A Novel Exception to Privity of Contract?

(The following guest post is contributed by Shivprasad Swaminathan, who is Associate Professor at the Jindal Global Law School)

The
Delhi High Court’s judgment Utair
Aviation v Jagson Airlines
formulates a novel ‘conduct, acknowledgement
and admission’ exception to privity of contract. This post argues that neither
is the exception doctrinally warranted, nor its invocation in the case
justified.

1.  The Decision
Defendant
2 (the Contractor) entered into an agreement with Jagson for the supply and
maintenance of two helicopters. Utair, the “confirming party” to the
maintenance agreement between the Contractor and Jagson supplied the equipment
required for maintenance of the helicopters directly to Jagson. Despite the
agreement between Jagson and the Contractor coming to an end, the plaintiff’s equipment
continued to remain with Jagson. The Plaintiff, Utair sued for recovery of the
equipment. Jagson applied for rejection of the plaint under O.7 R.11 (a) on the
ground there was no privity of contract between Utair and Jagson and that Utair
as a “third party” could not sue. Utair also pleaded that communication between
parties and their conduct was consistent with there being a contract between
them. The decision under discussion was handed down by the court on the O.7
R.11 (a) application where it fell for the court to decide—without questioning
any of the facts alleged in the plaint—whether a cause of action was disclosed.
The court held in Utair’s favour by holding that the case fell within what the
court regarded to be one of the “well-recognized exceptions” to the privity
doctrine: “conduct, acknowledgment and
admission
” (pp. 640-41).

The
court appears to have been steered in the direction of making the case turn on
privity because the question was squarely raised by Jagson. It is not entirely
clear, however, if this course was at all necessary. Firstly, a cause of action
could be made out quasi ex contractu
without having to invoke the contract—in this case all of the relief claimed
would also have been available under section 70 of the ICA, which
allows the owner of goods who has non-gratuitously handed them over to recover
them from another party along with compensation.  And secondly, even if cause of action had to
be found ex contractu, the question
of privity still remained orthogonal to the relief sought as Utair claimed in
the plaint to be a “confirming party” to the agreement: a pleading, by virtue
of which it could in no way be termed as a “stranger” to the contract. A
confirming party may literally be the third party in the contract but that does not make it the third party to the contract. All said and done, the
“exception” seems to rescue the plaintiff from the pincers of a problem that
the plaintiff would not have needed rescuing from had the plaintiff not been
imagined to be in it in the first place.

2.
The Wide Definition of Consideration
under S. 2(d): Whether Relevant at all?
The
decision introduces the subject of exceptions to the privity rule by claiming
that while in England no stranger to a contract can sue, they can under exceptional
circumstances do so under Indian law because the definition of consideration
under s 2(d) of the ICA which allows consideration to move from the “promisee
or any other person” is wider than the English definition (p. 638). But this claim
seems problematic for three reasons. Firstly,
English law does recognize exceptions to the privity rule: (a) trust; (b) agency;
and (c) covenants running with land.
Exceptions (a) and (b) have also been received by Indian
cases and exception (c) has
statutory recognition in ss 39 and 40 of the Transfer of Property Act. Secondly, if the reasoning underlying
the argument—that exceptions to privity were made possible in Indian law only
because consideration may move from “any other person”—were to be taken to its logical
conclusion, the privity doctrine would be obliterated in a single swoop and
consideration moving from anyone should allow anyone to sue on it as there
would then be no good reason to read “any other person” restrictively to mean
just the category of persons forming one of the recognized exceptions to the
privity doctrine. Finally, the claim seems
to conflate privity of contract (the idea that a stranger to the contract
cannot sue) and privity of consideration (the idea that a consideration must
move from the promisee). No one can cavil about the wider definition of
consideration under s 2(d) having a direct bearing on the idea of privity of
consideration.

But
can s 2(d) be taken to have the effect of negating the privity of contract requirement
as well?
While, at one time, there was some
support for such a view (
see Debnarayan Dutt v Chunnilal Gose)
this was eventually trumped by the constricted view of s 2(d) advanced by Pollock
& Mulla, who argued that the issue of who can sue on a contract was analytically
distinct from the issue of who the consideration could move from. It was Pollock
& Mulla’s constricted view of s 2(d) that was instantiated in Rankin CJ’s
opinion in
Krishna Lal Sadhu v Promila Bala
Dasi
which was quoted with approval in the Supreme Court’s judgment which
settles the privity issue in India:
M.C. Chacko v State Bank of
Travancore
. It should therefore be taken as settled that the width of s
2(d) doesn’t have a bearing on who can sue upon a contract.

3.
Questioning the “Conduct, Acknowledgement
and Admission” Exception
Utair
v Jagson
traces the origin of the “conduct,
acknowledgment and admission” to a decision of a single judge of the Calcutta
High Court in Narayani Devi v Tagore Commercial
Corporation
. That decision, in turn, purports to follow an earlier
division bench’s decision in Jnan Chandra v Manoranjan Mitra.
It must be noted that the courts in both the decisions, Narayani Devi and Jnan
Chandra
, never took themselves to be inventing a novel exception to the
privity doctrine but were merely applying the “agency exception” to the case. The
excerpt from Narayani Devi set out in
the judgment makes it abundantly clear that in that case there was “conduct and
acknowledgment and admission” that the
defendants had constituted themselves as “agents” of the plaintiff. “Agency” is
in any event a well-recognized exception to the privity rule and Narayani Devi did nothing more than fit
the case within that well recognized exception. Utair v Jagson then goes on to say that this principle can also be
found to be relied on in Babu Ram v Dhan Singh. In Babu Ram, however, the court had allowed
relief on another well recognized exception to the privity rule, namely, trust.
Finally, the court also mentions the
“conduct, acknowledgment and admission” as being instantiated in Devaraje
Urs v Ramkrishnaniah
. This does not appear to be correct, either. The plaintiff
in Devaraje Urs had argued that his
case falls within the well-recognized “trust exception” and that is the
submission accepted by the court.

4. A Possible Source
of the Mythical Exception—Avtar Singh
The
judgment in Utair v Jagson does not
refer to Avtar Singh but in his Contract
and Specific Relief
, the court could have found support for its novel exception.
Avtar Singh notes Devaraje Urs as
supporting the “acknowledgment or estoppel exception” (Contract and Specific Relief 10th ed., 122). That
proposition, however, comes not from
the body of the judgment but from the headnote. And that headnote—as headnotes
have often done in the past—wrongly summarizes what was held in the case in
para 7. The text of the judgment itself leaves no doubt that the plaintiff had
sought to fit the case within the “trust” exception and that is just what the
court had permitted (Devaraje Urs
p.110 )

Another
case Avtar Singh adduces as “illustration of acknowledgment by conduct” and of
estoppel (p.122) is Khirodbehari Dutt v. Mangobinda where
according to him “the sub-tenant was
estopped from denying his liability to pay the tenant’s rent on the ground that
there was no such contract between him and the landlord
” (Avtar Singh, Contract and Specific Relief 10 ed. 122).
None of the factors, which according to Avtar Singh make up the estoppel in
this case had any more role to play in the reasoning of the court than the
colour of the plaintiff’s shirt and his inference that the ratio of the
decision was to create an exception to the privity rule on that basis that the sub-tenant
was estopped from denying his liability is based on a purely gratuitous reading
of the case. In fact, in Khirodhbehari
Dutt
, Lort-Williams J was not
trying to create any “exception” to the privity of contract doctrine, let alone
pegging the decision on the exception identified by Singh. Rather, he argued
that there was no need for any exceptions to the privity doctrine in India
because the doctrine itself was wholly inapplicable here.

5. The Redundancy of the Exception
There
are two ways in which the “acknowledgment, conduct and admission” exception can
operate, both of which, it will be claimed, make it redundant. If the role of
estoppel is to preclude the promisor from denying that a state of affairs
existed—which at the most would mean precluding him from denying the existence
of a promise—it is not clear how the third party profits from it. If a state of
affairs, which is to say an express promise, cannot give a third party a right
to sue, a fortiori, the principle which precludes the promisor from denying
that state of affairs—which is precisely what estoppel does—cannot either. To
allow that would lead to the absurd result that while it would not be possible
to sue on an express promise it would be possible to sue on an implied promise
or on something even weaker. On the other hand, if the only purpose of the
acknowledgment exception is to make the perfectly anodyne point that the
acknowledgment and estoppel could establish an “implied” promise with the third
party, then the “exception” becomes redundant. This is because the so-called
third party will no longer be a third party in the real sense—it will be the
“promisee” to the second promise instead. The situation would then resemble Chinnayya v Ramayya (1881) (except that
Chinayya was the case of an express promise and this would be a case of implied
promise) and the promisee to the second promise will in any case be able to
sue. In the case under discussion, all the pleadings regarding “conduct and
acknowledgment” in the plaint could, at best have gone to strengthen the point
that there was indeed an “implied” promise between the Utair and Jagson making
Utair the “promisee”, which further buttresses the point that there was no need
to invoke an exception to the privity doctrine at all, whether real or
mythical.
(Many thanks are
due to Rohan Alva, Ankur Sood and Prashant Iyengar)

About the author

V. Niranjan

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