Privity of contract means relationship existing between the parties who have entered into agreement. There are two consequences of the doctrine of privity of contract.
1. A person who is not a party to a contract cannot sue upon it even thouth the contract is for his benefit and he provided consideration.
Example:
X owes Rs. 1 Lac to Y. X sells his house to B for Rs. 1 Lac. And asks B to pay to Y. B fails to pay. Y cannot sue B because he is not a party to the contract.
2. A contract cannot confer rights or impose obligations arising under it on any person other than the parties to it.
Example:
Dunlop sold tyres to D, on the condition that he will not sell the tyres to the public below Dunlop’s list price. D sold tyres to S on this condition. S further sold them below the list price. It was held that the Dunlops could not sue S, as he was a stranger to the contract. (Dunlop Tyres Co. vs. Selfridges Lts).
Stranger to the Contract:
A person who is not a party to the contract is calles stranger to the contract. A stranger to the contract cannot sue because he has no privity of contract. The above rule is subject to the following exceptions:
1. Trust:
In case of trust, the beneficiary can sue to enforce his rights under the trust, though he is not a party to the contract.
Examples:
a. A transfers some property to B under trust for the benefit of M. M can enforce the agreement. (M.K. Ropai vs. John).
b. An addressee of an insured article can sue the Post Office in case of loss; because on receipt of article, the post office becomes trustee for the addressee. (Amir Ullah vs. Central Government).
Charge:
A person in whose favor, a charge on some specific immovable property has been created, may enforce it although he is a stranger to the contract.
Example:
A buys a house through HBFC. The house is under charge with HBFC. A sells the house to X without returning loan to HBFC. HBFC can sue X.
3. Family Settlements:
where provision is made for the marriage, partition of other family arrangements for the benefit of any member of a family, such member though not party to the agreements, can enforce the agreements.
Example:
On a partition of joint property, two brothers agreed to pay Rs. 300 to their mother for her manintenance. Held, she was entitled to recover. (Shuppu vs. Ammal).
4. Agent:
Where a person acts as agent for his principal, the principal can sue on a contract though he is not a party to a contract.
Example:
A appoints B as his agent to sell goods. B sells goods to X. X can sue A for defective goods though there is no direct contract between A and X.
5. Assignment:
In assignment of rights under a contract in favour of a third party voluntarily or by operation of law, the assignee can enforce the contract.
Example
A assigned his insurance policy in favour of his wife. The wife can enforce it although she is not a party to the contract.