Exceptions to the privity of contract
Trusts, family arrangements, agency, assignment, estoppel, covenants running with land and statutes
In one minute
The rule is that a stranger cannot sue on a contract. Courts allow exceptions where strict privity would cause injustice. In these cases a person outside the contract can enforce a right.
The main exceptions are trusts, family arrangements, agency, assignment and acknowledgment. Courts have also allowed claims through covenants running with land, statutes and promissory estoppel.
Exam questions ask you to list the exceptions and to name the case for each. In real life, they decide when a family member, a beneficiary or an injured person can claim.
Exam focus
- Frequency: No data
- Usually asked as: No data
Legal provision
- No single section. The exceptions come from case law and from specific statutes.
- Section 2(d), Indian Contract Act, 1872: consideration may come from "the promisee or any other person".
- Section 147, Motor Vehicles Act, 1988: a policy of insurance must cover liability for death or bodily injury to any person, or damage to a third party's property, caused by the use of the vehicle in a public place.
Meaning and definition
An exception to privity is a case where a person who is not a party to a contract may still enforce it, or be bound by it. The idea is sometimes called jus quaesitum tertio (a right acquired by a third party).
The reason for the exceptions is fairness. A strict rule would let a promisor escape a promise made for the benefit of a family member or a beneficiary, merely because that person was not named as a party.
- Stranger to the contract
- Through the parties' own arrangement
- Trust or beneficiary
- Family arrangement or marriage settlement
- Agency
- Assignment of contract
- Acknowledgment or estoppel
- Through the law
- Covenant running with land
- Statutory right of a third party
- Promissory estoppel
- Through the parties' own arrangement
Detailed explanation
Each exception is explained below, with an example.
1. Trusts and beneficiaries
If a contract creates a trust for someone's benefit, that beneficiary can enforce it although not a party.
Example. Rao hands Rs 5 lakh to a bank as trustee for the education of his granddaughter Lata. If the bank refuses to apply the money, Lata can enforce the trust.
2. Family arrangements and marriage settlements
In Khwaja Muhammad Khan v. Husaini Begum (1910), a father-in-law agreed with the bride's father to pay her a monthly allowance after her marriage. When he stopped paying, she sued, though she was not a party to that agreement. The Privy Council held that she could enforce it. The agreement was made for her benefit under a family arrangement.
Example. Before a wedding in Warangal, the groom's father promises the bride's father to pay the bride Rs 5,000 a month. The bride can enforce the promise if it is made for her benefit as part of the family arrangement.
3. Agency
Where one party acts as agent for a principal, the principal can sue on the agent's contract. The agent's contract is treated as the principal's own.
Example. A manager signs a supply contract for his employer's firm, in the firm's name. The firm can sue the supplier though the manager signed.
4. Assignment of contract
If a contractual right is validly assigned to another person, the assignee can enforce it.
Example. A contractor assigns his right to receive Rs 10 lakh from a client to his bank. The bank, as assignee, can recover the amount from the client.
5. Acknowledgment or estoppel
If a party to the contract later acknowledges an obligation to a third party, the third party may be able to enforce it. The party is estopped (stopped) from denying it.
Example. A holds money for B under a contract with C. A tells B, "I hold this money for you." A cannot later deny that the money is B's.
6. Covenants running with land
In Tulk v. Moxhay (1848), a buyer of land who took it with notice of a restriction on its use was bound by the restriction. The person who sold the land could enforce it against the later buyer, though that buyer had made no contract with them.
Example. A sells a plot to B and B promises to keep the plot as a garden. B sells it to C, who knows of the promise. A can enforce the promise against C.
7. Statutory rights of third parties
A statute may give a stranger a direct right. Under section 147 of the Motor Vehicles Act, 1988, the insurance policy must cover liability to third parties for death, bodily injury or property damage. The injured person can claim against the insurer although the policy is a contract between the owner and the insurer.
Example. A car owner insures his car. A pedestrian in Vijayawada is injured by the car. The pedestrian is not a party to the policy but can claim from the insurer.
8. Promissory estoppel
Promissory estoppel holds a party to a promise that the other side relied on. The Supreme Court applied it against the Government in Motilal Padampat Sugar Mills v. State of Uttar Pradesh (1978).
Example. A State promises a tax holiday to a factory. The owner builds the factory on the strength of the promise. The State cannot withdraw it, unless public interest requires.
Don't confuse: a stranger who may sue and one who may not
An exception does not abolish privity. It lets a specific kind of stranger sue. A stranger outside the exceptions still cannot.
| Point | Stranger within an exception | Stranger outside every exception |
|---|---|---|
| Can sue? | Yes | No |
| Example | Bride under a family settlement (Khwaja Muhammad Khan) | Tyre maker suing a retailer (Dunlop v. Selfridge) |
| Basis | Trust, family arrangement, agency, assignment, estoppel, land, statute | None. The ordinary rule applies |
Inside the concept. A widow named as beneficiary of an insurance trust sues the trustee. She is a stranger to the contract but within the trust exception.
Just outside the concept. A nephew who benefits from his uncle's contract with a builder, but is not a beneficiary of any trust, cannot sue the builder.
Common mistakes
- Giving the exceptions without a case. Name Khwaja Muhammad Khan for family arrangements.
- Saying every beneficiary can sue. Only those within an exception can.
- Forgetting the statutory exception under the Motor Vehicles Act, 1988.
- Confusing these exceptions with privity of consideration under section 2(d).
Apply it
Problem
Meera's father transfers a plot of land to Suresh. As part of the same family arrangement, Suresh promises to pay Meera a monthly stipend during her studies. Suresh stops paying. Can Meera sue?
Issue. Is Meera, who is not a party to the land transfer, within an exception to privity?
Rule. A person for whose benefit a family arrangement is made may enforce it (Khwaja Muhammad Khan v. Husaini Begum, 1910).
Application. The stipend was part of a family arrangement made for Meera's direct benefit.
Conclusion. Meera can enforce Suresh's promise.
Leading case laws
- Khwaja Muhammad Khan v. Husaini Begum (1910)
Facts. A father-in-law agreed with his daughter-in-law's father to pay her a monthly allowance after her marriage. He stopped paying, and she sued.
Principle. The agreement was made for her benefit under a family arrangement, so she could enforce it.
Why it matters. It is the leading Indian case on the family arrangement exception.
- Tulk v. Moxhay (1848)
Facts. A buyer took land with notice of a restriction on its use.
Principle. The buyer was bound by the restriction, though he made no contract with the person who imposed it.
Why it matters. It is the basis of covenants running with land.
- Motilal Padampat Sugar Mills v. State of Uttar Pradesh (1978)
Facts. The State government gave an assurance of a sales tax exemption for three years. The company set up a plant on the strength of it.
Principle. The Supreme Court enforced the assurance against the Government by promissory estoppel.
Why it matters. It shows that promissory estoppel can bind the State.
How to write this answer in the exam
5-mark answer
- State the rule of privity in one line.
- List the five main exceptions.
- Cite Khwaja Muhammad Khan v. Husaini Begum for family arrangements.
10-mark answer
- The rule of privity and the reason for exceptions.
- Each exception with a short example.
- Khwaja Muhammad Khan (1910) in a short paragraph.
- Covenants running with land: Tulk v. Moxhay (1848).
- Statutory rights: section 147, Motor Vehicles Act, 1988.
- Promissory estoppel: Motilal Padampat (1978).
Key points to remember
- The general rule is that a stranger cannot sue. The exceptions are fixed by case law and statute.
- Main exceptions: trust, family arrangement, agency, assignment, acknowledgment or estoppel.
- Khwaja Muhammad Khan is the case for family arrangements.
- Covenants running with land: Tulk v. Moxhay.
- Third-party insurance claims are allowed by section 147 of the Motor Vehicles Act, 1988.
- Promissory estoppel can bind the State (Motilal Padampat).
Quick self-test
1. Name the five main exceptions to privity of contract.
Trust or beneficiary, family arrangement, agency, assignment, and acknowledgment or estoppel.
2. Which case supports the family arrangement exception?
Khwaja Muhammad Khan v. Husaini Begum (1910).
3. Which statute lets an injured stranger claim against a motor insurer?
Section 147 of the Motor Vehicles Act, 1988.