Stranger to Contract

 Stranger to Contract (“Privity of contract”)

It is a general rule of law that only parties to a contract may sue and be sued on that contract. This rule is known as the doctrine of privity of contract.

“Privity of contract” means relationship subsisting between the parties who have entered into contractual obligations. It implies a mutuality of will and creates a legal bond or tie between the parties to a contract.

·        Piyush  has borrowed some money from Jishnu.

·        Piyush owns a property and decides to sell it to Arjun.

·        Arjun promises to pay Jishnu on behalf of Piyush.

 

Simply: If there is a contract between A and B, C cannot enforce it.

So we can say that,

A Stranger to a Contract cannot Sue upon it:

Example: S bought tyres from the Dunlop Rubber Co. and sold them to D, a sub-dealer, who agreed with S not to sell these tyres below Dunlop’s list price and to pay the Dunlop Co. £5 as damages on every tyre D undersold.  D sold two tyres at less than the list price and thereupon the Dunlop Co. sued him for the breach. Held, the Dunlop Co. could not maintain the suit as it was a stranger to the contract [Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd., (1915) AC. 847].

Note: Under English Law, neither a stranger to consideration can sue to enforce the contract nor a stranger to the contract can sue upon it even though the contract may be for his benefit. For example, if there is a contract between A & B, C cannot enforce it even though the contract may be for his benefit.

 

Exception to Rule: ‘A stranger to a Contract cannot sue’

As a rule, a stranger to a Contract cannot sue upon it but a stranger to consideration may file a suit if he is a beneficiary to contract. These exceptions allow a stranger to enforce a claim as given below.

• Trust
• Family Settlement
• Assignment of Contract
• Acknowledgment
• Agency
• A Covenant Running with the Land

Trust

If a contract is made between the trustee of a trust and another party, then the beneficiary of the trust can sue by enforcing his right under the trust, even if he is a stranger to the contract.

Arjun’s father had an illegitimate son, Ravi. Before he died, he put Arjun in possession of his estate with a condition that Arjun would pay Ravi an amount of Rs 500,000 and transfer half of the estate in Ravi’s name, once he becomes 21 years old.

After attaining that age when Ravi didn’t receive the money and asked Arjun about it, he denied giving him his share. Ravi filed a suit for recovery. The Court held that a trust was formed with Ravi as the beneficiary for a certain amount and share of the estate. Hence, Ravi had the right to sue upon the contract between Arjun and his father, even though he was not a party to it.

Family Settlement

If a contract is made under a family arrangement to benefit a stranger (person not a party to the contract), then the stranger can sue in his own right as a beneficiary of the contract.

Peter promised Nancy’s father that he would marry Nancy else would pay Rs 50,000 as damages. Eventually, he married someone else, thereby breaching the contract. Nancy filed a case against Peter which was held by the Court since the contract was a family arrangement with Nancy as the beneficiary.

Ruchika  was living in a Hindu Undivided Family (HUF). The family had made a provision for her marriage. Eventually, the family went through a partition and Ruchika filed a suit to claim her marriage expenses. The Court held the case because Ruchika was the beneficiary of the provision despite being a stranger to the contract.

Assignment of a Contract

Acknowledgment or Estoppel

If a contract requires that a party pays a certain amount to a third-party and he/she acknowledges it, then it becomes a binding obligation for the party to pay the third-party. The acknowledgment can also be implied.

Peter gives Rs 1,000 to John to pay Arjun. John acknowledges the receipt of funds to be paid to Arjun. However, he fails to pay him. Arjun can sue John for the recovery of the amount.

Rita sold her house to Seema. A real estate broker, Pankaj, facilitated the deal. Out of the sale price, Pankaj was to be paid Rs 25,000 as his professional charges. Seema promised to pay Pankaj the amount before taking possession of the property. She made three payments of Rs 5,000 each and then stopped paying him. Pankaj filed a suit against Seema which was held by the Court because Seema had acknowledged her liability by conduct.

A Covenant Running with the Land

When a person purchases a piece of land with the notice that the owner of the land will be bound by all duties and liabilities affecting the land, then he can sue upon a contract between the previous land-owner and a settler even if he was not a party to the contract.

Peter owned a piece of land which he sold to John under a covenant that a certain part of the land will be maintained as a public park. John abided by the covenant and eventually sold the land to Arjun. Though Arjun was aware of the covenant, he built a house in the specific plot. When Peter came to know of it, he filed a suit against Arjun. Although Arjun denied liability since he was not a party to the contract, the Court held him responsible for violating the covenant.

Contract through an Agent

If a person enters into a contract through an agent, where the agent acts within the scope of his authority and in the name of the person (principal).