PRIVITY OF CONTRACT
Meaning: Privity of contract means a relationship subsisting between the parties who have entered into a contractual obligation and implies a mutuality of will and understanding and creates a legal bond between the parties to a contract.
Privity of contract means that a stranger to a contract (i.e. a third party) cannot sue for the carrying out of promises made by parties to a contract.
Consequences of privity of contract are:
(a) A person who is not a party to a contract cannot sue upon it, even though the contract is for his benefit and he provided consideration.
Example: A who is indebted to B sells his property to C. C promises to pay off the debt of A to B. If C fails to pay B has no right to sue C being a stranger to the contract.
(b) A contract cannot confer rights or impose obligation arising under it on any person other than the parties to it.
Exception to Doctrine of Privity
Following are the exception to the rule of privity of contract, under which a person who is not a party to a contract can sue on it.
1. Constructive trust: A beneficiary in whose favour a trust in some specific immovable property has been executed has a right of action even though he is not a party to the contract.
2. Agency contracts: The second exception is in respect of contracts entered into through an agent. A principal, even if concealed, can enforce a contract made by an agent. Thus, A secretly acting as agent for B made a contract with C. B can intervene to enforce the contract between A and C.
3. Family arrangement, marriage settlement or petition:
Where an arrangement is made in respect of marriage, petition or other family arrangements and a provision is made for the benefit of a third person, he can sue although he is not a party to the arrangement.
4. Acknowledgement: Where a person acknowledges a fund in favour of a third party, there is a quasi-contract.
5. Assignment of contract: The assignee of a debt or an actionabie claim has a right to sue the original debtor if the assignment is a legal assignment.
No consideration necessary
The general rule is that an agreement made without consideration is void. But section 25 lays down certain exceptions which make an agreement enforceable even though made without considerations. Under the law an agreement without consideration is valid.
a. if it is in writing and registered under the law and is made on account of natural love and affection between parties standing in near relation to each other,
b. if it is promise in writing and signed by the person to be charged therewith, or by his agent, to pay a debt barred by the law of limitation,
c. if it is made to compensate a person who has already done something voluntarily for the promisor, or done something which the promisor was legally compellable to do.
Compensation for voluntary services-Section 25, Para 2: A promise to compensate, wholly or in part, a person who has already voluntarily done something for the promoter, is enforceable, even though without consideration.
Examples (a): A finds B’s purse and gives it to him. B promises to give A Rs.50. This is a contract.
(b): A supports B’s infant son. B promises to pay A’s expenses in so doing. This is a contraci.
3. Promise to pay time barred debt-Section 25, Para 3: A promise by a debtor to pay a time barred debt is enforceable if it is in writing and is signed by the debtor or his agent.
Example: A owes B Rs.1,000 but the debt is time barred under the law. If A. signs a written promise to pay B Rs.500 on account of the debt, there is a contract.
4. Completed gift-Section 25 (Explanation 1): Where a gift is actually made there is a contract even though there is no consideration.
5. Agency contract-Section 185: To create an agency no consideration is necessary.