Privity of Contract

The doctrine of privity in contract law provides that a contract cannot confer rights or impose
obligations arising under it on any person or agent except the parties to it.

The premise is that only parties to contracts should be able to sue to enforce their rights or claim
damages as such. However, the doctrine has proven problematic due to its implications upon
contracts made for the benefit of third parties who are unable to enforce the obligations of the
contracting parties.

Privity of contract occurs only between the parties to the contract, most commonly contract of
sale of goods or services. Horizontal privity arises when the benefits from a contract are to be
given to a third party. Vertical privity involves a contract between two parties, with an
independent contract between one of the parties and another individual or company.

If a third party gets a benefit under a contract, it does not have the right to go against the parties
to the contract beyond its entitlement to a benefit. An example of this occurs when a
manufacturer sells a product to a distributor and the distributor sells the product to a retailer. The
retailer then sells the product to a consumer. There is no privity of contract between the
manufacturer and the consumer.

This, however, does not mean that the parties do not have another form of action e.g. Donoghue
v. Stevenson – here a friend of Ms. Donoghue bought her a bottle of ginger beer, which was
defective. Specifically, the ginger beer contained the partially decomposed remains of a snail.
Since the contract was between her friend and the shop owner, Mrs. Donoghue could not sue
under the contract, but it was established that the manufacturer has a duty of care owed to their
consumers and she was awarded damages in tort.

Privity is the legal term for a close, mutual, or successive relationship to the same right of
property or the power to enforce a promise or warranty.

Exception to the general rule

Exceptions to General Rule of Privity:

1 Collateral Contracts: A collateral contract is one that accompanies the main contract
between two parties. It is one involving either of them and a third party. A classic example of
this happened in England in 1953 in the case of Shanklin Pier v. Detel Products Ltd. In this case
Shanklin Pier (plaintiff) employed contractors to paint a pier. The contractors then instructed
Detel Products to supply them paint. This instruction was given based on a statement made by
the defendants to the plaintiffs that the paint would last for seven years. When after just three
months the paint work fell apart, the plaintiff sued and was given the go ahead by the courts to
proceed with the suit against the defendant because even though the main contract had been
between the contractor and the defendant there was in existence a collateral contract between the
plaintiff and the defendant guaranteeing seven years protection.

2 Multilateral Contracts: When a person joins an unincorporated association such as a club, it

could be said that he has gone into a contractual relationship with other members even if he may
not be aware of their identity and if the person only liaises with the secretary of the organization.
In one case the courts decided that a competitor in a race contracted not only with the organizers
but with other competitors.

3 Agency: The status and vicarious liability issues of an agent also create exceptions to the
rule of privity. When an agent negotiates a contract between his principal and a third party, it is
generally regarded as being between the principal and the third party. However there are
situations where it is subject to question as to whether or not an agent acted on his own behalf or
not. It may even reach new heights of complexity when an agent makes use of a sub-agent,
spawning twin questions of whether or not the contract will now be between the principal and the
sub-agent or the agent and the sub-agent.

Statutory Exceptions to the Doctrine of Privity

Insurance Contracts Act 1985 (Cth), s. 48

Bills of Exchange Act 1909 (Cth), ss. 36-43

Cheques Act 1986 (Cth), s. 73

Motor Vehicles (Third Party Insurance) Act 1942 (NSW), s. 10(7)