Privity of contract: Overview, definition and example
What is privity of contract?
Privity of contract is the legal concept that only the parties directly involved in a contract have rights and responsibilities under that contract. If you're not a party to the contract, you generally cannot enforce its terms or be held liable for any breaches, even if the contract affects you. This principle ensures that only those who have agreed to the contract can seek legal remedies for violations of its terms.
Why is privity of contract important?
Privity of contract is important because it sets clear boundaries around who can take action if a contract is breached. It protects businesses by preventing third parties from interfering in or claiming benefits from agreements they aren’t a part of. It also ensures that legal obligations are clearly defined between the actual contracting parties, which minimizes confusion and potential legal complications.
Understanding privity of contract through an example
Imagine Company A and Company B enter into a contract where Company A agrees to deliver goods to Company B. If Company A fails to deliver, Company B can sue for breach of contract. However, if a third party, Company C, is affected by the non-delivery (for example, if they were relying on Company B to get the goods), Company C cannot sue Company A because they’re not part of the contract. Only the parties who signed the agreement, Company A and Company B, can enforce it.
An example of privity of contract in a clause
A typical privity of contract clause might look like this:
"Only the parties to this agreement have the right to enforce its terms. No third party shall have any right to enforce any provision of this agreement unless expressly agreed upon by the parties involved."
Conclusion
Privity of contract is a foundational principle in contract law that ensures only the contracting parties can enforce the terms of the agreement or be held accountable for breaches. While third parties typically don’t have standing to take action under the contract, there are certain exceptions where they might be able to do so. Understanding privity helps businesses navigate their rights and obligations in contracts and avoid unexpected claims from outside parties.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.