Stranger to Contract or Privity of Contract | Meaning | Exceptions

What is Stranger to Contract or Privity of Contract?

The expression “Privity of Contract” is a doctrine, which means stranger to a contract. It means that a person, who is not a party to the contract, cannot sue for carrying out the promise made by the parties to the contract. That is, a person who is not a party to the contract cannot enforce a contract.

Stranger to Contract or Privity to Contract

Stranger to Contract or Privity to Contract – Meaning, Example, Exception

The underlying principle of the doctrine is that a contract is always a privity relationship between the parties who make it. No other person can acquire rights or incur liabilities under it.

Example: Manufacturer A supplied tyres to a wholesaler, B, on condition that any retailer to whom B resupplied the tyres should promise B not to sell them to the public below Manufacturer A’s list price. B supplied tyres to C upon this condition, but nevertheless C sold them below the list price. Held, there was a contract between C and B, and a contract between Manufacturer A and B, but no contract between Manufacturer A and C. Therefore, Manufacturer A could not obtain damages from C.

Exceptions to Doctrine of Privity of Contract

There are, certain exceptions to the rule of privity of contract recognized both by the English Law and the Indian Law, under which a person, who is not a party to a contract can sue on it. The exceptions to the rule are:

1. Trust or Charge

Sometimes under contract, a benefit is given to a person who is not a party to the contract. This benefit can be given by creating a Trust or Charge in favour of such person. In such cases, the beneficiary under the trust or charge may enforce the contract even though he is not a party to it.

2. Marriage Settlement, Partition or Other Family Arrangements

Sometimes, an agreement is made in connection with marriage, partition or other family arrangements and a provision is made for the benefit of some person. In such cases, a person, for whose benefit the provision is made, can enforce the agreement though he is not a party to it.

3. Acknowledgement of Payment

Sometimes, one of the parties to a contract acknowledges the payment to a third party or otherwise constitutes himself as an agent of the third party. In such cases, the party incurs a binding obligation towards the third party who can enforce it. And if that party acknowledges the payment to the third person or constitutes himself as an agent of that third person, then the third person can recover the amount from such a party.

4. Agreements Affecting the Land

Sometimes, the owner of land is entitled to certain rights and obligations created by an agreement relating to the land. If such land is purchased by somebody with the notice of rights and obligations of the owner, then those rights and obligations shall bind the purchaser although he was not a party to the agreement.

5. Agency

A principal, even if concealed, may sue on a contract made by an agent. The third party cannot plead that there was no contract between him and the principal.

6. Assignment

The assignee of a debt or an actionable claim may sue the original debtor if the assignment is a legal one.

7. Holder in Due Course

A holder in due course of a negotiable instrument is one who has obtained the negotiable instrument in good faith and for valuable consideration. He can sue prior parties to the negotiable instrument.

8. Fund in Hands of a party

Where a fund is created in the hands of one of the contracting parties in favor of a third party, it may be possible to give the latter, a remedy in quasi-contract on the grounds that to allow the contracting party to keep the fund would be to allow unjust enrichment.