The Doctrine of Privity of Contract
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:
*Only parties to a contract can rely upon rights created by that contract
*Privity determines which persons can enforce rights under a contract.
This is known as the doctrine of privities.
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]
Creation of contractual rights
The rule that outsider cannot acquire rights from contracts to which they are not parties applies even where that outsider is actually mentioned in a contract as a beneficiary. Thus where A and B have concluded a contract whereby B is to pay A for doing something which will benefit C, C will not be able to sue if A fails to do that which he promised to do.
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.
Contractual liabilities arising
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.
