Chapter 1 The effect of privity of contract

Privity of contract means that only parties to a contract can enforce, or be bound by, its terms. Therefore, privity of contract prevents the enforcement of contractual rights or obligations against or by a third party. However, it does not restrict non-contractual rights and obligations. In particular, it does not restrict liability in negligence. It also does not apply to trust and agency relationships, certain property transactions (ie easements and covenants), and the assignment of a benefit to a third party. Statutory exceptions also exist (eg section 13 of the Property Law Act 1974 (Qld), section 36C of the Conveyancing Act 1919 (NSW), section 11 of the Property Law Act 1969 (WA)).

The application of privity of contract is uncertain as a result of the High Court’s decision in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107. Where an offeror has unambiguously promised to confer a benefit on a third party in return for good consideration by the offeree, and the third party has relied on the promise and would suffer detriment if the promise is not performed, then privity of contract is unlikely to apply.

To mitigate the harshness of privity of contract, courts have ordered equitable or discretionary remedies such as specific performance, stays of action and restitution.

CASE STUDY

Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107

Facts
  • Trident insured Blue Circle Southern Cement Ltd against bodily injury to all contractors, subcontractors and suppliers.
  • One of McNiece’s employees was seriously injured whilst contracting to Blue Circle.
  • McNiece made a claim against Trident.
  • Trident denied liability on the grounds that McNiece was not a party to the insurance contract and had not provided any consideration.
Result
  • The High Court held that due to the nature of liability insurance, the contractual terms give an unmistakable intention that each insured party should be entitled to the benefit of the insurer’s promise to indemnify it against the specified loss and should be entitled to have that promise enforced.
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