Project of Contract

RESEA RESEA RCH RCH PROJECT PROJECT of CON CON TRA CT -1 ON TH E TOPI TOPI C

―PRIVITY OF CONTRACT ‖ PRESENTED BY  - --- K U M A R B.A.LLB,

M A N GA GA L A M  

FIRST YEAR

2 ND SEMESTER ROLL NO.-936 SUBJECT TEACHER--- VIJAY KUMAR VIMAL 1

 TABLE OF CONTENTS

1. INTRODUCTION a. Aim of the researcher b. Research methodology c. hypothesis

2.CHAPTERISATION 1. 2. 3. 4. 5.

INTRODUCTION COMPARISION WITH BRITISH LAW DEFENCES RELATED TO PRIVITY OF CONTRACT Cases related to privity of contract CONCLUSION

3.bibliography

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1. Introduction

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. The parties who have done the contract are only titled to take action if any  breach of contract is done. A person who stands to any type of gain or  beneficiary is not entitled to take any enforcement action if that person denied the promised benefit. According to Indian contract act, 1872 it is dealt under CONSIDERATION topic. CONSIDERATION is defined as ―When, at the desire of the promisor, the promisee or any other person has done 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 1 promise.”

There are several types of exceptions to privity of contracts:A) COLLATERAL CONTRACTS B) AGENCY C) TRUSTS D) ) MARRIAGE SETTLEMMENTS, PARTITION FAMILY AGREEMENTS E) THIRD PARTY BENEFICIARY F) STATUTES G) REMEDIES OF THE CONTRACTING PARTY H) IMPOSSIBILITY OF PERFORMANCE

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SECTION 2(D) OF INDIAN CONTRACT ACT, 1872

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OR OTHER

1. a. aim of the researcher The aim of the researcher is to find details about the privity of contract, defenses related to it, comparison between British law and Indian law in accordance with privity of contract, and case laws related to it.

1. B. research methodology The researcher has used the doctrinal method for his research project. This doctrinal method includes books, library books, journals, case law books and online researches.

1. C. hypothesis The hypothesis of the researcher is that any person who is party of contract or not a party of contract can file suit against the party who breached the promises of the contract.

2. Comparison with english law

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IN INDIA

In India, there is no provision providing for the doctrine of privity of contract in Indian Contract Act, 1872. However by judicial decisions it has been well established that even in India the general rule is that a person who is not a party to the contract cannot enforce the contract. CASES RELATED

TH AT

SH OWS APPLI CATION

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RULE 

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 BOOK OF CONTRACT-1 BY KAILASH RAI

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JAMADAS vs. RAM AVTAR In this case, a person mortgaged his property to another person. Thereafter he sold his property to a third person who agreed to with the seller to mortgaged debt to mortgagee. The mortgagee brought an action against the third person who purchased the property for the recovery of the mortgage money. The court held that the contract was created between the seller and the purchaser and mortgagee was not a party of the contract thereto and therefore he was not entitled to enforce the contract.

M.C. CHAKO vs. STATE BANK OF TRAVANCORE The Supreme Court has made it clear that a person who is not a party to a contract cannot enforce it. However this general rule is subjected to a few exceptions. If a trust is created by contract in favour of a third party in relation to property, the third person can enforce the contract, even if he is not a party to a contract. Besides , where the contract is apart of the family arrangement, the  person for whose benefit it has been made can enforce it, even if he is not a  party of the contract.

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I N E N GL I SH L A W  

In England, the old rule is that if a person, who was to take a benefit under the contract, was nearly related by blood to the promise a right of action would vest in him.

CASES RELATED TO THA T SH OWS TH E ABOVE RUL E A PPLI CATION

1. TWEDDLE vs. ATKINSON

In this case an agreement was entered between the respective fathers of a husband and his wife. Under the agreement their fathers were to pay a sum of 3

 BOOK OF CONTRACT-1 BY KAILASH RAI  BOOK OF CONTRACT-1 BY KAILASH RAI

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money to the husband and the husband could sue for such money. After the death of the fathers, the husband sued the executors of his wife‘s father for the money promised to hm. The court held that he was not entitled to enforce the contract as he was not a party of the contract. The court has made it clear that a  person who is stranger to contract or stranger to consideration cannot enforce the contract, even if he is intended to be beneficiary of the contract.

2. BESWICK VS. BESWICK

Peter Beswick was a coal merchant. He agreed to sell his business to his nephew, the respondent, if he paid him a certain sum of money for as long as he lived, and then to pay his wife (the appellant) £5 per week for the rest of her life after he died. He died, and the nephew only paid his aunt once before stating that no contract existed between them. She was also the administratrix of her husband's will. Mrs. Beswick was unsuccessful at trial and successful at appeal, which John Joseph Beswick appealed?

DECISION The House of Lords decide that the aunt has no right to sue her nephew in her own capacity as she was not a party to the contract. This overturns Denning's findings in the lower court allowing third parties to sue for benefits that were guaranteed to them under a contract. However, in her capacity as the administratrix she is able to sue him for the specific performance of his promise that was made in the contract. The appeal was dismissed by the court.

A. COLLATERAL CONTRACTS

A contract between two parties may be accompanied by a collateral contract  between one of them and a third person relating to the same subject-matter. For example: 5

 http://www.lawteacher.net/PDF/Privity%20Lecture%20&%20Cases.pdf

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Shanklin Pier v Detel Products [1951] 2 KB 854. The plaintiffs had employed contractors to paint a pier. They told them to buy paint made  by the defendants. The defendants had told them that the paint would last for seven years. It only lasted for three months. The court decided that the  plaintiffs could sue the defendants on a collateral contract. They had  provided consideration for the defendants' promise by entering into an agreement with the contractors, which entailed the purchase of the defendants' paint.

There must, however, be an intention to create a collateral contract before that contract can be formed

B. AGENCY

The concept of agency is an exception to the doctrine of privity in that an agent may contract on behalf of his principal with a third party and form a binding contract between the principal and third party. For example, a third party may be able to take the benefit of an exclusion clause  by proving that the party imposing the clause was acting as the agent of the third party, thereby bringing the third party into a direct contractual relationship with the plaintiff: 

In Scruttons Ltd v Midland Silicones Ltd [1962] AC 446, a bill of lading limited the liability of a shipping company to $500 per package. The defendant stevedores had contracted with the shipping company to unload the plaintiff's goods on the basis that they were to be covered by the exclusion clause in the bill of lading. The plaintiffs were ignorant of the contract between the shipping company and the stevedores. Owing to the stevedores negligence, the cargo was damaged and, when sued, they  pleaded the limitation clause in the bill of lading. The House of Lords held that the stevedores could not rely on the clause as there was no  privity of contract between the plaintiffs and defendants.

Lord Reid suggested that the stevedores could be brought into a contractual relationship with the owner of the goods through the agency of the carrier  provided certain conditions were met: (1) that the bill of lading makes it clear that the stevedore is intended to be protected by the exclusion clauses therein. (2) that the bill of lading makes it clear that the carrier is contracting as agent for the stevedore. (3) the carrier must have authority from the stevedore to act as 7

agent, or perhaps, later ratification by the stevedore would suffice. (4) consideration must move from the stevedore. 

All of the above conditions were satisfied in New Zealand Shipping v Satterthwaite (The Eurymedon) [1975] AC 154.

C. TRUSTS

Equity developed a general exception to the doctrine of privity by use of the concept of trust. A trust is an equitable obligation to hold property on behalf of another. The device was approved by the House of Lords in Les Affreteurs Reunis v Leopold Walford [1919] AC 801, where a broker (C) negotiated a charter party  by which the ship-owner (A) promised the charterer (B) to pay the broker a commission. It was held that B was trustee of this promise for C, who could thus enforce it against A. However, the trust device has fallen into disuse because of the strict requirements of constituting a trust and most particularly that there should be a specific intention on the part of the person declaring the trust that it should be a trust. D. MARRIAGE SETTLEMENT, PARTITION OR OTHER FAMILY MATTERS

If contract has been entered into for the purpose of marriage settlement or other family arrangement, the person for whose benefit such agreement has been made may enforce it, even though he is not a party to the contract. Thus, if n the  partition of the joint family, the male members entered into the contract so as to  provide that each of them will contribute equally towards the mmarriageexpenses of the female members or maintenance of the old members for whose  benefit the contract has been entered into, even though the member or members are the party to the contract. E. THIRD-PARTY BENEFICIARIES

In Australia, it has been held that third-party beneficiaries may uphold a  promise made for its benefit in a contract of insurance to which it is not a party (Trident General Insurance Co Ltd v. MacNeice Bros Pty Ltd  (1988) 165 CLR 107). It is important to note that the decision in Trident  had no clear  ratio, and did not create a general exemption to the doctrine of privity in Australia.

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Queensland, the Northern Territory and Western Australia have all enacted statutory provisions to enable third party beneficiaries to enforce contracts, and limited the ability of contracting parties to vary the contract after the third party has relied on it. In addition, section 48 of the Insurance Contracts Act 1984 allows third-party beneficiaries to enforce contracts of insurance. Although damages are the usual remedy for the breach of a contract for the  benefit of a third party, if damages are inadequate, specific performance may be granted ( Beswick v. Beswick [1968] AC 59). The issue of third-party beneficiaries has appeared in cases where a stevedore has claimed it is covered under the exclusion clauses in a  bill of lading. In order for this to succeed, three factors must be made out: 

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The bill of lading must clearly intend to benefit the third party. It is clear that when the carrier contracts with the consignor, it also contracts as an agent of the stevedore. That is, either the carrier must have had authority by the stevedore to act on its behalf, or the stevedore must later ratify (endorse) the actions of the carrier. Any difficulties with consideration moving from the stevedores must be made out.

The last issue was explored in  New Zealand Shipping Co Ltd v. A M Satterthwaite & Co Ltd  [1975] AC 154, where it was held that the stevedores had provided consideration for the benefit of the exclusion clause by the discharge of goods from the ship.

F. STATUTES

Certain exceptions to the doctrine of privity have been created by statute, including price maintenance agreements; and certain contracts of insurance enforceable in favour of third parties. For example, under s148(4) of the Road Traffic Act 1972, an injured party may recover compensation from an insurance company once he has obtained judgment against the insured person.

G. REMEDIES OF THE CONTRACTING PARTY

The question of the extent to which a contracting party may recover for loss sustained by a third party who is intended to benefit from the contract was raised in:

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Jackson v Horizon Holidays [1975] 1 WLR 1468. The plaintiff entered into a contract for himself and his family. The holiday provided failed to comply with the description given by the defendants in a number of respects. The plaintiff recovered damages and the defendants appealed against the amount. Lord Denning MR thought the amount awarded was excessive compensation for the plaintiff himself, but he upheld the award on the ground that the plaintiff had made a contract for the benefit of himself and his family, and that he could recover for their loss as well as for his own. However, in Woodard Investment Development v Wimpey Construction [1980] 1 WLR 277, the House of Lords rejected the basis on which Lord Denning had arrived at his decision, and reaffirmed the view that a contracting party cannot recover damages for the loss sustained by the third party. Their Lordships did not dissent from the actual decision in Jackson, which they felt could be supported either because the damages were awarded for the plaintiff's own loss; or because booking family holidays or ordering meals in restaurants calls for special treatment.

A. DUNLOP PNEUMATIC TYRE CO. LTD. V. SELFRIDGE & CO. LTD. FACTS: Dunlop, a tire manufacturing company, made a contract with Dew for sale of tires at a discounted price on condition that they would not resell the tires at less than the listed price and that any reseller who wanted to buy them from Dew had to agree not to sell at the lower price either. Dew sold the tires to Selfridge on the same Price Maintenance Terms, but Selfridge proceeded to sell the tires  below the price he promised to sell them for. ISSUES: 1) Whether there was any contract between Dunlop and Selfridge?

2) Whether Dew contracted with Selfridge in the capacity of an agent of Dunlop? 6

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3) Whether Dunlop gave any consideration by itself or through the promisee, acting as his agent in giving it? HELD: 1) Dunlop was acting as complete stranger to the contract between Selfridge and Dew and thus on acc ount of privity of contract couldn‘t sue Selfridge for breach of its agreement with Dew. It was a mere beneficiary to it on account of Price Maintenance Clause.

2) On whatever terms the contract between Selfridge and Dew was made was to  be solely determined by them and was not in any way regulated or stipulated by Dunlop apart from the Price Maintenance Clause. While Dew was assumed to  be acting as agent while inserting PMC in the contract it was acting as principal while stipulating terms of the contract with Selfridge –   but as held by Court, a  person can‘t contract in two capacities in the same agreement. Hence, HoL held that Dunlop wasn‘t acting as the undisclosed principal of Dew. 3) Dew had the title to goods manufactured by Dunlop independently of any contract with Selfridge. They were free to sell the tyres to anyone they wished. Secondly, the consideration by way of discount was given wholly out of Dew and neither directly nor indirectly out of Dunlop. Neither Dunlop gave any consideration directly to Selfridge nor through Dew as his agent. Further since all the terms of the contract including whether to give any discount to Selfridge or not was solely stipulated by Dew on its own account and not as Dunlop‘s agent, therefore HoL unanimously held appellan t‘s contention that their  permitting and enabling Dew, with the knowledge and desire of Selfridge, to sell to the latter on the terms of its contract was consideration moving from Dunlop to Selfridge, as unsustainable.

B. JAMADAS vs. RAM AVTAR

In this case, a person mortgaged his property to another person. Thereafter he sold his property to a third person who agreed to with the seller to mortgaged debt to mortgagee. The mortgagee brought an action against the third person who purchased the property for the recovery of the mortgage money. The court held that the contract was created between the seller and the purchaser and mortgagee was not a party of the contract thereto and therefore he was not entitled to enforce the contract.

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C. M.C. CHACKO V. STATE BANK OF TRAVANCORE

FACTS:

H bank had an overdraft account with State Bank. MC Chacko was the manager of H bank and his father K had guaranteed the repayment of debt. K gifted his  properties to members of his family. The gift deed provided that liability if any under the said guarantee should be met either by MC personally or through  property gifted to him under the said deed. State Bank sued all the heirs under the deed alongwith MC; albeit limitation period to sue on letter of guarantee had already passed. ISSUES:

1) Whether a ‗charge‘ was created in favour of State Bank under the said deed to satisfy the debt under the letter of guarantee?

2) Whether the charge, assuming that a charge exists, is enforceable by bank when it is not a party to the deed? HELD:

A ‗charge‘ may be created on immovable property when either through express words or implied from deed, it is clear that party intended to make a specified  property or fund, belonging to him, liable for debt due by him.

In present case, no such charge was created in favor of State Bank  — the deed merely set out an internal arrangement between the donor and members of family which conferred a right of indemnity upon them against M.C. Chacko and his inherited property — however, no intention to convert a personal debt into a secured debt in favor of the bank could not be inferred. Since it was a debt of K such that he was personally liable under the debt; after his death all his inheritors were liable to satisfy the debt out of his estate, inherited by them. However, in such a case, other members would have been indemnified by M.C. Chacko for any share of debt paid by them. By the definition of promisor and promisee as contained in S.2 along with constructive interpretation of ICA in light of similar provisions in English Law, the notion that ‗a stranger to a contract could enforce the obligations there under‘ is completely excluded. A person not a party to contract cannot enforce the terms of the contract unless he is a beneficiary under the contract or the

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contract is one of family arrangement (which confers upon him equitable rights, albeit not contractual) Even if charge would have been created in favour of State Bank, it wouldn‘t have been able to enforce it since it is not a party to the deed and, was a complete stranger to it: it wasn‘t a beneficiary under the contract. Since limitation period has passed, State Bank couldn‘t claim anything under the letter of guarantee either from MC Chacko (who personally never guaranteed payment) and or from any other heir of K.

D. RANA UMANATH BAKSH SINGH Vs. JUNG BAHADUR

FACTS:A son was appointed by his father as his successor. The entire state was given to him. The father has an illegitimate son also. In consideration the legitimate son therefore agreed with his father to give certain sum of money and a village to the illegitimate son after he attains majority. But later he refused to his promise. HELD:The court held that since it is matter of trust between son and father so the illegitimate son has right to enforce the contract and take his share of money and village. The decision was in the favour of the illegitimate son.

E. KWAJA MOHAMMAD KHAN vs. HUSSAINI BEGAM FACTS

Kwaja Mohammad khan entered into a contract with father of Hussaini begum and under the contract he was promised to pay Rs 500 per month in perpetuity as Kharch-e-Pandan if she married his son. He also charged his immoveable  property for the payment. After marriage they said allowance was paid to Hussaini Begum for sometimes. On account of quarrel between Hussaini Begum and her husband, both separated from each other and thereupon the  payment of the allowance was stopped. Hussaini begum filed a suit for enforcement of the contract.

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HELD

The court held that the property was specially payment of the said personal allowance and she was beneficiary of the charge and therefore, she could enforce the contract, even though she was not the party of the contract.

F. SUNDARARAJA AYENGAR vs. LAKSHMIAMMAL FACTS

In this case on the partition of the family, the male members entered into an agreement to contribute towards the expenses on the marriage of a female member of the family. The female member brought a suit to enforce the contract. HELD

The court held that even though he was not a party of the contract, she could enforce the contract as it was entered into for her benefit.

G. ROSE FERNANDES vs. JOSHEPH CONSLAVES

FACTS:The father of the plaintiff, a minor girl entered into an agreement for her marriage with the defendant. After attaining majority the plaintiff brought suit against the defendant for breach of contract. HELD:The court held that the plaintiff could sue the defendant for the breach.

H. NARAYAN DEVI vs. TAGORE COMMERCIAL CORP. LTD.

There was a contract between plaintiff‘s husband and the defendant. According to this contract the plaintiff‘s husband was to sell certain shares to the defendant and as a consideration thereof the defendant was to pay Rs. 500 per month to the plaintiff‘s husband during his lifetime and after his death, Rs. 250 per month to his wife during her lifetime. After the death of the plaintiff‘s husband , the 14

defendant made certain payments to the plaintiff in accordance with the contract, and asked plaintiff to execute certain documents in this connection. HELD:The court held that by making certain payments accordance with the contract and asking the execution of certain documents in this connection, the defendant accepted the right of the plaintiff under the contract therefore, he was stopped to deny the right of the plaintiff. Thus, the court held that the plaintiff was entitled to enforce the contract, although she was not party to the contract.

I. DEV RAJ URS vs. RAMAKRISHNIAH FACTS:-

A person sold his house to another person. A part of the price was left to the seller in the hands of the buyer for the payment of his creditor. The buyer made a part of payment and informed the creditor that the balance would be paid soon. He informed the creditor that the payment was made out of the sale price left by the seller in his hands. He failed to pay the balance and therefore the creditor sued him. HELD:-

The court held that the buyer acknowledged his liability to pay the amount due to the creditor and also the right of the creditor to recover the balance from him and therefore the creditor was entitled to recover the balance, although he was not a party to the contract. J. KHIROD BEHARI vs. MAN GOVIND PANDA FACTS:-

There was a contract between tenant and sub-tenant. According to this contract the sub tenant was to pay the rent directly to the landlord. He actually paid the rent and landlord accepted it also. HELD:-

The court held that sub tenant could be stopped from denying his liability to pay the rent to the landlord and landlord could sue to recover the unpaid rent, although he was not a party to the contract. 15

5. After doing the research work, the researcher has came to the conclusion that the person who is not the party to the contract cannot enforce the contract or cannot file suit for the breach of the contract. There are also some exceptional cases related to privity of the contract. The exceptional cases include:1. 2. 3. 4.

COLLATERAL CONTRACTS AGENCY TRUSTS MARRIAGE SETTLEMMENTS, PARTITION FAMILY AGREEMENTS 5. STATUTES 6. REMEDIES OF THE CONTRACTING PARTY 7. IMPOSSIBILITY OF PERFORMANCE

OR OTHER

Therefore the hypothesis of the researcher proved wrong at the end of the research.

SECTION 2(D) OF INDIAN CONTRACT ACT, 1872 BOOK OF CONTRACT-1 BY KAILASH RAI PAGE NO.102 BOOK OF CONTRACT-1 BY KAILASH RAI PAGE NO.100-101 http://www.lawteacher.net/PDF/Privity%20Lecture%20&%20Cases.pdf  ACCESSED ON 16TH April 2014 AT 18 HRS CONTRACT-1 BY KAILASH RAI FROM PAGE NO. 100-105

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