Doctrine Of Privity Of Contract

DOCTRINE OF PRIVITY OF CONTRACT DOCTRINE OF PRIVITY OF CONTRACT By Muhammad Riaz Malik, Advocate Introduction The privity of contract is a principle whereby a contract binds only to those who are in a privy. And, no man can enforce a contract to which he is not a party.1 Similarly, a contract can neither confer rights and nor it can impose those obligations arising under it, on any person, except the parties to it.2 The doctrine of privity, which in principle, at least it prevents a third party (beneficiary) from suing on a contract, and it operates with equal logic to forbid the contracting parties to enforce obligations against a stranger. It has long been an axiom of the common law that a contract between A and B cannot impose a liability upon C.3 It is a common law rule which took centuries to establish but was recognized, firstly, in Tweddle v. Atkinson4 and later affirmed in Dunlop Pneumatic Tyre Co Ltd v. Selfridge Ltd.5, wherein, it was held that 'only a person who is a party to the contract can sue on it or be sued, and thus, no right accrued to the manufacturer to sue the dealer (a third party). The court also explained that law knows nothing of a jus quaesitum tertio6 arising by way of contract. Such a right cannot be conferred on a stranger to a contract as a right to enforce the contract in personam'. Subsequently, certain doubts raised by the common law, however, this doctrine was reconfirmed and established firmly in Port Jackson Stevedoring Pty Ltd. v. Salmond and Spraggon (Australia) Pty Ltd. (The New York Star)7, and Amsprop Trading Ltd v. Harris Distribution Ltd.8 However, a big reform took place finally in the law of England when the rule of privity of contract and third party beneficiary rights were considered thoroughly and statutory shape was given them by The Contracts (Right of Third Parties) Act 1999. Whereby, the intentions of the parties stipulated in a contract to be prevailed rather than being prevented by legal doctrine. While, most of the other common law countries are still relying on this doctrine, with some exceptions, established for centuries under the English law. Scope and applicability of the rule The doctrine of privity has been a feature of English Law and despite of a lot of criticism and attempts to abrogate it, the doctrine is continued to be applied and incorporated in other common law countries, including Pakistan, as well. In practice, this doctrine has caused many difficulties, hardships and injustices for the third party; because, it is not applied in different jurisdictions frequently and freely. Initially, under the common law, the two aspects of this doctrine were established, which were: (a) No one but the parties to the contract are entitled under this rule to sue. Rights or benefits may be conferred upon third party, but such a third party can neither sue under the contract nor rely on defenses based on such contract; and (b) The other was that the parties to a contract cannot impose liabilities on a third party. In the common law, this doctrine is now an established rule, however, its scope and applicability are modified time to time by different precedents of the courts as well as by the statutes. However, the scope and applicability of this doctrine, in general, may still be contestable in particular circumstances.9 The Supreme Court of Pakistan also applied this doctrine in a case Commissioner of Income-Tax Peshawar Zone, Peshawar v. Messrs Siemen A.G.10 and held that 'when parties by mutual free consent enter into a valid contract, then the third parties have no right to intervene either to frustrate the contract, or to change its nature'. Another case of Sindh High Court, Shahi Syed through Attorney v. Total Parco Marketing Ltd.11 did not give any benefit to a third party which was a licensee to the lessee, by a separate contract, even in a possession of the property in dispute, because it being a stranger to the main lease agreement, relating to the said property, existing among lessor and lessee. Similarly, in a case Talaat Inayatullah Khan v. Dr. Anis Ahmad Sheikh12, Sindh High Court also applied this doctrine and observed that 'doctrine of privity of contract provides that a contract cannot confer rights or impose obligations arising under it on any person or agent except parties to it, [and] only parties to contracts should be able to sue to enforce their rights or claim damages.' Relating to an application of this rule on The Contract Act, 1872 (the, "Contract Act"), the case of Debnarayan Dutt v. Chunilal Ghose13 has very significance, whereby, the Division Bench of then Calcutta High Court held that the Contract Act is unlike the English Law, and the limits with which the doctrine of privity of contract operates in English Law, cannot with the same vigor be applicable in the Contract Act. On the point of consideration, the Contract Act and English law have a lot of divergence, whereas, under the English law, only a party to the contract can pay the consideration. If he doesn't, pay the consideration he becomes a stranger to the contract while under the Contract Act, it is not necessary that consideration should be paid by the promisee. The consideration for a contract, in terms of section 2(d)14 of the Contract Act, 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 also quite immaterial whether it moves from the promisee or any third party. The issue, where a benefit if is conferred by a contract to a third party, how it would be enforceable by the said third party, was decided by a Single Bench of the Sindh High Court reported as Karachi Water and Sewerage Board v. Karachi Electric Supply Corporation15 while considering the case-laws to all jurisdictions of the world in great detail and observed that "in Pakistan, the no-benefit rule should be applied, only in a modified form, subject to a general exception or qualification to the rule that will apply if the following test, comprising of four elements, is fulfilled: (a) Did the parties to the contract intend to confer or extend the benefit in question on or to the third party seeking to rely on the contractual provision?, and (b) Are the actions of any of the contracting parties in relation to or affecting the third party seeking to rely on the contractual provision, or of the third party itself (as the case may be), the very actions contemplated as coming within the scope of the contract in general, or the provision in particular, again as determined by reference to the intentions of the parties? If so, then (c) The contract, insofar as it confers or extends the benefit, may be enforced directly by the third party, but (d) Subject to any defences that would have been valid between the contracting parties." Certain exceptions of the doctrine Although the doctrine of privity is applicable in the other common law jurisdictions as well, but the same applies along with well recognized exceptions.16 It is no more strictly guided by the dictum of Twaddle v. Atkinson17 in order to defeat the claim of the party. With the passage of time, a lot of exceptions have been carved out in the principle of privity of contract.18 The few of the exceptions, almost applicable to all jurisdictions are as follows: (a) A beneficiary under a trust is an exception where a third party is a beneficiary of a contract, and the said benefit is based on trust, he can enforce such trust even though he is not a party to the contract. This exception is well recognized by the privy council in the case of Khawaja Muhammad Khan v. Hussaini Begum19, wherein, it was held that 'in India their marriages were arranged during minority and contracts for the benefit of the minor were entered into by parents and the guardians. It was caused serious injustice if the strict rule of England Law were applied'. A contract could not as a general rule, confer rights or impose obligations arising under it on any person, except party thereto. Third parties, however, were entitled to sue in their own right in certain cases viz. beneficiary under a trust.20 (b) A family settlement is also an exception, where a person, though, not a party to the contract can sue to enforce its terms, if it was a settlement by which some provisions were made by him as a member of family e.g for maintenance or marriage, though the same was not made a charge.21 Where two brothers, on a partition of joint properties, agreed to invest in equal shares a certain sum of money for the maintenance of their mother she was held entitled to require them to make the said investment.22 Another case of the Indian Jurisdiction, wherein, a daughter along with husband entered into a contract with her father, whereby it was agreed that she will maintain her mother and property of the father which will be conveyed to them. The daughter subsequently refused to maintain her mother. Whereupon, the court held that the mother was entitled to require her daughter to maintain her, though, she was a stranger to the contract.23 (c) The agency can also be viewed as an exception to the doctrine of privity as in that the principal on the basis of the contract with a third party, the contract being concluded by his agent, is able to sue and to be sued on it.24 Under this, the principal i.e. the third party, may be benefited or burdened. Because, the existence of the principal cannot have to be known to the party with whom the agent is contracting. While the agent may the agent of both the of the contracting party like insurance brokers are agents of both of the insured and of the insurer25. (d) The conduct and acknowledgement of the parties are an exception where the plaintiff has any interest in the property, it can demand the return of the property without having established any privity to contract. In the case of Klaus Mittelbachert v. East India Hotels26 wherein he court held that employees of an airline staying a hotel can claim against the hotel in a case where is an injury suffered by them while staying at hotel both the under the tort a well as under the contract. (e) The declaration can be made 'as a right' and the court can ignore or avoid the rule of privity of contract. A third party to a contract can obtain declaratory relief in respect of interpretation or application of that contract without necessarily being a party and having a legally enforceable right to receive benefits under the said contract. And this does not cut across the privity of contract.27 (f) An estoppel also creates an exception where the term of the contract contact party is required to make payment to a third party and he acknowledged it to that a third party. The acknowledgement may be expressed or implied same is covered by the exception to the doctrine of privity28. Traditionally, the doctrine of estoppel was intended to be relied upon only as a defense; it could be used as a shield but not as a sword.29 (g) A beneficiary under a policy of insurance can sue on the policy, even though, he is not a party to the insurance policy and provided no consideration.30 (h) The covenants are where relating to land, there, the rule of privity may also be negotiated by the principles relating to transfer of immovable property. The principle of the famous case is that a person who purchases a land with notice that the owner of the land is bound by certain duties created by an agreement or covenant affecting the land, shall be bound by them although he was not a party to the agreement.31 (i) Unjust enrichment will allow a person to recover a benefit given to another party in circumstances where it is unjust that the party retains the said benefit.32 In the nutshell, it is clear that the doctrine of privity of contract is an established norm, and third person action or right to enforce a contract of which he is not a party is an exception to the general rule. This position remains unshaken, notwithstanding the debate around the redundancy of the doctrine in the contemporary commercial context, as advanced by Flannigan, who condemned the doctrine as being an error and inconsistent33