What is Privity of Contract?
A stranger to a contract cannot sue, only a person who is a party to a contract can sue on it.
This basically means if two parties form a contract, in case of a breach, either of these two parties can sue the other one and not a third party.
Let’s look at this example-
A tyre company ‘A’ contracts with a distributor ‘B’ for selling tyres. As per the contract the distributor shall not sell the tyres below rupees 1500 each. The distributor sells the tyres to a retailer ‘C’. Now the retailor sold the tyre for rupees 1000. The tyre company manufacturer got frustrated as the contract according to him was broken. He went to file a case for breach of contract.
Can A file a suit for breach against C?
The answer is no. The reason being, since ‘A’ and ‘C’ do not have a privity of contract, ‘A’ cannot sue ‘C’. If ‘A’ had made a direct contract with ‘C’, only in that case suit can be filed for breach.
What are exceptions to Privity of Contract?
This basically means even though there is no privity of contract, a third party outside of the contract can sue a party to the contract. This shall be very much legal. Let’s look at these exceptions.
1. In case of Family Settlement-
e.g. 4 brothers decide to divide a common plot and sell it to a prospective buyer for Rupees 2 crore. It was decided that out of these 2 crore they would keep a sum of rupees 50 lakhs aside for their sister’s wedding as a duty. After the sale was done, the brothers did not keep aside that money for their sister. In such a case she can file a suit against the brothers even though she was not a party to contract as this a family settlement case.
2. In case of Express or Implied Trust-
e.g. A is the author of a fund and appoints B as the trustee of that fund thereby make a contract for the same. C is the beneficiary of this trust. As per the contract it was decided that B shall give the trust to C upon A’s death. Upon A’s death B does not transfer the money to C. In such a case C can sue B even though they do not have a privity to contract.
3. In case of Assignment of Contract-
Under Transfer of Property of Act ‘Assignment’ is defined. This means transferring contractual rights or liability by a party to the contract to some other person who is not a party. The person who is gives is the ‘Assigner’. The person who receives is the ‘Assignee’.
e.g. ‘A’ a moneylender has given 50 lakh rupees to ‘B’ a manufacturer of clothes. A asked B to return the money by the end of the month because ‘A’ wants to transfer the money to ‘C’ as per the Assignment Deed. By the end of the month, ‘B’ did not return the money. In such a case ‘C’ is the assignee and ‘A’ is the assigner. ‘C’ can sue ‘B’ in this case even though he is not a party to the contract.
4. Contract with an Agent-
e.g. ‘A’ is an agent of ‘B’. ‘A’ on behalf of the principal ‘B’ goes and pays Rs. 1 crore as a consideration for property of ‘C’ at Fort, Mumbai. ‘C’ however later refuses to sell the property. In such a case ‘B’ can file a suit against ‘C’ even though he is not a party to contract. Even though the contract was between ‘A’ and ‘C’, ‘B’ can still file a suit. Hence privity of contract will not be applicable in this case.
5. In case of Acknowledgment of Debt-
e.g. ‘A’ has appointed ‘B’ to pay Rs. 100 crores to Bank ‘XYZ’. ‘A’ gave the sum of Rs. 100 crores to ‘B’. Later ‘B’ however did not forward and deposit the money to the Bank ‘XYZ’. In such a case ‘XYZ’ can file a suit against ‘B’ even though he is not a party to contract. The initial contract was between ‘A’ and ‘XYZ’ for deposit of sum of Rs. 100 crores, however, ‘B’ can be sued for not fulfilling his duties.
6. In case of Official Receiver- In case of insolvency, official receiver is appointed.
e.g. ‘A’ is a shareholder of certain shares. However, he became insolvent. In that case the official receiver has the rights to seal and then sell the shares to whomsoever he wants to.
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