January 18, 2024
truth concept arrangement with balance

As per the Indian Contract Act 1872, Section 2(h), a contract is an agreement between two parties that is legally enforceable and supported by consideration. The promise that each party has given to the other to carry out their half of the bargain is the fundamental element of contract law.

A fundamental concept in the law of contracts that determines the relationship between parties under a contract is the concept of privity of contract. It defines who is able to enforce a contract’s obligations and rights in addition to who has those rights. The principles of contracts, particularly the idea of privity, are regulated by the Indian Contract Act of 1872, which serves as part of the legal structure in India.

privity of contract meaning

  • A common law principle known as the doctrine of privity of contract states that only parties to a contract may bring legal action against one another to enforce their rights and obligations, and that no stranger may impose obligations on any non-party, even if the contract was entered into for that person’s benefit.
  • The “interest theory,” which suggests that the sole party with an interest in the contract is legally authorized to defend his rights, is the foundation for the rule of privity.

privity of contract example

  • If X agrees to bring Y the stuff. In this instance, only Y has the authority to bring legal action against X in the event that he breaches the agreement; no other party may do so.

Privity of Contract: Essentials

  • The most crucial need is that two or more parties have entered into a contract.
  • The implementation of this doctrine is contingent upon the parties’ competence and the presence of legitimate consideration.
  • The doctrine of privity of contract must be used in the event that one Party breaches the agreement.
  • Only the parties to a contract have the right to sue one another for non-performance of the contract after the breach.

privity of contract case law india

  • In the case of Pratapmull v State of West Bengal, although a nominee under the policy, the widow was not a party to the insurance company’s contract with the deceased, so no interest flowed to her just because she was mentioned in the policy, and her attempt to recover the money due beneath her deceased husband’s insurance policy was denied.
  • In the Advertising Bureau v C. T. Devaraj case, the plaintiff-appellant received an order from the proprietor of the circus to produce advertisements for the amusement. There was no agreement between the plaintiff-advertiser and the circus financier. The agreement between the financier and the owner of the circus did not include the advertisement. The advertiser’s complaint against the financer was dismissed due to the lack of privity of contract between the two parties.

exceptions to privity of contract

A Beneficiary of a Contract:

  • The acknowledgment of beneficiaries under a contract is one of the most important exceptions to the privity of a contract.
  • A third party who is not a signatory to a contract may enforce its terms if the third party is expressly intended to benefit from them.
  • This exemption guarantees that beneficiaries will not be left without legal redress and is in line with the purposes of the contractual parties.
  • For example: X may enforce their claim based on a beneficial right created for them over property by a contract between Y and Z.

Conduct, Acknowledgment, or Admission:

  • Another exception is when one of the parties acknowledges the rights of a third party by deeds, statements, or acknowledgments. Under some circumstances, the third party could be able to assert a claim using the legal precepts of promissory estoppel.
  • This exclusion highlights how crucial it is to keep your word and abide by the guarantees given by the parties, even in cases when a third party isn’t a signatory to the agreement directly.
  • When a third party has legitimately depended on a party’s obligations to their detriment, it forbids the parties from breaking their word.
  • For example: A makes a contract with B to pay Rs. 5,000 to B’s son C each month for the duration of their lives, and A confirms this to C in C’s presence, C may bring a lawsuit against A in the event that A defaults, even though C was not a party to the agreement.

Making Arrangements for Maintenance or Marriage:

  • The theory of privity of contract is not applicable to agreements containing clauses pertaining to marriage or maintenance.
  • In some situations, the contract may be enforced by third parties with a stake in its execution but who are not parties to it directly.
  • For example: If A divides his property equally among his three sons and stipulates that each of them must give C, A’s daughter, Rs. 10,000 upon his death. Now, if any of them disobeys, C can bring legal action.

Although modifications have been made to the rigid application of the idea of privity of contract to fit the changing requirements of modern society, it nonetheless remains a fundamental principle of contract law. These exceptions bring contract law into line with the changing needs of business and society by giving third parties a legal way to enforce agreements where justice and fairness so required.

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