Privity of Contract and Third-Party Rights under the Indian Contract Act, 1872

I. Introduction

Commercial contracts frequently contemplate benefits flowing to persons who are not themselves parties to the agreement. A holding company expects its subsidiary to have the benefit of a warranty given in an acquisition agreement. A lender expects to enforce an undertaking given in a project document to which it was not a party. A future assignee expects to step into the shoes of the original contracting party and call for performance. In each of these situations, the doctrine of privity of contract is directly relevant, and the answer it provides is frequently not the one the commercial parties assumed.

The doctrine provides that only a party to a contract may sue or be sued on it. A third party who stands to benefit from a contract between two others has no right to enforce it in the absence of a specific exception or a deliberate structural arrangement that brings them within its scope. Indian law affirms this general rule firmly, while recognising a defined set of exceptions that permit third-party enforcement in specified circumstances. The practical consequence for commercial contracting is that intended third-party rights must be created deliberately and documented with precision, rather than assumed to arise from the fact that the contract was plainly meant to benefit a non-party.

II. The Statutory Framework

Section 2(d) of the Indian Contract Act, 1872 defines consideration to include an act or promise performed or given by the promisee or any other person at the desire of the promisor. The phrase "any other person" means that consideration for a promise need not come from the person who will receive the benefit of it. A parent who provides consideration so that a promisor will pay a sum to their child, or a company that provides consideration so that a promisor will perform an obligation in favour of a related entity, satisfies the statutory requirement.

What Section 2(d) does not do is resolve whether the beneficiary of the promise can sue to enforce it. The provision addresses the validity of consideration, not the standing of third parties to bring a claim. Courts have consistently held that the two questions are analytically distinct: consideration may be valid even though it moves from a third party, but that third party still cannot enforce the promise unless they are a party to the contract. The expanded definition of consideration in Section 2(d) creates doctrinal space for third-party rights but does not, of itself, confer them.

III. The Privity Rule and Its Exceptions

The privity rule in Indian law was definitively stated by the Privy Council in Jamna Das v. Pandit Ram Autar Pande (1916) ILR 38 All 209. A property owner had mortgaged her property to Jamna Das. She subsequently sold the property to Ram Autar, who as part of the sale agreement undertook to pay off the outstanding mortgage. When Ram Autar defaulted, Jamna Das sued him directly on the undertaking. The Privy Council held that Jamna Das had no enforceable claim. He was a stranger to the sale agreement and could not sue on it, however clearly the undertaking was intended for his benefit. The rule is not displaced by the fact that the third party was the obvious and intended beneficiary of the obligation; privity requires more than intended benefit.

The most commercially significant exception to the privity rule is the trust exception. Where a contract creates a trust or charge over a defined fund or asset in favour of an identified third party, that party may enforce the obligation as the beneficiary of the trust or charge. The exception was established in the context of a marriage settlement in the Privy Council decision in Nawab Khwaja Muhammad Khan v. Nawab Hussaini Begum (1910) ILR 32 All 410, where the Court held that an obligation to pay an allowance, structured as a charge on property, was enforceable directly. The exception applies wherever the contract creates a dedicated obligation held specifically for the third party's benefit, as distinct from an obligation that merely produces a benefit for the third party as a consequence of performance between the original parties.

Beyond the trust exception, three further categories permit third-party enforcement in commercial contexts. First, the agency exception under Sections 226 and 230 of the Contract Act: where an agent contracts within the scope of their authority, the undisclosed or named principal may sue and be sued on the contract. Second, covenants and charges registered against property: a purchaser of property with notice of an existing agreement affecting it may be bound by that agreement even though not a party to it, which is of direct relevance in real estate and project finance transactions. Third, statutory exceptions: specific legislation, including the Insurance Act, 1938 in the context of life insurance policies and the Companies Act, 2013 in the context of rights arising from a company's constitution, displaces the privity rule in defined circumstances without requiring any contractual structuring.

The common thread across all these exceptions is that they require something more than an intention to benefit a third party. They require either that the third party be brought within a specific statutory or equitable category, or that the contract be deliberately structured to create an enforceable right in their favour. The assumption that a clearly intended benefit is sufficient for enforcement is the most common commercial misapprehension about the privity doctrine, and it is the one that creates problems in practice.

IV. Commercial Contracting: Where the Rule Bites

The privity rule has its sharpest commercial consequences in three recurring contexts: group company transactions, tripartite payment arrangements, and assignment and benefit transfer structures.

Group company transactions. A holding company that is not itself a party to a contract entered into by its subsidiary cannot ordinarily enforce the contractual rights arising under it, and cannot be compelled to perform the obligations. This has direct implications in acquisition agreements, where warranties and indemnities given to a target company's parent may not be enforceable by the parent if it is not named as a party. It equally affects project and infrastructure contracts where the contracting entity and the entity with the commercial interest in enforcement are different members of the same group. The solution is structural: the intended beneficiary must be joined as a direct party to the agreement, or a separate direct deed of undertaking must be executed in its favour.

Tripartite payment arrangements. Where a contract between A and B provides that B will make a payment to C, and C is not a party to that contract, C cannot enforce the payment obligation against B if B defaults. The Jamna Das facts illustrate exactly this problem. In commercial practice, this arises in escrow arrangements, in vendor payment obligations under acquisition agreements, and in back-to-back payment obligations in supply chain contracts. The risk is routinely underestimated because the obligation is express and the beneficiary is identified. The legal position is nonetheless clear: identification as a beneficiary is not the same as being a party. C must either be joined to the A-B contract, or B must execute a direct payment undertaking in favour of C, or the A-B contract must expressly create a charge over the payment fund in C's favour.

Assignment and benefit transfer. The benefit of a contract, meaning the right to receive performance, can generally be assigned by the original contracting party to a third party. The burden, meaning the obligation to perform, cannot be transferred without the consent of the counterparty. A common commercial error is to assume that a novation of the entire contract can be achieved by an assignment clause in the original agreement, without the counterparty executing a fresh consent at the time of transfer. Where the contract contains an anti-assignment clause, even the transfer of the benefit requires the counterparty's consent. In transactions where the identity of the contracting party is likely to change, whether through corporate restructuring, refinancing, or a sale of the business, the assignment and novation provisions of the contract should be carefully drafted at the outset to ensure that the intended transfer mechanism is contractually available when needed.

V. Structural Approaches to Conferring Enforceable Third-Party Rights

Given the framework described above, the drafting choices available for conferring enforceable rights on a party who is not, or cannot be, a direct signatory to a contract fall into three categories, each with distinct practical implications.

The most reliable approach is direct joinder. Where the intended beneficiary can be identified at the time of contracting, joining them as a party to the agreement removes the privity problem entirely. A holding company joined as a party to its subsidiary's acquisition agreement has direct enforcement rights under it. A lender joined to a project agreement as a party to a direct agreement with the project counterparties can enforce the relevant obligations directly. The administrative cost of joinder is modest compared to the legal uncertainty that its absence can create.

Where joinder is not practicable, the trust or charge structure is the most legally robust alternative. A contract that expressly provides that a defined payment or fund is held on trust for an identified third party, or that a specific asset is charged in a third party's favour, creates an enforceable interest for that party without requiring them to be a signatory. The drafting must make the trust or charge character of the obligation explicit: language such as "the seller shall hold the retention amount on trust for the benefit of the buyer's parent company" is effective; language that merely states "the seller shall pay the retention amount to the buyer's parent company" creates an obligation on the seller to the buyer but does not give the parent company any direct right of enforcement. This is a distinction that commercial contracts frequently blur and that litigants frequently discover too late.

A deed of undertaking or direct agreement, executed between the obligor and the intended beneficiary as a standalone document, is the third structural option. Rather than attempting to confer rights on the third party through the primary contract, the obligor executes a separate agreement directly with the intended beneficiary, containing the specific obligation that the beneficiary is intended to enforce. This approach is commonly used in project finance, where lenders require direct agreements with contractors, suppliers, and other project parties as a condition of financing, and in real estate transactions, where tenant covenants may be required to be given directly to a landlord's lender. The direct agreement creates clean privity between the obligor and the beneficiary without any reliance on the trust exception or on the primary contract.

VI. Conclusion

The privity doctrine under Indian law is firmly established and its consequences for commercial contracts are concrete. An obligation in a contract, however clearly intended for the benefit of a third party, is not enforceable by that party unless they are brought within the privity of the contract through one of the recognised mechanisms. The general rule, confirmed in Jamna Das, applies with full force in commercial transactions. The trust exception provides the primary route to third-party enforceability without direct joinder, but only where the contract genuinely creates a dedicated obligation in the third party's favour rather than a mere intended benefit.

The practical discipline required is to identify, at the structuring stage of any commercial transaction, every party that is intended to have enforceable rights under the agreement and to ensure that the documentation creates those rights through one of the three structural approaches available, being direct joinder, express trust or charge, or a standalone deed of undertaking. Transactions that are structured on the assumption that intended benefit is sufficient for enforcement, without attending to the privity question, carry a risk that materialises precisely when enforcement is most needed.