Privity of Contract

• Author: John D. McCamus
• Pages: 326-356

326

CHAPTER 9

PRIVITY OF CONTRACT

A. INTRODUCTION

The doctrine of privity of contract applies to situations in which one

of the parties to an agreement 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 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 as 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 and therefore not truly a party to the agreement.

As has been explained, “only a person who is a party to a contract can

sue on it.”1

It is true, of course, that if A breaches 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 Contract327

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 incentive for bearing the cost of a lawsuit that

might result only in a benef‌it to C. In many cases, then, the thi rd-party

benef‌iciary rule will leave the third party without any effective redress

against the person who promised, for good consideration, to confer a

benef‌it on the third party.

The third-party benef‌iciary 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 benef‌iciary. 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 issues. Insurance contracts often impose obligations on the

insurer to pay money to a third-party benef‌iciary in certain def‌ined cir-

cumstances. The distribution 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 similar problems.

If the manufacturer includes, in its contract of sale with the dealer, a

manufacturer’s guarantee that is intended to benef‌it the ultimate con-

sumer, the consumer will be a th ird-party benef‌iciary of that g uarantee.

Similar problems may arise in the context of building contracts. In

the typical pattern, the owner of land hires a general contractor to con-

struct a building. In turn, 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 with 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 their subcontractors

by purchasing a performance bond under which a surety guarantees

that the subcontractors wi ll be paid. The subcontractors are third-party

benef‌iciaries of arrangements 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

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.