Doctrine of Privity of Contract in India: Tweddle v. Atkinson, Dunlop v. Selfridge, the Position under the Indian Contract Act, 1872, and the Recognised Exceptions

A contract creates rights and obligations between the parties to it, and ordinarily between nobody else. A person who is not a party acquires no right to sue on it, even where the contract was made expressly for his benefit and even where the parties intended him to be able to enforce it. The Indian Contract Act, 1872 contains no provision to this effect, and the doctrine has been received into Indian law entirely through decisions. It is subject to a substantial body of exceptions, several of which are of daily importance, and it must be kept distinct from the different rule about privity of consideration, which India does not apply.

1. The Doctrine

The classical statement of the English position combines two propositions which are logically separate. In Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd., [1915] AC 847, Lord Haldane put them together: in English law only a person who is a party to a contract can sue on it, and consideration must move from the promisee. Indian law has accepted the first and rejected the second.

📖 Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd., [1915] AC 847 (HL)

Facts: Tyre manufacturers sold tyres to a dealer on terms that the dealer would not resell below a listed price and would obtain a like undertaking from any trade customer to whom it sold. The dealer sold tyres to the defendants, who gave such an undertaking to the dealer. The defendants sold below list price, and the manufacturers sued them directly on the undertaking.

Held: The House of Lords held that the manufacturers could not sue. They were not parties to the contract between the dealer and the defendants, and no consideration had moved from them to the defendants. It was not shown that the dealer had contracted as their agent in such a way as to make them principals in the transaction.

Ratio: Only a party to a contract may sue on it. A person for whose benefit a stipulation was inserted acquires no right of action unless he can show that he was a party through an agency relationship or otherwise.

The earlier decision in Tweddle v. Atkinson, (1861) 1 B & S 393 established the companion proposition that no stranger to the consideration can take advantage of a contract although made for his benefit. English law has since modified the position by statute for certain third-party beneficiaries, but the common law rule is as stated.

The rule of privity, its recognised exceptions, and the distinction it is confused with

2. The Position in India

The Act says nothing on the subject. Section 2(h) defines a contract as an agreement enforceable by law, and Section 37 requires the parties to a contract to perform their respective promises, but no section states who may sue. The doctrine has nonetheless been applied consistently, and the leading Indian statement is that of the Supreme Court.

📖 M. C. Chacko v. State Bank of Travancore, (1969) 2 SCC 343

Facts: A bank of which the appellant was manager had an overdraft account with another bank. The appellant's father had given letters of guarantee to the creditor bank. The father then executed a deed distributing his properties among his children and wife, which recited that the guarantee had been given at the appellant's request and that any liability under it was to be met by the appellant and out of the properties allotted to him. The creditor bank, which was not a party to that deed, sued to enforce a charge on those properties.

Held: The Supreme Court held that the bank could not enforce the arrangement. It must be taken as well settled that, except in the case of a beneficiary under a trust created by a contract, or in the case of a family arrangement, no right may be enforced by a person who is not a party to the contract. The recitals in the deed did not disclose an intention to convert the father's personal debt into a debt secured in favour of the bank, and no charge in the bank's favour could be inferred.

Ratio: A person who is not a party to a contract cannot enforce it, subject to the recognised exceptions of a trust created by the contract and a family arrangement. An intention to create a charge in favour of a third person is not to be inferred from recitals that merely allocate liability between the parties.

The Privy Council had reached the same conclusion in Jamna Das v. Ram Autar Pande, (1911) 38 IA 209, holding that a mortgagee could not enforce against a purchaser of the mortgaged property an undertaking, given by the purchaser to the mortgagor, to pay off the mortgage debt. The undertaking formed no part of any contract to which the mortgagee was a party.

3. The Exceptions

3.1 Beneficiary under a trust or charge

Where a contract creates a trust in favour of a third person, or charges specific property with a payment to him, the beneficiary may enforce it. The reason is that his right arises not from the contract but from the trust or the charge, which are proprietary in character. This is the first of the two exceptions expressly recognised in M. C. Chacko.

📖 Khwaja Muhammad Khan v. Husaini Begum, (1910) 37 IA 152 (PC)

Facts: On the betrothal of two minors, the father of the boy entered into an agreement with the father of the girl undertaking to pay the girl an allowance, described as kharch-i-pandan or betel-box expenses, in perpetuity after the marriage, and charging certain immovable property with the payment. The girl, who was not a party to the agreement, sued for arrears after living with her husband and later separating from him.

Held: The Privy Council allowed her claim. Although she was not a party to the agreement, the allowance had been charged on specific immovable property in her favour, and she was clearly the person for whose benefit the provision was made. In such a case the beneficiary may enforce the covenant notwithstanding that she was a stranger to the contract, and the English rule was not to be applied to Indian conditions so as to defeat a provision of this kind.

Ratio: A third person for whose benefit a charge on specific property is created by a contract may enforce it, although not a party. The right rests on the charge rather than on the contract itself.

3.2 Family settlement, partition and marriage arrangement

Where provision is made for a member of the family under a family settlement, a partition or a marriage arrangement, that member may sue to enforce it although not a party to the document. This is the second exception recognised in M. C. Chacko, and the Indian courts have applied it liberally, consistently with the general judicial favour shown to family arrangements in Kale v. Deputy Director of Consolidation, (1976) 3 SCC 119.

3.3 Acknowledgment or estoppel

Where a party to a contract has, by words or conduct, acknowledged his liability to the third person, or has so dealt with him as to constitute himself an agent or trustee for him, he is estopped from denying the third person's right. The acknowledgment may be express, or may be inferred from the making of payments to the third person over a period, and it operates independently of the contract.

3.4 Assignment

The benefit of a contract is generally assignable, and an assignee may enforce the contractual right in his own name subject to the equities affecting the assignor. The burden of a contract cannot be assigned without the other party's consent, since that would substitute a different debtor, and novation under Section 62 is the route where the parties wish to achieve that result. Rights involving personal skill or confidence are not assignable.

3.5 Agency

Where one of the contracting parties acted as agent for the third person, the third person is the principal and is a party to the contract in law. Sections 226 to 234 govern the position, including the rights of an undisclosed principal. This is strictly not an exception at all: the principal sues because he is a party, not in spite of not being one. The argument failed in Dunlop because the agency could not be established on the facts.

3.6 Covenants running with land

A purchaser of land takes subject to covenants affecting it of which he had notice, and the person entitled to the benefit may enforce them against him although he was not a party to the original covenant. Section 40 of the Transfer of Property Act, 1882 gives statutory effect to the principle in India, and the rule derives from the doctrine in Tulk v. Moxhay.

4. Privity of Contract and Privity of Consideration Compared

	Privity of contract	Privity of consideration
The question	Must the person suing be a party to the contract?	Must the consideration have moved from the person suing?
English answer	Yes, per Dunlop v. Selfridge	Yes, per Tweddle v. Atkinson
Indian answer	Yes, per M. C. Chacko and Jamna Das	No. Section 2(d) permits consideration to move from any other person
Source in India	Judicial doctrine; the Act contains no provision	Statutory; the words 'the promisee or any other person' in Section 2(d)
Exceptions	Trust or charge, family arrangement, acknowledgment or estoppel, assignment, agency, covenants running with land	None needed, since the rule is not applied in India

⚠ The two rules must be applied in the right order

A claimant must first show that he is a party to the contract. Only then does Section 2(d) assist him by allowing the consideration to have moved from someone else. A person who is a stranger to the contract gains nothing from Section 2(d), because that section defines consideration and says nothing about who may sue. This is why Chinnaya v. Ramayya is not authority that a third party may enforce a contract in India: the plaintiff there was a party to the deed executed in his favour, and what he was a stranger to was only the consideration.

5. The Position Stated Shortly

A person who is not a party to a contract cannot sue on it, even where the contract was made for his benefit.
Dunlop v. Selfridge states the English rule, combining privity of contract with privity of consideration.
The Indian Contract Act contains no provision on privity of contract; the doctrine has been received judicially.
M. C. Chacko: except in the case of a beneficiary under a trust created by a contract, or a family arrangement, no right may be enforced by a person who is not a party.
Jamna Das v. Ram Autar Pande is the Privy Council authority to the same effect.
Khwaja Muhammad Khan v. Husaini Begum: a third person for whose benefit a charge on specific property is created may enforce it.
The recognised exceptions are trust or charge, family settlement and marriage arrangement, acknowledgment or estoppel, assignment, agency, and covenants running with land under Section 40 of the Transfer of Property Act, 1882.
India applies privity of contract but not privity of consideration, and the two must not be conflated.

6. Related Topics and Provisions

Topic or provision	Connection
Doctrine of Privity of Consideration	The companion rule, which India does not apply
Consideration under the Indian Contract Act	Section 2(d) and the words permitting consideration to move from any other person
Intention to Create Legal Relations	Family arrangements, and the decision in Kale
Consideration: Motive, Object and Reality	A map of the whole consideration doctrine
Section 2(h), Indian Contract Act	Definition of a contract
Section 37, Indian Contract Act	Obligation of the parties to a contract to perform
Section 62, Indian Contract Act	Novation, where the burden of a contract is to be transferred
Sections 226 to 234, Indian Contract Act	Agency, and the rights of an undisclosed principal
Section 40, Transfer of Property Act, 1882	Covenants running with land