Short notes: privity of contract; modes of creating an agency; suit upon quantum meruit

(i) The doctrine of privity of contract

Only a person who is a party to a contract can sue on it. Under the Indian Contract Act, 1872 the consideration may move from a third person, so a stranger to the consideration may still be a party; but a stranger to the contract itself cannot enforce it. This rule is the doctrine of privity of contract. Example: Kabir owes ₹3 lakh to Leela and sells his shop to Mohan, who promises Kabir to pay Leela. If Mohan does not pay, Leela cannot sue Mohan, because she is not a party to the sale.

Exceptions: a stranger to the contract may enforce it:

1. Trust: the beneficiary can enforce his rights under the trust, though not a party to the contract between the settlor and the trustee.
2. Family settlement: where its terms are put in writing, family members who were not parties may enforce it.
3. Marriage arrangements: a person for whose benefit provision is made may sue on it, though not a party.
4. Assignment: an assignee of the benefit of a contract may enforce it, provided it does not involve personal skill.
5. Acknowledgement or estoppel: a promisor who by his conduct acknowledges that he holds money for a third person is bound to that person.
6. Covenant running with the land: a buyer who takes land knowing of a covenant attached to it is bound by it.

(ii) The modes of creation of agency

An agency may be created in any of the following ways:

1. By express agreement, the principal appointing the agent in so many words; for instance, a company signs a letter of authority appointing a customs clearing agent.
2. By implied agreement, which takes two forms:
   • estoppel (holding out): a person who has led a third party to believe that someone is his agent, and on whose conduct the third party has acted, cannot later deny the agency. A shop owner who has regularly let his nephew collect payments from customers cannot deny the nephew's authority to a customer who paid him in that belief;
   • necessity: where an agent authorised to do an act meets an emergency, he gains a special authority to act so as to save his principal from loss, as where a transporter carrying fresh mangoes is stranded by a highway blockade and, unable to reach the owner, sells the fruit locally before it rots.
3. By operation of law, where the law treats one person as another's agent; a partner is the agent of the firm for the purposes of its business.
4. By ratification (s. 196): where one person acts on another's behalf without his knowledge or authority, that other may choose to ratify or to disown the act; if he ratifies, the act has the same effect as if he had authorised it, and ratification may be express or implied from conduct. For a valid ratification the principal must have full knowledge of the facts, ratify the whole transaction, act within a reasonable time and communicate it; it must not put a third party to damage, and the act ratified must itself be valid.

(iii) The suit upon quantum meruit

Quantum meruit means as much as is deserved. Where one person has rendered service to another in circumstances showing that both understood it was to be paid for, though no amount was fixed, the law infers a promise to pay. It also covers a party injured by a breach who had done part, but not all, of his work when the breach occurred, and who claims the value of what he has done.

Conditions: (1) the original contract must have been discharged; and (2) the claim must be brought by a party who is not in default. The claim is restitutory, not compensatory like damages: it awards a reasonable sum for the value of the work done. Example: a shopkeeper orders ten cartons of biscuits, also receives two cartons of namkeen he did not order, and keeps them; he must pay a reasonable price for the namkeen.

When the claim arises:

• when an agreement is discovered to be void, or a contract becomes void;
• when something is done without any intention of doing it free of charge;
• when there is an express or implied contract to render services but nothing has been agreed about payment;
• when one party abandons the contract or refuses to perform it; the other may then claim for what he has already done.