The Doctrine of Privity of Contract
Privity of contract is one of the most basic rules of the common law of contract and one of the defining tests for the validity of any contract. This doctrine essentially determines who is a party to contract and who may rely upon the rights granted under the contract to sue another. In the absence of privity there is no contract. In a mixed capitalist economy there is no compulsion to contract for the most part so contracts are voluntarily entered into by the parties. The implication is that:
*Privity determines which parties can expect to enforce rights under a contract
*No other person can incur liabilities under a contract to which he/she is not a party.
In a nutshell the doctrine of privity of contract is that simple.
In one particular case, a businessman B sold his business to C. One of the conditions of the sale was that C should pay B’s wife 10 per week for life after A had died. When Mr.B died, C refused to make the weekly 10 payment because Mrs B was not a party of the contract whereby the business was sold. The court held that Mrs.B would not personally enforce the contract because she was not a party to it. However, she succeeded in enforcing it, but only as the administratrix of her husband’s will [Beswick v. Beswick 1968]
Creation of contractual rights
It is essential to recognize that this doctrine of privities excludes third parties from gaining rights under a contract even if that party is explicitly referred to by name in the contract as the beneficiary of a provision of that contract. So, for example, if Y and X agree that Y should compensate X for a service rendered to Z, then Z is not in a position to enforce the rights that were apparently created in his favor under the contract even if Y fails to fulfill his obligations.
There are a number of circumstances worth noting where privity of contract does not affect the rights of a person to enforce under an agreement. The best example is the case of an agency arrangement. Typically an agent is regarded by law as a special case. So if a contract is entered into between a party, P, and another, A, who is secretly an agent for B, then a legal analysis of the relationship is that the contract is effectively between P and B as the agent drops out of the equation. So, in this circumstance, B could enforce against P even though B is not actually a party (privy) to the contract. The analysis is that B stands in A’s shoes and hence enjoys a relationship of privity through A. It is also worth noting that various legislative instruments may have the effect of undermining the doctrine of privity.
Contractual liabilities arising
Liability arises under a contract, in theory, only when a party is privy to that contract. Which makes sense as it would seem absurd for two parties to meet in a far part of the world and agree that I am liable to pay them some money. However, it is not always that simple. For example if a party acquires a property which is subject to a restrictive covenant entered into by a previous owner of a property, i.e, a party with whom the new owner has no relationship of privy, nevertheless the new owner will be liable under the covenant because under property law the obligation runs with the land rather than the owner.
An important restriction on the doctrine of privity is The Contracts (Rights of Third Parties) Act 1999 which is intended to allow a person named as a beneficiary in a contract to sue for its enforcement. The legislative intent is to undo the perceived harshness of the Beswick case. However, in many cases, the Act is explicitly excluded from application by a clause of the contract.
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