Privity of contract is one of the most basic rules of the common law of contract and one of the defining tests for the validity of any contract. This doctrine essentially determines who is a party to contract and who may rely upon the rights granted under the contract to sue another. In the absence of privity there is no contract. In a mixed capitalist economy there is no compulsion to contract for the most part so contracts are voluntarily entered into by the parties. The implication is that:

*No other person can acquire rights under a contract to which he/she is not a party.

*No other person can incur liabilities under a contract to which he/she is not a party.

In a nutshell the doctrine of privity of contract is that simple.

In one particular case, a businessman B sold his business to C. One of the conditions of the sale was that C should pay B's wife 10 per week for life after A had died. When Mr.B died, C refused to make the weekly 10 payment because Mrs B was not a party of the contract whereby the business was sold. The court held that Mrs.B would not personally enforce the contract because she was not a party to it. However, she succeeded in enforcing it, but only as the administratrix of her husband's will [Beswick v. Beswick 1968]

Creation of contractual rights

The rule that outsider cannot acquire rights from contracts to which they are not parties applies even where that outsider is actually mentioned in a contract as a beneficiary. Thus where A and B have concluded a contract whereby B is to pay A for doing something which will benefit C, C will not be able to sue if A fails to do that which he promised to do.

There are a number of important caveats to the application of the doctrine of privities. A common example arises under the concept of agency. In the circumstance where A acts covertly as an agent for G in a contract with H, then G may enforce rights under the contract against H even though not a party to the contract. This is because A is said to be a mere cipher in the equation and is effectively discounted for the purposes of legal analysis. A second exception arises under the Road Traffic Act 1988. In this case parties protect under a contract of insurance as third parties may sue the insurer of a party having an accident.

Contractual liabilities arising

The second part of the rule of privities, that a third party cannot be held liable under a contract to which he is not a party is also subject to a number of important caveats. For instance, cases have imposed liability on non parties to a contract where there is strong commercial usage or evidence of customary behaviors. Another exception, though not strictly contractual, is that of restrictive covenants which arise under property law as these are attached to the land itself.

An example of a restrictive covenant affecting a third party arises where P buys a real asset which is the subject of a covenant in favor of a third party either nominated specifically or a member of a clearly identifiable class.