By the time you are done reading this your will be in a position to explain:
- What privity of a contract and the doctrine of privity of a contract means
- Examples of cases and scenarios showing 3rd party positions in contracts
- Know the exceptions to the doctrine of privity in contracts
What is a contract?
A contract is a legally binding agreement.
The idea is, one party makes an offer, basically an offer to sell or buy something, and if the other party accepts the offer an agreement is arrived at. Both parties provide consideration, that is, a price for being in the contract, and legal consequences follow which sum up the contract.
The challenge is, there are moments when 3rd parties get involved, or want to get involved in contracts, which is where privity of a contract comes in.
Privity of a contract explained
The doctrine of privity means that a contract cannot, as a general rule, confer rights or impose obligations arising under it on any party except the parties to it
To understand this, look at this situation
let’s say you and your brother are living in together in a beautiful house and since you are the one with some income, you take an insurance policy against fire to cover your lovely home.
The house catches fire but you are in a different country doing some business deals and your brother realizes that the insurance company is taking a lot of time to compensate you so he decides to sue the insurance company…
will your brother win that case?
Ok, your brother isn’t going to win… this in fact, is an example of what happens if there is no privity of contract between the parties
What this means is that only parties to that contact can benefit, sue and be sued under the contract.
In fact, here is a case that made this doctrine famous
Dunlop Pneumatic Tyre Co. Ltd v. Selfridge & Co. Ltd
At a time when the law did not restrict resale price maintenance, Dunlop, who were wholesale tyre manufacturers sold tyres to X under a contract whereby X undertook not to sell the tyres below Dunlop’s list prices and agreed, as Dunlop’s agent, to obtain a similar undertaking from other traders.
X sold to Selfridge, who agreed with X not to sell below Dunlop’s list prices.
They broke this contract and Dunlop sued for this breach
Held: there was no contract between Dunlop and Selfridge. And even assuming that X was the agent of Dunlop when he obtained the price maintenance stipulation from Selfridge, Dunlop could not enforce the contract because no consideration moved from them
And the rule just goes to show that a stranger will generally not sue and benefit from a contract they aren’t part of as per the privity doctrine
Here is another example of how this doctrine can play out
Beswick v. Beswick
Peter, a coal merchant, entered into a written contract with his nephew John, where by Peter sold his business to John. The contract provided that after the death of Peter the nephew would pay the widow (who was not party to the agreement) an annuity of $5 a week.
Peter died and the nephew refused to pay her.
Held: The widow could not enforce the obligation in her personal capacity as she was not a party to the contract
But as an administratrix of Peter’s estate, however, she could enforce his contracts as his representative and there by obtain an order for specific performance requiring the nephew to make the annuity payments
Quick question…
What about in employment situations where an employer takes an insurance policy to cover his employees, can the employees sue the insurance company to benefit from the contract if they are some issues with implementation of the policy?
Are there exceptions to the doctrine of privity?
Of course there are exceptions to the doctrine of privity, look at an example of a real estate.
You get into a rental after signing a contract with an agent, except the agent is not the owner of the house, so does that mean you cannot sue the owner, in this case the landlord, since you never met them?
Ok, the law of agency has some technicalities regarding how to deal with principals who don’t want to be known, basically undisclosed principals, but generally the principal is bound by the contract
The exception to the privity doctrine will include:
- If the law, for example, retail price act, or consumer protection act, controls price and you go against it – by the way just check which body in your country set up the celling and floor prices, the main reason for some of these price maintenance acts is based on the idea that no trader should be in a worse position than if he had been a party to the original contract
- In a contract made by an agent acting on behalf of the principal, the principal can be sued
- If a contract constitutes a trust relationship under which a trust fund is created in the hands of one of the contracting parties in favour of a 3rd party, the latter can sue the trustee in case of breach
For example:
Let’s say John promises Jane, that out of the money he owes her he will pay Jack, who is Jane’s brother and informs Jack about this.
Later John refused to pay and Jack decided to sue him.
Jack will win the case and the reason is that the money was held in trust for him despite the fact that it was just a monetary obligation and not identifiable money
- Restrictive covenants- for example in land
Conclusion
Generally, only parties to a contract are said to be privy to the contract and these are the ones who can benefit from the contract.
However, there are situations when 3rd parties can become part of the contract, either in the form of stopping the contract or benefiting from it. This is shown by the exceptions to the privity of contract doctrine