Articles

What is Privity of Contract in Australia?

An Overview on Privity of Contract in Australian Contract Law

In Australia, privity of contract relates to the idea that only parties to a contract should be “bound by its obligation”, and benefit from the contractual relations (Seddon & Bigwood, 2023, para 7.1). It is viewed as an essential element of contract, because the “essence of contract is the enforcement of promises” (Kincaid, 1989, p.75).

Notwithstanding the present prominence of the privity rule, prior to 1861, there were many decisions in English law that did accept that a “third party could bring an action on a contract for his benefit” (Stewart, 1999, p. 359). It is only with the modern development in Australian contract law that privity of contract has evolved into a general technical rule that “no stranger to the consideration” should be able to enforce a contract (Stewart, 1999, p. 359).

In this article, we address the frequently asked questions regarding privity of contract and its application in Australia, including:

How is Privity of Contract relevant to Australian Contract Law?

Although legal academics may suggest the legal rules of consideration and privity are simply “different ways of stating the one rule”, the two rule should be aptly viewed as “separate though interrelated” rules that originate from the bargain theory of contract (Carter, 2018, p. 340). When commonly describing the legal principle of consideration, consideration should move from the promisee as part of an exchange between parties to a promise. However, this legal principle is distinct from privity of contract that states a promise is enforceable by the promisee.  On either rule, the promisee is the subject of substantive discourse that views the subject through different perspectives, and not the third-party beneficiary. 

If the idea of a contract relies on bargain theory, the essence of contract law has been claimed to be based on the “voluntary assumption of legally enforceable duty” or alternatively, enforceable promises based on “obligations voluntarily undertaken” (Stewart, 1999, p. 366). On either definition, voluntariness forms an important element when adopting obligations.

Privity of contract is also described as forming an essential element of contract law because it follows from an understanding of contract law as a bargain. From this, there has been scholarly claims in support of the privity rule (Stewart, 1999):

  • a contract “should only affect the parties to it” (Stewart, 1999, p. 366).
  • a mere donee should not be allowed to enforce a contract.
  • third-party beneficiaries would unfairly benefit if they could enforce a contract without assuming a liability in the contractual relationship.
  • third-party contracts would recognise rights between a third party and promisor.

To explore and contextualise privity of contract, the legal elements to a contract are briefly summarised:

Legal ElementsSummary
Offer and AcceptanceOffer and Acceptance must be communicated between the parties to a contract. The offeror makes an offer, and the offeree communicates acceptance.
Intention to Create Legal RelationsAn intention to create legal relations is required between the parties for a contract to be formed.  
ConsiderationConsideration is an exchange between the parties for a promise that the law regards as valuable. The consideration should be adequate, but it does not need to be sufficient.
CertaintyThe essential terms to a contract must be sufficiently certain and complete.
CapacityThe parties to a contract must have contractual capacity to enter into a contract.  
FormalityCertain types or kinds of contracts may be required to comply with formal legal requirements depending on the jurisdiction.

Read More: What is Contract Law?” provides a broad overview on contemporary legal theories that explain nature of contract law.

Do you need legal advice? Let’s start a conversation to address your queries. Call us on (03) 5331 1244 to get in touch and arrange an appointment with one of our lawyers.

You can also connect with us by filling out your details and telling us about your information for legal advice below:

Contact Form

What is the History of Privity of Contract?

The emergence of privity of contract as a doctrine is described as culminating from a “combination of historical, legal, social and economic factors” (Stewart, 1999, p. 355). The rule’s true source of origin has some uncertainty, and this may cause tracing its history to inherit more than “one interpretation” or narrative (Stewart, 1999, p. 355). For example, legal historians have traced privity of contract to the action of assumpsit in English law, but early principles may also be found in Roman law (Stewart, 1999).

Notwithstanding the historical nuances, the relevance of privity of contract in modern contract law was only formally rooted in English law in the last two centuries. In the English decision of White v John Warwick & Co Ltd [1953] 2 All ER 1021, Lord Denning described the recency of the privity rule as follows:

For the 200 years before 1861, it was settled law that, if a promise in a simple contract was expressly for the benefit of a third person in such circumstances that it was intended to be enforceable by him, then the common law would enforce the promise at his instance, although he was not a party.

Therefore, it was the Court of King’s Bench decision in Tweddle v Atkinson (1861) 121 ER 762, that became the decisive judicial authority on establishing privity of contract in English law. Wightman J stated at 763-764:

On the contrary, it is now established that no stranger to the consideration can take advantage of a contract, although made for his benefit.

Relevantly, in Australia, the High Court decision in Coulls v Bagot’s Executor and Trustee (1967) 119 CLR 460 affirmed the applicability and relevance of the privity rule and traced the rule’s history to English law. Barwick CJ at 478, stated that privity of contract formed part of Australian contract law:

“It must be accepted that, according to our law, a person not a party to a contract may not himself sue upon it so as directly to enforce its obligation. For my part, I find no difficulty or embarrassment in this conclusion. Indeed, I would find it odd that a person to whom no promise was made could himself in his own right enforce a promise made to another.

What is Privity of Contract in Australian Contract Law?

The privity rule is described as principally operating to “prevent non-parties from enforcing contractual promises that benefit them” (Robertson & Paterson, 2020, p. 275). While a contract may benefit a third party, either through positive or negative performance, the privity rule prevents the third-party from enforcing the contract or placing a legal burden on the third party (Robertson & Paterson, 2020). Therefore, according to the privity rule, the parties that are legally bound, are the parties to the contract.

A simple description is drawn on how privity of contract may apply. For example, if A and B enter into a contract. As part of the contract, A promises in exchange for B’s consideration, that A will provide a benefit to C. In this situation, C cannot enforce the performance of that contract, notwithstanding that C may receive a benefit because of A’s promise, by reason that the consideration moved from B as the promisee.

When could Privity of Contract not apply?

In the High Court decision in Trident General Insurance Co Ltd v McNience Bros Pty Ltd (1988) 165 CLR 107, there was a close judicial examination on privity of contract. Whilst the explanation for the judgements made by the High Court Justices were diverse, varied, and with contrasting views, this article addresses only three scenarios that privity of contract may not apply: Agency, Assignment and Trusteeship.

How is Privity of Contract affected by an agency relationship?

Generally, the privity rule may not apply if an agent enters into a contract on behalf of a principal. In summary, an agent is a person that “has power to enter into a contract on behalf of another person” (Robertson & Paterson, 2020, p. 281). By reason of the agency relationship, the principal may benefit or be burdened by a contract if the agent contracts on the principal’s behalf.

How is Privity of Contract affected by an assignment?

Generally, the privity rule may not apply in circumstances when a person is not a party to a contract, unless that person acquires contractual rights through an assignment. An assignment is described as a “transfer to a third party (the assignee) of some or all of the contractual rights held by a contractual party (the assignor)” (Robertson & Paterson, p. 284). Generally, following an assignment, the privity rule should not prevent the assignee from enforcing the assigned contractual rights against the promisor.

How is Privity of Contract affected by a trusteeship?

Generally, depending on the facts, the privity rule may not apply in a trusteeship. In a trusteeship, a trustee holds property on trust for a beneficiary. In this situation, the Court may “discern an intention” on the part of the trustee to hold on trust the “contractual right to enforce” a promise if the promise forms part of trust property (Robertson & Paterson, 2020, p. 285). In this situation, the trustee’s duties and obligations to the beneficiary are not affected by the privity rule, and the beneficiary may “indirectly enforce the promise by compelling the trustee to enforce” (Robertson & Paterson, 2020, p.285).

The contrast between the trust relationship and an agency relationship is that an agent “contracts for a principal”, and a trustee contracts as the “principal, but for the benefit of a beneficiary” (Carter, 2018, p. 342).

Bibliography

  • Carter, J. (2018). Contract Law in Australia (7th ed). LexisNexis.
  • Kincaid, P. (1989). Privity and the Essence of Contract. University of New South Wales Law Journal, 12(1), 59-75. 
  • Robertson, A., & Paterson, J. (2020). Principles of Contract Law (6th ed). Thomson Reuters.
  • Seddon, N. & Bigwood, A. (2023). Cheshire & Fifoot Law of Contract. LexisNexis.
  • Stewart, I. (1999). Why Place Trust in a Promise? Privity of Contract and Enforcement of Contracts by Third Beneficiaries. Australian Law Journal, 73(5), 354 – 378.

Implied Terms | Enforceable Contract | Frustration | Legally Binding Agreement | Termination | Express Terms | Consideration | Intention to Create Legal Relations | Offer and Acceptance | Certainty | Repudiation | Classification of Terms | Contract Law (Theories) | Causation | Remoteness | Damages |

If you are looking for legal expertise and have any questions, connect with an author or a member of our litigation and dispute resolution team.

Do you need legal advice? Call us on (03) 5331 1244 to get in touch and arrange an appointment with one of our lawyers.

You can also connect with us by filling out your details and telling us about your information for legal advice below:

Contact Form

Authored by:
Ben Franklin, Managing Partner (LIV Accredited Specialist – Property Law), &
Matthew Tran, Lawyer.

Table of Contents