Introduction
The concept of privity of contract is important to understanding some points of the law we encounter in our everyday lives. This paper aims to explain the term and discuss some examples and exceptions to its use.
Principle of Privity of Contract
Simply speaking, privity of contract means that only the sides of the agreement are obliged by the law to fulfill it (Duhaime’s Law Dictionary par. 1). It means that nobody can be forced to follow the agreement made by somebody else. It also means that no third party can prosecute one of the sides if it fails to comply with the terms of the contract. For example, A promises B to pay C 100$. A and B are the sides of the contract. They are privy to it. So, C has no right to sue A in case they fail to pay the promised sum of money. Despite receiving the benefits of the contract, C is not privy to it. The concept is based on an assumption that only people directly involved in the contract have the right to decide whether they want to legally enforce its terms. However, a problem occurs, when a third party is somehow affected by the contract being fulfilled (What is Privity in Contract Law par. 3). Such situations occur very often in wholesale trade and insurance contracts. For that reason, some exceptions to the principle were created.
History of Privity of Contract
Originally, the concept was created in order to prevent third parties from enforcing the agreement. In the middle of the 19th century, the British court ruled out the privity of contract to stop that behavior (Law Commission 2). It was justified by another legal concept known as consideration. Consideration is something that one of the sides puts into the contract. It can be physical or virtual. For example in the example above, A’ consideration is the obligation to pay 100$ to C. B’s consideration is the right to enforce the payment. Thus, both sides have investments in the contract and will lose out if it is not fulfilled. The concept of privity was developed based on the logical assumption that an agreement should only concern parties which have invested in it.
It has existed almost unchanged for about half a century until the problems with the concept became apparent to judges around the world. The first noticeable exception to the concept was created in 1916. In the case called MacPherson v. Buick Motor Co., a stonecutter Donald C. MacPherson sued Buicks Motors over a car wheel which broke and caused him to get injured. Originally, Buick denied responsibility since the car was bought from a retailer and there was no privity between the consumer and the manufacturer. However, the court ruled that the manufacturer has a duty of care for the consumers and is held responsible in case a user gets harmed due to using the product. So, nowadays, despite there being no formal contract between the producer and the consumer, a manufacturer can still be sued for the faulty products. That practice is a part of the consumer protection laws which help to ensure that the producer can be held responsible for low-quality goods that cause harm to the users.
Exceptions Based on Trusts
Another common exception to the privity of contract is the case of trusts. If one of the sides of the agreement is trusted by a third party with commodities that are a part of the contract, the third party can sue the holder of those goods to enforce the contract (Tufal 2). Formally, this is not considered an exception since the third party would not be suing the other side of the agreement. Instead, they would be suing the side trusted with the commodities. So in the case provided above, C can sue B to force them to initiate the legal action against A. That is possible, because C has trusted B with the right to ask 100$ of A on their behalf. They still cannot sue A since they are bound by no agreement to that party.
Insurance Exceptions
Insurance agreements are one more exception. In this case, if the insurance company is supposed to pay a third party based on the agreement with the insured person, the third party has the right to seek to enforce the agreements. We can encounter this exception most commonly in cases of the automobile insurance. If the insured car gets into the accident, the insurance company is obligated to pay the damages to the other side of the incident. The agreement is between the company and the owner of the insured car, but the third party can sue for the contract to be fulfilled. The exception is obviously meant to ensure that the company cannot just refuse the payment on the behalf of the insured person.
Restrictive Covenants
Another interesting exception is the restrictive covenant. It means that the agreement regarding a piece of property, usually land, applies to every subsequent owner of that property (Privity of Contract: Definition, Exception & Cases par. 3). For example, if upon buying a plot of land the owner made an agreement with his neighbors to never build anything on it, that covenant applies to anybody who will buy that land in the future. So the contract between the original seller and the original buyer also applies to third parties. This exclusion ensures that the change of owner does not violate the original terms of the purchase contract.
Complexity of Concept
While these various exceptions make sure that the person most interested in the execution of the contract can execute it, they make the whole concept extremely complicated. While it seems logical that only the sides of the agreement should be able to make each other liable as we can see from the examples above, the reality is much more complicated. For that reason, many lawyers have suggested changes to the concept. The British law was corrected to ensure that the contracts include all the exceptions in 1999 (Contracts (Rights of Third Parties) Act par. 1). In other countries, this area remains rather unclear.
Conclusion
It is extremely important to understand the concept of privity of contract. We may not realize this, but we come in contact with this principle and exceptions to it daily. Buying something from a store we are exempted from the rule of privity. The producer does not answer only to the retailer. They are also obliged to provide us with a reasonable product which will not harm anybody. If somebody gets into a car accident, they have to understand the exemptions from the concept, to protect their rights effectively. That is privity of contract affects everybody including people who have nothing to do with trade and business.
Works Cited
Contracts (Rights of Third Parties) Act 1999. Web.
Duhaime’s Law Dictionary. n.d. Web.
Law Commission. n.d. “Privity of Contracts: Contracts for the benefits of third parties”. Law Commisission Website. Web.
Privity of Contract: Definition, Exception & Cases. n.d. Web.
Tufal, Asif. n.d. “Privity of Contract”. Law Teacher Website. Web.
What is Privity in Contract Law. n.d. Web.