| At the heart of contract law is the concept of | | | | where, by standing in the shoes of the deceased, |
| privity of contract. One of the fundamental tests | | | | she became a party to the contract and thus |
| of whether a contract binds a particular person is | | | | entered a relationship of privity with her nephew. |
| whether a relationship of privity exists. Without | | | | When does a contract give rise to a relationship |
| privity there is no contractually binding obligation. | | | | of privity? |
| The issue affects contract more with respect to | | | | It is essential to recognize that this doctrine of |
| enforcement than formation; a contract may | | | | privities excludes third parties from gaining rights |
| exist but the crucial questions often overlooked | | | | under a contract even if that party is explicitly |
| are "who may sue" on the contract and "who is | | | | referred to by name in the contract as the |
| liable" under the contract? The question of privity | | | | beneficiary of a provision of that contract. So, for |
| is also a matter of logic. In a free society there is | | | | example, if Y and X agree that Y should |
| no obligation to enter into a contract for the most | | | | compensate X for a service rendered to Z, then |
| part. Hence, it is only logical, that the common law | | | | Z is not in a position to enforce the rights that |
| limits the scope of contractual rights and | | | | were apparently created in his favor under the |
| obligations to a narrow class of persons. Hence | | | | contract even if Y fails to fulfill his obligations. |
| there are two parts to the rule: | | | | However, there are some exceptions to this. |
| *No other person can acquire rights under a | | | | Under the law of agency, where B is secretly |
| contract to which he/she is not a party. | | | | acting as an agent for C, C may intervene to |
| *Third parties, i.e., those not party to the contract | | | | enforce a contract between A and B. In this case, |
| cannot be held liable under a contract | | | | B will drop out and the contract will be one which |
| This, in essence, is the doctrine of privity of | | | | links A directly to C. Also, under the Road Traffic |
| contract. | | | | Act 1988, persons specified in a 3rd party car |
| The House of Lords decision in the 1968 case of | | | | insurance policy may sue the insurance company |
| Beswick v Beswick [1968] AC 58 is the authority | | | | to enforce the policy for their own benefit. |
| which best explains privity and which rejects the | | | | When does a liability arise under a contract? |
| alternative notion that any beneficiary to a | | | | The rule that outsiders cannot incur liabilities under |
| contract can sue on it (the finding of Lord Denning | | | | a contract is also subject to a number of |
| in the Court of Appeal. In that case an ageing | | | | exceptions. Thus the law has allowed outsiders to |
| husband, Peter Beswick, assigned his business to | | | | be so affected where commercial usage or trade |
| his nephew. One term of the agreement was the | | | | customs so provides. Restrictive covenants |
| payment of a weekly annuity to Mrs. Beswick | | | | affecting land may also have implications for 3rd |
| after the death of Mr. Beswick. The nephew | | | | parties, as these may run with the land. |
| decided, upon Peter's death, that he was not | | | | An example of a restrictive covenant affecting a |
| obliged to pay the annuity as Mrs. Beswick was | | | | third party arises where P buys a real asset which |
| not a party to the contract. The court accepted | | | | is the subject of a covenant in favor of a third |
| this contention. However Mrs. Beswick was | | | | party either nominated specifically or a member |
| allowed to enforce the contract as the | | | | of a clearly identifiable class. |
| administratrix of the estate of Mr. Beswick | | | | |