Understanding Privity of Contract in Law

1. Privity (Privacy) of Contract Privity of contract can be defined as follows: • As a general rule, only a person who is a party to a contract has enforceable rights or obligations under it. • Third parties have no right of action save in certain exceptional instances. • The common law doctrine of privity of contract states that a person cannot be bound by, or take advantage of, a contract to which he is not a party. • See Dunlop v Selfridge 1915. • The facts: The claimant supplied tyres to Dew & Co, a distributor, on terms that they would not re-sell the tyres at less than the prescribed retail price. If Dew & Co sold the tyres wholesale to trade customers, they must impose a similar condition on those buyers to observe minimum retail prices. Dew & Co resold tyres on these conditions to the defendant. Under the terms of the contract between Dew & Co and Selfridge, Selfridge was to pay to the claimant a sum of £5 per tyre if it sold tyres to customers below the minimum retail price. They sold tyres to two customers at less than the minimum price. The claimant sued to recover £5 per tyre as liquidated damages. • Decision: The claimant could not recover damages under a contract (between Dew & Co and Selfridge) to which it was not a party.

2. Contd.. • The party to the contract who imposes the condition or obtains a promise of a benefit for a third party can usually enforce it, but damages cannot be recovered on the third party's behalf, since a claimant can only recover damages for a loss he has suffered. Other remedies may be sought however. • A third party may enforce a contract term, if • The contract itself expressly so provides. • The term confers a benefit on the third party, unless it appears that the contracting parties did not intend him to have the right to enforce it. • The third party must be expressly identified in the contract by name, class or description, but need not be in existence when the contract is made (for example, an unborn child or a future spouse).

3. Exceptions to the rule of privity • To prevent injustice, a number of exceptions to the rule have been acknowledged to enable beneficiaries to enforce their rights. • 1 Agency. Where agents make contracts on behalf of their principals with third parties, the principals may sue or be sued on those contracts as if they had made them themselves. • 2 Third-party insurance. A third party may claim under an insurance policy made for their benefit, even though that party did not pay the premiums (for example: life assurance and third-party motor insurance). • 3 Assignment of contractual rights. The benefits (but not the burdens) of a contract may be assigned to a third party, who may then sue on the contract (for example: selling debts). • The original debtor may be sued by the new creditor to whom the rights to collect the debt have been assigned. The duty to perform a contract cannot be assigned.

4. Contd.. • 4 Trusts. This is an equitable concept by which one person transfers property to a second person (the trustee), who holds it for the benefit of others (beneficiaries). The party who created the trust, which is often done by a will, lays down the rules under which it is to be administered. If these are not complied with, the beneficiaries have the right to ask the court to enforce the trust for their benefit. • 5 Collateral contracts. The performance of one contract between A and B may indirectly bring another into being between A and C. • 6 Contracts for the benefit of a group. Where a contract to supply a service is made in one person’s name but is intended to benefit a group of people, the members of the group have no rights to sue at common law if the contract is breached; there is no privity of contract between them and the supplier of the service. The court, however, may take some of their losses into account when awarding damages to the buyer.

5. Contingent Contract • Contract Act of Nepal does not define contingent contract. • Section 31 of the Indian Contract Act defines a contingent contract as follows: • “A contingent contract is a contract to do or not to do something, if some event, collateral to such contract does or does not happen.” • Thus it is a contract, the performance of which is dependent upon, the happening or non-happening of an uncertain event, collateral to such contract. • The collateral event is one, which does not form part of consideration of the contract, and is independent of it. • According to Pollock and Mulla, a collateral event, means an event which is “neither a performance directly promised as part of the contract, nor the whole of the consideration for a promise.”

6. Contd.. • Contracts of insurance and contracts of indemnity and guarantee are popular instances of contingent contracts. • As the performance of a contract is made dependent upon a contingency, contingent contracts are also known as ‘conditional’ contracts. But in certain cases a contract may look like a ‘conditional’ contract, whereas in fact it may be simply an ordinary absolute contract where the promisor undertakes to perform the contract in all events. • For example, where A promises to pay Rs.500 to B, a property broker, if B manages to get a two rooms accommodation for him at a rental of Rs2,500 per months, it is not a contingent contract, though on the face of it, it appears like a conditional contract. It is an ordinary absolute contract because the uncertain event (namely, managing to get an accommodation) itself forms the consideration of the contract and is not a collateral event.

7. Contd.. • The following two elements are the essential elements of a contingent contract: 1. The performance of such a contract depends upon the happening or non-happening of some future uncertain event. 2. The future uncertain event is collateral i.e., incidental to the contract. Rules Regarding the Contingent Contracts • Contingent contracts to do or not to do anything if an uncertain future event happens, it cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void. • Contingent contracts to do or not to do anything if an uncertain future event does not happen, it can be enforced when the happening of that event becomes impossible, and not before. • Contingent contracts to do or not to do anything, if a specified uncertain event happens within a fixed time, becomes void, if, at the expiration of the time fixed, such event has not happened, or if, before the time fixed, such event becomes impossible.

8. Contd. 4. Contingent contracts to do or not to do anything, if a specified uncertain event does not happen within a fixed time, may be enforced by law when the time fixed has expired and such event has not happened, or, before the time fixed has expired, if it becomes certain that such event will not happen. 5. Contingent agreements to do or not to do anything, if an impossible event happens, are void, whether the impossibility of the event is known or not to the parties to the agreement at the time when it is made.