Privity of contract

As a general common law rule, only parties to a contract will have rights or obligations under that contract. Consequently, a contract between A and B cannot impose obligations on C; conversely, a contract between A and B can not be enforced by C, even if the contract is intended to benefit C. Strict application of the doctrine can give rise to harsh results, particularly where contracts are intended to benefit a third party and a third party relies upon this. In some cases exceptions or alternative remedies have emerged to avoid or limit those harsh results.

The doctrine of privity of contract was formally recognised and entrenched in Tweedle v. Atkinson (1861). In this case, the father of a bride promised the father of the groom to pay the groom (plaintiff) a sum of money upon the marriage. However, before making this payment, the bride's father died and his estate refused to honour his promise. The plaintiff sued for the money but failed on the ground that, although the contract had been made for his benefit, he was not a contracting party.

See also Dunlop Pneumatic Tyre Co Ltd v Selfridge and Co Ltd [1915] AC 847

Scope of the doctrine

It is important to remember that the doctrine of privity of contract applies only to contractual rights and obligations; if the contract involved gives rise to non-contractual rights and obligations then it is possible for these to be enforced against, or in favour of, those who are not parties to the contract. For example, A and B might agree that B will adhere to certain safety precautions when building a property for A and that these were intended to protect A, B and also third parties (C) who might enter the premises. Should B fail in this respect and, as a result of that failure C is injured, then although C could not sue B for breach of B's contract with A, C may have a claim against B in tort - for negligence.

The privity doctrine in Australia

In Trident the High Court cast doubt upon the extent of the doctrine. Two judges said the doctrine of privity of contract produced injustice where third parties were intended to benefit from the contract and could not enforce it directly - they said it's time to review the laws - they allowed the intended beneficiaries in this case to get the benefit - looked at commercial reality - it would have been inequitable for the insurance company to turn their back on the risk. Problems highlighted by the Court included:

• often, damages are not suffered by contracting party. If A breaches contract, B might have suffered no damages compared to C and C can't enforce the contract.
• although B can enforce contract for benefit of C, specific performance is discretionary and may not be granted in these circumstances.
• one way around this situation is to say B entered into the contract as trustee for C - but it's often an inadequate remedy.

Mason CJ and Wilson J asked: should it be sufficient that A and B intend C should get the benefit of the contract. Or should A and B specifically intend that C can enforce it - they said it should be enough that they were intended to get the benefit. They also said that it was time for the law to be reviewed. C ought to be able to enforce the contract and would lose that right if B had rendered the contract ineffective provided C knew that. But if C didn't know that and acted to its detriment, C ought to be able to enforce the contract. However, they indicated that these comments were obiter only because this issue didn’t need to be decided for purposes of the case. They just went as far as insurance in this case (predated the Insurance Contracts Act) Brennan J dissented and thought policy ought not be extended. Dawson J also dissented. Deane J supports Mason CJ and Wilson J - said ought to be some review of the law. He thought the law of trust should prevail - he did not use the same reasoning but still said that it was unjust and unreasonable. Toohey J also said it was unjust - in respect of liability insurance, could be solved on the basis of unjust enrichment. Gaudron J also found in favour of the head contractor on the basis of unjust enrichment. Note: the decision cast doubt on the scope of the doctrine of privity of contract.