Thursday, June 4, 2015

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)

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