What is Privity of Contract?

Charity Delich

Under the legal doctrine of privity of contract, only the parties to a contract owe duties to one another and realize any benefits under the contract. The contracting parties also have the ability to sue one another for breach of contract. While the contracting parties have rights and responsibilities, third parties typically do not enjoy any rights or have any obligations.

Under privity of contract, only the parties to a contract owe duties to one another and realize its benefits; the parties can also sue one another if the contract is breached.
Under privity of contract, only the parties to a contract owe duties to one another and realize its benefits; the parties can also sue one another if the contract is breached.

For example, John and Jane are parties to a contract, pursuant to which John has agreed to provide Jane, who runs a tuxedo rental company, with 200 tuxedos by a certain date. In turn, Jane has agreed to provide Bob with 50 tuxedos for an upcoming concert. If John fails to provide Jane with the tuxedos, Jane can sue him because they are in privity of contract with one another. Bob could also sue Jane for breach of contract, if Jane fails to deliver the tuxedos. Bob could not, however, sue John because Bob and John do not have a contract with one another, and John does not owe Bob any duties.

In some cases, third parties can obtain the right to privity of contract, however. Assignment is one of these ways, and it occurs when one of the contracting parties, called the assignor, transfers his or her rights or duties under the contract to a third party, called the assignee. After the assignment occurs, the assignor loses his or her contract rights, and the assignee receives any rights that were previously enjoyed by the assignor. The assignor is no longer liable for performing duties under the contract, and the assignee must perform any of the assignor’s duties.

It can also be given to third parties through delegation of duties. In this case, one of the contracting parties, called the delegator, gives some of his or her duties to a third party, known as the delegatee. The delegetee is obligated to perform those duties. Unlike with an assignment, if the delegetee fails to perform, the delegator would ultimately remain responsible for performing the contract duties.

Some contracts designate third-party beneficiaries, who then enjoy privity of contract to some extent. In a typical third-party beneficiary contract, the contracting parties expressly agree that a third party is intended to benefit from the contracting parties’ performance of the contract. If the contracting parties fail to perform their duties, the third-party beneficiary usually has the right to sue for damages. In the tuxedo example above, for instance, if Bob had been a third-party beneficiary, he could have sued John for damages if John failed to deliver the tuxedos to Jane.

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Discussion Comments


What if you are a third party under the Contracts Act of 1999.


@turkay1-- That sounds like a sensitive situation, but the neighbors are actually right. When it comes to contract disputes about land, there is a law which allows neighboring land owners to enforce contracts even if one was not a party to the contract when it was made. This law was made to protect establishments such as waterways, tunnels, trails and so forth. Your uncle's path seems to fit into this category and if his neighbors wish to continue the contract of using the path, there really isn't anything he can do about it. This is the one exception to the privity of contract, its legal term is called "easement", you can look it up online.


Okay, I have a question about the privity of contract. My uncle recently bought this beautiful house next to a lake and there is a whole path that passes through his backyard and down to the lake. The problem is that his two neighbors insist on using this path which is closest to their house and often walk through my uncle's yard. We talked to them about it, but they resist making any changes and say that a contract had been made many years ago with the previous owner that allow the neighboring houses to use my uncle's path.

My uncle didn't make the contract, so why should he abide by it? What should we do?


@fify-- Mentioning someone's name in a contract is not enough to have the right of privity. One has to be physically part of the contract drafting and negotiation in order to be binded to the legal contract. In simple terms, anyone other than the two main contract makers have to be recognized as a "third party" and also sign the contract to have any legal rights to it.


What if a person's name is mentioned in a contract and it actually states that they are to receive a benefit of some sort -- is the individual included in the privity of contract? Is he or she accountable for the contract's terms?

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