Privity of contract
PRIVITY OF CONTRACT: WHAT DOES IT MEAN?
Privity of contract states that under a particular contract, only the original parties are subject to the rights and liabilities of that contract. This means it is only these parties which can sue/be sued. Third parties do not have rights under that particular contract, and cannot hold one of the original parties liable for something that occurred under the contract.
In certain situations, third parties can obtain rights under privity of contract. Methods by which this can be done include assignment, novation, delegation of duties, and the allocation of third party beneficiaries.
Privity of Contract through Assignment
Assignment can occur where one of the original parties to the contract transfers their rights/obligations under a particular contract to a third party. The third party then becomes the ‘assignee’. Once this has been done, the ‘assignor’ (i.e. the original party who assigned his rights) loses his rights under the contract. He therefore does not have to comply with any obligations under the contract either. This means that he can no longer be held liable for any problem which results from the contract. The assignee now has to perform the assignor’s duties. Assignment can occur without the other original party’s acceptance.
Privity of Contract through Novation
This concept derives from Roman law. Through novation it is believed that all obligations/duties and liabilities under a contract can be transferred to a third party if all the original parties consent. Where this occurs, the original contract between the original parties is annulled, with a new contract taking its place between the continuing parties and the third parties.
Privity of Contract through Delegation of Duties
This method involves one of the original parties to the contract delegating some of their duties to a third party. The third party (known as the delegatee), is now required to perform these duties under the contract. The original party (known as the delegator) is relieved from having to perform the specified duties. The major difference between the delegation of duties and assignment is that through the delegation of duties, the delegator remains liable for the actions of the delegatee. This means that if the delegatee in some way fails to carry out the duties which he is now responsible for, the delegator is responsible for ultimately ensuring that those duties are carried out. Liability thus still rests with the delegator.
Privity of Contract through the Allocation of Third Party Beneficiaries
If one of the original parties has allocated a third party beneficiary under the contract, this beneficiary will enjoy, to a certain extent, privity of contract. Generally speaking, if there are to be these beneficiaries under a particular contract, the original parties would expressly agree to this during the process of formulating the contract. If this is the case, and the original parties fail to carry out their duties in some way, the third party may be able to sue the original parties for damages.
The Effect of the Contracts (Rights of Third Parties) Act 1999
This Act has had the effect of relaxing the principle of privity of contract. Under this Act, third parties are able to implement a contract without having to be a party to it. This will be the case if the contract bestows a particular benefit upon them. This may also be the case if the contract expressly purports a benefit to them.
Checking the Contract
It is important to check your contract to see what is expressly stated and catered for within the contract. Some contracts may refer to assignment or novation as a method of dealing with the limitations associated with the privity of contract.