Privity

What Is Privity?

Privity is a doctrine of contract law that says contracts are only binding on the parties to a contract and that no third party can enforce the contract or be sued under it. Lack of privity exists when parties have no contractual obligation to one another, thereby eliminating obligations, liabilities, and access to certain rights.

Understanding Privity

Privity is an important concept in contract law. Under the doctrine of privity, for example, the tenant of a homeowner cannot sue the former owner of the property for failure to make repairs guaranteed by the land sales contract between seller and buyer as the tenant was not "in privity" with the seller. Privity is intended to protect third parties to a contract from lawsuits arising from that contract. 

However, privity has proven to be problematic; as a result, numerous exceptions are now accepted.

Exceptions to Privity

Insurance Companies

According to the doctrine of privity, the beneficiary of a life insurance policy would have no right to enforce the contract since they were not a party to the contract and the signatory is dead. As this would be inequitable, third-party insurance contracts, which allow third parties to submit claims from policies issued for their benefit, are one of the exceptions to the doctrine of privity.

In addition, a third party involved in an automobile accident with an insured vehicle may, in some cases, sue the insurance company when he gets a favorable court ruling against the vehicle owner.

The Sale of Defective Goods

One exception to privity is manufacturers’ warranties for their products. It used to be the case that a lawsuit for breach of warranty could only be brought by the party to the original contract or transaction; so, consumers would have to sue retailers for faulty goods because no contract existed between the consumer and the manufacturer. Now, under modern doctrines of strict liability and implied warranty, the right to sue has been extended to third-party beneficiaries, including members of a purchaser's household, whose use of a product is foreseeable.

Negligence

In the event that a personal injury occurs because of negligence, the negligent party can be sued by third parties who have not entered into a contract with the negligent party.

Restrictive Agreements

In some cases, a restrictive agreement may be enforceable against a third party. For example, assume that the owners of a house want to sell their house with the understanding that the buyer is not going to change the design of the house. If the buyer sells the house to a third party and some requirements are met, the third party may be obligated to follow the original owners' conditions.

Trusts

In some cases, a contract between a trustee and another party may affect the owner. For example, if a contract is made between the trustee of a trust and another party, the beneficiary of the trust can sue by enforcing their right under the trust, even if they are a stranger to the contract.

Example of Privity

Consider the example in which Shawn signs a contract to sublease a Manhattan one-bedroom condo from a friend, Blake, who leases the unit from its owner Jude before entering into a contract with Shawn, Blake obtained written permission from Jude, the landlord. This permission does not absolve Blake from tenant duties as Jude's tenant as privity still exists between them.

Six months into the one-year lease, Shawn threw a large party, and the guests caused $10,000 in damages to the unit. Jude sent the bill for damages to Jessica, and, in response, Blake demanded payment from Shawn. Unfortunately, Shawn vacated the apartment and avoided Blake's attempts to recover for damages and unpaid rent. Since Blake is the original tenant named on the lease, Blake is culpable for any damages to the unit and is responsible for rents due and performing all duties as specified in the original lease. Shawn has no privity with Jude; therefore, Blake must pay Jude for the damages, or take legal action. However, Blake is not defenseless as Blake can sue Shawn since Shawn has privity with Blake.

Privity FAQs

What Is Privity of Contract?

Privity of contract is a doctrine of contract law that states that contracts should not give rights or obligations to entities other than those who are parties to the contract.

What Is Privity of Estate?

Privity of estate exists when two or more parties hold an interest in the same real estate property. For example, under a lease agreement, both the landlord and tenant have privity of estate.

What is the Difference Between Horizontal Privity and Vertical Privity?

Horizontal privity refers to the relationship between the original parties who created the contract, whereas vertical privity refers to the relationship between an original party and a successor.