Privity of Contract & Privity of Consideration

By Shruti Singh 15 Minutes Read

Introduction

The doctrines of privity of contract and privity of consideration determine who can enforce agreements and the necessity of consideration. In English law, only parties directly involved in a contract can enforce its terms, excluding third parties. Indian law, while generally following this rule, allows exceptions for third-party beneficiaries under Section 25 of the Indian Contract Act, 1872.

Regarding consideration, English law requires it to come from the promisee, ensuring a reciprocal exchange. Indian law is more flexible, allowing consideration from any party, as long as it exists, under Section 2(d) of the Act. This highlights the stricter approach of English law compared to the more inclusive stance of Indian law.

Meaning of Privity of Contract

• Privity of contract is a fundamental principle in contract law, ensuring that only the parties directly involved in a contract can hold rights or liabilities related to that agreement.
• This doctrine is based on the English legal principle of ‘Interest Theory,’ which states that third parties who are not signatories to the contract cannot assert claims or enforce terms under the contract.
• According to Interest Theory, only those with a direct interest in the contract—namely, the parties who have entered into the agreement—are entitled to legal recourse or obligations arising from it.
• The doctrine of privity of contract was first established in English law in Tweddle v. Atkinson (1861)[1], where the court ruled that the groom could not sue for a promised sum of money from his fiancée’s father’s executor because he was neither a party to the contract nor had provided consideration, highlighting that only parties directly involved in a contract can enforce its terms.

Essentials to Privity of Contract

1. Existence of a Contractual Relationship

• The doctrine of privity of contract requires a formal contract between two or more parties.
• This contract establishes the legal relationship and defines the rights and obligations of those involved.
• Without a valid contract, the doctrine of privity cannot be applied.

2. Competency of Parties and Valid Consideration

• For the doctrine of privity to apply, the parties must be legally competent, meaning they have the legal capacity to contract, such as being of sound mind and of legal age.
• There must be valid consideration, which is something of value exchanged between the parties, essential for the contract to be enforceable.

3. Occurrence of a Contractual Breach

• A breach of contract by one party is essential for the application of the privity doctrine.
• It occurs when a party fails to fulfill their contractual obligations.
• This breach allows for legal recourse and the enforcement of rights and obligations under the doctrine of privity.

4. Right to Sue for Non-Performance

• Only those directly involved in the contract can sue for non-performance or seek remedies.
• Third parties, not part of the contract, are excluded from making legal claims related to it.

Exceptions of Privity of Contract

1. Beneficiary under a Contract

• A third party can enforce a contract if it was expressly made for their benefit, even if they are not a signatory.
• Example: If a contract is created with the intention of benefiting a third party, they can take legal action if the contract is breached.
• In Muhammad Khan v. Husaini Begum[2], the court held that a third-party beneficiary could enforce the contract, as it was intended to provide a benefit to them, highlighting the protection of intended beneficiaries.

2. Conduct, Acknowledgment, or Admission

• An exception to the privity doctrine occurs through the principle of estoppel.
• Estoppel applies when a party’s conduct or acknowledgment effectively recognizes the rights of a third party.
• It prevents a person from denying a right or fact they have previously affirmed through their actions or statements.
• If a party acknowledges a third party’s rights under a contract, they cannot later deny those rights, even if the third party was not originally involved.
• This principle ensures fairness by holding parties accountable for their actions and representations.

3. Provision for Maintenance or Marriage under Family Arrangements

• Family arrangements, such as wills or settlements, often include provisions for the maintenance or marriage of family members.
• These are exceptions to the privity of contract doctrine, allowing intended beneficiaries to enforce the provisions.
• Even if a family member is not a direct party to the agreement, they can enforce these rights.
• This exception ensures that the intentions of the parties or testator are honoured, and family members’ rights are protected.

Comparison of Privity of Contract between English Law and Indian Law

Doctrine of Privity of Consideration

• The doctrine of privity of consideration states that only those who have provided consideration for a contract can enforce its terms.
• Under the Indian Contract Act, 1872, Section 2(d) defines consideration as something of value given or promised in return for a promise from the other party.
• In English law, only the promisee who provides consideration can enforce the contract.
• Indian law is more flexible, allowing consideration to be provided by a third party, making the contract enforceable even if the promisee did not directly provide it.
• This inclusivity focuses on the presence of valid consideration rather than its direct source, allowing broader enforcement rights in contractual relationships.

Essentials to Privity of Consideration

1. Existence of Valid Consideration

• Privity of consideration requires valid consideration, which is something of value exchanged between the parties in a contract.
• Consideration can take various forms, such as monetary payment, goods, services, or an obligation to perform or refrain from a specific act.
• It is the essential element that turns a mere agreement into a legally binding contract. Without valid consideration, the contract is not enforceable, as it fails to meet one of the core requirements of contract law.
• In Durga Prasad v. Baldeo[3], Durga Prasad built shops in a market on the orders of the area collector and later sought a commission from Baldeo, a shopkeeper who had promised to pay a commission on sales. When Baldeo failed to pay, Durga Prasad sued for breach of contract. The court ruled that the contract was unenforceable because the consideration—building the shops—was not provided at Baldeo’s request but at the collector’s, making the promise invalid.

2. Reciprocity of Obligation

• Consideration ensures reciprocity in a contract, with both parties having something at stake, providing mutual benefits or detriments.
• This mutual exchange of value makes the contract equitable and binding, underpinning the legitimacy of the agreement.
• In Chinnaya v. Ramayya (1882), [4]a mother gifted property to her daughter, Ramayya, with the condition that she pay an annuity to her aunt, Chinnaya. After the mother’s death, Ramayya stopped payments, arguing that there was no direct consideration between her and Chinnaya. The Madras High Court ruled in favor of Chinnaya, holding that consideration provided by the mother was sufficient under Indian law, even if it did not flow directly from the promisee.

3. Direct or Indirect Furnishing of Consideration

• In Indian law, consideration for a contract can be provided by a third party on behalf of the promisee, satisfying the requirement for a valid contract.
• This flexible interpretation focuses on the existence of consideration, rather than its direct origin from the promisee, allowing for broader enforceability in contractual relationships.

4. Enforceability by the Provider of Consideration

• The party who furnishes the consideration, whether directly or through a third party, gains the right to enforce the contract.
• This enforceability is a critical element, as it determines who holds the legal standing to seek remedies in the event of a breach.
• The ability to enforce the contract is directly linked to the contribution of consideration, emphasizing the significance of this element in contract law.

Privity of Contract Vis-À-Vis Privity of Consideration

Comparison of Privity of Consideration under English Law and Indian Law

Conclusion

The doctrines of privity of contract and privity of consideration define who can enforce contracts and what constitutes valid consideration. Privity of contract restricts rights and obligations to the parties directly involved, preventing third-party claims. Privity of consideration requires valid consideration, but Indian law allows it to come from a third party, unlike English law. Together, these doctrines balance exclusivity with flexibility, ensuring fairness in contractual relationships.

[1] 1861 EWHC QB 57.

[2] AIR 1919 PC 86.

[3] (1881) ILR 3 All 221.

[4] (1882) ILR 4 Mad 137.

Shruti Singh