economics with law. The student in this study hence tries to establish how the above mentioned position was achieved and the conditions and the scenario that paved the path for the current position of the third parties, especially after the Rights of Third Parties Act of 1999. Richardson, J. stated that the action should have been “more properly” brought by the son, for he was the person “in whom the interest is”. The Supreme Court held that the privity rule could be relaxed where the parties to the contract had, expressly or by implication, intended the relevant provision to confer a benefit on the third parties (the employees), and the action taken out by the third parties came within the scope of the agreement between the initial parties. The plaintiff filed a suit upon the failure of the defendant to pay the annuity.eval(ez_write_tag([[728,90],'lawtimesjournal_in-medrectangle-4','ezslot_1',112,'0','0'])); The defence put forward by the defendant was that the promisee, i.e. It is unnecessary to cite authorities, but the principle is firmly established for this country by the decision of the Privy Council in Khwaja Muhammad Khan v. Hussaini Begum[lxxxviii].”. The suit was held to be maintainable. Hawes[v]. Although in the former two cases, the reason why Cfailed was because he was a stranger to the consideration, Price v Easton contains seeds of moremodern doctrine: whereas Denman CJ said that no consideration for the promise moved fromC to A, Littledale J said that there was no privity between C and A. In the words of Toohey J[lv]: “When a rule of the common law harks back no further than the middle of the last century, when it has been the subject of constant criticism and when in its widest form, it lacks a sound foundation in jurisprudence and logic and further, when that rule has been so affected by exceptions or qualifications, I see nothing inimical to principled development in this Court now declaring the law to be otherwise in the circumstance of the present case.”. The court held that the third party beneficiary was entitled to rely on the waiver of subrogation clause whereby the insurer expressly waived any right of subrogation against the third party beneficiary. No doubt there are volumes of cases in the books and journals in which such related third parties who are not parties to a contract have been allowed to sue upon it and their interest is secured against any breach by the counter party. This paper analyses the evolution of the doctrine of privity, taking into consideration the law in various countries, for largely focusing on England and India.”, ‘The doctrine of privity means that a contract cannot, as a general rule, confer rights or impose obligations arising under it on any person except the parties to it’[i]. Our law knows nothing of a jus quaesitumtertio…’[lxxiii] “. The law does not allow a stranger to file a suit on the contract. For example, the classic case of negligence, Donoghue v Stevenson[xxxi], established that where A supplies goods to B under a contract with B, A may owe a duty to C in respect of personal injury or damage to property caused by defects in those goods. It has been already established in this study that the Doctrine of Privity as such was established in the case of Tweddle v. Atkinson[lxxviii]and that the principle laid down, or the law declared in it was affirmed in Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd[lxxix]. An intention to create a trust is clearly distinguishable from a mere intention to make a gift.[xxvi]. The committee took a view that the relations between privity and consideration was largely unproblematic- the consideration requirement is relevant as to whether there is an enforceable bargain (a contract); the privity doctrine determines who is permitted to enforce the contract. In spite of these cases favouring actions by third party beneficiaries, it is not accurate to say that the third party rule was entirely a 19th century innovation. E.) Third Parties (Rights Against Insurers) Act 1930: Section 1(1) this Act provides that the insured’s right against the insurer shall, notwithstanding anything in any Act or rule of law to the contrary, vest in the third party to whom liability was incurred. C would lose because he or she had given nothing for A’s promise. In this case, the plaintiff’s father, and his prospective father-in-law, mutually agreed to pay sums of money to the plaintiff on marriage. It took a few more centuries for the rule to take its form as we know it. He was no party to the sale. The consideration for the promise is the abstinence by the father to sell the wood. Call us at- 8006553304, © 2014-2020 Law Times Journal | All Rights Reserved, Doctrine of Privity of Consideration & its position in England & India. Whether affiliates, relatives and agents of the parties can be treated as “beneficiary” if their role is restricted to few terms like mentioned hereinabove? We also can say that only a person who has provided consideration can enforce a promise. Consideration is a rule that there must be a "benefit or detriment" involved in any contract, and that this must initially come from the promisee. Consideration is the most important essential of any contract formed between the parties unless there is consideration a contract is said to be void. The proposal must involve a relaxation of the consideration requirement. Some believe it to be very likely that the introduction of the rule into English Law was accompanied by that in the French law as well, which took place in the early 19th century. I’m always excited about it and never miss a chance to explore new places and be adventurous. D.) Motor Insurance: Under section 148(7) of the Road Traffic Act 1988, a person issuing a policy under Section 145 of the Act shall be liable to indemnify the persons or classes of person specified in the policy in respect of any liability which the policy purports to cover in the cases of such persons. A.) The doctrine of privity emerged alongside the doctrine of consideration, the rules of which state that consideration must move from the promise, that is to say that if nothing is given for the promise of something to be given in return, that promise is not legally binding unless promised as a deed. What can be done when the city police tow the vehicle in a non parking zone? Position of Privity of Consideration in England, Firstly, the doctrine of privity of consideration was not applicable in England. Hence, at issue was whether the scope of the indemnity extended to the plaintiff. The main principle highlighted by this concept of Privity of Contract is regarding the rights of third parties in a contract. [xxiii]Tomlinson v. Gill (1756) Amb 330; Lloyd’s v. Harper (1880) 16 Ch D 290; Paul v. Constance  1 WLR 527. The purchases entered into no contract with him, and the purchaser is not personally bound to pay this mortgage debt.”. This is somewhat similar to the rule of privity, as only the parties actually entered into the contract and who have offered consideration are able to benefit from the agreement. “Though originally there was no privity of contract between B and C, B having subsequently acknowledged his liability, C was entitled to sue him for recovery of the amount.”. It has been argued that privity is not even a distinct doctrine, but rather simply part of consideration. [xli] ILR (1924) 48 Bom 673: AIR 1925 Bom 97. The authority of Tweddle v Atkinson[xvi]was soon generally acknowledged. That argument can be met either by admitting the principle and saying that it does not apply to this case, or by disputing the principle itself. [xxviii], C.) Agency: Agency is the relationship which exists between two persons, one of whom (the principal) expressly or impliedly consents that the other should act on his behalf, and the other of whom (the agent) similarly consents so to act or so acts. But I strongly believe that by remaining focussed on our goals and not letting ourselves be discouraged, we can indeed achieve anything we At law school, I have developed a keen interest in researching. A person was a “creditor beneficiary” if performance of the promise would satisfy an actual or asserted duty of the promisee to him. The Privy Council in Khwaja Muhammad Khan v. Hussaini Begum[lxxxvi]observed: “In India and among communities circumstanced as the Mohemmedans, among whom marriages are contracted for minors by parents and guardians it might occasion serious injustice if the common law doctrine was applied to agreements or arrangements entered into in connection with such contracts,”. It was held that in the circumstances mentioned above a trust was created in favor of J for the specified amount and the village, Hence he was entitled to maintain the suit. Clause 11(b) of the contract provided: “The warehouseman’s liability on any one package is limited to $40 and unless the holder has declared in writing a valuation in excess of $40 and paid the additional charge specified to cover warehouse liability.”. He was no party to the sale. It means therefore, that as long as there is a consideration for a promise, it is immaterial who has furnished it. However, in modern times the doctrine of privity has been relaxed to a large extent. In Carnegie v. Waugh[xii], the tutors and curators of an infant, C, executed an agreement for a lease with A, for an annual rent to be paid to C. It was held that C could sue on the instrument, even though he was not a party to it. Hence, although the ship-owners may not have been privy to the contract of carriage (between shipper and charterer) they took possession of the goods on behalf of, and as agents for, the charterers and so could claim the same protection as their principals. It is defined in Section 29d0 of the Indian contract act 1872. Wightman J said: “It is now established that no stranger to the consideration can take advantage of a contract, although made for his benefit.”, whereas, Crompton J said that “consideration must move from the promisee”. According to Section 2 (d) of the Indian Contracts Act, 1872, the consideration may move from the promisee or any other person, at the desire of the promisor. Hamm. 1833 saw the case of Price v. Dunlop Pneumatic Tyre v. Selfridge and Co. Ltd. AC 847.eval(ez_write_tag([[250,250],'lawtimesjournal_in-box-4','ezslot_10',114,'0','0'])); Venkata Chinnaya v. Venkataramaya Garu ILR (1881) 4 Mad 137. If an immediate assignment is valid, there can hardly be fundamental objections to allowing the third party to sue without an assignment. Though many cases were decided in the 17th century, the privity rule was still not established. The court relied on the judgment of Dutton v Poole, that the gift deed and the contemporaneous agreement between the plaintiff and the defendant may be considered as one transaction and the defendant obtained an estate from her mother that would suffice to constitute consideration under Section 2(d). The two principles of privity and consideration have become tangled but are still distinct. In this section we focus our attention on calls for reform made by the judiciary in past cases. The majority of the House of Lords confirmed English law’s adherence to the privity of contract doctrine and was not prepared to hold that the principle of vicarious privity of contract doctrine and was not prepared to hold that the principle of vicarious immunity was the ratio of Elder, Dempster.[xxxviii]. In this case A borrowed ₹40,000 by executing a mortgage of her zamindari in favour of B. Fire Insurance: Under section 83 of the Fire Prevention (Metropolis) Act 1774, where an insured house or building is destroyed by fire, the insurer may be required “upon the request of any person or persons interested” to lay out the insurance money for the restoration of the building. D.) Tort of Negligence: The tort of negligence can be viewed as an exception to the third party rule where the negligence in question constitutes the breach of a contract to which the plaintiff is not a party. Various other jurisdiction either have it or have adapted it. The case of Davaraja Urs v. Ram Krishnaiah[xl]is a relevant case under this head: A sold his house to B under a registered sale deed and left a part of the sale price in his hands desiring him to pay this amount to C, his creditor. This Doctrine of Privity, though accepted in many jurisdictions, has been subject to various reforms, each depending on the jurisdiction in question. Also, this rule goes into contradiction with that established by the case of Dunlop Pneumatic Tyres Co Ltd v. Selfridge Ltd[xxxii]where the pursuer could acquire no benefit under that contract because she was a third party to it. B sued C for the recovery of the mortgage money, but he could not succeed because he was no party to the agreement between A and B. Lord MacNaughtan, in his very short judgment, said that the undertaking to pay back the mortgagee was given by the defendant to the vendor. American judicial opinion also recognizes this rule and the doctrine of privity of consideration does not hold well in American judicial system. The plaintiff brought an action against the defendant as the insurer for an indemnity. Jaspat Rai[xlii]: The defendant’s wife left him because of his cruelty. The Supreme Court has, by its decision in M.C. Here, the consideration for the defendants promise to pay the annuity was the gift deed made by the old lady and the consideration was being furnished by the plaintiff. Thus, the relationship between the father and the son had made the sister a party to the agreement, even if she was not included at the time the contract was agreed. The rule of consideration and the doctrine of privity are different legal concepts but produce a similar end result. However these are not exhaustive and from time to time, number of exceptions against the Doctrine of Privity has been evolved and recognized by Indian judiciary and more than often quoted exception is that a person for whose benefit the contract is entered into can certainly sue as it is “beneficiary” in the contract.[lxxxv]. Every agreement to be enforceable at law must necessarily be supported by consideration. The doctrine of privity of consideration states that the consideration must only move from the promisee and the stranger to the contract, although a beneficiary can enforce the terms of the agreement. The most important questions to be considered were whether a third party could acquire rights, or incur obligations, to a contract to which he or she is not a party?These questions were highly prevalent in England from 17th to 20th century. Law Times Journal: One-Stop Destination for Indian Legal Fraternity. When it comes to the rule of privity, the English Law is no alone in having it. A decision of the High Court of Australia Trident General Insurance Co Ltd v. McNiece Bros Pty Ltd[liii]and that of the Canadian Supreme Court London Drugs Ltd v. Kuehne and Nagel International Ltd[liv]are the two most significant cases in this aspect. [xxix] Under this, the principal, i.e. It may move from the promisee or, if the promisor has no objection, then from any other person. The same was true in Scotland[lii]. Poole views this judgment as holding that the doctrine of privity being comprised of two elements, one that relates to the agreement component of the contract and the other relating to the consideration part of the contract. In India also there has been a great divergence in of opinion in the courts as to how far a stranger to contract can enforce it. Two recent judgments of the Supreme Court of Canada have modified the law relating to privity: London Drugs Ltd v Kuehne & Nagel International Ltd[lxx]and Fraser River Pile & Dredge Ltd v Can-Dive Services Ltd[lxxi]. Lord Goff of Chievely of the Privy Council stated in an obiter dictum: “the time may well come when, in an appropriate case, it will fall to be considered whether the courts should take what may legitimately be perceived to be the final, and perhaps inevitable, step in this development, and recognize in these cases a fully-fledged exception to the doctrine of privity of contract, thus escaping from all the technicalities with which courts are now faced in English law. [xi](1797) 1 Bos& P 101, n (c); 126 ER 801, n (c). The majority had little doubt that the circumstances were eminently appropriate: “When all the circumstances of this case are taken into account, including the nature of the relationship between employees and their employer, the identity of interest with respect to contractual obligations, the fact that the appellant knew that employees would be involved in performing the contractual obligations, and the absence of a clear indication in the contract to the contrary the term ’warehouseman’ in clause 11 (b) of the contract must be interpreted as meaning ‘warehousemen’. “The doctrine of privity means that a contract cannot, as a general rule, confer rights or impose obligations arising under it on any person except the parties to it.”[ii]. From the nature of the covenant entered into by him, a lessee has both privity of contract and of estate; and though by an assignment of his lease he may destroy his privity of estate, still the privity of contract remains, and he is liable on his covenant notwithstanding the ass Thought the position in various countries is now similar, if not the same, it was not the same when the rule came into being. Rather, they are unexpressed or implicit third party beneficiaries with respect to this clause.”. Privity of consideration states that only a person who has provided consideration can enforce the contract and take action against it. If A makes a contract with B, he comes under a legal obligation to pay damages if he fails to keep his promise. E.) Assignment: Except when personal considerations are at its foundation,[xxxiv] the benefit of a contract may be assigned (that is transferred) to a third party. The purport behind the agreement was to provide the plaintiff a certain amount of money. The relevant covenant may relate to freehold land or leasehold land. Acknowledgment may be express or implied. This was the case of Levettv. In Dutton v. Poole[x]a son promised his father that, in return for his father not selling a wood, he would pay 1000 pounds to his sister. A general consensus is that privity is distinct from consideration. F.) Companies Act, 1985 Section 14: Under section 14 of the Companies Act 1985, the registered memorandum and articles of association of a company bind the company and its members to the same extent as if they respectively had been signed and sealed by each member. This theory basically meant that only he who had an interest in the promise could bring up an action before the court, or in the words of the Court, “He that hath interest in the promise shall have the action”[iv]. Exceptions to the Doctrine of Privity of Contract Although the principle of vicarious immunity was subsequently generally accepted by the lower courts, it did not survive the decision of the House of Lords (Lord Denning dissenting) in Midland Silicones Ltd v Scruttons Ltd.[xxxvii]the defendant stevedores, engaged by the carrier, negligently damaged a drum containing chemicals. [lxiii]Queensland Property Law Act 1974, s 55(3)(b). Later, in 1861, the position in England changed in Tweddle v. Atkinson. Now third parties can claim compensation provided he is an intended beneficiary under the contract, and infringement is proved. The defendant executed in plaintiffs favour and iqraranama, agreeing to give effect to this stipulation. Thus, though the contract entered between his father and ‘G’ was for he is benefiting he remained stranger the contract and the contract denied to give him rights to enforce the terms of the contracts.eval(ez_write_tag([[580,400],'lawtimesjournal_in-medrectangle-3','ezslot_5',111,'0','0'])); Further in Dunlop Pneumatic Tyre v. Selfridge and Co. Ltd., the fundamental proposition in the English law, i.e. Section 2(d) in The Indian Contract Act, 1872: When, at the desire of the promisor, the promisee or any other person has clone or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such Act or abstinence or promise is called a consideration for the promise. It is only in a very wide sense, therefore, that standard examples of the tort of negligence constitute exceptions to the third party rule. Chacko v State of Travancore[lxxxix], held that a person not a party to a contract cannot subject to certain well recognized exceptions, enforce the terms of the contract. The assent of the promisor is not necessary for an assignment. [xliii], C.) Insurance by Persons with Limited Interest: Any person who has an interest in the subject-matter of a policy of marine insurance can insure ‘on behalf of and for the benefit of other persons interested as well as for his own benefit’[xliv] Also, where property is sold and suffers damage before the sale is completed, any insurance moneys to which the vendor is entitled in respect of the damage must be held for the purchaser and paid over on completion[xlv]. A promisee can be held to be a trustee for a third party only if he has the intention to create a trust[xxiv] and this intention must be to benefit the particular third party and not third parties generally. As in the Trident case, the central issue in London Drugs was whether the particular circumstances were appropriate ones in which to relax the privity doctrine. Though the doctrine of privity was recognised and established in the case of Tweddle v. Atkinson[iii], its foundations had been laid by the English courts over the years, starting from as early as the end of 16th century. Indeed, it said quite the contrary. His Lordship based his decision on three grounds: • The doctrine of privity requires that only a party to a contract can sue under that contract. “The mortgagee has no right to avail himself of that. [lxi]Queensland Property Law Act 1974, ss 55(2). In The Pioneer Container[ci] Lord Goff called into question the future of the rule, and in White v Jones[cii] his Lordship said, “[O]ur law of contract is widely seen as deficient in the sense that it is perceived to be hampered by the presence of an unnecessary doctrine of consideration and (through a strict doctrine of privity of contract) stunted through a failure to recognise a jus quaesitumtertio”. This principle of the doctrine of privity of consideration is not applicable in India. In the Fraser River case, a third party beneficiary sought to rely on a contractual provision so as to defend against an action brought by one of the contractual parties (the insurer). The relation which subsists between two contracting parties. It was held that the sister could sue, on the ground that the consideration and promise to the father may well have extended to her on account of the tie of blood between them. This was due mostly to issues associated with ancillary contract terms that dealt with acceptance and consideration. [lvi]Western Australia Property Law Act 1969, s 11(2)(a). In Pandurang v. Vishwanath[xcv], it has been held the person beneficially entitled under the contract can sue even though not a party to the contract itself. There is a vast literature on third party rights in the United States, which no short account can adequately summarise. Despite this lack of privity, the majority of the Hifh Court ruled in favour of McNiece. Covenants Concerning Land: The law allows certain covenants (whether positive or restrictive) to run with land so as to benefit (or burden) people other than the original contracting parties. The debates are not just due to the lack of clarity in the statutes or dissenting judicial pronouncements but much of these owe to the academic and judicial debates linked with the ground roots of this doctrine. However the stranger should be included under the scope of “intended beneficiary” who has reciprocal obligations under the contract. There are some exceptions. But those cases are based on the view that such related third parties are claiming through a party to the contract, that it is in the position of a “cestuique trust”[lxxvi] or of a principal suing through an agent, that under the old procedure he/it could have filed a suit in equity, even if he/it could not have sued at common law. In this case, a father brought an action of assumpsit upon a promise made directly to him that marriage money would be paid to his son. For instance, where C buys goods from B, there may be a collateral contract between C and the manufacturer in the form of a guarantee. The consideration for the, Here, the consideration for the defendants promise to pay the annuity was the gift deed made by the old lady and the consideration was being furnished by the plaintiff. [lviii] The legislation also permits variation or cancellation of the contract by the contracting parties at any time until the third party adopts it either expressly or by conduct.[lix]. This is the postulate of the doctrine of privity of consideration. [lvii]Western Australia Property Law Act 1969, s 11(2)(b). Here, the agreement was between the father and the son, the defendant had made a promise to pay the amount to the plaintiff. There were also cases where the reason given why the third party could not sue was because he was a stranger to the consideration, that is, he had given nothing in return for the promise[xiv]. The debates and discussions on the Doctrine of Privity are relevant not only in daily life commercial contracts but also in the less frequent and comprehensive transactional contracts. But, after the marriage, the defendant failed to pay the required sum to the son which resulted in the plaintiff bringing and action in assumpsit. This rule although distinct from privity doctrines it often yields to same result as to be so connected. The court held that it was inequitable for the defendant to keep the wood also and deprive the plaintiff of her share. It has been argued, however, that privity is not even a distinct doctrine, but rather simply part of consideration. Since the defendant did not take the point that the plaintiff was not a party to the insurance contract, the Hong Kong Court of Appeal proceeded on the footing that the plaintiff’s claim, if otherwise good, was enforceable in the usual way. A similar end result: U was appointed by his father to him! Also can say that only a person who has furnished it no right avail... The quoted judgment is worded widely so as to who may be benefited burdened... Judiciary in past cases I would like to link economics with privity of consideration no... Are more or less the well- accepted and settled exceptions to the promisor.... 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[ xlvii ] Rai [ xlii ]: the defendant executed in plaintiffs favour,. As to cover Blue Circle and all its subsidiaries, contractors and sub-contractors in... Insured and of the biggest reforms that took place when the other party promised... In England Firstly, the doctrine of privity of a contract when the rule of consideration was not applicable England. This, the consideration for a ’ s working, studying or just sitting I! Of gift deed the premise is that of Rana Uma Nath Baksh Singh v. Jang [. Similar end result aspects must be an intention to make a gift. xxvi... Promisors of their chosen contracting party, which no short account can adequately summarise privity or, if promisor. Annuity of ₹ 653 should be paid every year to the plaintiff of her share lot apart from reading and... A ) and ( d ) terms that dealt with acceptance and.. Recorded case of such third parties in a contract when the rule of privity of &. In Jamna Das v. Ram Autar [ lxxxii ] extended this rule and 19th! A would not pay such third parties secured by the contract damages in case such. With ancillary contract terms that dealt with acceptance and consideration have become tangled but are still distinct found extend! [ lxxiv ] mentioned both the Trident case and the purchaser is not applicable in India, the to! S promise at issue was whether the scope of intervention in India, the respondents are not complete strangers the... Landed Property by way of gift deed the 18th century and the purchaser is not necessary for an.. The indemnity extended to the rule to take its form as we know.! A “ beneficiary ” if the infringement is proved lxxxii ] extended this rule to India [ xxxiv ] v... Acceptance, the defence put forward by the contracting parties through which they have been or... Contract nor interested in the quoted judgment is worded widely so as to be enforceable at law must be... Refrained from selling the wood also and deprive the plaintiff a would not pay category covered was... Been reformed by the judiciary in past cases beneficiaries under the contract nor in! Or discharge the terms being that a stipulated annuity of ₹ 653 be.
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