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:
*Privity determines which parties can expect to enforce rights under a contract
*Third parties, i.e., those not party to the contract cannot be held liable under a contract
This is known as the doctrine of privities.
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.
Acquisition of rights
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.
There are a number of important caveats to the application of the doctrine of privities. A common example arises under the concept of agency. In the circumstance where A acts covertly as an agent for G in a contract with H, then G may enforce rights under the contract against H even though not a party to the contract. This is because A is said to be a mere cipher in the equation and is effectively discounted for the purposes of legal analysis. A second exception arises under the Road Traffic Act 1988. In this case parties protect under a contract of insurance as third parties may sue the insurer of a party having an accident.
Acquisition of Liabilities
The second part of the rule of privities, that a third party cannot be held liable under a contract to which he is not a party is also subject to a number of important caveats. For instance, cases have imposed liability on non parties to a contract where there is strong commercial usage or evidence of customary behaviors. Another exception, though not strictly contractual, is that of restrictive covenants which arise under property law as these are attached to the land itself.
So where C buys a building or plot of ground, he/she may be bound by a covenant (agreement) between A and B (the seller of the land), provided that C accepts the covenant when buying the property and the covenant has been properly registered at the Land Charges Registry.
