Can a third party sue for breach of contract?

Answer By law4u team

In most legal systems, including Indian law, a third party generally cannot sue for breach of contract unless they are specifically mentioned in the contract or have a legal interest or right arising out of that contract. However, there are certain exceptions and circumstances under which a third party may be able to bring a claim. Can a Third Party Sue for Breach of Contract? 1. General Rule Under Indian Law: Under the Indian Contract Act, 1872, a contract is primarily a privileged relationship between the parties who enter into the agreement. This means only those who are part of the contract—the parties—can enforce the terms of the contract or sue for breach. This is known as the privity of contract doctrine. Section 2(h) of the Indian Contract Act, 1872 defines a contract as an agreement that is enforceable by law between the parties. Therefore, third parties—persons who are not parties to the contract—are not entitled to sue for breach, as they are not directly involved in the contractual relationship. 2. Exception: Third-Party Beneficiaries While the general rule is that only parties to a contract can sue, there are exceptions when a third party may be allowed to enforce a contract or sue for breach. a. Contracts for the Benefit of Third Parties (Doctrine of Third-Party Beneficiaries) In certain cases, a contract may be made expressly for the benefit of a third party. In such cases, if the contract explicitly states that the benefit of the contract is meant for a third party, then that third party can sue for breach of contract. This is particularly relevant in insurance contracts and contracts made in trust for another party. For example, if A contracts with B to deliver goods to C, and the goods are not delivered as promised, C (the third party) may sue A or B for breach of the contract, as the contract was specifically meant to benefit C. Case Law Example: In the case of Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd. (1915), the House of Lords held that a third party cannot enforce a contract unless the contract expressly provides for their benefit. However, Indian law, through certain provisions, acknowledges that third-party beneficiaries can sue if the contract was made for their direct benefit. 3. Exception: Assignment of Rights and Delegation of Duties Another situation where a third party may be allowed to intervene in a breach of contract is when there is an assignment of rights or a delegation of duties: a. Assignment of Rights: In contracts where rights are assignable, a third party who has been assigned the right to benefit from the contract can also sue for a breach of that right. The assignor (the original party) transfers their rights to the assignee (the third party), who can then sue for a breach of those rights. For instance, in the case of Bharat Sanchar Nigam Ltd. v. Nortel Networks India Pvt. Ltd. (2008), a third-party assignee was allowed to sue the defendant for breach of contract because they had been assigned the right to enforce the contract. b. Delegation of Duties: If one party to a contract delegates their duties to a third party and the third party fails to perform the delegated duty, the other contracting party may have the right to sue for breach of contract. However, this will depend on the terms of the original contract and whether delegation is allowed. 4. Exception: Contracts Made in Trust In some cases, contracts may be made where one party agrees to hold the benefits or rights in trust for a third party. This trust arrangement can give the third party a right to sue for breach of the contract. For instance, if A makes a contract with B to transfer property to C at a later date, and A fails to do so, C (the third party beneficiary) can claim that their beneficial rights were not honored under the contract and may sue A for breach. 5. Exception: Tort Claims Arising from Breach of Contract In some situations, a third party may not sue for breach of contract, but they may claim damages under the tort of negligence or another related tort. For example, if a breach of contract causes harm to a third party, the third party may pursue a tort claim (such as negligence or interference with contractual relations) even if they are not part of the contract. For example, if a supplier breaches a contract with a company, and the breach causes harm to a third-party consumer (such as product defects leading to injury), the third party could potentially sue for damages based on tort law rather than breach of contract. 6. Example of Third Party Lawsuits in Practice: Insurance Contracts: A common example is when an insurance policy is taken by Person A for the benefit of Person B. If Person A defaults on the premium payment, Person B (who is the third-party beneficiary) may sue the insurance company for breach of contract. Trusts and Estates: A trust document may specify that certain assets be transferred to third-party beneficiaries. If the trustee fails to perform the duties specified in the trust, the beneficiaries can sue for breach of contract or breach of trust. Third-Party Rights in Commercial Contracts: In some commercial contracts, a company may enter into agreements with its suppliers or clients that benefit a third party, such as a subcontractor or a consumer. If these terms are violated, the third party might have the legal standing to sue for the breach if their rights are adversely affected. 7. Conclusion Under Indian contract law, the general rule is that only the parties to a contract can sue for breach. However, third parties may be allowed to sue under certain exceptions: 1. Contracts for the benefit of third parties, where the contract expressly benefits the third party. 2. Assignment of rights, where rights are transferred to a third party. 3. Delegation of duties, where duties are delegated to a third party. 4. Contracts made in trust, where the third party is a beneficiary of the trust. 5. Tort claims arising out of a breach of contract that causes harm to the third party. These exceptions allow third-party beneficiaries or parties with vested rights in a contract to enforce terms or sue for breach under specific legal principles. If you're dealing with a case that involves a third party and breach of contract, it’s important to carefully review the contract terms, the intent of the parties, and any legal provisions that may support a third-party claim. Legal advice from a qualified professional is crucial for understanding the viability of such a claim in specific scenarios.

Answer By Ayantika Mondal

Dear client, The answer to your question is, in India as a general rule, a third party cannot sue for breach of contract. Under Indian Contract Act 1882, only the parties to a contract which means, those who have privity of contract have the legal right to enforce it. Since a third party is neither a signatory nor a contracting party, they ordinarily lack locus standi to bring a suit for breach. However, there are well recognised exceptions to this rule. A third party may sue in cases such as beneficiary contracts e.g., a trust or family settlement, contracts creating a charge on property, assignment of contractual rights, acknowledgment or estoppel, and where the contract is made for the benefit of a third party and is enforceable in equity. Outside these recognised exceptions, a third party cannot maintain a suit for breach of contract. I hope this answer was helpful. For further queries, please do not hesitate to contact us. Thank you.

Answer By Anik

Dear client, In general a third party cannot sue for breach of contract by virtue of privity of contract. In simple terms, this principle means that only the people who are directly part of a contract have the right to go to court and enforce it. If someone else, who wasn’t a party to the contract, wants to sue or be sued under it, the law generally does not allow that. Even if the contract was made for that person’s benefit, they can't claim any rights under it. However it is not applied strictly in India under the Indian Contract Act, 1872 According to Section 2(d) of the Indian Contract Act, 1872, it does not matter who gives the consideration as long as it is given at the desire of the promisor. So, in India, a person who is not a direct party to the contract but has given consideration can still sue. This is why the Doctrine of Privity of Consideration does not apply in India. Exceptions to the doctrine Even though the general rule says no, there are several exceptions especially under Indian law where a third party can sue: 1. Trusts or Charges: If a contract creates a trust in someone’s favor, that person can enforce it. 2.Marriage or Family Settlements: If an agreement is made during events like a marriage or property division, a person benefiting from the arrangement can sue. 3. Acknowledgement or Estoppel: If a promisor later accepts or acknowledges an obligation towards a third party, that person can sue. 4.Assignment of Contract: In case if the contract’s benefits are officially transferred to someone else that is a third person, that new person can sue. 5. Agency: in case if someone (agent) makes a contract on behalf of another (principal), the principal can enforce it, even if they didn’t directly make the agreement. Conclusion It could be concluded that the Doctrine of Privity of Contract is an important concept in contract law that provides as to who can enforce a contract. While English law sticks strictly to the rule, Indian law is more flexible, especially when it comes to who provides consideration. Moreover, multiple exceptions allow third parties to enforce rights if fairness and justice demand it. I hope this answer was helpful. For any further queries please do not hesitate to contact us.