The Doctrine of Privity of Contract is a fundamental principle of common law: "A stranger to a contract cannot sue to enforce its terms, nor can a contract impose liabilities on a stranger." Only parties to the contract have legal standing.
1. Privity of Contract vs. Privity of Consideration
It is crucial to distinguish between these two doctrines under Indian law:
- Privity of Consideration (NOT applicable in India): Under Indian law, consideration can move from a third party. A stranger to consideration can sue (Chinnaya v. Ramaya).
- Privity of Contract (APPLICABLE in India): A stranger to the contract itself cannot sue. Even if a contract is made for the benefit of a third party, that third party cannot file a lawsuit.
📜 Landmark Case: Dunlop Pneumatic Tyre Co v. Selfridge & Co (1915)
Dunlop sold tires to a distributor on the condition that they would not sell below list price. The distributor sold tires to Selfridge, who agreed not to sell below list price. Selfridge broke this promise. Dunlop sued Selfridge. The court held that Dunlop could not sue because they were not a party to the contract between the distributor and Selfridge.
Dunlop sold tires to a distributor on the condition that they would not sell below list price. The distributor sold tires to Selfridge, who agreed not to sell below list price. Selfridge broke this promise. Dunlop sued Selfridge. The court held that Dunlop could not sue because they were not a party to the contract between the distributor and Selfridge.
2. Exceptions to the Doctrine
Equity has carved out specific exceptions where a stranger to a contract can sue to enforce it:
- Trust or Charge: When a contract creates a trust or a financial charge in favor of a beneficiary, the beneficiary can sue to enforce it (e.g., family maintenance agreements).
- Family Settlements: If a family arrangement is made in writing to benefit a female member or a minor, they can sue even if they were not a signing party.
- Acknowledgment or Estoppel: If a party to a contract acknowledges to a third party that they owe them money or have an obligation under the contract, they are estopped from denying it later.
- Assignment of Contract: The assignee of a legal right (e.g., a policy holder of insurance) can sue.