Notes on Privity of Contract and Its Exceptions

Privity of contract is a legal principle that refers to the relationship between two parties who have entered into a contract. It means that only the parties who have signed the contract are bound by its terms and can enforce them. This principle protects parties from being held liable for contractual obligations that they did not agree to, and it ensures that the parties to the contract have sufficient control over the terms of their agreement.

However, there are certain circumstances where third parties may have rights or obligations under a contract, even if they are not a party to it. In this article, we will discuss some of the exceptions to the privity of contract principle.

1. Trusts

One of the most common exceptions to the privity of contract principle is trust law, where a trustee acts on behalf of another person or entity. Because the trustee is acting on behalf of another party, they are not considered a party to the contract. However, the trustee may be bound by the terms of the contract if it is necessary for the performance of their duties.

2. Assignment of contract

When a party assigns their rights and obligations under a contract to another party, that third party may acquire rights under the contract. This means that the third party can enforce the terms of the contract against the party who assigned the contract. However, the party who assigned the contract may still be liable for any obligations that they have not fulfilled.

3. Agency

When an agent acts on behalf of a principal, the principal may be liable for any contracts entered into by the agent. However, the agent is not considered a party to the contract, and they do not have any rights or obligations under the contract. Instead, the principal is the one who is bound by the terms of the contract.

4. Promissory estoppel

Promissory estoppel is a legal principle that allows a third party to enforce a promise made by another party, even if there is no contractual relationship between them. If a party makes a promise to a third party and that third party relies on that promise to their detriment, the third party may be able to enforce the promise in court.

5. Statutory exceptions

There are also several statutory exceptions to the privity of contract principle, which vary depending on the jurisdiction. For example, in some states, construction professionals may be held liable to subsequent purchasers of the property for defects, even if they were not a party to the original construction contract.

In conclusion, while the privity of contract principle is a fundamental legal concept, there are several exceptions to it that should be considered. These exceptions may allow third parties to have rights or obligations under a contract, and they may impact the enforceability of contractual terms. As such, it is important to understand these exceptions and how they may be relevant to your contractual relationships.