Privity of Contract
| Author | John D. McCamus |
| Pages | 326-356 |
326
CHA PTER 9
PRIVITY OF CONTRACT
A. INTRODUC TION
The doctrine of privity of contract applies to situ ations in which one
of the parties to an ag reement has undertaken to confer a benefit on a
third part y. For example, A and B may enter into a contract where, in
return for services provided to A by B, A promises to pay money to C.
For convenience we shall refer to A as the promisor, to B, the party who
gives consideration to the promisor, as the promisee, and to C a s the
third-party beneficiary. According to the doctrine of privity, C has no
standing to enforce A’s undertaking. C is a mere thi rd-party beneficiary
of A’s undertaking a nd therefore not truly a party to the agreement.
As has been ex plained, “only a person who is a party to a contract can
sue on it.”1
It is true, of course, that if A breache s his or her undertaking to
pay C, B could bring an action for damages for breach of contract. This
prospect may provide only cold comfort for C, however, for two rea-
sons. First, in many th ird-party beneficiary ca ses, 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 thi s is so, B’s claim would
1 Dunlop Pneum atic Tyre Co Ltd v Selfridge & Co Ltd, [1915] AC 847 at 853 (HL)
[Dunlop].
2 Contrast West v Houghton (1879), 4 CPD 197 (PC) with Lloyd’s v Harper (1 880),
16 Ch D 290 at 321 (CA), Lush LJ. In Beswick v Bes wick, [1968] AC 58 (HL), aff’g
[1966] Ch 538 (CA) [Beswick], for example, specific per formance was awarded
Privit y of Contract 327
likely result in the recovery of only nominal damages. Second, quite
apart from remedies issues, it may well be that B is unli kely 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 th at
might result only in a benefit to C. In many cases, then, the thi rd-party
beneficiary r ule will leave the third party without any effective redres s
against the person who promised, for good consideration, to confer a
benefit on the third part y.
The third-party benefici ary rule is potentially applicable in a
number of commonplace transactional patterns. The phenomenon of
agreements in which the promisor undertakes 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-party benefici ary. In others, the promisee’s intent may be to
ensure a disch arge of a pre-existing debt owed by a promise e to the third-
party beneficiary. Many insurance contracts may give rise to third-part y
beneficiary is sues. Insurance contracts often impose obligations on the
insurer to pay money to a third-party beneficiary in certain defined cir-
cumstances. The dist ribution of manufactured goods through the com-
mon distribution pattern of a manufacturer selling goods to a dealer
who sells, in turn, to a consumer may give rise to simi lar problems.
If the manufacturer includes, in its contract of sale with the dealer, a
manufacturer’s guarantee that is intended to benefit the ultim ate con-
sumer, the consumer will be a th ird-party beneficiary of that g uarantee.
Similar problems may ar ise in the context of building contract s. In
the typical patter n, the owner of land hires a general contractor to con-
struct a building. In tur n, the general contractor will hire subcontrac-
tors to supply goods and services of va rious kinds. The owner would be
a mere third-party beneficiary of the promises g iven by the subcontrac-
tors in their agreements w ith the general contractor. Another possibil-
ity arising in this context results from the common practice of owners
requiring contractors to ensure that they will pay t heir subcontractors
by purchasing a perform ance bond under which a surety guarantee s
that the subcontractors wi ll be paid. The subcontractors are third-party
beneficiaries of ar rangements of this kind.
Provisions of agreements t hat are designed to limit the liability of
one of the parties to the agreement may also be drafted w ith a view to
to the plaint iff in order to avoid, it would appear, resolvi ng the question of
whether C’s damage m ight be merely nominal becau se A’s breach caused no
loss to B (see ibid at 72–73 (AC), Lord Reid; and 88– 89, Lord Pearce). See also
Coulls v Bagot’s Executor & Trustee Co Ltd (1967), 119 CLR 460 at 500–2 (HCA),
Windeyer J.
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