Third Party Beneficiary Rights

Third-Party Beneficiary Rights

The rule of privity of contract is the principle that a third party cannot sue for damages on a contract to which he is not a party.

This rule has been strongly criticized in recent times, particularly where the contract is for the benefit of the third party.

Indeed civil law systems of other States recognize and enforce such contracts. Despite calls for statutory reform, the rule persists in Indian Law to prevent a third party from enforcing contractual provisions made in their favor.

The common law doctrine of privity means that a “contract cannot, generally, confer rights or impose obligations arising under it on any person except the party to it”.

The second part of this doctrine (under which a contract cannot impose liabilities on anyone except the parties to it) is generally regarded as sensible and just as it would not be fair to subject people to contractual obligations without their consent.

But the first part (under which a contract cannot confer rights on anyone except a party to it) has been subjected to much criticism.

Historical Overview

It wasn’t until the mid-19th century, that a hard and fast rule developed that a third party could not enforce a contract to which he was not a party.

Prior to this, there were authorities supporting both this view and the contrary view.

In Tweddle v. Atkinson, the Court acknowledged the existence of contrary authorities but held that the doctrine of privity of the contract meant that third-party beneficiary could not enforce against the promisor the promise that the promisor had made to the promisee.

The rule was affirmed in Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd where it was accepted that it was a fundamental principle of law that only a party to a contract who had provided consideration could sue on it.

Exceptions to Application of Principle

If a third party gets a benefit under a contract, it does not have the right to go against the parties to the contract beyond its entitlement to a benefit. An example of this occurs when a manufacturer sells a product to a distributor and the distributor sells the product to a retailer.

The retailer then sells the product to a consumer. There is no privity of contract between the manufacturer and the consumer.

But the parties can exercise a different form of action e.g. “Donoghue v. Stevenson” – here a friend of Ms. Donoghue bought her a bottle of ginger beer, which was defective. Specifically, the ginger beer contained the partially decomposed remains of a snail.

Since the contract was between her friend and the shop owner, Mrs. Donoghue could not sue under the contract, but it was established that the manufacturer has a duty of care owed to their consumers and she was awarded damages in tort. Privity is the legal term for a close, mutual, or successive relationship to the same right of property or the power to enforce a promise or warranty. The Consumer Protection Act, 1986 makes the user of the good who has not paid consideration also a consumer which is a deviation from the general rule of privity of contract.