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.

Key Takeaways

  • In contract law, privity is a doctrine that imposes rights and obligations to parties of a contract and restricts non-contractual parties from enforcing the contract.
  • Lack of privity states that there is no contract between parties, thereby not requiring them to perform certain duties and not entitling them to certain rights.
  • The strict liability and implied warranty doctrines allow third-parties to sue manufacturers for faulty goods, even though they are not parties to the original contract.

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.

However, privity has proven to be problematic; as a result, numerous exceptions are now accepted. For example, according to the doctrine of privity, the beneficiary of a life insurance policy would have no right to enforce the contract since he or she was not a party to the contract and the signatory is dead. As this would be inequitable, third-party insurance contracts, which allows third-parties to submit claims from policies issued for their benefit, are one of the exceptions to the doctrine of privity.

Another exception is the 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.

Example of Privity

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

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