we don’t allow a stranger to enter into our dealings or contracts and that is why the rule of privity came into existence. However, there are exceptions to this rule. i have tried to explain the same in this article.
The concept of privity of contract says that there cannot be a stranger to a contract. It means that any third party to a contract cannot involve into of the contract. This means that he/ she who is not a party to the contract does not hold the right to sue or cannot sue a party to the contract. This right is reserved only to the parties of the contract. This means that privity of contract is a legal doctrine that confers rights and imposes duty only on the parties to the contract and no stranger or a third party.
This is mainly because only the parties to the contract are in a legal relationship and not the other party and therefore, they are only answerable to each other when there is a breach of contract and the third party is not given the right to interfere. This principle has evolved with the change in time. Here, we must understand two major parts of the privity rule namely: –
- Privity of contract
The concept of privity of contracts mainly talks about who is eligible to sue or can be sued in a contract, which is dispute redressal mechanism in a contract.
- Privity of consideration
To understand the privity of consideration, we must look into sec.2(d) of the Indian contracts Act,1872 which states that (When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise) at the desire of the promisor the promise or any other person ( which may be a person who is not a party to the contract ) has given the consideration. This tells us that as long as the consideration is given, it is immaterial who has given it.
However, there are a few exceptions to the rule of privity.
One of those is Trust or beneficiary. A trust is an organisation set up in the objective for giving some sort of benefit to the beneficiaries. It is a fiduciary relationship in which one party is the trustor and the other party is the trustee. The beneficiary Is a person who receives benefit from the contract between the trustor and trustee. It is considered that beneficiary is a third party to this contract and therefore will not be able to sue the trustor or trustee in case of any breach of contract if the privity rule is followed. But by the breach of the contract between the trustor and trustee, the beneficiary is affected and therefore he/she must be allowed to sue the parties to the contract in case of any breach and thus, it is declared as an exception to the privity rule.
An example for the beneficiary rule is
A executed an agreement with B’s father in the consideration for B’s marriage with A’s son will give Rs500 every month. Both the husband and wife were separated and the suit was brought by the daughter and she was not a party to the contract. It was held that thought the daughter was not a party to contract, she is eligible to file the case because she is a beneficiary to the contract. This case stands as an exception to the privity rule.
An example for Trust
A was appointed by his father as his decedent and was given the entire estate. In return Agreed to pay a certain amount and give a village to B. But A failed to do this. It is observed that the A’s father is the trustor, A is the trustee and B is the beneficiary in this case. This is because B is receiving a benefit from the agreement between A and A’s father. The question is whether B can sue A? The court said that B is eligible to sue A though he is not a party to the contract in this case because it is an exception to the privity rule.
Therefore we can conclude that trust and beneficiaries are an exception to the privity rue and they possess the right to sue a party to the contract even though they are not party to the contract.
 Khwaja Muhammad Khan v. Husaini Begum 1910 SCC OnLine PC 15:(1909-10) 37 IA 152.
 Rana Uma Nath Bakhsh Singh v. Jang Bahadur 1938 SCC OnLine PC 41: AIR 1938 PC 245.