DEFINITION of 'Privity'

A legal interpretation in contract law where contracts are only binding on the parties signing the contract. The idea is that, contracts are private agreements among the signatory parties which should have no bearing on others who are not involved in making the contract. While the doctrine makes sense in certain situations, over time it has proved to be problematic and numerous exceptions to the doctrine of privity are now well accepted.

BREAKING DOWN 'Privity'

The doctrine of privity has important implications for the rights of third parties to a contract. For example, consider a life insurance contract that is made between the insurance company and the insured. The arrangement is that the insured will pay premiums, and upon their death, the insurance company will make a payment to the third-party beneficiary. Under the doctrine of privity, the beneficiary would have no right to enforce the contract, since he or she was not a party to the contract. This conclusion is clearly inequitable, therefore, third-party insurance contracts are one of the exceptions to the doctrine of privity.



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