Privity of Contract and Privity of Consideration

In one line

Privity of consideration is the rule that consideration must move from the promisee, and section 2(d) rejects it; privity of contract is the rule that only a party to a contract may sue on it, and Indian law keeps it, subject to a list of exceptions.

The two doctrines, kept apart

Most answers on this topic fail by treating them as one, and separating them is the first thing to do.

Privity of consideration asks who furnished the price. English law requires that consideration move from the promisee, so a person who gave nothing cannot enforce the promise even if it was made for their benefit.

Privity of contract asks who is a party. It holds that a contract confers no rights and imposes no obligations on a person who is not a party to it, however clearly it was made for their benefit.

Privity of consideration: rejected

Section 2(d): consideration may be furnished by the promisee or any other person.

Those four words abolish the English rule. A person who is a party to the agreement may enforce the promise made to them even though the consideration for it moved from somebody else entirely.

The classic illustration is the family arrangement. An old lady gives property to her daughter on the daughter's promise to pay an annuity to the old lady's sister. The consideration moved from the old lady; the promise was made to the sister; and the sister may sue, because section 2(d) does not require the consideration to move from her.

Notice what makes that work: the sister was a PARTY to the arrangement. She is not enforcing a contract she is a stranger to; she is enforcing a promise made to her, for which somebody else paid. That is privity of consideration abolished, not privity of contract.

Privity of contract: retained

Nothing in the Indian Contract Act abolishes privity of contract, and the courts have applied it.

The English root is Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge and Co. Ltd., (1915) AC 847.

Facts. Dunlop sold tyres to a dealer on terms that the dealer would not sell below a listed price and would obtain the same undertaking from any trade customer. The dealer sold to Selfridge, who gave that undertaking to the dealer. Selfridge sold below the listed price and Dunlop sued.

Held. Dunlop could not sue. Only a person who is a party to a contract can sue on it, and Dunlop was not a party to the contract between the dealer and Selfridge, nor had any consideration moved from Dunlop to Selfridge.

The decision rests on both doctrines, which is exactly why it must be handled carefully in India: the second ground would not apply here, because section 2(d) does not require consideration to move from the promisee. The first ground does apply, and it is the reason Indian law reaches the same result.