Privity of contract

In some cases, a legal principle known as ‘privity of contract’ may help establish liability. The principle provides that only the parties who have entered into and established the contract are subject to binding rights and obligations under it. If one party breaches the contract, the other party is the only person(s) entitled to seek a remedy. Liability cannot be imposed on a third party who is a stranger to the contract unless an agreement or guarantee is given. In general, a contract cannot confer or enforce rights or impose obligations (such as claiming compensation or damages) arising under it on any person except the parties subject to it.

Examples

Katy is a student and lives alone. Her father is the guarantor for her energy supply. A bill has gone unpaid. The supplier can approach Katy’s father and demand payment.

Ayo is a student and lives in a house with other students. His name is on the energy bill. An energy bill has gone unpaid. The supplier cannot approach Ayo’s parents and demand payment of the bill. Ayo’s parents are not liable for Ayo’s debts, since no contract was made with them.

Rowan moves into a new property where previous occupiers have failed to pay an energy bill. Rowan cannot be held liable for the bills left behind.

The doctrine of privity of contract is of importance where a house is in multiple occupation and residents are transient. In many cases, it is arguable that the long-term occupiers or the landlord are those who are liable under the supply contract, since these are the individuals who have actually reached a binding agreement with the supplier, either in writing, orally or by conduct.