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Doctrine of Privity of Contract & Exceptions to the Rule

Provided by Kenna & Associates

If the world of business was a building, contracts could be described as the foundation upon which it depends for its stability. Trade as we know it would be in chaos if a would-be promisor felt free to break his word without the threat of legal sanctions pointing in his direction. A contract is simply that promise or set of promises that the law finds enforceable. In essence the universal law of contract requires that a valid contract possess certain factors, namely; an intention to enter into legal relations, an agreement and a deed under seal (written) or supported by consideration or payment.

What Is Meant By Privity of Contract?

If Mr. A makes a contract with Mr. B, he comes under a legal obligation to pay damages if he fails to keep his promise. The enforceability or liability as regards this contract lies firmly in the hands of A and B to the exclusion of others, this is the foundation of the doctrine of privity of contract.

The doctrine of privity of contract is that a contract cannot confer rights or impose those obligations arising under it, on any person except the parties to it. The term "parties" may seem simple enough but there are situations where it may become doubtful as to exactly who the parties are and resultantly, who, in the eyes of the law should be liable or should be compensated in event of inevitable breaches that may occur from time to time.

The concept of privity is part of the bedrock called common law which was made up of the collective judicial decisions derived from court decisions. Today however the law has recognized that with the increasingly complex world of commerce there must be some changes to accommodate certain exceptions to the general rule and guarantee restitution to the aggrieved. Growing consumer rights questions including warranty claims have contributed to this amendment of approach.

Exceptions to General Rule of Privity:

  • 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.
     
  • 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.
     
  • 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.

 

The current relaxed requirements of modern contract law in relation to privity of contracts have, provided an avenue for redress to genuinely affected persons who the strict common law interpretation of privity might have been deprived of such. Under the current operation of the law, a perfect stranger could be awarded damages if the infringement is proved.


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