CASES:-

Mohori Bibee v/s dharmodas Ghose:-

Any person who is below 18 yrs of age or who has not completed the age of
18 yrs. of age i.e. a minor cannot intend to create contract or make major
decisions. This case has basically provided us with the knowledge that, since
minors are legally incompetent to give their assent so they need to deserve or
be provide with the protection in their dealings with the other major persons.
After this case , any sought of contact or agreement with the minor was void
from beginning. Such contracts are "void ab-initio”.

Facts:-
The facts of this case were as follows:-
Dharmodas Ghose, was the respondent in this case. He was a minor (i.e. has
not completed the 18 years of age) and he was the sole owner of his
immovable property. The mother of Dharmodas Ghose was authorized as his
legal custodian by Calcutta High Court.

When he went for the mortgage of his own immovable property which was
done in the favor of appellant i.e. Brahmo Dutta, he was a minor and he
secured this mortgage deed for Rs. 20,000 at 12% interest rate per year.

Bhramo Dutta who was a money lender at that time and he secured a loan or
amount of Rs. 20,000, and the management of his business was in the control
of Kedar Nath, and Kedar Nath acted as the attorney of Brahmo Dutta.

Dharmodas Ghose's mother sent a notification to Brahmo Dutta informing him

about the minority of Dharmodas Ghose on the date on which such mortgage
deed was commenced.
but the proportion or sum of loan that was actually provided was less than Rs.
20,000.

The negotiator or representative of the defendant, who actually acted instead

of on behalf of money lender has given money or sum to the plaintiff, who was
a minor and he fully had knowledge about the incompetency of the plaintiff to
perform or enter into contract and also that he was incompetent legally to
mortgage his property which belonged to him.

After that, on 10thSept. 1895 Dharmodas Ghose along with his mother brought
an legal suit or action against Brahmo Dutta by saying that the mortgage that
was executed by Dharmodas was commenced when he was a minor or infant
and so such mortgage was void and disproportionate or improper and as a
result of which such contract should be revoked or rescinded.

When this petition or claim was in process, Brahmo Dutta had died and then
further the appeal or petition was litigated or indicted by his executor's.
The plaintiff argued or confronted that in such case no relaxation or any
sought of aid should be provided to them because according to him,
defendant had deceitfully or dishonestly misinterpreted the fact about his age
and because if mortgage is cancelled at the request by defendant i.e.
Dharmodas Ghose.

Issues Raised:-
Issues Raised in this case were:-
Whether the deed was void under section 2, 10[5], 11[6], of Indian Contract
Act, 1872 or not?
Whether the defendant was liable to return the amount of loan which he had
received by him under such deed or mortgage or not?
Whether the mortgage commenced by the defendant was voidable or not?

Judgement:-
According to he verdict of Trial Court, such mortgage deed or contract that
was commenced between the plaintiff and the defendant was void as it was
accomplished by the person who was an infant at the time of execution of
mortgage.
When Brahmo Dutta was not satisfied with the verdict of Trial Court he filled
an appeal in the Calcutta High Court.

According to the decision of Calcutta High Court, they agreed with the verdict
that was given by Trial Court and it dismissed the appeal of Brahmo Dutta.
Then he later went to Privy Council for the appeal and later the Privy Council
also dismissed the appeal of Brahmo Dutta and held that there cannot be any
sought of contract between a minor and a major person.
The final decision that was passed by the Council were :-
1.Any sought of contract with a minor or infant is void/ void ab-initio (void
from beginning).
2.Since minor was incompetent to make such mortgage hence the contact
such made or commenced shall also be void and id not valid in the eyes of
law.
3.The minor i.e. Dahrmodas Gosh cannot be forced to give back the amount of
money that was advanced to him, because he was not bound by the promise
that was executed in a contract.

Misrepresentation:-

Bisset v Wilkinson [1927] AC 177

Whether a statement is one of fact or opinion for the purposes of rescinding a

contract
Facts

The defendant in this matter was the purchaser of land in New Zealand which
was purchased by the claimant for the purpose of sheep farming. The appeal,
to which this judgment relates, is on the defendant’s counterclaim. During the
purchase process, the claimant informed the defendant that the land being
purchased was capable of sustaining 2000 sheep. However, after the
purchase the defendant discovered that this was only possible if very careful
land management was carried out, and that the land as it stood could not
sustain this number of sheep. The defendant therefore sought to rescind the
contract on the basis that the claimant’s statement was a misrepresentation.

Issue

The issue in this circumstance was whether the statement made by the
claimant could be considered a statement of fact in terms of being a
representation, or whether it was simply an opinion held by the claimant.

Held

It was held that the claimant’s statement was nothing more than an opinion
as to the capacity of the land, based on the claimant’s knowledge of farming,
together with the defendant’s knowledge of the current stock. The statement
was not therefore held to be a representation. In any event, the defendant had
not been able to demonstrate that the land was not capable of carrying the
2000 sheep that the claimant had stated, and therefore the claimant’s appeal
was allowed and the contract could not be rescinded.

Mistake:-

Cooper v Phibbs (1867) LR 2 HL 149

Facts

The complainant, Mr Cooper, was the nephew of the owner of the salmon
fishery near Ballysadare, Ireland. He leased this salmon fishery from his
Uncle. When his uncle died and the lease came up for the time of renewal, the
complainant renewed the lease for the salmon fishery with his Aunt. However,
it was later found out that in the Uncle’s will, Mr Cooper as his nephew, had
been given life tenancy of the salmon fishery. This meant that there was no
need for the lease that existed between him and the Aunt and the dispute
arose when the next rental payment was due.

Issues

The issue in this case was whether Mr Cooper was the owner of the salmon
fishery and whether the lease would be void.
Held

It was held that the contract and lease that existed between the complainant
and the defendant was voidable, rather than void. This was due to the claim
being in equity, as Mr Cooper had beneficial ownership of the salmon fishery
and not legal ownership. This case concerned ‘res sua’ and it was a mistake
as to the title of the property; Mr Cooper was already the beneficial owner of
the salmon fishery and there could not be a lease. It was held that such an
agreement would be set aside due to a common mistake by both parties as to
ownership.

Undue influence:-
BCCI v Aboody [1989] 2 WLR 759

A husband and wife owned a family company and the company’s liabilities to

its bank were secured, among other things, by charges of the wife’s house.
The

bank sought to enforce the securities and the wife pleaded actual undue

influence by the husband. Although the judge found that such influence had
been

established, he refused to set aside the charges as it had not been proved
that

they were manifestly disadvantageous to the wife (a point since overruled by

the

House of Lords in CIBC Mortgages v Pitt [1993]).

It was held by the Court of Appeal that manifest disadvantage for the

purposes of the doctrine of undue influence had to be a disadvantage which

was

obvious as such to any independent and reasonable person who considered

the

transaction at the time with knowledge of all the relevant facts. The fact that
the complaining party had been deprived of the power of choice (eg because
his

will had been overborne through the failure to draw his attention to the risks

involved) was not of itself a manifest disadvantage rendering the transaction

unconscionable. Furthermore, since the giving of a guarantee or charge

always

involved the risk that the guarantee might be called in or the charge enforced,

the question whether the assumption of such a risk was manifestly

disadvantageous to the giver of the guarantee or charge depended on

balancing

the seriousness of the risk of enforcement to the giver, in practical terms,

against the benefits gained by the giver in accepting the risk.

There were no grounds for disagreeing with the judge’s conclusion that on

balance a manifest disadvantage had not been shown by the wife in respect
of any

of the six transactions, since although there were substantial potential

liabilities and the family home was at risk as a result of the transactions,

that was counterbalanced by the fact that the loans gave the company a

reasonably good chance of surviving, in which case the potential benefits to

the

wife would have been substantial. Moreover, the evidence established that on

balance the wife would have entered into the transactions in any event and

accordingly it would not be right to grant her equitable relief as against the

bank. The wife’s appeal was therefore dismissed.

Fraud:-
Derry vs Peek:-

FACTS:

A tramway company’s prospectus stated that it had the right to use steam
power for moving carriages as an absolute right, though in actuality it was
subject to condition of Board of Trade (BoT). Plaintiff, on faith of that
statement, took shares of the Co. When Board of Trade refused its consent,
and Co. got wound up, plaintiff brought an action for deceit against the Co.
directors.

ISSUE:

Whether any action for fraud can succeed against the defendants?

HELD:

“Fraud is proved when it is shown that a false representation has been made
knowingly, or without belief in its truth, or recklessly without caring whether
it is true or false.” A false statement made without reasonable grounds for
believing it to be true, may be evidence of fraud in light of plaintiff’s
contention that defendant had no actual belief in its truth; but such a
presumption is rebuttable. Such a statement, if made in the honest belief that
it is true, is not fraudulent and no action for deceit will lie. ‘Fraud without
damage’ and ‘damage without fraud’ doesn’t give rise to an action for deceit
which lies only when both fraud and damage converge, i.e. when plaintiff
relying upon the fraudulent statement acts upon it to his detriment.

The alleged statement was untrue in the sense that it was stated as an
absolute right which was in fact conditional on the approval of BoT. The
directors honestly believed that it was the mere question of formality to
obtain BoT approval and the Co. having complied with the procedures and
requirements, the approval was due. Hence, they had honest belief in the
truth of the impugned statement and it never dwelled in their minds that BoT
will refuse such consent. In light of these observations, the honest belief was
reasonable and defendants could not be held liable for deceit.

Types of breach:-

Material breach:-
A material breach is a major violation of the terms of a contract. A material
breach typically harms one person who signed the contract.

An example of a material breach would be a situation where the table maker

and table buyer entered into a contract and the table buyer paid a deposit to
the table maker but the custom table was never made.

The table buyer would be harmed by this breach because the table buyer
relied on the table maker to complete the project. The purpose of the contract
in this situation, the creation of a custom table, could not be fulfilled by the
material breach.

Partial breach of contract:-

Sometimes a party will fail to uphold a portion of the contract, but most of the
contract can still be fulfilled. This can result in a partial breach. A partial
breach is also sometimes referred to as an immaterial breach.

This type of breach occurs when one party to the contract fails to fulfill a
contract term and that term is negligible. 'Negligible' means that the contract
term is small or unimportant. A partial breach will be minimal enough that it
won't cause the entire contract to fail.

Most of the time, a partial breach will be remedied by a payment, or a credit,

to the party who was wronged. For example, let's look at our contract for your
wedding roses. Let's say that I deliver the roses, and you pay me the full
amount, which is $1,200. After I leave, you discover that one dozen is too
wilted for you to use. We argue the matter, and eventually, you sue me in
court for breach of contract. The court agrees with you, and I'm ordered to
refund your money for one dozen roses. Your remedy is a cash payment, from
me to you, for $12.

I only breached a portion of the contract. I fulfilled your order for the majority
of the contract. This is a partial breach, and you'll be compensated with a
right to damages, or payment, for only the portion of the contract that I
breached.

Anticipatory breach of contract:-

An anticipatory breach of contract is an action that shows one party's

intention to fail to fulfill its contractual obligations to another party. An
anticipatory breach ends the counterparty's responsibility to perform its
duties. Demonstrating the other party's intention to breach the contract gives
the counterparty grounds for beginning legal action. An anticipatory breach is
also referred to as an anticipatory repudiation.

An anticipatory breach occurs when a party demonstrates its intention to

break a contract. However, vocal or written confirmation is not required, and
failure to perform any obligation in a timely matter can result in a breach. By
declaring an anticipatory breach, the counterparty may begin legal action
immediately rather than waiting until the terms of a contract are actually
broken.

Remedies for Breach of contract:-

1) Rescission of the contract:-

Rescission is nothing but the cancellation of the contract. When one party
commits a breach of contract, the other party may treat the contract
rescinded and need not perform his part of the obligations under the contract.
In such a case, the aggrieved party is exempted form or excused from all his
obligations created under the contract.

2) Suit for damages:-

The party who is injured by the breach of the contract may bring an action for
damages. ‘Damages’ means compensation in terms of money for the loss
suffered by the injured party. Whenever an action is initiated for damages we
have to consider two aspects a) the remoteness of damage, b) measure of
damages.

Types of damages:-

a) General damages.

b) Special damages.

c) Nominal damages.

d) Vindictive damages.

e) Pre-contract expenditure.

f) Mental pain and suffering.

g) Liquidated damages.

h) Cost of suit.

i) Payment of interest.
3) Suit upon Quantum meruit:-

This is a remedy for breach of contract to file upon quantum meruit. The term
quantum meruit literally means “as much as earn”. When a person has done
some work under a contract and the other party repudiates the contract or
some events happened which makes the further performance of the contract
impossible then the party who has performed the work can claim the
remuneration for the work he has already done. Even when one party to the
contract to the contract has performed part of his performance and is
prevented by the other party to the contract from completing remaining part
of his promise, then he can file suit upon quantum meruit and claim for the
value of the work what he has done.

4) Suit for specific performance:-

Specific performance means as agreed between the parties. It provides that

when there exist no standard for ascertaining actual damage caused by non-
performance of the act agreed to be done or when the act agreed to be done
is such that compensation in money for its non-performance would not afford
adequate relief unless and until the contrary to the contract will be
specifically enforced.

5) Suit for injunction:-

Injunction means the order of a court either restraining the parties not to do
certain thing compelling them to do certain act. Injunctions are of two types-
Preventive and Mandatory.

The preventive injunction may be also temporary and permanent. Mandatory

injunction may be also temporary or permanent.

UNCERTAIN AGREEMENT: (Sec. 29) 

Sec. 29 says "Agreements the meaning of which is not certain, or capable of
being made certain are void": In order to make a valid contract the terms of
agreement must not be vague, uncertain or indefinite. It should. be clear and
definite. So the certainty of contract is also an essential element of valid
contract. 

An agreement may be uncertain either because the terms in it are ambiguous

or vague or because it is incomplete. The general rule is that if the terms of
an agreement are vague or indefinite which cannot be ascertained with
reasonable certainty of the intention of the parties, then there is no contract
enforceable by law.
Concluded Contract

As stated in The parties should make their own contract and the court will not
construct a contract for parties when the terms are indefinite or unsettled.
The court must first be satisfied that the parties have a concluded contract,
before seeking to make certain terms.

Capable of Being Made Certain

As given in Bahadur Singh vs Fuleshwar Singh [2], a contract is not void if its
terms are capable of being made certain. The meaning of the contract should
not be uncertain and further, it needs to be shown that it is not capable of
being made certain. Mere vagueness or uncertainty which can be easily
removed by proper interpretation does not make a contract void. Even oral
agreements will not be considered vague if its terms are ascertainable with
precision.

A contract out of which more than one meaning, when constructed, can
produce in its application more than one result will not be void for
uncertainty. A contract will be void for uncertainty only if its essential terms
are uncertain or incomplete unless the uncertain part being not essential is
severed, leaving the balance of the agreement intact. To ascertain what is
essential and what is not, one must look into the intention of the parties.
There is no concluded contract when an essential or critical terin is expressly
left to be settled by future agreement of the parties. Also, there will not be a
binding contract where the language is obscure and incapable of any definite
meaning.

An agreement that provides for the future fixation of price by the parties or by
a third party is capable of being certain and is valid under Section 29. Such a
contract will not be void for uncertainty.

Resolving Uncertainty

The courts are reluctant to hold a contract void for uncertainty of any
provision that is intended to have legal effect as given in Brown v Gould [3]. It
has been emphasized that it must always be in such a way as to balance
matters that, without violating essential principles, man’s dealings are
treated as effectively as possible and that the law cannot be accused of
destroying bargaining.

But the courts will not undertake to supply defects or remove ambiguities
according to its own notions of what is reasonable as it would not be to
enforce a contract by parties but to make a new contract for them.

Implying Terms
A contract that is intended to be binding may be enforceable even though
certain terms have not been precisely agreed if the nature of the terms can be
ascertained by implication. The courts construe business agreements fairly
and broadly and imply terms to the extent that is necessary to give business
efficacy to the transaction

Commercial Agreements

Commercial documents are sometimes expressed in language which does not

have a clear meaning. This was seen in Dhanrajamal Gobindram vs Shamji
Kalidas And Co.[5]. Cases of commercial contracts are different as there are
standards of commercial custom and usage to appeal in deciding what terms
are just and reasonable. Words that are grammatically meaningless may be
found used in a mercantile sense and constructed accordingly. The mere fact
that it is difficult to interpret a commercial contract is not fatal, nor is
difficulty synonymous with ambiguity so long as to any definite meaning can
be extracted. A contract is not necessarily ineffective because it is open to
more than one meaning if the meaning intended can be ascertained.

Custom and Trade Usage

As given in the Indian Evidence Act 1872, vagueness apparent on the face of
the contract may be resolved by reference to the custom or trade usage. A
commercial contract for the sale and purchase of American cotton was not
void for vagueness or uncertainty by reasons of a clause ‘subject to the usual
force majeure clause’.

In Ashburn Anstalt v Arnold [6], an agreement to lease a shop in a prime

location was not uncertain as it could be determined by expert evidence
since the phrase is a commonly used in the particular property trade.

Previous Course of Dealings

In Lani Mia vs Muhammad Easin Mia [7], a covenant for renewal of lease
which did not specify the period or rent must be presumed to be for the same
period and the rent as the original lease and is not void for uncertainty.

Reasonableness

Where an intention to transact is clear, which is the intention to buy and sell,
the terms can be determined by the standard of reasonable. This may be
implied by law as Section 46 of the Act. When goods are sold without naming
a price, the agreement is understood to be for payable of a reasonable price.
Where the remuneration in a contract of service was to be fixed by the
employer, the contract was enforceable and the rate fixed on basis of what is
fair and reasonable. But a condition for the purchase of  a motor van to be
partly paid on hire purchase terms over a period of two years was held to be
indefinably too vague to constitute a binding contract in Scammell v Ouston ,
it was held that where remuneration in a contract service was to be fixed by
the employer, the contract was enforceable , and the rate fixed on the basis
of what was fair and reasonable.

Performance Executed

The degree of certainty required for creating obligations varies according to

the whether the transaction remains wholly executory or has been party
formed or acted upon. Whether the alleged agreement has been wholly or
partially executed that is performed by any party the very fact of the
performance being executed may itself lead to the conclusion that agreement
is binding as in Hart v Hart [8].

For example as in the case of many commercial contracts two parties

continue to send each other counter offers after they comment performance.
A Court may decide that there is a contract one of the following places-

(i)- The terms agreed with the court’s idea of of what are reasonable terms
being supplied to fill all areas of omission or disagreement;

(ii)- The entire contract being constructed on what the court thinks is
reasonable, the terms which the parties have agreed being evidence of what
is reasonable in the circumstances.

Machinery for Ascertainment

A contract would not be vague if it provides machinery for ascertaining a

term. In Damodhar Tukaram Mangalmurtiand v The State Of Bombay [9], the
renewal clause contained a provision which said “subject to such fair and
equitable enforcement as the lessor shall determine”. The clause was not
held vague or uncertain. In Talbot v Talbot [10], the provision in a will giving
option to the beneficiaries under the will to purchase the farms in which they
live at a reasonable valuation was enforceable.

However the High court of Australia in Hall v Busst [11], held by majority that
the words reasonable sum to cover depreciation as uncertain and therefore
unenforceable. In Milnes v Gery [12], an agreement to sell at a fair valuation
was also held to be uncertain.

Severance of Uncertain Part

Where there is agreement on all substantial terms, the court may disregard a
subsidiary term on the grounds that it is meaningless as in Nicolene ltd v
Simmonds. But this rule cannot be applied to a major term, which was seen in
Kingsley & Keith, Ltd. v. Glynn Brothers (Chemicals), Ltd. [13], or subject to a
war clause or to force majeure conditions, or an option on terms to be agreed.

Agreements Held Certain

In S.R. Varadaraja Reddiar vs Francis Xavier Joseph Periaria [14], it was held
that where both the parties were fully aware of the identity of the property to
be conveyed under the agreement, the agreement would not be uncertain
merely because the exact boundaries, survey number or location were not
mentioned in the agreement, if the identity of the property could be
reasonably ascertained there form. In Mithu Khan vs Pipariya wali [15], an
agreement for sale of land with the name of the land but without its survey
number or are was not void for uncertainty.

Agreements Held Uncertain and Vague

In Deojit v Pitambar [18], where the defendants themselves as residents of a

certain place, executed a bond and hypothecated as security for the amount “
our property, with all the rights and interest”, the hypothecation was held too
indefinite to be acted upon. The mere fact that the defendants described
themselves in the bond as residents of a certain place was not enough to
indicate  their property in that place as the property that was hypothecated.
If they had described themselves as the owners of certain property, it would
have been reasonably to refer the indefinite expression to the description.

In case of an agreement to sell immovable property, if the property cannot be

identified with the certainty and there is no consensus between the parties as
regards the price payable, there could not be no concluded contract between
the prospective purchasers of flats and the builders.

Conclusion

Agreements whose meaning is not certain or is incapable of being made

certain are void in nature. An agreement can be unsure either because it
contains ambiguous or vague terms or because it is incomplete. The general
rule is that if the terms of an agreement are vague or indefinite, which cannot
be ascertained with reasonable certainty of the parties ‘ intention, then the
law does not enforce a contract.

Doctrine of Privity of Contract

The Indian Contract Act. 1872, allows the ‘Consideration‘ for an agreement to
proceed from a third-party. However, a stranger (third-party) to consideration
is different from a stranger to a contract. The law does not allow a stranger to
file a suit on the contract. This right is available only to a person who is a
party to the contract and is called Doctrine of Privity of Contract.

Exceptions to the Doctrine of Privity of Contract

A stranger or a person who is not a party to a contract can sue on a contract

in the following cases:

1. Trust
2. Family Settlement

3. Assignment of a Contract

4. Acknowledgement or Estoppel

5. A covenant running with the land

6. Contract through an agent

There are exceptions to the general rule, allowing rights to third parties and
some impositions of obligations. These are:

* Collateral Contracts (between the third party and one of the contracting
parties)

* Trusts (the beneficiary of a trust may sue the trustee to carry out the
contract)

* Land Law (restrictive covenants on land are imposed upon subsequent

purchasers if the covenant benefits neighbouring land)

* Agency and the assignment of contractual rights are permitted.

* Third-party insurance - A third party may claim under an insurance policy

made for their benefit, even though that party did not pay the premiums.

* Contracts for the benefit of a group, where a contract to supply a service is

made in one person's name but is intended to sue at common law if the
contract is breached; there is no privity of contract between them and the
supplier of the service.

In England and Wales, the Contracts (Rights of Third Parties) Act 1999
provided some reform for this area of law which has been criticised by judges
such as Lord Denning and academics as unfair in places. The act states:

1. - (1) Subject to the provisions of this act, a person who is not a party to a
contract (a "third party") may in his own right enforce a term of the contract
if-

(a) the contract expressly provides that he may, or

(b) subject to subsection (2), the term purports to confer a benefit on him.

(2) Subsection (1)(b) does not apply if on a proper construction of the contract
it appears that the parties did not intend the term to be enforceable by the
third party.

This means that a person who is named in the contract as a person

authorised to enforce the contract or a person receiving a benefit from the
contract may enforce the contract unless it appears that the parties intended
that he may not.

The Act enables the aim of the parties to be fully adhered to. In Beswick v
Beswick, the agreement was that Peter Beswick assign his business to his
nephew in consideration of the nephew employing him for the rest of his life
and then paying a weekly annuity to Mrs. Beswick. Since the latter term was
for the benefit of someone not party to the contract, the nephew did not
believe it was enforceable and so did not perform it, making only one payment
of the agreed weekly amount. Yet the only reason why Mr. Beswick
contracted with his nephew was for the benefit of Mrs. Beswick. Under the
Act, Mrs. Beswick would be able to enforce the performance of the contract
in her own right. Therefore, the Act realises the intentions of the parties.

The law has been welcomed by many as a relief from the strictness of the
doctrine, however it may still prove ineffective in professionally drafted
documents, as the provisions of this statute may be expressly excluded by
the draftsmen.

In Hong Kong, the Contracts (Rights of Third Parties) Ordinance provided for a
similar legal effect as the Contracts (Rights of Third Parties) Act 1999.

In Australia, it has been held that third-party beneficiaries may uphold a

promise made for its benefit in a contract of insurance to which it is not a
party (Trident General Insurance Co Ltd v. McNiece Bros Pty Ltd (1988) 165
CLR 107).[3] It is important to note that the decision in Trident had no clear
ratio, and did not create a general exemption to the doctrine of privity in
Australia.

Queensland, the Northern Territory and Western Australia have all enacted
statutory provisions to enable third party beneficiaries to enforce contracts,
and limited the ability of contracting parties to vary the contract after the
third party has relied on it. In addition, section 48 of the Insurance Contracts
Act 1984 (Cth) allows third-party beneficiaries to enforce contracts of
insurance.

Although damages are the usual remedy for the breach of a contract for the
benefit of a third party, if damages are inadequate, specific performance may
be granted (Beswick v. Beswick [1968] AC 59).

The issue of third-party beneficiaries has appeared in cases where a

stevedore has claimed it is covered under the exclusion clauses in a bill of
lading. In order for this to succeed, three factors must be made out:

* The bill of lading must clearly intend to benefit the third party.

* It is clear that when the carrier contracts with the consignor, it also
contracts as an agent of the stevedore. That is, either the carrier must have
had authority by the stevedore to act on its behalf, or the stevedore must
later ratify (endorse) the actions of the carrier.

* Any difficulties with consideration moving from the stevedores must be

made out.

The last issue was explored in New Zealand Shipping Co Ltd v. A M

Satterthwaite & Co Ltd [1975] AC 154, where it was held that the stevedores
had provided consideration for the benefit of the exclusion clause by the
discharge of goods from the ship.

New Zealand has enacted the Contracts Privity Act 1982, which enables third
parties to sue if they are sufficiently identified as beneficiaries by the
contract, and in the contract it is expressed or implied they should be able to
enforce this benefit. An example case of not being "sufficiently identified" is
that of Field v Fitton (1988).

EXCEPTIONS TO RULE OF PRIVITY

Common Law Exceptions:

A.) Trust: Trust is a well-established exception to the rule of privity. This

means that if A makes a promise to B for the benefit of C, C can enforce this
promise if B has constituted himself trustee of A’s promise for C[xxiii]. But
this rule is subject to certain restrictions. A promisee can be held to be a
trustee for a third party only if he has the intention to create a trust[xxiv] and
this intention must be to benefit the particular third party and not third parties
generally.

Also, the intention to benefit the third party must be irrevocable.[xxv] And a
mere intention to confer a benefit is not enough, there must be an intention to
create a trust. An intention to create a trust is clearly distinguishable from a
mere intention to make a gift.[xxvi]

An Indian case relevant under this head is that of Rana Uma Nath Baksh
Singh v. Jang Bahadur[xxvii]. In this case:

U was appointed by his father as his successor and was put in possession of
his entire estate. In consideration, thereof U agreed with his father to pay a
certain sum on money and to give a village to J, the illegitimate son of his
father, on his attaining majority.

It was held that in the circumstances mentioned above a trust was created in
favor of J for the specified amount and the village, Hence he was entitled to
maintain the suit.

B.) Covenants Concerning Land: The law allows certain covenants (whether
positive or restrictive) to run with land so as to benefit (or burden) people
other than the original contracting parties. The relevant covenant may relate
to freehold land or leasehold land. The law on covenants relating to leasehold
land has recently been reformed by the Landlord and Tenant (Covenants) Act
1995.

The benefit and burden of covenants in a lease granted prior to 1996 would
pass on an assignment of the lease or reversion so as to benefit or bind the
assignee of the lease or the reversion, provided that the covenant “touched
and concerned” the land.[xxviii]

C.) Agency: Agency is the relationship which exists between two persons, one
of whom (the principal) expressly or impliedly consents that the other should
act on his behalf, and the other of whom (the agent) similarly consents so to
act or so acts.[xxix] Under this, the principal, i.e. the third party, may be
benefited o burdened. The existence of the principal does not have to be
known to the party with whom the agent is contracting. Also, an agent may be
the agent of both the contracting parties. Thus insurance brokers are both
agents of the insured and of the insurer.[xxx]

Although one can normally say that the principal is the real party to the
contract concluded by his agent, agency can also be viewed as an exception
to the privity doctrine as in that the principal, on the basis of a contract with
a third party, that contract being concluded by his agent, is able to sue (and
be sued) on it.

D.) Tort of Negligence: The tort of negligence can be viewed as an exception

to the third party rule where the negligence in question constitutes the
breach of a contract to which the plaintiff is not a party. For example, the
classic case of negligence, Donoghue v Stevenson[xxxi], established that
where A supplies goods to B under a contract with B, A may owe a duty to C
in respect of personal injury or damage to property caused by defects in those
goods. But the right not to be injured or to have one’s property damaged by
another’s negligence exists independently of any contractual undertaking by
A. It is only in a very wide sense, therefore, that standard examples of the tort
of negligence constitute exceptions to the third party rule. Also, this rule goes
into contradiction with that established by the case of Dunlop Pneumatic
Tyres Co Ltd v. Selfridge Ltd[xxxii]where the pursuer could acquire no benefit
under that contract because she was a third party to it. Yet, according to the
principle laid down in Donoghue v. Stevenson[xxxiii], the pursuer might
recover against a manufacturer in respect of physical injuries suffered as a
result of the manufacturer’s negligence.

E.) Assignment: Except when personal considerations are at its foundation,

[xxxiv] the benefit of a contract may be assigned (that is transferred) to a
third party. The assignment is effected through a contract between the
promisee under the main contract (that is, the assignor) and the third party
(that is, the assignee). In addition to assignment by an act of the parties,
there exists assignment by operation of law. The assent of the promisor is not
necessary for an assignment. Assignment may therefore deprive promisors of
their chosen contracting party, although safeguards are imposed to protect
promisors.
In considering reform of the third party rule, assignment constitutes a
particularly significant exception. For if, immediately after a contract for a
third party’s benefit is made, the promisee assigns his rights under it to that
third party, the third party can enforce the contract and the promisee loses all
right to enforce, vary or cancel the contract. There is a thin divide between (i)
making a contract for the benefit of a third party; and (ii) making a contract
for the benefit of a third party and, immediately thereafter, assigning that
benefit to the third party (especially where the third party does not provide
consideration). If an immediate assignment is valid, there can hardly be
fundamental objections to allowing the third party to sue without an
assignment. It also follows that in considering the details of reform it is
instructive to consider the rules of assignment dealing with, for example, the
defences and counterclaims available to the promisor (the principle is that an
assignee takes “subject to equities”), and joinder of the original promisee
(joinder of the assignor is sometimes necessary).[xxxv]

F.) Vicarious Immunity: The principle vicarious immunity is illustrated by the

case of Elder, Dempster Ltd v Paterson Zochonis& Co Ltd.[xxxvi]. In this case,
the House of Lords held that the owners of a vessel were entitled to rely on
the limitations contained in a bill of lading issued pursuant to a contract
between the cargo owners and the charterers of the vessel, when they
(owners of the vessel) were sued by the cargo owners in respect of the
damage caused by bad stowage.

Perhaps the most significant point is that some of their Lordships seemed to
accept a principle of vicarious immunity, according to which a servant or
agent who performs a contract is entitled to any immunity from liability which
his employer or principal would have had. Hence, although the ship-owners
may not have been privy to the contract of carriage (between shipper and
charterer) they took possession of the goods on behalf of, and as agents for,
the charterers and so could claim the same protection as their principals.

Although the principle of vicarious immunity was subsequently generally

accepted by the lower courts, it did not survive the decision of the House of
Lords (Lord Denning dissenting) in Midland Silicones Ltd v Scruttons Ltd.
[xxxvii]the defendant stevedores, engaged by the carrier, negligently
damaged a drum containing chemicals. When the cargo-owners sued in tort,
the stevedores unsuccessfully attempted to rely on a limitation clause
contained in the bill of lading between the carriers and the cargo owners. The
majority of the House of Lords confirmed English law’s adherence to the
privity of contract doctrine and was not prepared to hold that the principle of
vicarious privity of contract doctrine and was not prepared to hold that the
principle of vicarious immunity was the ratio of Elder, Dempster.[xxxviii]

G.) Collateral Contract: A contract between two parties may be accompanied

by a collateral contract between one of them and a third party. A collateral
contract may in effect allow a third party to enforce the main contract
(between A and B). For instance, where C buys goods from B, there may be a
collateral contract between C and the manufacturer in the form of a
guarantee. Collateral contracts have been used as a means of rendering
exclusion clauses enforceable by a third party; and are extensively used in
the construction industry as a way of extending to subsequent owners or
tenants the benefits of a builder’s or architect’s or engineer’s contractual
obligations. Strictly speaking, of course, a collateral contract is not an
exception to the third party rule in that the ‘third party’ is a party to the
collateral contract albeit not a party to the main contract.

In Shanklin Pier v. Detel[xxxix] the plaintiff had employed contractors to paint

their pier, and instructed them to use a paint made by the defendants. This
instruction was given in reliance on a representation made by the defendants
to the plaintiffs that the paint would last seven years. It lasted for only 3
months. It was held that the defendants’ representation gave rise to a
collateral contract that the paint would last seven years.

H.) Estoppel or Acknowledgement: Where by the terms of a contract a party is

required to make a payment to a third person and he acknowledges it to that
third person, a binding obligation is thereby incurred towards him.
Acknowledgment may be express or implied. This exception covers cases
where the promisor by his conduct, acknowledgment, or otherwise,
constitutes himself an agent of the third party. The case of Davaraja Urs v.
Ram Krishnaiah[xl]is a relevant case under this head:

A sold his house to B under a registered sale deed and left a part of the sale
price in his hands desiring him to pay this amount to C, his creditor.
Subsequently B made part-payments to c informing him that they were out of
the sale price left with him and that the balance would be remitted
immediately. B, however, failed to remit the balance and C sued him for the
same.

The suit was held to be maintainable. “Though originally there was no privity
of contract between B and C, B having subsequently acknowledged his
liability, C was entitled to sue him for recovery of the amount.”

I.) Marriage Settlement, Partition or Other Family Arrangements: Where an

agreement is made in any of the mentioned concerns and a provision is made
for the benefit of a person, he may take advantage of that agreement although
he is no party to it. In Rose Fernandez v. Joseph Gonsalves[xli]a girl’s father
entered into an agreement for her marriage with the defendant, it was held
that the girl after attaining majority could sue the defendant for damages for
breach of the promise of marriage and the defendant could not take the plea
that she was not a party to the agreement.

Statutory Exceptions:

A.) Life Insurance: By section 11 of the Married Women’s Property Act 1882, a
life insurance policy taken out by someone on his or her own life, and
expressed to be for the benefit of his or her spouse or children, creates a
trust in favour of the objects named in the policy.
B.) Fire Insurance: Under section 83 of the Fire Prevention (Metropolis) Act
1774, where an insured house or building is destroyed by fire, the insurer may
be required “upon the request of any person or persons interested” to lay out
the insurance money for the restoration of the building. This means that a
tenant can claim under its landlord’s insurance, and a landlord under its
tenant’s insurance.[xliii]

C.) Insurance by Persons with Limited Interest: Any person who has an
interest in the subject-matter of a policy of marine insurance can insure ‘on
behalf of and for the benefit of other persons interested as well as for his own
benefit’[xliv] Also, where property is sold and suffers damage before the sale
is completed, any insurance moneys to which the vendor is entitled in respect
of the damage must be held for the purchaser and paid over on
completion[xlv]. This has been upheld in various case laws[xlvi]

D.) Motor Insurance: Under section 148(7) of the Road Traffic Act 1988, a
person issuing a policy under Section 145 of the Act shall be liable to
indemnify the persons or classes of person specified in the policy in respect
of any liability which the policy purports to cover in the cases of such
persons.

E.) Third Parties (Rights Against Insurers) Act 1930:  Section 1(1) this Act
provides that the insured’s right against the insurer shall, notwithstanding
anything in any Act or rule of law to the contrary, vest in the third party to
whom liability was incurred. This position also applies where the insured dies
insolvent[xlvii].

F.) Companies Act, 1985 Section 14: Under section 14 of the Companies Act
1985, the registered memorandum and articles of association of a company
bind the company and its members to the same extent as if they respectively
had been signed and sealed by each member.