What is Privity of Contract?

Table of Contents

Share at:

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.  

Get on demand legal advice for one low monthly fee.

Sign up to our Legal Advice Plan and access professional legal advice whenever you need it.

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.

Find the perfect lawyer to help your business today!

Get a fixed-fee quote from Australia's largest lawyer marketplace.

 

Share at:

Simplify creating legal documents today

Browse through Lawpath's AI tools which can be used to draft, review and refine legal documents today!

Related Articles

Red food truck with its serving hatch open

How to Start a Food Truck Business in Australia: Licences, Permits and Costs

Starting a food truck business in Australia means getting the right registrations, state and council licences, and enough capital to cover setup.
Small business owner packing handmade products into boxes

TM vs ® Symbol: When You Can Use Each in Australia

Use TM on any mark you are claiming. The ® symbol is only for marks registered with IP Australia, and using it too early can be an offence.

9 Virtual Office Benefits To Know (Before You Dismiss the Idea)

On the fence about getting a virtual office for your business? Here are 9 virtual office benefits that will change your mind.

Understanding Document Retention Legal Requirements

In some instances, the law requires you to retain documents and data. In others, it requires you to destroy them. Read this article to find out about document retention requirements, relevant periods, and commercial best practice.

Should You Use A Mutual or One-Way NDA? (2027 Update)

As a business owner, it's important to protect your confidential information in every context. Find out the difference between one way and mutual NDAs here.

What to Do When You Receive a Concerns Notice

Received a concerns notice? Whether or not you've defamed someone, you need to decide how (or if) you're going to respond. Read about it in this article.