TREATMENT OF “DOCTRINE OF PRIVITY” BY INDIAN JUDICIARY:
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Priyesh Sharma
An Introduction to the controversy related to the “Doctrine of Privity”: “Doctrine of Privity” is
one of the debated doctrines under law of contracts, not only in India but around the world. The
uncertainty behind the legal position in this regard is not merely because of the lack of clarity in
the statutes or dissenting judicial pronouncements but much of it owes to the academic and
judicial debates associated with the very basis of this doctrine and its comparative advantages
and disadvantages.
The controversy and unsettled position with respect to the Doctrine of Privity is not only relevant
in day to day commercial contracts but also for high value and complex transactional contracts.
In practice it is not uncommon for the contracting parties to impose obligations on other party’s
affiliates, relatives and agents with respect to terms like restrictive covenants, non-compete and
confidentiality obligations. Interest of such third parties is very well protected through the
contracting parties through which they are related to the contract. 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. 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 “cestui que trust”1 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. Those cases are recognized exception to the general
principle that only parties to a contract can sue upon it. However is it possible for such related
parties to enforce their rights or protect their interest in their independent capacity? This article
makes an attempt to analyze the current legal position in this regard and possible precautions
while documenting the said clauses.
What is “Doctrine of Privity”? : To begin with it is very necessary to understand what this
doctrine actually speaks about. In layman’s language the “Doctrine of Privity” can be worded so
as to mean that a contract cannot confer rights or impose those obligations arising under it, on
any person except the parties to it.2 However, whenever there are third party beneficiaries in a
contract, it may become necessary to determine as to, who, in the eyes of the law should be liable
or should be protected in event of inexorable breaches that may occur from time to time. From
here arises the whole debate about the significance, practical hassles and debates created by this
doctrine.
Judicial Interpretation of the Doctrine: a departure from “Tweedle v Atkinson” rule: It is
generally agreed that the Tweddle v Atkinson has laid down “the true common law doctrine” of
1
Short for cestui a que use le trust est créé, meaning 'the person for whose benefit anything is given in trust to
another'.
2
See: Harnam Singh v. Purbi Devi, AIR 2000 HP 108; Narayani Devi v Tagore Commerical Corpn Ltd AIR 1973
Cal 401.
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the modern third party rule3. 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 4 and
subsequently been reaffirmed in numerous cases.
The decision in Tweddle v Atkinson was based on two grounds, firstly the third party was not
privy to the contract and secondly, the consideration did not flow from the third party claiming
under the contact. The two principles of privity and consideration have become tangled but are
still distinct. Even though under Indian Contract Act, the definition of consideration is wider than
in English law and the consideration can very well be given by a non-contracting party, yet the
common law principle of Doctrine of Privity is generally accepted in India.
Today the legal fraternity around the world has recognized that with the increasingly complex
world of commerce there must be some changes to avoid the hardship caused by the rigid
adherence to the Doctrine of Privity and accommodate certain exceptions to the general rule
thereby ensuring restitution to the aggrieved persons. However the extent to which these
exceptions are recognized vary from jurisdiction to jurisdiction. In the words of Jenkins, CJ:
“That Indian Contract Act is unlike the English Contract Act and the limits with which the
doctrine of privity of contract operates in English law cannot with same vigour be applicable to
Indian Contract Act”5.
Time and again Indian judiciary has reiterated that the administration of justice should not be
hampered by Tweedle v Atkinson6 and that in India, we are free from these trammels and are
guided in matters of procedure by the rules of justice, equity and good conscience.
Concept of ‘Beneficiary” as an exception to the Doctrine of Privity: The application of
Doctrine of Privity has been appreciated by the Indian courts with the well –recognized
exceptions like beneficiaries of a trust, family arrangement and marriage settlements, tort,
collateral contracts, creation of charge or covenants running with land. The aforementioned are
more or less the well- accepted and settled exceptions to the Doctrine of Privity. 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.
3
See: Gandy v. Gandy, (1885) 30 ChD 57, 69 (Bowen LJ)
[1915] AC 847
5
Debnarayan Dutt vs Chunilal Ghose, reported in (1914) ILR 41 Cal 137; approved and followed in N Devaraje
Urs v M Ramakrishniah AIR 1952 Mys 109.
6
(1861) 1 B & S 393, [1861-73] All ER Rep 369, 124 RR 610
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In India, the apex court has by its decision in M.C. Chacko v State of Travancore7 in a far
reaching attempt of clearing the ambiguities in the application of the Doctrine of Privity held that
a person not a party to a contract cannot subject to certain well recognized exceptions, enforce
the terms of the contract. The recognized exception mentioned in the quoted judgment is worded
widely so as to cover the beneficiaries under the terms of the contract. Views on the rights of
third party beneficiaries have been laid down by other courts of the country. For instance in
Bhujendra Nath vs. Sushamoyee Basu8, the division bench of the Calcutta High Court has held
that a stranger to a contract which is to his benefit is entitled to enforce the agreement to his
benefit. In Pandurang vs. Vishwanath9, it has been held the person beneficially entitled under the
contract can sue even though not a party to the contract itself.
To quote Lord-Williams J, from a considered judgment in Khirod Behari Dutt v. Man Gobinda10
“..though ordinarily only a person who is a party to the contract can sue on it, where a contract
is made for the benefit of a third person, there may be an equity in the third person to sue upon
the contract.”
Hence it is clear that Indian judiciary has recognized “beneficiary” to the contract as an
exception to the general rule of Doctrine of Privity. So the next question arises as to who may be
treated as a “beneficiary” under a contract? Are there any criteria to be met to fall under the
category of “beneficiary”? Whether affiliates, relatives and agents of the parties can be treated as
“beneficiary” if their role is restricted to few terms like mentioned hereinabove?
Who essentially is a “Beneficiary”? There is no clear definition of the term “beneficiary” given
under the Indian Contract Act. However analyzing the treatment of Indian Judiciary to such
cases, it becomes clear that the intent is not to capture any person who draws any benefit out of
the contract or is affected by a breach by any party but only those persons who are specifically
intended to be beneficiary under the contract or for whose benefit the contract is entered into.
Any indefinite or unidentified person should not be considered as a “beneficiary” for this
purpose. In other words distinction needs to be made between the “intended beneficiary” and
“incidental beneficiary”. The category which falls under the accepted exception is “intended
beneficiary”.
When two parties to a contract confer benefits on a third party who has not signed the contract,
then it would appear that they intended that the third party should be in a position to
independently enforce that right. In such circumstances, the third party would be adversely
affected if the two parties signing the contract were to cancel or amend the contract to the
detriment of the third party. It was recommended by the law commission of India in its 87th
7
AIR 1970 SC 504
AIR 1936 Cal 66
9
AIR 1939 Nag 20
10
AIR 1934 Cal 682
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report that where a contract expressly conferring a benefit directly upon a third party has been
adopted by a third party, the contracting parties cannot substitute a new contract for it or rescind
or alter it so as to effect the rights of third party. However this recommendation has not been
implemented till date. Possibly the argument against its implementation is that the very essence
of contract i.e. the intention of the parties and freedom of parties to vary the contract as per
mutual understanding and agreement at any time would be at peril because of such restrictions. It
could however be argued that as long as there is reciprocity as to the binding nature of the
contract between the persons who want to enforce it and the person against whom it is sought to
be enforced, the parties should not be allowed to vary or change the terms of contract even with
mutual agreement. The aforesaid view is supported by the judgment given in the case of Kedar
Das Mohta v. Nand Lal Poddar11. Accordingly, if the intended beneficiary under the contract
performs its obligations and the parties accept or act in pursuance of the same, it would imply
that parties have acted under the contract and once it does so it cannot then take any step so as to
deny the rights of the beneficiary.
As a practical perspective of the above, international judicial precedents have laid down that the
following two issues should be checked as soon as the issue whether a particular third party can
enforce its rights under the contract creeps in:
(a) Did the parties to the contract intend to extend the benefit in question to the third party
seeking to rely on the contractual provision?;and
(b) Are the activities performed by the third party seeking to rely on the contractual provision the
very activities contemplated as coming within the scope of the contract in general or the
provision in particular, again as determined by reference to the intentions of the parties?
In nutshell, the possible explanations for broadening the scope of exceptions to the general rule
of privity and extending it to the “beneficiaries” in general could be the commercial perspectives
or giving effect to the intentions of the contracting parties.
The last connected question which remains unanswered is whether this right can be used merely
as a defense or can be used to enforce rights or sue the parties also? Going by the aforesaid logic
of there is no reason why these exceptions should not be interpreted in favour of the beneficiaries
and used as a sanction to enforce the rights also.
A right to enforce the contract means (1) a right to all remedies given by the courts for breach of
contract (and with the standard rules applicable to those remedies applying by analogy) that
would have been available to the third party had he been a party to the contract, including
damages, awards of an agreed sum, specific performance and injunctions; and (2) a right to take
advantage of a promised exclusion or restriction of the promisor’s rights as if the third party were
11
AIR 1971 Pat 253: It has been held therein that an agreement cannot be enforced at the instance of a person who
himself is not bound by it. In other words, there must be reciprocity as to the binding nature of the agreement
between the persons who want to enforce it and the person against whom it is sought to be enforced.
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a party to the contract. However to the best of knowledge, there is no decision by our Judiciary in
this regard and most of the other jurisdictions still want to restrict this right as a “shield” instead
of being used as a “sword”. This point is still open for interpretation till the time any judicial
pronouncement is made on the same.
Concluding remarks…
The current relaxed requirements of modern contract law and non-conventional approach of the
judiciary in relation to Doctrine of Privity have provided an avenue for redress to genuinely
affected persons who the strict interpretation of Doctrine of Privity might have been deprived of
rights as such. Under the current operation of the law, a stranger could be awarded damages if
the infringement is proved. However the stranger should be included under the scope of
“intended beneficiary” who has reciprocal obligations under the contract.
The views of judiciary and also academicians as to the scope of “beneficiary” and applicability
of this doctrine are not uniform and the possibility of conflict or dispute cannot be ruled out.
Specifically in reference to the transactional and complex agreements involving certain
obligations of third parties like agents, affiliates, consultants, etc. it becomes difficult to
ascertain who the “intended beneficiaries” actually are? From practical perspective, it is
advisable to include a specific clause in the agreement stating that the parties (whether
specifically identified or categorized) who can enforce their rights as “third party beneficiary”
under the contract. The incorporation of such a specific clause would however be subject to any
defenses available to the contracting parties.
© 20th May, 2013. All rights reserved with Vaish Associates Advocates, 106, Peninsula Center, Dr S.S Rao Road,
Parel, Mumbai 400 032. Phone: 022 4213 4101.
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advice should be sought about your specific circumstances. The views expressed in this article are solely of the
author of this article.
Specific Questions relating to this article should be addressed to the author at priyesh@vaishlaw.com.
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