CONTRACT LAW - PART III (PRIVITY OF CONTRACT & CAPACITY OF PARTIES)

PRIVITY OF CONTRACT

The doctrine of Privity of Contract is a common law principle that provides that a contract cannot confer rights nor impose its obligations upon any person who is not a party to the contract.

The premise is that only parties to contracts should be able to sue to enforce their rights or claim damages as such.

In other words:

Only the contracting parties have rights and obligations towards one another. 

All others are strangers and can claim no rights and have no obligations.

However, the doctrine has proven problematic due to its implications upon contracts made for the benefit of third parties who are unable to enforce the obligations of the contracting

parties. [Dunlop Pneumatic Tyre Co Ltd v Selfridge Ltd (1915)]

Exceptions:

• Where a trust or charge has been created in favour of a person. [Gandy v Gandy (1884)]
• Cases of a marriage settlement, partition or any other family arrangement where provision is made for the benefit of a person. [Shuppu Ammal v Subramaniyam (1910)]
• Where the promisor by his conduct acknowledges or otherwise constitutes himself as an agent of a third party, a binding obligation is thereby incurred by him towards the third party.
• An assignee of rights and benefits under a contract not involving personal skill can enforce the contract subject to the equities between the original parties (E. g. holder in due course of a negotiable instrument)
• Covenants running with the land. [Tulk v Moxhay (1848)]

Cases

1.     Dunlop Pneumatic Tyre Co Ltd v Selfridge Ltd (1915)

It is an English contract law case, with relevance for UK competition law decided in

the House of Lords. It established that an agreement for resale price maintenance was

unenforceable as a matter of Privity of contract.

Summary

         Dunlop made tyres. It did not want them sold cheaply but to maintain a standard resale price. It agreed with its dealers (in this case, Dew & Co.) not to sell them below its recommended retail price. It also bargained for dealers to get the same undertaking from their retailers (in this case, Selfridge). If retailers did sell below the list price, they would have to pay £5 per tyre in liquidated damages to Dunlop. Dunlop thus was a third party to a contract between Selfridge and Dew. When Selfridge sold the tyres at below the agreed price, Dunlop sued to enforce the contract by injunction and claimed damages. Selfridge argued that Dunlop could not enforce the burden of a contract between Dunlop and Dew, which Selfridge had not agreed to.

2.     Gandy v Gandy (1884)

The person in whose favour a trust or charge has been created can sue if trustees refuse

to do so.

Summary

         As part of a deed of separation between husband and wife, the husband agreed to pay the trustees an annual sum of money for his wife and two eldest daughters to use. The husband also agreed to pay for the education of the two youngest daughters. The agreement also required the younger daughters to live somewhere at his expense and on the basis that both the husband and wife had reasonable access to them. The trustees agreed to indemnify him against liability and that the wife did not bring proceedings for further payments. When one of the youngest daughters turned sixteen years old, the husband refused to pay any maintenance. The daughter brought an action against the husband to enforce the deed of separation. The wife also claimed further maintenance payments on the basis that the husband had committed adultery and she had been given custody of the two younger children.

         On the construction of the deed, the daughter plaintiff was not in a position to claim under the agreement between husband and wife. However, the writ application to the court could be amended by adding the trustees, wife or elder daughters to include them in the claim. The wife joined the claim as co-plaintiff after the trustees rejected to do so. The court held that the wife could claim increased maintenance payments, despite the original agreement between the parties that agreed she could not do so.

3.     Shuppu Ammal & Another v Subramaniyam & Others (1910)

A person who is no party to a document but in whose favour a charge is

created by such document is entitled to maintain a suit to enforce its terms,

either as the actual beneficiary or as the charge-holder.

Summary

The lower court ruled as follows:

         The first plaintiff had two sons, the second plaintiff and the deceased Krishna Pattar, the father of defendants Nos. 1 and 2. In 1896, the second plaintiff and the said Krishna Pattar divided, and it was provided by the deed of partition that the second plaintiff and Krishna Pattar should each contribute Rs. 150 and invest the Rs. 300 on some landed property and make the interest directly payable to the first plaintiff towards her maintenance. Till the money is invested on land, the second plaintiff and Krishna Pattar were each to pay Rs. 1.5 a month to the first plaintiff. On the first plaintiff's death, the deed of partition provides that the second plaintiff is to collect the money, perform the obsequies and divide the balance between himself and Krishna Pattar. The first plaintiff is no party to this partition deed, and, so long as the first plaintiff lives, the second plaintiff has no right whatever to sue for the amount which Krishna Pattar undertook to contribute towards the first plaintiff’s maintenance. It, therefore, follows that, while the second plaintiff has no right to join the first plaintiff in bringing the suit, the first plaintiff cannot enforce the agreement contained in the deed of partition to which she was no party. What is more, there is no provision in the deed of partition for the payment of Rs. 150 to the first plaintiff. All that is provided for by the partition deed is that the second plaintiff and Krishna Pattar should each contribute Rs. 150 and invest the Rs. 300 on the landed property for the benefit of the first plaintiff. Under no circumstances was Krishna Pattar to pay the Rs, 150 to the first plaintiff. Such being the agreement in the suit to recover the Rs. 150 is clearly unsustainable.

         As to the interest, the second plaintiff has no right whatever to recover it, and the first plaintiff cannot sue for it; there has been no Privity of contract between her and Krishna Pattar. No doubt the first plaintiff has a right to sue for her maintenance, but certainly, she has no right to sue to enforce the agreement contained in the deed of partition to which she was no party.

         The second plaintiff might, no doubt, have invested the whole Rs. 300 on land for the first plaintiff’s benefit and then sued his brother’s sons for contribution, but he did not choose to do so, and, as the suit is now framed, the second plaintiff has no right whatever to be on record.

         In these circumstances, the lower court dismissed the suit with costs. This judgment was confirmed on appeal. Plaintiffs appealed to the High Court.

        The High Court declared that the courts below were wrong in dismissing the suit altogether. It held that since it was clear that the 1st Plaintiff has a charge for Rs. 300, she is entitled to have that amount invested in her favour.

4.     Tulk v Moxhay (1848)

         It is a landmark English land law case that decided that in certain cases, a restrictive covenant can "run with the land" (i.e. a future owner will be subject to the restriction) in equity (just & fair)

Summary

         In 1808, Charles Augustus Tulk, the owner of several parcels of land in Leicester Square, sold a plot to another party, making a covenant to keep the Garden Square "uncovered with buildings" such that it could remain a pleasure ground. Over the following years, the land was sold several times over to new parties, eventually to the defendant.

         The defendant, who was aware of the covenant at the time of purchase, refused to abide by the covenant as he claimed he was not in Privity of contract and so was not bound by it.

Some other Land Mark Cases

5.     Priest & Wife v Last (1903) 

This case demonstrates the principle if the buyer told the seller the particular purpose for which he/she is purchasing the goods, then it is an implied condition that the goods are reasonable for the purpose. (And there is no question of Privity of Contract coming in the way of such contracts.)

Summary

         Priest asked Last for a hot water bottle. Having being shown one by Last, he asked Last if it would stand boiling water.  Last replied no, but it would stand hot water. P then bought for his wife. On the fifth night of use, the bottle bursts & injures Mrs P. It turned out that the bottle burst because pure rubber formed a very small proportion of the material.  Priest claims price & damages for wife’s pain & suffering from Last.

6.     Donoghue v Stevenson(1932)

         Snail in the bottle case. There was no contractual relationship between Ms May Donoghue and the drinks manufacturer or even the café owner, as Donoghue had not ordered or paid for the drink herself. Although there was a contractual relationship between the café owner and Donoghue's friend, the friend had not been harmed by the ginger beer. As ginger beer was not a dangerous product, and the manufacturer had not fraudulently misrepresented it, the case also fell outside the scope of the established cases on product liability. On the face of it, the law (on the basis of Contract Law & product liability laws) therefore, did not provide a remedy for Donoghue.

On an appeal, the House of Lords laid down the following main points:

• Negligence is a distinct Tort.
• A contract is not necessary.
• Manufacturer’s liability ‘a manufacturer of products, which he sells in such a form as to show that he intends them to reach the ultimate consumer in the form in which they left him with no reasonable possibility of intermediate examination, and with the knowledge that the absence of reasonable care in the preparation or putting up of the products will result in an injury to the consumers' life or property owes a duty to the consumer to take that reasonable care’
• The Neighbour Principle ‘persons who are so closely and directly affected by my act that I ought to have them in contemplation as being so affected when I am directing my mind to the acts or omissions which are called question’

7.     Klaus Mittelbachert v East India Hotels Ltd (1997) 

A copilot of Lufthansa is injured by a defective pool at Hotel Oberoi Intercontinental. Lufthansa, not Klaus, booked the hotel room. There was no Privity of contract between Klaus & the hotel. It was held by the Delhi High Court that though the contract was between Lufthansa & the hotel, the beneficiaries are the crew who would stay, and hence the contract was for their benefit.

8.     M C Chacko v State Bank of Travancore (1970) 

M C Chacko’s father guarantees his overdraft. The father gifts his property under a gift deed to family members in which states that M C Chacko should meet the liability under the guarantee from the share of property gifted to him. The Bank tries to enforce a provision of this gift deed. It was held by the SC that ‘except in the case of a beneficiary under a trust created by a contract or in the case of a family arrangement, no right may be enforced by a person who is not a party to the contract.’

CAPACITY OF PARTIES

Section 10 in The Indian Contract Act, 1872 reads as follows:

“All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.”

Section 11 in The Indian Contract Act, 1872 speaks of the competency of persons thus: “Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind and is not disqualified from contracting by any law to which he is subject”

The following persons are incompetent to contract:

• Minors
• Persons of unsound mind
• Idiot
• Lunacy or insanity
• Drunkenness or intoxication
• Disqualified persons
• Alien enemies
• Foreign sovereigns & ambassadors
• Convict
• Undischarged Insolvent

MINORS

A valid agreement requires that both the parties to the contract should understand the legal

implications of their conduct. They must have mature mind. They should be major in age.

According to the Indian Majority Act, 1875, every person domiciled in India shall be deemed to

have attained his majority when he shall have completed his age of eighteen years and not

before. In case a guardian has been appointed to the minor or where the minor is under the

guardianship of the court of wards, the person shall become major on the completion of the

age of 21 years.

A contract with a minor is void abinitio. [Mohori Bibee v. Dharmodas Ghose (1903)]

Payment can be made out of a minor's property for the necessities of life supplied to him. (Necessaries are those without which an individual cannot reasonably exist.)

A minor cannot ratify any contract made during his minority.

A minor may be admitted to the benefits of a partnership.

The minor’s contracts do not impose any liability on his parents, even if the contract is for

necessaries.

A minor cannot be declared insolvent because he is incapable of contracting debts.

If a minor takes the plea of minority in fulfilling contractual obligations, the court would

accept it and hold the contract unenforceable. However, it would restore the benefits to the

other party.

Cases

Mohori Bibi v. Dharmodas Ghose(1903)

Supreme Court held that unless the parties are competent to contract, no agreement is a

contract and hence is not enforceable by law.

Summary

         The plaintiff, Dharmodas Ghose, while he was a minor, mortgaged his property in favour of the defendant, Brahmo Dutt (having been deceased, his wife Mohori Bibi represented him in the appeal), who was a moneylender to secure a loan of Rs. 20,000.  The actual amount of loan given was less than Rs. 20,000.  At the time of the transaction, the attorney, who acted on behalf of the moneylender, had the knowledge that the plaintiff is a minor. The plaintiff brought an action against the defendant, stating that he was a minor when the mortgage was executed by him and, therefore, the mortgage was void and inoperative, and the same should be cancelled. Defendant, amongst other points, contended that the plaintiff had fraudulently misrepresented his age and therefore no relief should be given to him, and that, if the mortgage is cancelled as requested by the plaintiff, the plaintiff should be asked to repay the sum of Rs. 10,500 advanced to him.