Exception to the rule that a stranger to a contract cannot sue

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Exception to the rule that a stranger to a contract cannot sue

Introduction

The doctrine, "privity of contract" means stranger to a contract. Stranger is a person who is not a party to the contract or a third party. Doctrine of privity of contract explains that a third party or a stranger cannot file a suit for the enforcement of the terms of the contract. This doctrine has its origin in the common law (UK) but now it also applicable in India and some other countries. However Indian Contract Act,1872 allows consideration to flow from a third party, stranger to consideration is different from stranger to contract. Doctrine of privity of contract ensures that a contract is a privity between the parties and no other person can acquire rights or incure liabilities out of it.

Illustration: If X makes a promise to deliver goods to Y. Then in this case, if X breaches the contract then only Y has a right to prosecute him and no other person can prosecute him. But this general rule has certain exceptions.

Exceptions

There are, certain exceptions to the rule of privity of contract recognized both by the English Law and the Indian Law, under which a person, who is not a party to a contract can sue on it. The exceptions to the rule are:

1.Trust or charge. 2.Family Settlement. 3.Assignment of a Contract. 4.Acknowledgement of payment or Estoppel. 5.Aggrement affecting the Land. 6.Contract through an agent or agency. 7.Holder in due course.

1.Trust or charge

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. This concept of a beneficiary under a contract has been highlighted in the case of Muhammad Khan v. Husaini Begum.

Example: Ivan's father had an illegitimate son, Nadan. Before he died, he put Ivan in possession of his estate with a condition that Ivan would pay Nadan an amount of Rs 10,00,000 and transfer half of the estate in Nadan's name, once he becomes 18 years old.

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

2.Family settlement

There can be agreement made in connection with marriage, partition or other family arrangements and a provision is made for the benefit of some person. In such cases, a person, for whose benefit the provision is made, can enforce the agreement though he is not a party to it.

Example:

Ravi promised Indira’s father that he would marry Indira else would pay Rs 80,000 as damages. Eventually, he married someone else, thereby breaching the contract. Indira filed a case against Ravi which was held by the Court since the contract was a family arrangement with Indira as the beneficiary.

Radhika 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 Radhika filed a suit to claim her marriage expenses. The Court held the case because Radhika was the beneficiary of the provision despite being a stranger to the contract . 3.Assignment of a contract

The assignee of a debt or an actionable claim may sue the original debtor if the assignment is a legal one. If the benefits under the contract are assigned to the third party, the assignee can sue.

Example : Krishnan Lal Sahu Vs. Promila Bala, A.I.R (1928) 518 cal. In this case, Court held that "the assignee of rights and benefits under a contract not involving personal skill can enforce the contract subject to the equities between the original parties.

4.Acknowledgement of payment or Estoppel

Sometimes, one of the parties to a contract acknowledges the payment to a third party or otherwise constitutes himself as an agent of the third party. In such cases, the party incurs a binding obligation towards the third party who can enforce it. And if that party acknowledges the payment to the third person or constitutes himself as an agent of that third person, then the third person can recover the amount from such a party.

Example: Aby gives Rs 1,000 to Jose to pay Anu. Jose acknowledges the receipt of funds to be paid to Anu. However, he fails to pay him. Anu can sue Jose for recovery of the amount.

5 Agreement affecting the Land

If a certain land is purchased by somebody with the notice of rights and obligations of the owner towards that property, then those rights and obligations shall bind the purchaser although he was not a party to the agreement. This exception was created in the case of Tulk vs. Moxhay, 1919.

6.Contract through an agent or Agency

This exception is more like that of acknowledgement of payment. In a contract of Agency, a person appoints another person to act on his behalf with a third party. The person who appoints another person is called 'Principal' and the person, who is appointed is called 'Agent'. When an agent enters into a contract on behalf of the principal, the principal can enforce the contract.( here Principal is a stranger to the Contract; the agent and other parties are parties to the Contract.

7.Holder in due course

A holder in due course of a negotiable instrument is one who has obtained the negotiable instrument in good faith and for valuable consideration. He can sue prior parties to the negotiable instrument.

Conclusion

The general rule states that only parties to contract can sue each other and no stranger is allowed to enter between the parties to sue. But with the development of time, the law has also developed and now even a stranger is permitted to sue to safeguard his interest under exceptional circumstances.