The reasons for limiting the operation of the contract to its parties only are many and the following are the most profound:
The third party did not provide consideration for the promise, even though consideration was provided for the promise.
It is unjust to permit a person to sue on a contract when he cannot be sued upon it.
If non-contracting parties were permitted to enforce contracts made for their benefit, the rights of the contracting parties to vary or terminate such contracts would be affected.
It is unfair to call upon the promisor to be liable to two actions, from the promisee as well as the third party.
It is desirable to limit the potential liability of a contracting party from the possibility of a wide range of possible third party claimants
The Doctrine in India
There has been a divergence of opinion in India as to whether the Doctrine of Privity of Contract, which prevails in the English Courts, is applicable to the Indian Courts.
The Indian Contract Act, 1872 (hereinafter referred to as “the Act”) codifies the methods of entering into a contract, executing a contract; rules to implement provisions of a contract and effects of breach of a contract. The provisions of the Act prevail over any usage or custom or trade however the same will be valid as long as it is not inconsistent with provisions of the Act.
Section 2(d) of the Act says that ” when, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something , such act or abstinence or promise is called a consideration for the promise”
It is clear from this section that the consideration for a contract can proceed from any person and not necessarily the parties to the contract. A promise is enforceable if there is some consideration for it and it is quite immaterial whether it moves from the promisee or any other person. However there is no specific provision in the Act which either for or against the Doctrine of Privity of Contact. It is through a series of case laws that the Doctrine has evolved.
In Debnarayan Dutt v Ramsadhan 2 it was observed that the doctrine in Tweedle v Atkinson is inapplicable in India and that “The aim of the Mofussil Courts of Justice in British India is to do complete justice according to the principles of Justice, equity and good conscience.”
The decision in Debnarayan Dutt v Ramsadhan was followed in N. Devaraja v M.Ramakrishnan 3 .The facts of the case in brief are that A sold a house to B under a registered sale deed under the terms that a certain sum will be paid to A and the remaining to C, A’s creditor. B subsequently made part- payments to C informing that the amount was in respect of the sale and that he would pay the remaining amount, B failed to make the payment and C sued B for the same. It was held that the suit was maintainable as B promised to pay the amount to C and hence C was entitled to bring a suit against B for recovery of the amount.
However in Jamna Das v Ram Autar 4 the Privy Council extended the doctrine to India and held that the person not party to the agreement cannot recover the amount due from one party. This decision has been followed in few cases later like Babu Ram Budhu Mal v Dhan Singh Bhishan Singh 5 where the mortgagee was not allowed to recover the money retained by the second mortgagee under an agreement between the owner and the second mortgagee.
Subbu Chetti v Arunachalam 6 considers in detail the development of the Doctrine of Privity of Contract with reference to the decisions of the English Court. The court considering the decision in various English cases held that “where all that appears is that a person transfers property to another and stipulates for the payment of money to a third person a suit to enforce that stipulation by the third party will not lie.”
The Supreme Court has by its decision in M.C. Chacko v State of Travancore 7 expressed itself in favour of the rule in Tweedle v Atkinson thus clearing the ambiguities in the application of the doctrine of Privity of Contract.
There are two aspects of this doctrine. Firstly, no one but the parties to the contract are entitled under it. Rights or benefits may be conferred upon a third party but such a third party can neither sue under the contract nor rely on defenses based on the contract. The second aspect is that the parties to a contract cannot impose liabilities on a third party.