Privity of Contract

What Is Privity of Contract?

Privity of contract is a doctrine that protects the parties involved in a contract from third-party interference.

This common law principle states that only the parties directly involved in a contract can enforce the terms of the agreement. Therefore, someone who is not named as a party in the contract cannot enforce the contractual obligations or claim a right to the benefit of the contract.

What Are Examples of Privity of Contract?

Privity of contract is designed to protect parties who have entered into an agreement from lawsuits filed by others who are not part of the legal contract. In other words, the obligations and rights stemming from a legal contract can only affect the contracting parties.

Based on the privity doctrine, even though a third party may have been granted certain rights by one or more of the contracting parties, the third party cannot sue a contracting party to gain those rights.

Here are three examples where privity of contract comes into play.

• Privity of contract in a lease. Anne leases a unit in an apartment building, and six months into her one-year lease, she has to move. Anne subleases the apartment to Bella, and the landlord gives them written permission for this sublease arrangement. Bella has a party that causes $15,000 worth of damage to the apartment. Bella refuses to pay and moves out. Anne is legally responsible for paying the bill since she is the one with the privity of contract with the landlord.

• Privity of contract with possessions. James and Allen sign a contract for Allen to give Grace an heirloom necklace. Then, Allen refuses to part with the valuable piece of jewelry. Grace cannot sue Allen because there is no privity of contract between Grace and Allen.

*. Privity of contract as a subcontractor. An electrician signs a contract with a construction company to install wiring in a new home. However, the construction company fails to pay the electrician. In this case, the electrician cannot sue the homeowner because there is no privity of contract between the homeowner and the electrician.

What Are Some Exceptions to Privity of Contract?

There are some exceptions to the privity of contract law. Many of these exceptions are designed to protect consumers. Here are some examples:

• Life insurance policies. Although the beneficiary of a life insurance policy did not sign the policy agreement, they are allowed to submit claims.
• Automobile accidents. In some cases, a third party involved in a car accident may be able to sue the insurance company of a vehicle owner.
• Defective merchandise. Under revised doctrines of strict liability and implied warranty, third parties, including members of a purchaser's household, may be able to sue a company for defective goods.
• Negligence. In some cases, third parties can successfully sue someone for negligence in the event of personal injury.

Before signing a contract, you need to make sure you understand all the terms, including who is responsible for doing what. Knowing how to write a contract, such as an employment contract, will give you peace of mind that you are in full compliance with the law.