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What is Privity of Contract?

What is Privity of Contract?

A guide to one of the fundamental principles of contract law.

18th December 2018

Definition

Privity of Contract is a doctrine of law stating that only the two parties of a bilateral contract have the right to sue (or be sued). Thus, to sue someone for a breach of promise, you need to be the promisee in the contract.

Example

Alex promises Blake, to make a payment to Clarke if Blake delivers certain goods to him. Clarke is unable to sue Alex if Alex refuses to make good on his promise. The rationale behind this doctrine is that only parties that agree to a contract should be bound by it. As Clarke has not provided any consideration in the contract, he should not have a right to benefit from it either.  

Benefit of Privity

This doctrine prevents third parties from enforcing contractual promises that benefit them. It was first explored in Australia in Coulls v Bagot’s Executor and Trustee Co Ltd.  Arthur Coulls granted a company the right to quarry stone from his property in exchange for royalties payment. Consequently, Arthur and his wife signed the contract as joint tenants. After Arthur’s death the High Court found that the wife was not entitled to the royalties because she was a third party and the promise was not expressly made to her. The wife was a party to an Agreement, not a contract.

The Insurance Exception

Ever since the decision in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd, the application of this doctrine is uncertain in Australia. Cited as a specific exception to the doctrine of privity, the High Court ruled in favour of third parties in this insurance case. In the case, Trident agreed to insure Blue Circle (including all its contractors, related companies and supplies) against liability. When an employee of McNiece, a contractor of Blue Circle, sued McNiece for personal injuries, it claimed insurance from Trident. Based on the privity of contract, Trident claimed that McNiece was a third party and therefore not eligible for insurance. The High Court deemed this unjust and created an insurance exception to the doctrine, granting McNiece a right to claim.

Other Notable Exceptions

Over the years, other exceptions to this doctrine have also emerged, including:

  • Motor vehicle insurance
  • State Property law legislation
  • Express, Implied or apparent Agency
  • Trusts

Privity of Contract is a crucial legal doctrine. It aims to prevent third parties from enforcing a promised contract that benefits them, unless they provide consideration. However, over time, it has been deemed too unjust and several exceptions has been created in law to mitigate its effect. Nevertheless, it remains a long-standing, indispensable doctrine in contract law.

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Author
Avi Bhargava

Avi is a legal intern at Lawpath. He is currently studying a Bachelor of Commerce (Finance) with a Bachelor of Laws at Macquarie University.