PRIVITY OF CONTRACT

Building a connection is one of the most vital things in any relationship and a business relationship is no different. As you run a business and sign a contract, this relationship is described as privity. The major rule under the privity of a contract is that no one may be entitled to or bound by the terms of a contract to which he or she is not an original party.

This allows only parties involved in a contract to sue each other against said contract and not a third party. A third party may be a person who is likely to gain something of value from the contract (also known as a third-party beneficiary). Said person has no legal right to take any contract-enforcing action if they do not receive the promised benefits. In the case of Tweddle v Atkinson, it was stated that “no stranger to the consideration can take advantage of a contract, although made for his benefit.”

The perfect example to explain this would be in a tenancy arrangement. If a tenant to a piece of property that was purchased by someone else and a contract stating that the person that sold the property was required to make certain repairs exist. If the said seller did not fulfill the obligation, then a tenant would not be able to sue the seller because they are not in privity with this person. Instead, it would be expected that the party who is named in the contract be the one to bring up a lawsuit. 

 It’s not all cases that privity to a contract does not rule out the possibility of that entity suing or being sued over matters arising from the contract. The  Asante Aviation Ltd V Star Of Africa Air Charters Ltd & 3 Orshis case was an application for an order of specific performance compelling the defendants to sign transfers of an aircraft. The court relied on the concept that only parties to a contract can sue for breach (privity of contract). It observed that one of the exceptions to this rule is where a third party can prove that he/she is a beneficiary of the contract between the two people. The court held that the defendants were third-party beneficiaries since the loan agreement between the first defendant and the second defendant was for their benefit.

Here are a few exceptions where a third party is able to sue under a contract to which they are not privy;

1) Third parties can sue contracting parties if it is proven that the contracting parties were negligent.

2) In instances benefits of a contract may be assigned to a third party. 

3) Insurance is the most common exception. A party involved in a car accident can benefit from an insurance company.

4) A third party may sue the seller over defective goods if the third party is affected by the flaws in the goods. 

RIGHT TO ACTION

Under the exceptions that have been shared, a third party is allowed to sue for the following remedies;

i) Specific performance

ii) Damages

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