CENTRAL UNIVERSITY OF SOUTH BIHAR

SCHOOL OF LAW AND GOVERNANCE

Topic: “Privity of Contract”

Under the Supervision of:

Meenakshi Maam

Submitted by

BHARTI MISHRA

B.A.LL.B. (2nd Sem)

CUSB1813125026

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CONTENT

SERIAL NUMBER TOPIC PAGE NUMBER

1. Acknowledgement 3

2. Preface 4

3. Research Methodology 5

4. Introduction 6

5. What is meant by Privity of 7

Contract?
6. History 8

7. Establishment and 9-10

Developments in the Rule
8. Exceptions to rule of Privity 11-15

9. Statutory Exceptions 16-17

10. Conclusion 18

11. Bibliography 19

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 ACKNOWLEDGEMENT

An enterprise of such a magnitude as this research on the case law “Privity of

Contract” could only fructify in such a short span of time due to the coalescing of able
guidance and support of many learned and able persons, whose efforts and
cooperation, I as the researcher, with a sense of gratitude, being duty bound too,
acknowledge in no particular order. My deepest gratitude and thanks to Meenakshi
Maam, an eminent professor and scholar gave enough time and space for free
exchange of ideas and, opinions greatly benefiting me in augmentation and critiquing of
many of the opinions which find their place in this work.

Despite the busy schedule and onerous academic responsibilities, she gave me
ample time whenever she was approached for his invaluable guidance. I am highly
indebted to the library staff to help me find the relevant books and journals, and other
officials and office staffs, who have also extended their help whenever needed. I would
like to extend my sincere thanks to all of my friends for their review and honest remarks.
Last, but not the least my eternal gratitude is due, to my loving Parents whose constant
unflinching support, blessings and encouragement both, temporal and emotional
support, to meet any challenge with confidence including, of this purposive academic
exercise.

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 Preface

As a part of the LLB curriculum (as prescribed by the bar council of India) and in order
to gain practical cum research knowledge in the field of law, I’m required to make a
report on prescribed topic as per given by the authority (my mentor cum teacher). Here,
I have got an assignment on the topic Privity of Contact. I’m required to make report on
the specified topic. The basic objective behind doing this project report is to get
knowledge tools of the term and consequences of law sources.

While going through this project report helped me to enhance my knowledge

regarding the various arguments and rights of citizens. While working on the specified
topic I understood my many points related by my topic concerned.

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RESEARCH METHOLOGY

This research is basically a doctrinal one. It is partially based on Library research and
partially on Articles written by various Scholars which includes the collection of data
from the books which is the secondary sources. The researcher has undergone various
books in order to get the complete knowledge of the topic. The researcher has read the
researched topic and formulated it in the research project.

This research methodology is also based on the guidance of my teacher who

persuaded me to find some relevant information from website like Google and Wikipedia
and books also.

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Chapter-1
Introduction

The main principle highlighted by this concept of Privity of Contract is regarding the
rights of third parties in a contract. Thought the position in various countries is now
similar, if not the same, it was not the same when the rule came into being. 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 17 th to 20th century. Under
Common Law, the answer to these questions was no. It was developed by the end of
19th century that third parties were necessarily strangers to contract and hence could
neither acquire the rights nor incur obligations upon any party to a contract to which
they themselves were not a party. “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.”1

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.

After establishing the position in England, the student tries to discuss the position of the
concept of Privity, in detail, in the Country of India, mostly with the help of landmark
case laws, changing the course of the rule despite of the very high influence of the
English Laws and cultures on the Indian laws. Then, the student tries to look into the
position held by this concept in other major countries of the world.

1
GH Treitel, The Law of Contract

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Chapter-2

WHAT IS MEANT BY PRIVITY OF CONTRACT?

If A makes a contract with B, he comes under a legal obligation to pay damages if

he fails to keep his promise. The enforceability or liability as regards this contract
lies firmly in the hands of A and B to the exclusion of others, this is the foundation of
the doctrine of privity of contract.

The doctrine of privity of contract is that a contract cannot confer rights or impose
those obligations arising under it, on any person except the parties to it. The term
“parties” may seem simple enough but there are situations where it may become
doubtful as to exactly who the parties are and resultantly, who, in the eyes of the law
should be liable or should be compensated in event of inevitable breaches that may
occur from time to time.

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Chapter-3

HISTORY
Though the doctrine of privity was recognised and established in the case of Tweddle
v. Atkinso2, its foundations had been laid by the English courts over the years, starting
from as early as the end of 16 thcentury. But in these cases, it can be seen that the
Courts rather decided upon them by keeping in mind the so-called ‘Interest Theory’.
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”.3

The first recorded case of such an instance was decided upon in 1599. This was the
case of Levettv. Hawes4. 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. The court
was of the opinion that the action ought to have been brought by the son, “for the
promise is made to the son’s use and the ordinary covenants of marriage are with the
father to stand seized to the son’s use; and the use shall be changes and transferred to
the son, as if it were a covenant with himself; and the damage of non-performance is
thereof to the son.”

Rippon v. Norton which was decided in the year of 1602. In this case, the father of
a child’s assumpsit on the father of another child in order to stop the latter child from
assaulting the former. But the objection made by the defendant party, which was
relied upon the case of Levettv. Hawes, was upheld by the court and it was held
that “…because there is no damage to the father by the battery to the son an action
lies not for the father. And although it were objected that the father was at the
charge for the curing the son of his wounds, yet, because it was a thing he was a
thing he not compelled unto, it is no cause why he should maintain this action.”

Another important decision is that of Hadvesv. Levit5 (1632). In this case, the

bride’s father (the defendant) had promised the groom’s father (the plaintiff) that he
would pay would pay 200 pounds to the plaintiff’s son after the marriage had taken
place and hence the plaintiff on this condition gave his consent for the marriage. 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 claim was rejected by
the Court of Common Pleas. Richardson, J. stated that the action should have

2
123 ER 762: I B&S 23: 30 LJ QB 218: 4 LT 468: 124 RR 610

3
Corny and Curtis  v. Collidon; 1674 (1) Freem. K.B. 284

4
Cro. Eliz. 654
5
 (1632) Het. 176. This decision was supported, obiter, by Lord Mansfield in Martyn v. Hind (1776) 2 Cow
p. 437, 443: ER 1174, 1177.

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been “more properly” brought by the son, for he was the person “in whom the
interest is”.

In Dutton v. Poole6 a son promised his father that, in return for his father not selling
a wood, he would pay 1000 pounds to his sister. The father refrained from selling
the wood, but the son did not pay. 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.

Chapter-4

ESTABLISHMENT AND DEVELOPMENTS IN THE RULE

Though many cases were decided in the 17 th century, the privity rule was still not
established. It took a few more centuries for the rule to take its form as we know it. A
study of a few cases decided in the 18 thcentury and the 19th are essential in order to
reach that establishment.

In Marchington v. Vernon7, Buller J said that, independently of the rules prevailing in

mercantile transactions, 13 if one person makes a promise to another for the benefit of
a third, the third may maintain an action upon it.

In Carnegie v. Waugh8, 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.

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. There were other
16th and 17th century cases where a third party was denied an action on the grounds
that the promisee was the only person entitled to bring the action 9. 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 10.
These cases typically involved the following facts. B owed money to C. A would agree
with B to pay C in return for B doing something for A, such as working or conveying a

6
(1678) 2 Lev 210; 83 ER 523

7
(1797) 1 Bos& P 101, n (c); 126 ER 801, n (c)
8
(1823) 1 LJ (OS) KB 89
9
Jordan v Jordan (1594) Cro Eliz 369; 78 ER 616; Taylor v Foster(1600) Cro Eliz 776; 78 ER 1034.

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house. A would not pay, and C would sue A. C would lose because he or she had given
nothing for A’s promise.

Tweddle v. Atkinson11: This is considered to be one of the most significant decisions

which to the doctrine of privity. 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. The
plaintiff duly married, but the father-in-law died before his portion of money had been
paid. It was held that the plaintiff could not recover the money, even though the
agreement had expressly provided that the plaintiff should have the right to sue on it.
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”.

The authority of Tweddle v Atkinson was soon generally acknowledged. In Gandy v

Gandy, Bowen LJ said that, in spite of earlier cases to the contrary, Tweddle v Atkinson
had laid down “the true common law doctrine”.

In Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd.12 the House of Lords

accepted that it was a fundamental principle of English law that only a party to a
contract who had provided consideration could sue on it.

In Drive Yourself Hire Co (London) Ltd v Strutt13, Denning LJ said:

“It is often said to be a fundamental principle of our law that only a person who is a
party to a contract can sue on it. I wish to assert, as distinctly as I can, that the common
law in its original setting knew no such principle. Indeed, it said quite the contrary. For
the 200 years before 1861 it was settled law that, if a promise in a simple contract was
made expressly for the benefit of a third person in such circumstances that it was
intended to be enforceable by him, then the common law would enforce the promise at
his instance, although he was not a party to the contract.”

 Despite several attempts by Denning LJ to allow rights of suit by third party

beneficiaries,14 the House of Lords reaffirmed the general rule in Midland Silicones Ltd
v Scruttons Ltd15  Viscount Simonds said: “Heterodoxy, or, as some might say, heresy,
is not the more attractive because it is dignified by the name of reform. …If the principle

10
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.

11
Supra n. 3
12
[1915] AC 847.
13
[1954] 1 QB 250.
14
Smith and Snipes Hall Farm Ltd v River Douglas Catchment Board [1949] 2 KB 500;  Drive Yourself
Hire Co (London) Ltd v Strutt[1954] 1 QB 250.
15
[1962] AC 446 (Lord Denning dissenting)

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of jus quaesitumtertio is to be introduced into our law, it must be done by Parliament
after a due consideration of its merits and demerits”.

Chapter-5

EXCEPTIONS TO RULE OF PRIVITY

Common Law Exceptions:

A.) Trust: 
Trust is a well-established exception to the rule of privity. This means that if A makes a
promise to B for the benefit of C, C can enforce this promise if B has constituted himself
trustee of A’s promise for C 16. But this rule is subject to certain restrictions. A promisee
can be held to be a trustee for a third party only if he has the intention to create a
trust17 and this intention must be to benefit the particular third party and not third
parties generally.

Also, the intention to benefit the third party must be irrevocable. 18 And a mere intention
to confer a benefit is not enough, there must be an intention to create a trust. An
intention to create a trust is clearly distinguishable from a mere intention to make a
gift.19

An Indian case relevant under this head is that of Rana Uma Nath Baksh
Singh v. Jang Bahadur20. In this case:

U was appointed by his father as his successor and was put in possession of his entire
estate. In consideration, thereof U agreed with his father to pay a certain sum on money
and to give a village to J, the illegitimate son of his father, on his attaining majority.

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.
16
Tomlinson  v. Gill  (1756) Amb 330; Lloyd’s v. Harper  (1880) 16 Ch D 290; Paul v. Constance  [977] 1
WLR 527.
17
Swain v. Law Society  [1983] 1 AC 598; Tito  v. Waddell  (No 2) [1977] Ch 106
18
Re Sinclair’s Life Policy  [1938] Ch 799; Re Burgess’ Business Policy (1915) 113 LT 443; Re
Schebsman[1944] Ch 83.
19
Richards v Delbridge(1874) LR 18 Eq 11; Cleaver v. Mutual Reserve Fund Life Association [1892] 1
QB 147, 152; Re Foster  [1938] 3 All ER 357; Green v. Russell  [1959] 1 QB 28.
20
AIR 1938 PC 245

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B.) 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 relevant
covenant may relate to freehold land or leasehold land. The law on covenants relating
to leasehold land has recently been reformed by the Landlord and Tenant (Covenants)
Act 1995.

The benefit and burden of covenants in a lease granted prior to 1996 would pass on an
assignment of the lease or reversion so as to benefit or bind the assignee of the lease
or the reversion, provided that the covenant “touched and concerned” the land. 21

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. Under this, the
principal, i.e. the third party, may be benefited o burdened. The existence of the
principal does not have to be known to the party with whom the agent is contracting.
Also, an agent may be the agent of both the contracting parties. Thus insurance brokers
are both agents of the insured and of the insurer.

Although one can normally say that the principal is the real party to the contract
concluded by his agent, agency can also be viewed as an exception to the privity
doctrine as in that the principal, on the basis of a contract with a third party, that contract
being concluded by his agent, is able to sue (and be sued) on it.

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. For example, the classic case of negligence, Donoghue v Stevenson22,
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. But the right not to be injured or to have one’s property damaged by another’s
negligence exists independently of any contractual undertaking by A. It is only in a very
wide sense, therefore, that standard examples of the tort of negligence constitute
exceptions to the third party rule. Also, this rule goes into contradiction with that
21
Supra n.3
22
(1911) 39 IA; 21 MLJ 1158

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established by the case of Dunlop Pneumatic Tyres Co Ltd v. Selfridge Ltd where
the pursuer could acquire no benefit under that contract because she was a third party
to it. Yet, according to the principle laid down in Donoghue v. Stevenson23, the pursuer
might recover against a manufacturer in respect of physical injuries suffered as a result
of the manufacturer’s negligence.

E.) Assignment:
Except when personal considerations are at its foundation, 24 the benefit of a contract
may be assigned (that is transferred) to a third party. The assignment is effected
through a contract between the promisee under the main contract (that is, the assignor)
and the third party (that is, the assignee). In addition to assignment by an act of the
parties, there exists assignment by operation of law. The assent of the promisor is not
necessary for an assignment. Assignment may therefore deprive promisors of their
chosen contracting party, although safeguards are imposed to protect promisors.

In considering reform of the third party rule, assignment constitutes a particularly

significant exception. For if, immediately after a contract for a third party’s benefit is
made, the promisee assigns his rights under it to that third party, the third party can
enforce the contract and the promisee loses all right to enforce, vary or cancel the
contract. There is a thin divide between (i) making a contract for the benefit of a third
party; and (ii) making a contract for the benefit of a third party and, immediately
thereafter, assigning that benefit to the third party (especially where the third party does
not provide consideration). If an immediate assignment is valid, there can hardly be
fundamental objections to allowing the third party to sue without an assignment. It also
follows that in considering the details of reform it is instructive to consider the rules of
assignment dealing with, for example, the defences and counterclaims available to the
promisor (the principle is that an assignee takes “subject to equities”), and joinder of the
original promisee (joinder of the assignor is sometimes necessary).

F.) Vicarious Immunity:

The principle vicarious immunity is illustrated by the case of Elder, Dempster Ltd v
Paterson Zochonis& Co Ltd.25. In this case, the House of Lords held that the owners
of a vessel were entitled to rely on the limitations contained in a bill of lading issued
pursuant to a contract between the cargo owners and the charterers of the vessel, when

23
DebnarayanDutt vs ChunilalGhose, reported in (1914) ILR 41 Cal 137; approved and followed in N
DevarajeUrs v M Ramakrishniah AIR 1952 Mys 109.
24
(1861) 1 B & S 393, [1861-73] All ER Rep 369, 124 RR 610
25
TREATMENT OF “DOCTRINE OF PRIVITY” BY INDIAN JUDICIARY: Priyesh Sharma, Vaish Law
Associates

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they (owners of the vessel) were sued by the cargo owners in respect of the damage
caused by bad stowage.

Perhaps the most significant point is that some of their Lordships seemed to accept a
principle of vicarious immunity, according to which a servant or agent who performs a
contract is entitled to any immunity from liability which his employer or principal would
have had. 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.

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. the defendant stevedores,
engaged by the carrier, negligently damaged a drum containing chemicals. When the
cargo-owners sued in tort, the stevedores unsuccessfully attempted to rely on a
limitation clause contained in the bill of lading between the carriers and the cargo
owners. 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.26

G.) Collateral Contract: 

A contract between two parties may be accompanied by a collateral contract between

one of them and a third party. A collateral contract may in effect allow a third party to
enforce the main contract (between A and B). 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. Collateral contracts have been used as a means of rendering exclusion
clauses enforceable by a third party; and are extensively used in the construction
industry as a way of extending to subsequent owners or tenants the benefits of a
builder’s or architect’s or engineer’s contractual obligations. Strictly speaking, of course,
a collateral contract is not an exception to the third party rule in that the ‘third party’ is a
party to the collateral contract albeit not a party to the main contract.

In Shanklin Pier v. Detel27 the plaintiff had employed contractors to paint their pier, and
instructed them to use a paint made by the defendants. This instruction was given in
reliance on a representation made by the defendants to the plaintiffs that the paint
would last seven years. It lasted for only 3 months. It was held that the defendants’
representation gave rise to a collateral contract that the paint would last seven years.

H.) Estoppel or Acknowledgement: 

26
AIR 1928 Mad 23
27
AIR 1970 SC 504

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Where by the terms of a contract a party is required to make a payment to a third
person and he acknowledges it to that third person, a binding obligation is thereby
incurred towards him. Acknowledgment may be express or implied. This exception
covers cases where the promisor by his conduct, acknowledgment, or otherwise,
constitutes himself an agent of the third party. The case of Davaraja Urs v. Ram
Krishnaiah28is 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. Subsequently B made part-
payments to c informing him that they were out of the sale price left with him and that
the balance would be remitted immediately. B, however, failed to remit the balance
and C sued him for the same.

The suit was held to be maintainable. “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.”’

I.) Marriage Settlement, Partition or Other Family Arrangements:

 Where an agreement is made in any of the mentioned concerns and a provision is
made for the benefit of a person, he may take advantage of that agreement although he
is no party to it. In Rose Fernandez v. Joseph Gonsalves29a girl’s father entered into
an agreement for her marriage with the defendant, it was held that the girl after attaining
majority could sue the defendant for damages for breach of the promise of marriage and
the defendant could not take the plea that she was not a party to the agreement.

Chapter-6
Statutory Exceptions:

A.) Life Insurance:

By section 11 of the Married Women’s Property Act 1882, a life insurance policy taken
out by someone on his or her own life, and expressed to be for the benefit of his or her
spouse or children, creates a trust in favour of the objects named in the policy.

28
AIR 1952 Mys 109
29
ILR (1924) 48 Bom 673: AIR 1925 Bom 97

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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. This means that a tenant can claim under its landlord’s insurance, and a
landlord under its tenant’s insurance. 30

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’31 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 32. This has been
upheld in various case laws.

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.

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. This position also applies where the insured dies
insolvent33.

F.) Companies Act, 1985 Section 14:

30
Portavon Cinema Co  v. Price & Century Insurance Co [1939] 4 All ER 601; Mark Rowlands Ltd  v. Berni
Inns Ltd [1986] QB211; Vural Ltd v Security Archives Ltd  (1989) 60 P & CR 258, 271-272;
31
 Marine Insurance Act 1906, s 14(2)
32
Law of Property Act, 1925 s. 47
33
Section 1(2)

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 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.

CONCLUSION

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.

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

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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.

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Bibliography

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