Privity Of Contract

GROUP 5:
1. Abdullah Bin Fawad (238)
2. Hasnain Khan (284)
3. Yasir Haroon (227)
4. Abdul Muneeb (165)
5. Muhammad Omair (101)
Privity of a contract is the rule that specifies only the parties directly involved in
a contract can enforce the terms of the contract. It protects the parties from third-party
interference.

The rule is a common law principle that states that someone who is not a party to the
contract cannot claim a right to the benefits of the contract, nor can they enforce the
obligations of the contract. Even if the third party might benefit from the existence of the
contract, they still cannot sue if they do not receive such benefits.

Privity of the contract came about when third parties went to court to enforce the terms of
contracts, even though they were not parties to the contract.

Sometimes, however, there may be no Privity of a contract between two parties, but there
is. For example, let us say a movie star wants to rent a private island for a summer
vacation. The movie star has a manager, whom the star has given the power to enter into
certain types of written agreements on behalf of the movie star. The manager, on behalf of
the movie star, signs a lease for the island for the summer. If the movie star moves onto
the island but does not pay the owner, the movie star cannot claim that there was a lack of
Privity between them and the owner just because the movie star did not sign the lease. In
legal terms, the manager was acting as the movie star’s legal agent, so the movie star is
bound by the terms of the lease.

What Is Privity?

Privity is a doctrine of contract law that says contracts are only binding on the parties to a
contract and that no third party can enforce the contract or be sued under it. Lack of Privity
exists when parties have no contractual obligation to one another, thereby eliminating
obligations, liabilities, and access to certain rights.

KEY TAKEAWAYS

 In contract law, Privity is a doctrine that imposes rights and obligations to parties of
a contract and restricts non-contractual parties from enforcing the contract.
 Lack of Privity states that there is no contract between parties, thereby not requiring
them to perform certain duties and not entitling them to certain rights.
  Under the doctrine of Privity, for example, the tenant of a homeowner cannot sue the
former owner of the property for failure to make repairs guaranteed by the land sales
contract between seller and buyer as the tenant was not "in Privity" with the seller.
 Privity is intended to protect third parties to a contract from lawsuits arising from
that contract. 
 The strict liability and implied warranty doctrines allow third parties to sue
manufacturers for faulty goods, even though they are not parties to the original
contract.

Understanding Privity

Privity is an important concept in contract law. Under the doctrine of Privity, for example,
the tenant of a homeowner cannot sue the former owner of the property for failure to make
repairs guaranteed by the land sales contract between seller and buyer as the tenant was not
"in Privity" with the seller. Privity is intended to protect third parties to a contract from
lawsuits arising from that contract. 

However, Privity has proven to be problematic; as a result, numerous exceptions are now
accepted.

History
Before 1861, there existed decisions in English Law allowing provisions of a contract to be
enforced by persons, not a party to it, usually relatives of a promise, and decisions
disallowing third-party rights. The doctrine of privity emerged alongside the doctrine
of consideration, the rules of which state that consideration must move from the promise,
which is to say that if nothing is given for the promise of something to be given in return, that
promise is not legally binding unless promised as a deed. 1833 saw the case of Price v.
Easton, where a contract was made for work to be done in exchange for payment to a third
party. When the third party attempted to sue for the payment, he was held to be not privy to
the contract, and so his claim failed. This was fully linked to the doctrine of consideration,
and established as such, with the more famous case of Tweddle v. Atkinson. In this case, the
plaintiff was unable to sue the executor of his father-in-law, who had promised to the
plaintiff's father to make payment to the plaintiff because he had not provided any
consideration to the contract.
The doctrine was developed further in Dunlop Pneumatic Tire v. Selfridge and Co.
Ltd. through the judgment of Lord Haldane.

Privity of Contract played a key role in the development of negligence as well. In the first
case of Winterbottom v. Wright (1842), in which Winterbottom, a postal service wagon
driver, was injured due to a faulty wheel, attempted to sue the manufacturer Wright for his
injuries. The courts however decided that there was no privity of contract between
manufacturer and consumer.

This issue appeared repeatedly until MacPherson v. Buick Motor Co. (1916), a case

analogous to Winterbottom v Wright involving a car's defective wheel. Judge Cardozo,
writing for the New York Court of Appeals, decided that no privity is required when the
manufacturer knows the product is probably dangerous if defective, third parties (e.g.
consumers) will be harmed because of said defect, and there was no further testing after the
initial sale. Foreseeable injuries occurred from foreseeable uses. Cardozo's innovation was to
decide that the basis for the claim was that it was a tort not a breach of contract. In this way,
he finessed the problems caused by the doctrine of privity in modern industrial society.
Although his opinion was the only law in New York State, the solution he advanced was
widely accepted elsewhere and formed the basis of the doctrine of product liability.

Exceptions to Privity

Insurance Companies

According to the doctrine of Privity, the beneficiary of a life insurance policy would have no
right to enforce the contract since they were not a party to the contract and the signatory is
dead. As this would be inequitable, third-party insurance contracts, which allow third parties
to submit claims from policies issued for their benefit, are one of the exceptions to the
doctrine of Privity.

In addition, a third party involved in an automobile accident with an insured vehicle may, in
some cases, sue the insurance company when he gets a favorable court ruling against the
vehicle owner.

The Sale of Defective Goods

One exception to privity is manufacturers’ warranties for their products. It used to be the
case that a lawsuit for breach of warranty could only be brought by the party to the original
contract or transaction; so, consumers would have to sue retailers for faulty goods because
no contract existed between the consumer and the manufacturer. Now, under modern
doctrines of strict liability and implied warranty, the right to sue has been extended to third-
party beneficiaries, including members of a purchaser's household, whose use of a product is
foreseeable.

Negligence

If a personal injury occurs because of negligence, the negligent party can be sued by third
parties who have not entered a contract with the negligent party.

Restrictive Agreements

In some cases, a restrictive agreement may be enforceable against a third party. For
example, assume that the owners of a house want to sell their house with the understanding
that the buyer is not going to change the design of the house. If the buyer sells the house to a
third party and some requirements are met, the third party may be obligated to follow the
original owners' conditions.

Trusts

In some cases, a contract between a trustee and another party may affect the owner. For
example, if a contract is made between the trustee of a trust and another party, the
beneficiary of the trust can sue by enforcing their right under the trust, even if they are a
stranger to the contract,

The doctrine of Privity emerged alongside the doctrine of consideration. The doctrine of
consideration states that if nothing is given for the promise of something to be given in
return, that promise is not legally binding unless promised as a deed. 

Example of Privity
Consider the example in which Shawn signs a contract to sublease a Manhattan one-
bedroom condo from a friend, Blake, who leases the unit from its owner Jude before
entering into a contract with Shawn, Blake obtained written permission from Jude, the
landlord. This permission does not absolve Blake from tenant duties as Jude's tenant as
Privity still exists between them.

Six months into the one-year lease, Shawn threw a large party, and the guests caused
$10,000 in damages to the unit. Jude sent the bill for damages to Jessica, and, in response,
Blake demanded payment from Shawn. Unfortunately, Shawn vacated the apartment and
avoided Blake's attempts to recover for damages and unpaid rent. Since Blake is the original
tenant named on the lease, Blake is culpable for any damages to the unit and is responsible
for rents due and performing all duties as specified in the original lease. Shawn has no
Privity with Jude; therefore, Blake must pay Jude for the damages, or take legal action.
However, Blake is not defenseless as Blake can sue Shawn since Shawn has Privity with
Blake.