The Indian Contract Act of 1872 and 'the great privity trick'


Though interesting only from a historiographical point of view, the ‘privity trick’ which was included in the Indian Contract Act 1872, is well-worth considering given the current uncertainty around the doctrine of privity and the rights of third parties. This article takes a look at the history behind and effect of this all-encompassing piece of legislation, much of which remains part of Indian commercial code to this day.


Historical background

Queen Elizabeth's Charter of 31 December 1600 granted legislative autonomy to the Governor of India, whose primary focus at that point was to safeguard the interests of the London East-India Company, so as to enable the enactment of laws that would better advance Britain's commercial interests in India.

The only real qualification on this power to legislate was that any laws passed could not be repugnant to the laws of England. As the Indian Contract Act is basically just a codified version of English common law, it is fair to presume that this rule is abided by.


Codifying offer, acceptance, undue influence and everything else

Passed into law in 1872, many aspects of the Indian Contract Act remain good law in India, but does not apply within the confines of the states of Jammu and Kashmir.  As an act, it is quite typical of nineteenth century English legislation in that it seeks to codify principles which have already been ironed out via the common law - ie, like how the M'Naghten rules on the insanity defence were codified in the Trial of Lunatics Act 1883.

The Indian Contract Act is quite impressive in that it manages to succinctly summarise all of the rules which are we are used to seeing in contract law cases – ie, offer and acceptance and the appropriate communication thereof. The efficacy of this piece of statute can be observed in how broad and all-encompassing it, with explicit definitions offered on issues like: Consent, free consent, coercion, undue influence, fraud and of course, misrepresentation. The definition offered for undue influence under s 16(1) reads as follows:

'A contract is said to be induced by "undue influence" where the relations between the parties are such that one of the parties is in a position to dominate the will of the other, and uses that position to obtain an unfair advantage over the other.'

As students of equity will surely recognise, this definition is very similar to the various common law definitions that have been offered in judgments over the years. For example, MHEIL's defines undue influence as arising where a 'person has not been allowed to exercise a free and deliberate judgement in the matter.' Therefore, the definition laid down in 1872 is quite spot on, even today.


The 'privity trick'

One area where the Indian Contract Act diverges from the wider body of common law can be observed in the operation of privity, a long-standing rule of the common law which prevents contracts from being enforced in favour of or against persons or bodies who are not a party to the contract at hand.

Although it has been said that the doctrine of privity has all but been 'abolished by exceptions' - for example, in trusts - privity was never expressly over-ruled. That said, it exists on shaky grounds as modern commercial transactions often include layers upon layers of interested third parties whose interests would be neglected if a strict interpretation of privity were to be regularly enforced by the courts.

In a 2006 paper entitled 'Privity of Contract: Third Party Rights', the LRC argued that: 'Commerce would be less complicated if a modern rule of third party rights was in place which reflected the needs of the 21st century.' However, roughly 140 years earlier the drafters of the Indian Contract Act had recognised that same issue. In the interpretation segment of the Act, namely s 2(d) a definition of consideration is provided in the following terms:

'When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.'

Though it may not seem apparent from first reading, the inclusion of the phrase 'or any other person' removed the necessity for consideration to move from the promisee, which was a common law requirement at the time. In effect, the provisions of the Indian Contract Act meant that provided the promisor got the requested consideration, any party could sue under the contract - thus giving birth to the syllogism, 'the great Indian privity trick' commonly attributed to Pollock.



Although the Indian Contract Act 1872 does not specifically mention the issue of privity, subsequent Indian cases openly stating that the rule in Tweddle v Atkinson (1861), largely recognised as giving birth to the doctrine, was not applicable. 

The silence of the Indian Contract Act as to the issue of privity could be interpreted in one of two ways. If privity was deliberately omitted, and this author believes that to be the case as Tweddle would have been well-known by this point, the drafters clearly intended there to be no bar to third party relief. In any event, it certainly makes for interesting reading. The Indian Contract Act of 1872 may be accessed in full here.




Note: This article is purely for entertainment purposes and is not intended to be relied upon as legal advice. Any errors should be notified to the editor and will be dealt with accordingly. For more on contract law generally, see McDermott and McDermottt Contract Law (2nd edn).

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