Report No. 13
13. The doctrine of privity.-
Closely connected with the doctrine of consideration is the rule that a third party cannot sue on a contract though made for his benefit.
In English Law the rule came to be established in the 19th century after the crystalisation of the doctrine of consideration, the first important landmark being the case of Twedle v. Atkinson, 1861 IB&S 393, decided in 1861. It has been categorically reaffirmed by the House of Lords in Dunlop Pneumatic Tyre Co. v. Selfridge, 1915 AC 847 (853), The hardship of the rule, however, manifested itself early, particularly where a person was entitled to some benefit under a contract to which he was not a party. Courts of equity sought to mitigate the hardship by applying the doctrine of constructive trust.1 But this device necessarily involved a fiction and in a number of cases the device has failed to work as the judges insisted upon a strict application of the fiction.2 In quite a few cases, such as benefits under insurance policies, the Legislature has intervened to modify the operation of the rule.3
1. Cf. Granday v. Grandy, (1885) 30 Ch D 57.
2. Cf. Vandepitte v. P.A.I. Corporation, 1933 AC 70.
3. E.g. section 36(4) of the Road Traffic Act, 1930 (20 & 21) Geo. 5, C 43); section 56 (1) of the Law of Property Act, 1925 (15 & 16 Geo. 5, C 20).
14. The English Law Revision Committee which examined the rule in its sixth interim report,1 has been unable to support the doctrine as it stands. The Committee thus observed-
1. Sixth Interim Report, para. 41.
"The common law of England stands alone among modern systems of Law in its rigid adherence to the view that a contract should not confer any rights on a stranger to the contract even though, the sole object may be to benefit him,1"
1. Six Interim Report, para. 41.
and recommended legislation to the following effect-
"Where a contract by its express terms purports to confer a benefit directly on a third party it shall be enforceable by the third party in his own name subject to any defences that would have been valid between the contracting parties. Unless the contract otherwise provides it may be cancelled by the mutual consent of the contracting parties at any time before the third party has adopted it expressly or by conduct.1"
1. Ibid., para., 48.
The English Legislature has yet to give effect to the recommendation. Meantime Denning L.J. (as he then was) has assailed the rule as to privity of contract as a comparatively recent innovation1 replacing the more than two centuries old settled law to the contrary. Though Denning L.J.'s reading of the history of this doctrine has not passed without criticism,2 even his critics seem to be in agreement with him as to the need for giving effect to the recommendations of the Law Revision Committee.
1. In Drive Yourself Hire Co. v. Strutt, (1954) 1 QB 250 (272).
2. Vide E.J.P.: Privity of Contract, 70 Law Quarterly Review, p. 467.
15. There has been a conflict of judicial opinion as to the applicability of this doctrine in India.
(a) In some cases1 the view has been taken that the words 'any other person' in section 2(d) which depart from the English rule that consideration must proceed from the promisee necessarily implied a corresponding deviation from the English rule as to privity of contract.
(b) The preponderating view, however, is that the English rule of privity of contract applies to India,2 notwithstanding section 2(d). The rule was applied by the Privy Council in Jamnadas v. Ram Autar, ILR (1912) 34 All 63 PC. In Krishna Lal v. Promila,2 Rankin C.J. struck a decisive blow to the argument based on the language of section 2(d). While conceding that the clause might be construed as implying a departure from the corresponding English rule, he observed that the definitions of promisor and promisee in section 2 rigidly excluded the notion that a stranger to a contract can sue thereon.
(c) At the same time, following English Law, a number of exceptions have been engrafted upon the doctrine by our courts. Thus, it has been held that a person who is not a party to a contract may nevertheless sue upon it-
(a) Where the contract implies a trust in favour of the third party,3 whether any property is specifically charged or not.4
(b) Where money to be paid under the contract is charged on some immovable property.5
Several exceptions have also been introduced by section 23 of the Specific Relief Act, 1887, e.g., in favour of the beneficiaries under a marriage settlement or compromise of doubtful rights.
1. Kindersley J. in Chinnayya v. Ramayya, 4 Mad 137; Kshirodbehari v. Mangobinda, 61 Cal 841 (860).
2. Krishna Lal v. Promila, AIR 1928 Cal 518; Subbu Chetti v. Annachalam, AIR 1930 Mad 382 (FB); National Petroleum Co. v. Popatlal, 60 Bom 954.
3. Khawaja Md. v. Hussaini Begum, (1910) 32 All 410 (PC); Mukherjea v. Kiran, (1938) 42 CWN 1212.
4. Dan Kuer v. Sarla, AIR 1947 PC 8.
5. Adhar v. Dol Gobinda, (1935) 40 CWN 1037; Atikalla v. MObarak, AIR 1949 Cal 174; Gulabchand v. Laximarayan, AIR 19444 Nag 46.
16. That a rigid adherence to the doctrine of privity is bound to cause hardship is obvious. The present state of law in India is not quite certain and the particular exceptions which have been acknowledged by case-law and statutes do not cover all cases of hardship and thus enhance the bewilderment of the layman. As we anticipated in our Report on the Specific Relief Act,1 the better course would be to adopt a general exception to cover all cases of contracts conferring benefits upon third parties and dispense with the particular instances where the rule of privity should not apply. We consider the recommendation of the Law Revision Committee best suited for the purpose, and recommend that a separate section be incorporated on the lines thereof.2
1. Ninth Report of the Law Commission, para. 53.
2. Vide section 37A of App I.