What is privity in contract law?

Privity in contract law

‘Privity of contract’ is a fundamental principle in contract law, meaning that only the parties to a contract can enforce its terms. A third party cannot, save in exceptional cases, enforce a contract to which it is not a party – it had no ‘rights’ in respect of that contract.

What are the rules?

There are rules which state who can take action to sue a party to a contract. In the important case of Dunlop v Selfridge (1915), there was a contract between two parties, Dunlop and Selfridge. It was ruled that a third party could not sue Selfridge over an agreement as to the price because that third party was not in contract with Selfridge. The court decided that there was no contract between the third party and the others, and it did not have the right to sue on that contract. This ‘privity’ rule means only those who are party to a contract have the right to take action against another party to the contract.

However, the rule of privity of contract can cause disadvantages including a degree of unfairness and inequity to third parties in some cases. The Contracts (Rights of Third Parties) Act 1999 (C(RTP)A 1999) was introduced to provide an exception to the general rule. There are also further exceptions to the rule that have been developed by the courts over the years.

Exceptions to the rule of privity of contract

The C(RTP)A 1999

Under the 1999 Act, a person who is not a party to a contract has the right to enforce some terms of the contract in specified circumstances. The contracting parties can incorporate limits and restrictions on the rights given to a third party, such as a consultant, under the contract. The contracting parties can, if they wish, contract out of the provisions of the Act to avoid any third party rights being conferred at all. The Act can apply to most contracts and mitigates against the potential for harshness of the general privity of contract rule.

Other exceptions

Agents: in the case of Eurymedon (1975), a third party was acting as a trustee or agent. Payment had gone to the third party who therefore had the right to sue.

Statute: some legislation also provides exceptions to the general rule, for instance, under the Married Woman’s Property Act 1882 married women are protected who, under the common law, were unable to take an interest in the marital property. Under the Road Traffic Acts, an individual can enforce a contract of insurance (ie. an insurance policy), even if they are not an original party, under the requirement that vehicle users take out third party insurance cover.

Collateral contracts: a contract may be accompanied by a ‘collateral contract’ between one of the contractual parties – and a third party. If the third party makes a collateral warranty upon which the formation of the warranty depends – then a party to the original contract can sue on that promise.

Covenants: where restrictive covenants run with the land, these are enforceable against a buyer who buys for money’s worth on the basis that buyers must take the property subject to any obligations and benefits.

Whilst the common law principle of privity of contract is the default rule, the existence of a number of exceptions to the general principle means it is a complex area of law. If you need specific legal advice on a dispute involving a contract to which you are not a party, we recommend you take specialist advice from civil litigation lawyers.