Privi Ty

7.
AIR 1970 SC 504
8. AIR 1936 Cal 66
9.AIR 1939 Nag 20
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.
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 ap-
plication of the Doctrine of Privity held that a person not a party to a con-
tract 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 en-
force 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.
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 specifi-
cally 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 ben-
eficiary". The category which falls under the accepted exception is "in-
tended 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 par-
ties signing the contract were to cancel or amend the contract to the detri-
ment of the third party. It was recommended by the law commission of In-
dia in its 87threport that where a contract expressly conferring a benefit di-
rectly 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 free-
dom of parties to vary the contract as per mutual understanding and agree-
ment 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 na-
ture 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 agree-
ment. The aforesaid view is supported by the judgment given in the case of
Kedar Das Mohta v. NandLalPoddar11. Accordingly, if the intended benefi-
ciary 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.
Under the doctrine, a third party who is not a party to the contractual
agreement, cannot: [6]
1. Obtain benefits of the contract
2. Liable under the agreement.
3. Legally enforce the terms of the contract.
Exceptions to the Rule of Privity [12]

• Beneficiaries under a Trust or other Arrangements
An inidividual can enforce a contract of which he is not a party to, in
case it has been created for their benefit or other interests, as illustrated
in Nawab Khwaja Muhammad Khan v. Nawab Hussaini Begum.[13]
• Estoppel or acknowledgement
Where the promisor acts as the third party's agent through their con-
duct, acknowledgement, or other means, a binding obligation arises to-
wards them; as highlighted in N. Devaraja Urs v. Ramakrishniah.[14]
• Marriage/ Family Settlement

When an agreement is made in regards to marriage, partition or other
familial arrangements for the benefit of a member, they may sue on
grounds of this agreement (for e.g., Rose Fernandez V. Joseph Gon-
salves).[15]
• Covenants running with land

As held in Tulk v Moxhay[16] , if a person buys some land knowing that
its owner is under specific duties created by a covenant or agreement
regarding the land, they would be bound by those, irrespective of the
fact that they were not a party to that agreement.
Justifications for the Rule[17]

Despite the fact that this concept has no solid foundation, there are various
arguments for its continued existence:
• Because a contract is founded on mutual agreement, enforcing obliga-
tions on at third party, not bound to the agreement would be unreason-
able.
• Allowing third parties to legally enforce agreements would influence or
restrict the contractual parties' rights to alter or end contracts.
• Third parties might not have provided with the necessary consideration
and so must be barred from enforcing the contract.
• The promisor then would be liable and might face actions from both the
promise as well as the third party.

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7.

AIR 1970 SC 504

8. AIR 1936 Cal 66

9.AIR 1939 Nag 20

Who essentially is a "Beneficiary"? There is no clear definition of the term

Exceptions to the Rule of Privity [12]

• Marriage/ Family Settlement

• Covenants running with land

Justifications for the Rule[17]

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