The doctrine of privity of contract is a common law principle which provides that a contract cannot confer rights or impose obligations upon any person who is not a party to the contract.
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 because of its implications for contracts made for the benefit of third parties who are unable to enforce the obligations of the contracting parties.
A common law doctrine which prevents a person who is not a party to a contract from enforcing a term of that contract, even where the contract was made for the purpose of conferring a benefit on the third party.
A contract cannot confer enforceable rights or impose obligations arising under it on any person, except parties to it. Thus, only parties to a contract can sue on it. It also follows that only those who have furnished consideration towards the formation of the contract can bring an action on it.
The classic exposition of this principle is contained in Lord Haldane’s judgment in Dunlop Pneumatic Tyre Co. Ltd. V. Selfridge Ltd; (1915) A.C. 847 at p.853.
“My lords, in the law of England, certain principles are fundamental. One is that only a person who is a party to a contract can sue on it.
Our laws knows nothing of a jus quaesitum tertio arising by way of contract. Such a right may be conferred by way of property, as for example, under a trust, but it cannot be conferred on a stranger to a contract as a right in personam to enforce the contract.
Thus, if Richard promises John for a consideration to render a service to zender, zender cannot sue Richard if he fails to carry out the promise. Zender is not a party to the contract. He is only a beneficiary. Only John can sue to enforce it.
There are, however, exceptions to the principle of privity of contract. Agency and the assignment of contractual obligations and novation are obvious examples. Others include contracts of insurance, contracts running with land, charter parties, and a special application of the trust concept in equity. The discussion of privity in this work, will concentrate on the general principle itself, and some of the exceptions listed above.
The General Principle and its Application – Privity of Contract
The rule that only parties to a contract can sue on it was only established comparatively recently. As late as the seventeenth century, in the case of Dutton V. Poole,
Facts of the case were as follows:
A father intended to sell woods to raise money for his younger children. His oldest son dissuaded him from doing so by promising to pay £1,000 to each of the younger children. When he failed to carry out his promise, one of the children sued him on it and was successful.
In the view of the court:
…there was such an apparent consideration of affection from the father to his children for whom nature obliges him to provide, that the consideration and promise to the father may well extend to the children…
The reasoning behind this decision was that if the promise had been made by the father directly to the younger children, he would have been bound because natural love and affection was then regarded as good consideration.
However, by the nineteenth century when the idea of natural love and affection had long been discarded, the doctrine of privity of contract became firmly established.
In Price V. Easton (1833) 4 B. & Ad. 433.
X owed price £13. Easton promised that if X worked for him, he would discharge X’s debt to Price. X did the work, but Easton failed to discharge the debt. Price sued Easton. His action failed.
It was held that he could not recover because he was not a party to the contract.
Also in Tweddle V. Atkinson (1861) 1 B. & S. 393;
The facts of the case were as follows:
The fathers of a husband and wife, in pursuance of an oral agreement made between then before the marriage, agreed together in writing that one of them should pay the husband £200 and the other should pay him £100, and that the husband should have full power to enforce the payments in any court of law.
An action by the husband against the wife’s father for the enforcement of his promise failed.
The doctrine was given a final judicial approval in the celebrated case of Dunlop Pneumatic Tyre Co. Ltd. V. Selfridge Ltd.(1915) A.C. 79;847 at p.853, from which the classical exposition of the doctrine of privity of contract was taken above.
Facts of the case were as follows:
The plaintiffs sold tyres to a certain dealer on the understanding that he would not resell below certain price and that in the event of a sale to customers the dealer would extract the same promise from them. The dealer sold tyres to Selfridge who agreed to observe the restrictions and to pay Dunlop £5 for each tyre they sold below the restricted price.
Selfridge sold some tyres below the restricted price to a customer and Dunlop brought this action to enforce the promise to pay £5 per tyre, for the breach.
It was held that while Selfridge had commited a breach of the contract between him and the dealer, the Dunlop company was not a party to this contract and had furnished no consideration for the defendant’s promise.
Lord Haldene then used the opportunity to restate the doctrine of privity.
“…the doctrine of privity has been fully applied in this country, at the highest judicial level.
In Chuba Ikpeazu V. African Continental Bank,(1965) N.M.L.R. 374.
Facts of the case were as follows:
The appellant entered into agreement with one Emodi, a debtor of the respondent bank, under which the appellant (who at that time was the bank’s solicitor) was to run Emodi’s business with the intention that all proceeds should be paid into the bank until Emodi’s debt was completely liquidated.
The appellant managed Emodi’s business for some time, and then under a new agreement with Emodi, he handed back the business to the latter without the knowledge of the bank.
The bank sued the appellant as guarantor of Emodi’s debt to it (about £28,000) relying on a deed under seal containing the agreement between Emodi and the appellant. In the deed, William Emodi as transferror, renounced in favour of the transferee (the appellant),…and transfers the same to the latter all his powers as Managing Director of the before mentioned business, including the collection and disbursement of revenue and the control of staff and debt owing to the African Continental Bank which the transferee guaranteed, is liquidated.
Earlier, one of the recitals in the deed had stated as follows:
AND WHEREAS the transferee has guarranteed the before mentioned loan.
However, it was quite clear from the terms and contents of the document, that it was an agreement between Emodi and the appellant only. The bank was never a party to it.
It was held that not being a party to it, the bank could not acquire rights under the deed.
“…Generally, a contract cannot be enforced by a person who is not a party, even if the contract is made for his benefit and purports to give him a right to sue upon it –Tweddle V. Atkinson 30 L.J., Q.B. 265. This view was supported by the House of Lords in Dunlop Pneumatic Tyre Co. V. Selfridge & Co. Ltd.