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:
*Only parties to a contract can rely upon rights created by that 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.
However, there are some exceptions to this. Under the law of agency, where B is secretly acting as an agent for C, C may intervene to enforce a contract between A and B. In this case, B will drop out and the contract will be one which links A directly to C. Also, under the Road Traffic Act 1988, persons specified in a 3rd party car insurance policy may sue the insurance company to enforce the policy for their own benefit.
When does a liability arise under a contract?
The rule that outsiders cannot incur liabilities under a contract is also subject to a number of exceptions. Thus the law has allowed outsiders to be so affected where commercial usage or trade customs so provides. Restrictive covenants affecting land may also have implications for 3rd parties, as these may run with the land.
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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