Common Law Contract Enforcement Requirements: Privity

At the heart of contract law is the concept of privity of contract. One of the fundamental tests of whether a contract binds a particular person is whether a relationship of privity exists. Without privity there is no contractually binding obligation. The issue affects contract more with respect to enforcement than formation; a contract may exist but the crucial questions often overlooked are "who may sue" on the contract and "who is liable" under the contract? The question of privity is also a matter of logic. In a free society there is no obligation to enter into a contract for the most part. Hence, it is only logical, that the common law limits the scope of contractual rights and obligations to a narrow class of persons. Hence there are two parts to the rule:

*No other person can acquire rights under a contract to which he/she is not a party.

*Third parties, i.e., those not party to the contract cannot be held liable under a contract

This, in essence, is the doctrine of privity of contract.

The House of Lords decision in the 1968 case of Beswick v Beswick [1968] AC 58 is the authority which best explains privity and which rejects the alternative notion that any beneficiary to a contract can sue on it (the finding of Lord Denning in the Court of Appeal. In that case an ageing husband, Peter Beswick, assigned his business to his nephew. One term of the agreement was the payment of a weekly annuity to Mrs. Beswick after the death of Mr. Beswick. The nephew decided, upon Peter's death, that he was not obliged to pay the annuity as Mrs. Beswick was not a party to the contract. The court accepted this contention. However Mrs. Beswick was allowed to enforce the contract as the administratrix of the estate of Mr. Beswick where, by standing in the shoes of the deceased, she became a party to the contract and thus entered a relationship of privity with her nephew.

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

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 example of a restrictive covenant affecting a third party arises where P buys a real asset which is the subject of a covenant in favor of a third party either nominated specifically or a member of a clearly identifiable class.