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Tuesday, March 17, 2020

The Doctrine of Privity of Contract

The Doctrine of Privity of Contract

The doctrine of privity of contract decrees that someone who is not a party to the contract may neither take the benefit of nor be burdened by, that contract.

To take a common example, if a developer appoints a professional (architect, engineer, or surveyor) in connection with a project, then any parties outside the contract, such as financier, purchaser, or tenant of the developer who suffers a loss as a result of some default by the professional, is denied a direct contractual remedy by the doctrine of privity of contract, based on the appointment alone.

As the doctrine of privity of contract, the agreement will only be enforceable as between the parties to a contract which both parties must be privy to the contract. Any agreements given the benefit of a third party are not enforceable by the third-party beneficiary.

A Mechanism in Contract of International Sale 

Since the only parties involved in the contract, for example, the seller and the buyer in sale-purchase agreement, both parties are privy to the contract and they provide consideration for all aspects of the agreements. The seller must provide the goods and the buyer must pay the price. Terms of the contract will determine whether the seller delivers the goods and the buyer collects and receives the goods.

In the international scope, the contract of sale may provide transportation by the seller as a part of the sale's agreements. The seller and the buyer are privy to the sale contract and both provide consideration. And under the contract of carriage, only the seller and the carrier are privy to the contract of carriage and provide consideration. On the other hand, the buyer only relies on the carrier to take care of and deliver the goods, but there is no privity between the buyer and the carrier, and both no provide consideration. This had an impact on no legal action from the buyer to the carrier since the buyer is not privy to the contract.

The similar situation exists when the buyer makes a loan contract with issuing bank (the bank issues the L/C) where the bank gives credit or loan to the buyer. The banks have no direct contractual relationship both on the contract of sale (between the buyer and the seller) and contract of carriage. Although the goods can be used as collateral for the loan, if the goods are damaged or lost in transit, there is no right for the bank to sue the carrier.

References:
  • Peter Wildman FCII & John D Wright FCII. 1998. Principles of Property and Pecuniary Insurances. The Chartered Insurance Institute.
  • The Law of International Trade and Carriage of Goods. Nationwide Mediation Academy for NADR UK Ltd.
Privity of Contract

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