Q3 Explain the concept of stranger to a consideration and stranger to a contract. Bring out the differences if any in the concept under Indian Law and English Law. Refer to leading case laws, what are the exceptions to the rule that a stranger to a contract cannot sue upon it?
Marks 15
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Privity of Consideration and Contract and its Exceptions:
Privity of Consideration (Stranger to 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.
Position of Privity of Consideration in England
Firstly, the doctrine of privity of consideration was not applicable in England. The court in Dutton v. Poole did not consider this principle.
The court held that it was inequitable for the defendant to keep the wood also and deprive the plaintiff of her share. 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 relationship between father and daughter was found to extend the consideration that the father gave in the promise to the children.
Further in Dunlop Pneumatic Tyre v. Selfridge and Co. Ltd.,[1915] the fundamental proposition in the English law, i.e. the Consideration must move from the promisee to the promisor only. If any other person furnishes the consideration, the promisee becomes the stranger and, therefore, cannot enforce the promise. This is the postulate of the doctrine of privity of consideration.
Position of Privity of Consideration in India
This principle of the doctrine of privity of consideration is not applicable in India. As per the Indian Contract Act, 1872 the definition of consideration in Section 2(d) states, consideration may be furnished by ‘the promisee or any other person’ as long as it is ‘at the desire of promisor’. Thus, the consideration may move from promisee, or some other person, if the promisor has no objection, from any other person. The leading authority, in this case, is the case of Venkata Chinnaya v. VenkataramayaGaru.[1881 Madras HC].
Privity of Contract (Stranger to Contract)
The doctrine of privity of a contract is a common law principle which 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 even though contract the contract have been entered into for his benefit.
Position of Privity of Contract in English law
In a leading English case of Tweddle v. Atkinson[1861], it was held that the plaintiff cannot sue as he was both a stranger to the contract as well stranger to consideration. This concept of privity of contract was again analyzed in the case of Dunlop Pneumatic Tyre Co.Ltd v. Selfridge & Co. Ltd.[1915]
Position of Privity of Contract in Indian law
In India, the apex court has by its decision in M.C. Chacko v State of Travancore (1970SC) 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 Basu (1936 Calcutta HC), 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. Vishwanath (1939), it has been held the person beneficially entitled under the contract can sue even though not a party to the contract itself.
Exceptions to the Doctrine of Privity of contract
As a general rule only parties to contract are entitled to sue each other, but now with the passage of time exceptions to this general rule have come, allowing even strangers to contract to prosecute. These exceptions are
1.A beneficiary under a contract:- If a contract has been entered into between 2 persons for the benefit of a third person not being a party, then in the event of failure by any party to perform his part, the third party can enforce his right against the others.
2.Conduct, Acknowledgement or Admission:- There can also be situation in which although there may be no privity of contract between the two parties, but if one of them by his conduct or acknowledgment recognizes the right of the other, he may be liable on the basis of law of estoppel. For eg., If A enters into a contract with B that A will pay Rs 5000 every month to B during his lifetime and after that to his Son C. A also acknowledges this transaction in the presence of C. Now if A defaults C can sue to him, although not being directly a party to contract.
3.Provision for maintenance or marriage under family arrangement:- These type of provisions is treated as an exception to the doctrine of privity of contract for protecting the rights of family members who not likely to get a specific share and also to give maximum effect to the will of the testator. For eg., If A gives his Property in equal portions to his 3 sons with a condition that after his death all 3 of them will give Rs 10,000 each to C, the daughter of A. Now C can prosecute if any one of them fails to obey this.
Conclusion
In the Indian law the concept of privity of contract is similar, the only difference being that in India a person who is stranger to consideration can sue whereas in England he cannot.
Marks 11
Well Explained
Stranger to Contract
The expression “Privity of Contract” is a doctrine, which means stranger to a contract. It means that a person, who is not a party to the contract, cannot sue for carrying out the promise made by the parties to the contract. That is, a person who is not a party to the contract cannot enforce a contract. The underlying principle of the doctrine is that a contract is always a privity relationship between the parties who make it. No other person can acquire rights or incur liabilities under it.
There are, certain exceptions to the rule of privity of contract recognized both by the English Law and the Indian Law, under which a person, who is not a party to a contract can sue on it. The exceptions to the rule are:
1. Trust or Charge
Sometimes under contract, a benefit is given to a person who is not a party to the contract. This benefit can be given by creating a Trust or Charge in favour of such person. In such cases, the beneficiary under the trust or charge may enforce the contract even though he is not a party to it.
2. Marriage Settlement, Partition or Other Family Arrangements
In an agreement made in connection with marriage, partition or other family arrangements, a person, for whose benefit the provision is made, can enforce the agreement though he is not a party to it.
3. Acknowledgement of Payment
If a party acknowledges the payment to the third person or constitutes himself as an agent of that third person, then the third person can recover the amount from such a party.
4. Agreements Affecting the Land
If such land is purchased by somebody with the notice of rights and obligations of the owner, then those rights and obligations shall bind the purchaser although he was not a party to the agreement.
5. Agency
A principal, even if concealed, may sue on a contract made by an agent. The third party cannot plead that there was no contract between him and the principal.
6. Assignment
The assignee of a debt or an actionable claim may sue the original debtor if the assignment is a legal one.
7. Holder in Due Course
A holder in due course of a negotiable instrument is one who has obtained the negotiable instrument in good faith and for valuable consideration. He can sue prior parties to the negotiable instrument.
8. Fund in Hands of a party
Where a fund is created in the hands of one of the contracting parties in favor of a third party, it may be possible to give the latter, a remedy in quasi-contract on the grounds that to allow the contracting party to keep the fund would be to allow unjust enrichment.
As a general rule, both Indian and English law are similar to each other that only parties to contract can sue each other. In a leading English case of Tweddle v. Atkinson, it was held that the plaintiff cannot sue as he was both a stranger to the contract as well stranger to consideration. This concept of privity of contract was again analyzed in the case of Dunlop Pneumatic Tyre Co.Ltd v. Selfridge & Co. Ltd.
Stranger to Consideration
In context of Indian law, as long as there is consideration for promise, it does not matter who furnishes the consideration. Which means in Indian law doctrine of Privity of Consideration does not applies. It can be clarified by the words given under Section 2(d) of Indian Contract Act, 1862. It states that, when, at the desire of the promisor, the promise or any other person. This concept has been confirmed by the then judicial system in the case of Kedarnath Bhattacharji v Gorie Mohammad (1887)
in English Law the consideration must move from the Promisee alone. It clearly depicts that stranger to consideration cannot enforce the promise under English Law. Which manifestly implies the presence of Privity of Consideration in English Law.
Under English law initially it was held in the case of Dutton v Poole (1678) that a stranger to consideration can sue however later on in the case of Tweddle v Atkinson (1861) the former precedent was set aside and held that stranger to consideration cannot sue under English law as there is no involvement of any other person either it be in contract or be in consideration. The consideration given or fulfilled by any other person in English law make that agreement void in itself.
However, in Indian law this concept has been taken inversely to the concept of English law. It can manifestly be seen in the wordings of the statute itself that a consideration can be given or fulfilled by any other person. Therefore, in India stranger to consideration can sue.
This apparently shows that Indian law is liberal to deal with the concept of Stranger to consideration whereas the English is strict at this place.
Marks 11
Include provisions as well
A contractual relationship is always between parties to contract, this concept is also called previty to contract. Contract gives a Right in Personam & not in Rem therefore any person who is not the party to contract cannot be held liable. Such third person is known as stranger to contract. Also According to section 2(d) of Indian contract Act (for brevity ICA) the consideration can be given by promisee or any other party, it means consideration can also be given by a third party. In case where the consideration is given by any third party to contract the promisee will be a stranger to consideration but not to contract. Even of the benefit is conferred to some 3rd person still he cannot claim reinforcement of contract because he is a stranger to contract & the privity is only between patries to contract. This rule is applicable under Indian law & English law. Moreover under section 73 ICA the word used are “Party Who Suffers” and not party giving consideration that means only a party to contract can claim remedies for breach even though he may be stranger to consideration.
Under the english law a stranger to contract cannot sue on it. the leading case on this point is tweddle v. Atkinson (1861) under which it was held that the stranger to contract cannot cue on it. Whitman, justice observed,” it is now established that no stranger to contract can take advantage of contract although made for his benefit”
Under Indian Law stranger to consideration can sue & can be sued but stranger to contract cannot & cannot be sued. Here stranger to consideration is a party to contract therefore privity is between him also. In krishan lal v. Promila bai devi it was observed that there is nothing in section 2 to encourage the idea that contracts can be enforced by a person who is not a party to the contract. The exceptions to the rule of privity to contract are as follows:
1. Where the trust is created in favour of a stranger to contract (candy v.candy (1880))
2. Where the provision is made in the marriage settlement (khwaja mohammad Khan v. Hussaini begum)
3. Where the provision made in partition or family arrangement for maintenance or marriage or a female member or minor (Dhankaur v. Saral devi (1946))
4. Where a charge is created in favour of a stranger.(Abdul gafur v. Md Salim)
5. Where there is a direct agreement to pay the defendant who constitutes himself as the agent of third person. (venkatareddi Naidu v. Narasimharao (1935))
As far as exception is concerned, they are similar both in English ans Indian laws.
Marks 10
Explain both separately.
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