The Indian Contract Act clearly states that there cannot be a stranger to a contract. What does this exactly mean? And are there any exceptions? This is explained through the Doctrine of Privity of a Contract. Let us see.
Doctrine of Privity of Contract
The Indian Contract Act. 1872, allows the ‘Consideration‘ for an agreement to proceed from a third-party. However, a stranger (third-party) to consideration is different from a stranger to a contract. The law does not allow a stranger to file a suit on the contract. This right is available only to a person who is a party to the contract and is called Doctrine of Privity of Contract.
Let’s understand this with the help of an example:
- Peter has borrowed some money from John.
- Peter owns a property and decides to sell it to Arjun.
- Arjun promises to pay John on behalf of Peter.
However, if Arjun fails to pay, then John cannot sue since Arjun is a stranger to the contract. It is important to note that the Doctrine of Privity has exceptions which allow a stranger to enforce a claim as given below.
Exceptions to the Doctrine of Privity of Contract
A stranger or a person who is not a party to a contract can sue on a contract in the following cases:
- Family Settlement
- Assignment of a Contract
- Acknowledgement or Estoppel
- A covenant running with the land
- Contract through an agent
Let’s look at each of them in details:
If a contract is made between the trustee of a trust and another party, then the beneficiary of the trust can sue by enforcing his right under the trust, even if he is a stranger to the contract.
Arjun’s father had an illegitimate son, Ravi. Before he died, he put Arjun in possession of his estate with a condition that Arjun would pay Ravi an amount of Rs 500,000 and transfer half of the estate in Ravi’s name, once he becomes 21 years old.
After attaining that age when Ravi didn’t receive the money and asked Arjun about it, he denied giving him his share. Ravi filed a suit for recovery. The Court held that a trust was formed with Ravi as the beneficiary for a certain amount and share of the estate. Hence, Ravi had the right to sue upon the contract between Arjun and his father, even though he was not a party to it.
If a contract is made under a family arrangement to benefit a stranger (person not a party to the contract), then the stranger can sue in his own right as a beneficiary of the contract.
Peter promised Nancy’s father that he would marry Nancy else would pay Rs 50,000 as damages. Eventually, he married someone else, thereby breaching the contract. Nancy filed a case against Peter which was held by the Court since the contract was a family arrangement with Nancy as the beneficiary.
Ritika was living in a Hindu Undivided Family (HUF). The family had made a provision for her marriage. Eventually, the family went through a partition and Ritika filed a suit to claim her marriage expenses. The Court held the case because Ritika was the beneficiary of the provision despite being a stranger to the contract.
Assignment of a Contract
If a contract is made for the benefit of a person, then he can sue upon the contract even though he is not a party to the agreement. It is important to note here that nominees of a life insurance policy do not have this right.
Acknowledgment or Estoppel
If a contract requires that a party pays a certain amount to a third-party and he/she acknowledges it, then it becomes a binding obligation for the party to pay the third-party. The acknowledgment can also be implied.
Peter gives Rs 1,000 to John to pay Arjun. John acknowledges the receipt of funds to be paid to Arjun. However, he fails to pay him. Arjun can sue John for recovery of the amount.
Rita sold her house to Seema. A real estate broker, Pankaj, facilitated the deal. Out of the sale price, Pankaj was to be paid Rs 25,000 as his professional charges. Seema promised to pay Pankaj the amount before taking possession of the property. She made three payments of Rs 5,000 each and then stopped paying him. Pankaj filed a suit against Seema which was held by the Court because Seema had acknowledged her liability by conduct.
A Covenant Running with the Land
When a person purchases a piece of land with the notice that the owner of the land will be bound by all duties and liabilities affecting the land, then he can sue upon a contract between the previous land-owner and a settler even if he was not a party to the contract.
Peter owned a piece of land which he sold to John under a covenant that a certain part of the land will be maintained as a public park. John abided by the covenant and eventually sold the land to Arjun. Though Arjun was aware of the covenant, he built a house in the specific plot. When Peter came to know of it, he filed a suit against Arjun. Although Arjun denied liability since he was not a party to the contract, the Court held him responsible for violating the covenant.
Contract through an Agent
If a person enters into a contract through an agent, where the agent acts within the scope of his authority and in the name of the person (principal).
Solved Example for You
Q1. Vidya purchases a property from Krishna. Rajiv is already living in the property on a three-year lease. As a part of the purchase agreement, Vidya takes over the lease. There are some leakages in the house that Krishna promises to fix, as a part of the contract. A few months go by and the leakages are still not fixed. Rajiv calls Vidya, the new owner, and she says that it is Krishna’s responsibility. Can Rajiv file a suit for repairs against Krishna?
Since there is no contract between Rajiv and Krishna about repairing the leakage, if he files a suit, it will probably be dismissed by the Court. Krishna had agreed to carry out the repairs in his purchase contract with Vidya. Hence, she can file a suit against Krishna to get the work done.
Rajiv, on the other hand, can sue Vidya for not performing her obligations according to the lease contract.