The doctrine of privity of a contract is a common law principle. It prevents third parties from enforcing the terms of a contract to which they are not a party. This means that a person not a party to a contract cannot sue to enforce its terms. This is even if the contract was for their benefit.
Furthermore, the basis of the doctrine is the idea that only the parties to a contract should be bound by its terms. This is because the parties to a contract have agreed to be bound by its terms. Therefore, they should be the only ones who can enforce those terms. This article will discuss privity of contract and its common law exceptions.
Scope of the Doctrine
The law of privity of a contract only applies to contractual rights and obligations. If the contract gives rise to non-contractual rights and obligations, it is enforceable against or in favour of people who are not contract parties.
For example, A and B agree that when constructing a building for A, B will take specific safety procedures to protect A, B, and any third parties (C) who may enter the premises. If B fails in this regard and C is injured, C may have a tort (a violation of right of another in which the law gives a remedy in the form of damages) claim against B for negligence, even if C cannot sue B for breach of B’s contract with A.
Why Is Privity of Contract Important?
There are several reasons why the privity of a contract is essential. Here are some:
- Protects the parties to a contract from being sued by third parties. If third parties could enforce contracts to which they were not a party, it would be difficult to know who was bound by the contract terms. This could lead to uncertainty and confusion and make it more difficult for businesses to enter into contracts.
- Promotes certainty in contract law. The doctrine of privity of a contract helps to ensure that the contract is binding only on the parties to a contract. This provides certainty for businesses and individuals, and it makes it easier to enforce contracts.
Exceptions to the Doctrine of Privity
There are some exceptions to the rule of privity of a contract in Australia. These include:
- Third party rights assignment. This allows a party to transfer its rights under a contract to a third party. The third party can then enforce those rights against the other party to the contract.
- Agency. An agency allows a party to act on behalf of another party in a contract. The agent can then enforce the terms of the contract on behalf of the principal.
- Trusts. A third party is permitted to enforce the terms of a contract if they are a beneficiary of a trust that is a party to the contract.
- Statutory exceptions. In New South Wales, the Contracts Review Act 1980 creates a statutory exception that allows third parties to enforce the terms of a contract. In addition, modifications to property law in Queensland, Northern Territory and Western Australia enable a third party beneficiary to enforce a contractual obligation to do or to refrain from doing an act for the benefit of the beneficiary.
Section 12 of the Act provides that in a case for relief under this Act involving a contract, if it seems to the Court that a person who is not a party to the contract is entitled to share in the benefits of the contract, the Court can make orders against or in favour of that person as may be just in the circumstances.
Case Law on the Doctrine of Privity
The exclusive application of contractual obligations between the contracting parties to the agreement is a well-established common law principle. The decisive case of Tweedle v. Atkinson (1861) in the UK establishes the doctrine of privity of a contract. Years later, the doctrine was reaffirmed by the case of Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd (1915).
Tweedle v. Atkinson (1861)
In this case, the bride’s father promised the groom’s father that he would give the groom (plaintiff) a sum of money upon the couple’s marriage. However, the bride’s father died before completing this payment, and his estate refused to honour his commitment.
The plaintiff sued for the money but was unsuccessful because he was not a contracting party even though the contract was for his benefit. The court agreed with the executor and held that the groom could not enforce the contract. The court found that the doctrine of privity of contract prevented third parties from enforcing contracts to which they were not a party.
Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd. (1915)
In this case, Dunlop, a tire manufacturer, agreed with their dealer, Dew & Co., not to sell the tires below a recommended retail price (RRP). As part of the agreement, Dunlop also required their dealers to have the same agreement with their retailers, who in this instance was Selfridge. Selfridge failed to comply with the condition; Dunlop sued for breach of contract.
However, the Court ruled that Dunlop could not enforce the contract against Selfridge because Selfridge was not a party to the contract. It found that only parties to a contract can enforce its terms and that Selfridge had not given any consideration to Dunlop in exchange for the promise not to sell the tires below RRP.
Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988)
This is a landmark case in Australian insurance contracts. In this case, Blue Circle Southern Cement Ltd (Blue Circle) entered into an insurance contract with Trident General Insurance Co Ltd (Trident).
The policy covered Blue Circle and its contractors for public liability. McNiece Bros Pty Ltd (McNiece) was a contractor working for Blue Circle at the time of an accident. A worker was injured in the accident and sued McNiece. McNiece sought an indemnity from Trident under the insurance policy.
However, Trident argued that McNiece was not a party to the insurance contract and could not enforce its terms. The High Court of Australia disagreed. Furthermore, the court found that it would be inequitable to prevent McNiece from enforcing the contract, given that they intended to benefit from it.
The decision has created an exception to the doctrine of privity and has helped to ensure that third parties can enforce contracts when necessary to do so to achieve the purpose of the contract.
Coulls v Bagot’s Executor and Trustee Co Ltd (1967)
This is also a landmark case in Australian contract law on the doctrine of the privity of a contract. In this case, Arthur Coulls (Arthur) entered into a contract with O’Neil Construction Pty Ltd (O’Neil) to allow O’Neil to quarry on his land.
The contract provided that O’Neil would pay royalties to Arthur and his wife, Doris Coulls (Doris). Doris did not sign the contract or provide any consideration for it. After Arthur died, Doris claimed she was entitled to receive the royalties under the contract. O’Neil argued that Doris was not a party to the contract and could not enforce its terms.
According to the High Court of Australia, Doris cannot enforce the contract. In addition, the court determined that although Doris was a beneficiary of the agreement, Arthur and Doris were not Doris’ exclusive beneficiaries. Doris could not enforce the contract’s provisions because she was not a party to it.
The Role of Lawyers in Enforcing Contracts
Here are some ways that a lawyer can help to enforce the privity of a contract:
- If a third party seeks to enforce a contract, a lawyer will need to show that the third party intended to benefit from the contract and that they have suffered a loss due to the breach of contract.
- If a contract is ambiguous as to whether it allows third parties to enforce the contract, a lawyer can help to interpret the contract and to determine whether the third party is a beneficiary.
- If a party sues a third party for breach of contract, a lawyer can help them defend the lawsuit by arguing that they are not a party to the contract and cannot be held liable. The lawyer must show that the third party did not receive any consideration for the promise and did not intend to benefit from the contract.
Our contract lawyers at JB Solicitors can help you enforce contractual rights, review and interpret the agreement, and protect your interests. Contact us today if you are primary or third party beneficiaries in an agreement or contract.
