Common Law Contract Enforcement Requirements: Privity

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]

When does a contract give rise to a relationship of privity?

The contention of Lord Denning in his Court of Appeal opinion in Beswick was that any beneficiary should be entitled to sue on a contract to enforce their rights. However, the House of Lords explicitly rejected this ruling even in a case where a beneficiary is explicitly named by a term of the agreement. The rationale for this decision as a matter of public policy can be regarded as somewhat conservative in that it would appear logical that two parties can agree between themselves to benefit a third party. However, the logic turns not on what can or cannot be agreed by two parties but rather on who can enforce a contract. The finding that only the parties to a contract can enforce is a great simplification which substantially reduces the scope for litigation and dispute.

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.

Acquisition of Liabilities

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.

So where C buys a building or plot of ground, he/she may be bound by a covenant (agreement) between A and B (the seller of the land), provided that C accepts the covenant when buying the property and the covenant has been properly registered at the Land Charges Registry.

Rebecca Lim is editor of the Findasolicitor website and has written articles on many topics of commercial interest. Rebecca has strong links with solicitors throughout the UK and if you are looking for a personal injury solicitor Rebecca should be able to help via the Find A Solicitor website