Exceptions to the Doctrine
There are certain exceptions to the Privity of Contract, meaning, a stranger or a person who is not a party to a contract can sue on a contract in the following cases:
1. Trust
When an agreement between several parties results in the formation of the trust in favour of a third party or a beneficiary, in that case, the latter is eligible to take legal action against the contracting parties as an exception to this Doctrine of Privity of Contract. For example, A gives possession of his company’s share to B, but with a condition that B will give 50% of his share to C. However, A died and B refused to give the share to C which was promised before the death of A. As B failed to fulfil his obligation, C sued B. In this case, C trusted B to receive the shares of the company but B didn’t fulfill the obligation. Here, C can sue B, even if he was not part of the contract.
2. Contract through an Agent
If an agent enters into a contract with a third party on behalf of a principal, then the latter is compelled to fulfil the contractual agreement with the third party. The Indian Contract Act on Privity of Contract defines an Agent as a person who has been formally recruited to perform and represents the principle in dealings with strangers. The person who employs an agent or anyone to be represented by one is called the principal. For example, if A is an agent of B, then A will build a contract with Z and deal with him on behalf of B.
3. Family Settlement
If the contract is of a family arrangement, like a marriage settlement. A third party or beneficiary can sue the parties to the contract to impose the agreement under exceptions to this Doctrine. For example, Sonia belongs to a joint family, and her family made some financial arrangements to pay the expenses for her marriage. However, the family parted ways due to which the arrangement for the marriage expenses of Sonia was not fulfilled. Later, Sonia sued for her benefits even though she was not part of the contract.
4. Beneficiaries under trust or charge or another arrangement
A person in whose favour a charge or other interest in some specific property has been created may enforce it even though he was not considered to be a party to the contract. The decision of the privy council in the case Nawab Kwaja Bombad Khan Vs Nawab Hussaini Begum is a landmark judgement on this principle. For example, If a contract is made between Aman and Jiya and it creates a beneficial right for Rohini over some property, Rohini can enforce her claim based on this right.
5. Acknowledgement or Estoppel
Whereby the terms of a contract have specified to make a payment to a 3rd person and both parties agree and acknowledge the fact to make the payment to that 3rd person, a binding obligation will be incurred towards him. Acknowledgement can be either expressed or implied. For example, Ajay asks Mahesh to give ₹5,000 to Uma on his behalf. If in this case, Mahesh acknowledges it then he is bound to pay the amount to Uma. If he doesn’t pay the amount then Uma can sue him irrespective of the fact that she is the third party.
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