Privity of contract is a legal doctrine which is the relationship of the parties who have signed a contract and are a party to the contract. Only the parties which have entered the contract are required to have to perform duties and obligations due to the contract with each other. In addition, it is only these individuals mentioned in the contract which are able to gain any benefits or burdens that the contract may contain in the text. These parties have the power through the contract to sue the other for any breaches of the contract of any individual mentioned in the contract. These are benefits which only individuals contracting to the contract have the power to enforce due to breach of contract.
Third Parties to a Contract
Any third parties to the contract do not have these rights as they are not mentioned in the contract and hence they are not considered to be able to rely on privity of contract. Any third parties to the contract are not able to sue, as any individual with privity of contract is able to sue under the contract.
Assignment
However, third parties may attempt to gain the same benefits as the individuals who hold privity of contract by certain situations in order to obtain these benefits. One of these situations is, for example, assignment. Assignment allows a third party to be privity of contract and this arises where one of the parties in the contract transfers their rights which have arisen by the contract to the third party. In other words, the assignee has allowed the assignor to have their obligations of the contract. The process of assignment results in the assignor giving up their rights, as after assignment they no longer have the benefit or burden of performing these duties under the contract. The assignee has the obligation of performing these duties instead.
Delegation
Another way of third parties gaining the right to sue under a contract is by delegation of any of the duties in the contract to a third party. Through this method, an individual who is contracted in the contract which is known as the delegator, allows a third party to obtain some or all of their duties. This third party hence is known as the delegatee. As the delegatee, the third party has the obligation of performing all of the obligations and duties which are stated under the contract. In contrast to assignment explained above, the delegator is not discharged of their duties upon delegation. Thus, if the delegate does not perform the contractual duties, the delegator could still be held responsible for this breach.
Designating a Third Party Beneficiary
A further method of any third party gaining the benefits of privity of contract is if the contract states that a third party has been designated as a third party beneficiary. This is to mean that the third party beneficiary is able to have the full benefit of the privity of contract, though possibly not to the full extent. In general, in this type of contract, the parties to the contract agree beforehand that a third party is able to benefit from the performance of the individuals’ performing of the contract. If any of the duties are not performed, and the contract has been breached, the third party beneficiary has a right which has arisen to sue for damages.
This post supplied by Darlingtons, who offer a range of business advice both via their main website and also designated business law site.
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