privity of contract

Privity of contract is a common law doctrine which derives from case law, which provides that only the parties to a contract can acquire rights under it, or have obligations imposed upon them under it. In other words, only a party to a contract can sue or be sued in respect of contractual obligations created by it. This is the case even if the contract was created to give a third party to the contract a benefit under the contract (such as the payment of money).

For example, a manufacturer of floor tiles sells its product to a distributor. The distributor then sells the product to a local pub. Where a customer orders tiled which happen to be defective, the customer has no contractual recourse against the manufacturer as there is no privity of contract between the supplier and the customer.

The doctrine proved problematic due to its implications upon contracts made for the benefit of third parties who are unable to enforce the obligations of the contracting parties.

Exceptions to Privity of Contract

In addition to the statutory reform, there are a number of exceptions to the doctrine, which include:

collateral contracts between a third party and one of the contracting parties;
restrictive covenants on land, which are imposed upon subsequent purchasers if the covenant benefits neighbouring land
the beneficiary of a trust can sue a trustee to carry out the contract
third-party insurance, whereby a third party may claim under an insurance policy made for their benefit, even though that party did not pay the premiums.

Comment

Privity of contract does not prevent liability under the law of tort, such as the tort of negligence, procuring a breach of contract or conspiracy by unlawful means (or the economic torts), and statutory liability if circumstances exist which enable a claimant to establish such liability.

The Contracts (Rights of Third Parties) Act 1999 reformed the privity of contract rule to give a person who is not a party to a contract a right to enforce a term of that contract in specified circumstances. The effect of the privity of contract has been ameliorated, however the Act is able to be excluded in its entirety by the parties when signing a contract. In commercial contracts which are professionally drafted, the effect of the Act is usually excluded to limit sources of direct liability of the contracting parties to third parties to the contract.