India: Treatment Of "Doctrine Of Privity" By Indian Judiciary

An Introduction to the controversy related to the "Doctrine of Privity": "Doctrine of Privity" is one of the debated doctrines under law of contracts, not only in India but around the world. The uncertainty behind the legal position in this regard is not merely because of the lack of clarity in the statutes or dissenting judicial pronouncements but much of it owes to the academic and judicial debates associated with the very basis of this doctrine and its comparative advantages and disadvantages.

The controversy and unsettled position with respect to the Doctrine of Privity is not only relevant in day to day commercial contracts but also for high value and complex transactional contracts. In practice it is not uncommon for the contracting parties to impose obligations on other party's affiliates, relatives and agents with respect to terms like restrictive covenants, non-compete and confidentiality obligations. Interest of such third parties is very well protected through the contracting parties through which they are related to the contract. No doubt there are volumes of cases in the books and journals in which such related third parties who are not parties to a contract have been allowed to sue upon it and their interest is secured against any breach by the counter party. But those cases are based on the view that such related third parties are claiming through a party to the contract, that it is in the position of a "cestuique trust"1 or of a principal suing through an agent, that under the old procedure he/it could have filed a suit in equity, even if he/it could not have sued at common law. Those cases are recognized exception to the general principle that only parties to a contract can sue upon it. However is it possible for such related parties to enforce their rights or protect their interest in their independent capacity? This article makes an attempt to analyze the current legal position in this regard and possible precautions while documenting the said clauses.

What is "Doctrine of Privity"?: To begin with it is very necessary to understand what this doctrine actually speaks about. In layman's language the "Doctrine of Privity" can be worded so as to mean that a contract cannot confer rights or impose those obligations arising under it, on any person except the parties to it.2 However, whenever there are third party beneficiaries in a contract, it may become necessary to determine as to, who, in the eyes of the law should be liable or should be protected in event of inexorable breaches that may occur from time to time. From here arises the whole debate about the significance, practical hassles and debates created by this doctrine.

Judicial Interpretation of the Doctrine: a departure from "Tweedle v Atkinson" rule: It is generally agreed that theTweddle vAtkinson has laid down "the true common law doctrine" of the modern third party rule3. In Tweddle v. Atkinson, the Court acknowledged the existence of contrary authorities, but held that the Doctrine of Privity of contract meant that third party beneficiary could not enforce against the promisor the promise that the promisor had made to the promisee. The rule was affirmed in Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd4and subsequently been reaffirmed in numerous cases.

The decision in Tweddle v Atkinson was based on two grounds, firstly the third party was not privy to the contract and secondly, the consideration did not flow from the third party claiming under the contact. The two principles of privity and consideration have become tangled but are still distinct. Even though under Indian Contract Act, the definition of consideration is wider than in English law and the consideration can very well be given by a non-contracting party, yet the common law principle of Doctrine of Privity is generally accepted in India.

Today the legal fraternity around the world has recognized that with the increasingly complex world of commerce there must be some changes to avoid the hardship caused by the rigid adherence to the Doctrine of Privity and accommodate certain exceptions to the general rule thereby ensuring restitution to the aggrieved persons. However the extent to which these exceptions are recognized vary from jurisdiction to jurisdiction. In the words of Jenkins, CJ:

"That Indian Contract Act is unlike the English Contract Act and the limits with which the doctrine of privity of contract operates in English law cannot with same vigour be applicable to Indian Contract Act"5.

Time and again Indian judiciary has reiterated that the administration of justice should not be hampered by Tweedle v Atkinson6 and that in India, we are free from these trammels and are guided in matters of procedure by the rules of justice, equity and good conscience.

Concept of 'Beneficiary" as an exception to the Doctrine of Privity: The application of Doctrine of Privity has been appreciated by the Indian courts with the well –recognized exceptions like beneficiaries of a trust, family arrangement and marriage settlements, tort, collateral contracts, creation of charge or covenants running with land. The aforementioned are more or less the well- accepted and settled exceptions to the Doctrine of Privity. However these are not exhaustive and from time to time, number of exceptions against the Doctrine of Privity has been evolved and recognized by Indian judiciary and more than often quoted exception is that a person for whose benefit the contract is entered into can certainly sue as it is "beneficiary" in the contract.

In India, the apex court has by its decision in M.C. Chacko v State of Travancore7 in a far reaching attempt of clearing the ambiguities in the application of the Doctrine of Privity held that a person not a party to a contract cannot subject to certain well recognized exceptions, enforce the terms of the contract. The recognized exception mentioned in the quoted judgment is worded widely so as to cover the beneficiaries under the terms of the contract. Views on the rights of third party beneficiaries have been laid down by other courts of the country. For instance in Bhujendra Nath vs. Sushamoyee Basu8, the division bench of the Calcutta High Court has held that a stranger to a contract which is to his benefit is entitled to enforce the agreement to his benefit. In Pandurang vs. Vishwanath9, it has been held the person beneficially entitled under the contract can sue even though not a party to the contract itself.

To quote Lord-Williams J, from a considered judgment in KhirodBehariDutt v. Man Gobinda10

"..though ordinarily only a person who is a party to the contract can sue on it, where a contract is made for the benefit of a third person, there may be an equity in the third person to sue upon the contract."

Hence it is clear that Indian judiciary has recognized "beneficiary" to the contract as an exception to the general rule of Doctrine of Privity. So the next question arises as to who may be treated as a "beneficiary" under a contract? Are there any criteria to be met to fall under the category of "beneficiary"? Whether affiliates, relatives and agents of the parties can be treated as "beneficiary" if their role is restricted to few terms like mentioned hereinabove?

Who essentially is a "Beneficiary"? There is no clear definition of the term "beneficiary" given under the Indian Contract Act. However analyzing the treatment of Indian Judiciary to such cases, it becomes clear that the intent is not to capture any person who draws any benefit out of the contract or is affected by a breach by any party but only those persons who are specifically intended to be beneficiary under the contract or for whose benefit the contract is entered into. Any indefinite or unidentified person should not be considered as a "beneficiary" for this purpose. In other words distinction needs to be made between the "intended beneficiary" and "incidental beneficiary". The category which falls under the accepted exception is "intended beneficiary".

When two parties to a contract confer benefits on a third party who has not signed the contract, then it would appear that they intended that the third party should be in a position to independently enforce that right. In such circumstances, the third party would be adversely affected if the two parties signing the contract were to cancel or amend the contract to the detriment of the third party. It was recommended by the law commission of India in its 87threport that where a contract expressly conferring a benefit directly upon a third party has been adopted by a third party, the contracting parties cannot substitute a new contract for it or rescind or alter it so as to effect the rights of third party. However this recommendation has not been implemented till date. Possibly the argument against its implementation is that the very essence of contract i.e. the intention of the parties and freedom of parties to vary the contract as per mutual understanding and agreement at any time would be at peril because of such restrictions. It could however be argued that as long as there is reciprocity as to the binding nature of the contract between the persons who want to enforce it and the person against whom it is sought to be enforced, the parties should not be allowed to vary or change the terms of contract even with mutual agreement. The aforesaid view is supported by the judgment given in the case of Kedar Das Mohta v. NandLalPoddar11. Accordingly, if the intended beneficiary under the contract performs its obligations and the parties accept or act in pursuance of the same, it would imply that parties have acted under the contract and once it does so it cannot then take any step so as to deny the rights of the beneficiary.

As a practical perspective of the above, international judicial precedents have laid down that the following two issues should be checked as soon as the issue whether a particular third party can enforce its rights under the contract creeps in:

  1. Did the parties to the contract intend to extend the benefit in question to the third party seeking to rely on the contractual provision?;and
  2. Are the activities performed by the third party seeking to rely on the contractual provision the very activities 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?

In nutshell, the possible explanations for broadening the scope of exceptions to the general rule of privity and extending it to the "beneficiaries" in general could be the commercial perspectives or giving effect to the intentions of the contracting parties.

The last connected question which remains unanswered is whether this right can be used merely as a defense or can be used to enforce rights or sue the parties also? Going by the aforesaid logic of there is no reason why these exceptions should not be interpreted in favour of the beneficiaries and used as a sanction to enforce the rights also.

A right to enforce the contract means (1) a right to all remedies given by the courts for breach of contract (and with the standard rules applicable to those remedies applying by analogy) that would have been available to the third party had he been a party to the contract, including damages, awards of an agreed sum, specific performance and injunctions; and (2) a right to take advantage of a promised exclusion or restriction of the promisor's rights as if the third party were a party to the contract. However to the best of knowledge, there is no decision by our Judiciary in this regard and most of the other jurisdictions still want to restrict this right as a "shield" instead of being used as a "sword". This point is still open for interpretation till the time any judicial pronouncement is made on the same.

Concluding remarks...

The current relaxed requirements of modern contract law and non-conventional approach of the judiciary in relation to Doctrine of Privity have provided an avenue for redress to genuinely affected persons who the strict interpretation of Doctrine of Privity might have been deprived of rights as such. Under the current operation of the law, a stranger could be awarded damages if the infringement is proved. However the stranger should be included under the scope of "intended beneficiary" who has reciprocal obligations under the contract.

The views of judiciary and also academicians as to the scope of "beneficiary" and applicability of this doctrine are not uniform and the possibility of conflict or dispute cannot be ruled out. Specifically in reference to the transactional and complex agreements involving certain obligations of thirdparties like agents, affiliates, consultants, etc. it becomes difficult to ascertain who the "intended beneficiaries" actually are? From practical perspective, it is advisable to include a specific clause in the agreement stating that the parties (whether specifically identified or categorized) who can enforce their rights as "third party beneficiary" under the contract. The incorporation of such a specific clause would however be subject to any defenses available to the contracting parties.

Footnotes

1. Short for cestui a que use le trust estcréé, meaning 'the person for whose benefit anything is given in trust to another'.

2. See: Harnam Singh v. Purbi Devi, AIR 2000 HP 108; Narayani Devi v Tagore CommericalCorpn Ltd AIR 1973 Cal 401.

3. See: Gandy v. Gandy, (1885) 30 ChD 57, 69 (Bowen LJ)

4. [1915] AC 847

5. DebnarayanDuttvsChunilalGhose, reported in (1914) ILR 41 Cal 137; approved and followed in N DevarajeUrs v M Ramakrishniah AIR 1952 Mys 109.

6. (1861) 1 B & S 393, [1861-73] All ER Rep 369, 124 RR 610

7. AIR 1970 SC 504

8. AIR 1936 Cal 66

9.AIR 1939 Nag 20

10. AIR 1934 Cal 682

11. AIR 1971 Pat 253: It has been held therein that an agreement cannot be enforced at the instance of a person who himself is not bound by it. In other words, there must be reciprocity as to the binding nature of the agreement between the persons who want to enforce it and the person against whom it is sought to be enforced.

© 2013, Vaish Associates, Advocates,
All rights reserved with Vaish Associates, Advocates, 10, Hailey Road, Flat No. 5-7, New Delhi-110001, India.

Specific Questions relating to this article should be addressed to the author at priyesh@vaishlaw.com Priyesh Sharma

The content of this article is intended to provide a general guide to the subject matter. Specialist professional advice should be sought about your specific circumstances. The views expressed in this article are solely of the authors of this article.

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