Sep 05,2019 | 14 min read

The Relevance of Doctrine of Privity of Contract

Author - Associate Sanjani Shah

“Legal doctrine or creed, that a contract would award rights and thrust accountability only on its contracting parties. They and not any third party can prosecute each other under the duration of the contracts. Privity is the legitimate term for a close, mutual, or successive relationship to the same right of property or the power to impose a promise or warranty.” This is definition as per dictionary Privity of contract.

As per the legitimate definition of Privity of Contract: “The doctrine of Privity in contract law provides that a contract cannot confer rights or impose obligations arising under it on any person or agent except the parties to it.”

As per Section 2 (h), of the Indian contract Act 1872, a contract is an agreement between two parties imposable by law backed by some deliberation. The soul of the law of contract lies in the commitment which both parties have made towards each other for attaining their part of the contract.

Relevance of Doctrine of Privity of ContractThe doctrine of Privity of contract is an ordinary law principle which obliques that only parties to a contract are allowed to prosecute each other to implement their rights and accountabilities. No outsider is allowed to confer accountability upon any person who is not an alliance to contract even though the contract has been entered to his advantage. The rule of Privity is primarily based on the ‘interest theory’ which states that the only person having an interest in the contract is eligible as per law to protect his rights.

The extremely important obligation is that there has been a contract between two or more parties. The capability of parties and the existence of consideration are preconditions for the application of this doctrine. Breach of trust or contract by one party is the vital need for the application of the doctrine of Privity of contract. After the breach of trust, only parties to a contract are eligible to prosecution against each other for non-performance of the contract.

Remuneration or consideration is the most important part of any contract existing between the parties if there is no remuneration or consideration a contract is considered being inappropriate. It is defined in Section 2(d) of the Indian Contract Act, 1872. Remuneration or consideration is considered as the key foundation of every contract and it forms the basis of it.

As a common rule only parties to a contract are eligible to prosecute each other, but now with the course of time exceptions to this common rule have come, permitting even outsiders to contract to sue. These exceptions are as follows:

  1. A legatee under a contract: If a contract has been undertaken between two persons for the advantage of a third person not being a part of the contract. Then in the circumstances of failure by any party to do his part, the third party can implement his right against the others. For example, if in a contract between Tom and Alex, advantageous right in respect of some asset may be created in favor of Ram and in that case, Ram can demand his claim on the basis of this right.
  2. Behavior, Acknowledgement or acceptance: There can also be circumstances in which there may be no Privity of the contract between the two parties but if one of them by his behavior or acknowledgment realizes the right of the other, he may be accountable on the basis of law. For example: If X enters into account with Y will pay Rs.7500 every month to Y during his lifespan and after that, his son A. X also accepts this transaction in the presence of A. Now if X failed A can prosecute to him, not directly a party to contract.
  3. Provision for preservation or maintenance or weeding under family arrangement: These types of provisions are dealt with an exception to the doctrine of Privity of contract for safeguarding the rights of family members who on the contrary get a specific allowance and also to give maximum effect to the will of the mortal. For example: If B gives his asset in equal portions to his three sons provided that after his death all three of them will give Rs.15,000 each to D, the daughter of B. Hence D can sue if any one of them fails to obey this.

From the above points, we have seen that only parties to a contract can prosecute each other and no outsider is allowed to enter between the parties to take legal actions. But with the course of time, the law has also evolved and now even outsider is allowed to prosecute to defend his interest under exceptional conditions.


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