STRANGER TO CONTRACT

STRANGER TO CONTRACT

STRANGER TO CONTRACT

The stranger to contract is a doctrine which means privity of contract. It means that a person, who is not a party to the contract, cannot sue for carrying out the promise made by the parties to the contract. That is, a person who is not a party to the contract cannot enforce a contract.

The underlying principle of the doctrine is that a contract is always a privity relationship between the parties who make it. No other person can acquire rights or incur liabilities under it.

Example: Manufacturer A supplied tyres to a wholesaler, B, on condition that any retailer to whom B resupplied the tyres should promise B not to sell them to the public below Manufacturer A’s list price. B supplied tyres to C upon this condition, but nevertheless C sold them below the list price. Held, there was a contract between C and B, and a contract between Manufacturer A and B, but no contract between Manufacturer A and C. Therefore, Manufacturer A could not obtain damages from C.

ESSENTIALS OF STRANGER TO CONTRACT

The following are the various essentials of stranger to contract:

  1. A contract has been entered into between two parties: The most important essential is that there has been a contract between two or more parties.
  2. Parties must be competent and there should be a valid consideration: Competency of parties and the existence of consideration are pre-requisites for application of this doctrine.
  3. There has been a breach of contract by one party: Breach of contract by one Party is the essential requirement for the application of the doctrine of privity of contract.
  4. Only parties to contract can sue each other: Now after the breach, only Parties to a contract are entitled to sue against each other for non-performance Of contract.

EXCEPTIONS TO DOCTRINE OF PRIVITY OF CONTRACT/ STRANGER TO CONTRACT

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

Sometimes under contract, a benefit is given to a person who is not a party to the contract. This benefit can be given by creating a Trust or Charge in favour of such person. In such cases, the beneficiary under the trust or charge may enforce the contract even though he is not a party to it.

CASE: KHWAJA MOHD. VS HUSAINI BEGUM (1910)

A had a son S and B had a daughter D. A agreed with B that in consideration of the marriage of D with S, he would pay to D, his daughter in law an allowance of 5000 a month in perpetuity. He charged certain properties with the payment with the power to D to enforce it. In this case, court held that, D although no party to the arrangement, was clearly entitled to recover the arrears of the allowance.

2. MARRIAGE SETTLEMENT, PARTITION OR OTHER FAMILY ARRANGEMENTS

Sometimes, an agreement is 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: J’s wife deserted him because of his ill treatment. J entered into an agreement with his father in law to treat her property or else pay her monthly maintenance, subsequently, she was again ill treated and also driven out, here she was entitled to enforce the promise made by J to her Father.

3. ACKNOWLEDGEMENT OF PAYMENT

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:  A receives some money from B to be paid over C. A admits of this receipt to C. C can recover the amount from A who shall be regarded as the agent of C.

4. AGREEMENTS AFFECTING THE LAND

Sometimes, the owner of land is entitled to certain rights and obligations created by an agreement relating to the land. If such land is purchased by somebody with the notice of rights and obligations of the owner, then those rights and obligations shall bind the purchaser although he was not a party to the agreement.

EXAMPLE: Peter owned a piece of land which he sold to John under a covenant that a certain part of the land will be maintained as a public park. John abided by the covenant and eventually sold the land to Arjun. Though Arjun was aware of the covenant, he built a house in the specific plot. When Peter came to know of it, he filed a suit against Arjun. Although Arjun denied liability since he was not a party to the contract, the Court held him responsible for violating the covenant.

5. AGENCY

A principal, even if concealed, may sue on a contract made by an agent. The third party cannot plead that there was no contract between him and the principal.

6. ASSIGNMENT

The assignee of a debt or an actionable claim may sue the original debtor if the assignment is a legal one. It is important to note here that nominees of a life insurance policy do not have this right.

EXAMPLE: Where a bill of exchange is transferred to a third party, that a third party can enforce the bill of exchange even though he was not a party of it.

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.

8. FUND IN HANDS OF A PARTY

Where a fund is created in the hands of one of the contracting parties in favor of a third party, it may be possible to give the latter, a remedy in quasi-contract on the grounds that to allow the contracting party to keep the fund would be to allow unjust enrichment.

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