Privity of 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 essentially states that someone who isn’t a party to the contract can’t 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 can’t sue if they don’t receive such benefits.
Here’s an example. Jane buys a rental property from John, but Ann is living on the property and has a one-year lease — which Jane assumes as part of the purchase. When Jane buys the property, there’s a leak in the roof that needs to be fixed. John agrees to fix the leak, but he doesn’t.
Even though Ann is directly affected, she can’t sue John to fix the leak because she has no contract with John. She could, however, sue Jane if Jane is obligated under landlord-tenant law to fix the leak. Likewise, if Jane and Ann have their own contract (a lease) that requires Ann to repair leaks, that would be another way for Ann to use legal means to get Jane to repair the leak.
Just so you know
Privity of contract came about when third parties went to court to enforce the terms of contracts, even though they weren’t actually parties to the contract.
Sometimes, however, it may appear that there’s no privity of contract between two parties, but there actually is. For example, let’s 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 doesn’t pay the owner, the movie star can’t claim that there was lack of privity between them and the owner just because the movie star didn’t 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.
Figuring out whether there’s a privity of contract issue isn’t always that simple. While it makes sense that a third party shouldn’t be able to enforce the terms of a contract -it isn’t always that cut- and- dried. Consumer protection, contract assignments, and insurance cases are just some of the types of contracts where courts can find privity even where a person isn’t technically a party to a contract.
For more information, you can have a look at our tips on complete guide on how to write a contract.