Privity of Contract
| Author | John D. McCamus |
| Pages | 303-332 |
303
CHAP TER 9
PRIVITY OF CONTR ACT
A. I NTRODUC TION
The doctrine of privity of contract applies to situations in which one of
the parties to an ag reement has undertaken to confer a benefit on a third
party. For example, A and B may enter into a contract where, in return
for services provided to A by B, A promise s to pay money to C. For con-
venience we shall refer to A as the promisor, to B, the party who gives
consideration to the promisor, as the promisee, and to C as t he third-
party beneficiary. According to the doctrine of priv ity, C has no stand-
ing to enforce A’s undertaking. C is a mere third-par ty beneficiary of A’s
undertaking and t herefore not truly a party to t he agreement. As has been
explained, “only a person who is a par ty to a contract can sue on it.”1
It is true, of course, that if A breaches h is or her undertaking to
pay C, B could bring an action for damages for breach of contract. Thi s
prospect may provide only cold comfort for C, however, for two rea-
sons. First, in many third-party beneficiary cases, B will have sustained
no real loss as a result of A’s non-performance. Although the point is
not free from difficulty,2 it appears that where this is so, B’s claim would
1Dunlop Pneum atic Tyre Co. Ltd. v. Selfridge & Co. Ltd., [1915] A.C. 847 at 853
(H.L.) [Dunlop].
2Contrast West v. Houghton (1879), 4 C.P.D. 197 (P.C.) with Lloyd’s v. Harper
ance was awarde d to the plaintiff in order to avoid, it wou ld appear, resolv-
THE LAW OF CONTR ACTS304
likely result in the recovery of only nominal damages. Second, quite
apart from remedies issues, it may well be that B is unlikely to bring
an action of this kind. B m ay be disinterested or may have disappeared.
B may have no financial i ncentive for bearing the cost of a lawsuit that
might result only in a benefit to C. In ma ny cases, then, t he third-party
beneficiary r ule will leave the third party wit hout any effective redress
against the person who promis ed, for good consideration, to confer a
benefit on the third part y.
The third-pa rty benefic iary r ule is potent ially applicable in a
number of commonplace transactional patter ns. The phenomenon of
agreements in which the promisor undert akes to pay money to the
third-party beneficiary has been referred to above. In some instances
of this kind, the intention of the promisee may be to confer a gift on
the third-par ty beneficiary. In others, the promisee’s intent may be to
ensure a discha rge of a pre-existing debt owed by a promisee to the
third-part y beneficiary. Many insurance contracts may give rise to
third-part y beneficiary i ssues. Insurance contracts often impose obli-
gations on the insurer to pay money to a thi rd-party beneficia ry in cer-
tain defined circumstances. The distribution of manufactured goods
through the common distribution pattern of a manufacturer selling
goods to a dealer who sells, in t urn, to a consumer may give rise to
similar problems. If the manufacturer includes, in its contract of sale
with the dealer, a manufacturer’s gua rantee that is intended to benefit
the ultimate consumer, the consumer will be a third-party beneficiary
of that guarantee.
Similar problems may a rise in the context of bui lding contracts. In
the typical pattern, the owner of land hires a general contractor to con-
struct a building. In turn, the general contractor wi ll hire subcontract-
ors to supply goods and service s of various kinds. The owner would
be a mere third-party beneficiary of the promises given by the sub-
contractors in their agreements w ith the general contractor. Another
possibility ar ising in thi s context results from the common practice
of owners requiring contractors to en sure that they wil l pay their sub-
contractors by purchasing a per formance bond under which a surety
guarantees that the subcontractors will be paid. The subcontractors are
third-part y beneficiaries of ar rangements of this kind.
Provisions of agreements that are designed to limit the liability of
one of the parties to the agreement may also be drafted with a view to
ing the quest ion of whether C’s damage might be merely nomi nal because A’s
breach caused no lo ss to B (see ibid. at 72–73 (A.C.), Lord Reid; and 88– 89,
Lord Pearce). See also Coulls v. Bagot’s Execut or & Trustee Co. Ltd. (1967), 119
C.L.R. 460 at 500 –2 (Aust. H.C.), Windeyer J.
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