The doctrine of privity prevents third parties to a contract (parties who “lack privity”) from suing to enforce that contract. In these situations it is wise to engage the advice of construction contract lawyers.
Issues with privity are not uncommon in building contracts and if parties are not aware of their rights prior to entering into agreements they may find themselves unable to enforce those agreements.
While privity is a longstanding and accepted common law doctrine, there are several common law and statutory exceptions and limitations to its application. These are primarily to do with cases of trusts and agency; assignment of choses (rights in property) in action; contracts under the Property Law Act 1974 (Qld) and in particular, negligence.
While the doctrine of privity may prevent third parties to a contract from suing or being sued for breach of contract, it does not limit that same third party’s tortious liability for negligence.
An example of this is a subcontractor who does defective work for a builder.
Under contract law, the principal to the contract (“the Home Owner”) would bring an action against the builder and the builder would in turn bring an action against the subcontractor. However, if the Home Owner wishes to pursue the subcontractor directly (as may occur, particularly if the builder becomes insolvent), then privity will not protect the subcontractor from a negligence claim.
There has been criticism of the doctrine of privity as its rigid application may result in an unjust outcome for third parties to a contract. This was addressed in relation to insurance contracts in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107.
The facts of the case
Trident General Insurance Co Ltd (“Trident”) entered into an insurance contract with Blue Circle Southern Cement Ltd (“Blue Circle”). The contract covered public liability, as well as maintenance and defect liability. The policy also indemnified all of Blue Circle’s related companies, contractors, suppliers and subcontractors including Blue Circle’s principal contractor McNiece.
While under the direction of one of McNiece’s engineers, a crane driver employed by another firm was injured on Blue Circle’s construction site. As a result, McNiece was found to be liable for damages to the crane driver.
McNiece then sought indemnity for the damages from Trident on the basis that McNiece was a contractor to Blue Circle and as such, was covered by Blue Circle’s insurance policy.
Trident refused to indemnify McNiece on the basis that McNiece lacked privity to the contract.
The legal issues involved
Since the contract was between Trident and Blue Circle, McNiece was not a party to the contract and no consideration (something of value) had moved from McNiece to Trident.
This meant that under the rule of privity, the only party able to enforce the contract was Blue Circle.
What the court found
At first instance the Supreme Court of NSW found in favor of McNiece. Trident then appealed to the Court of Appeal who also found in favor of McNiece. Trident appealed a second time to the High Court of Australia and was again unsuccessful.
The High Court, in a 4 to 3 majority, found in favor of McNiece, but for 3 different reasons.
Due to the complexity of this case, it is beyond the scope and certainly the length of this article to address those reasons in detail, but essentially, the Court found that beneficiaries under insurance policies may sue to enforce the contract as if they themselves were a party to the contract.
“…This argument [for an exception to the doctrine of privity in insurance contracts] has even greater force when it is applied to an insurance against liabilities which is expressed to cover the insured and its sub-contractors. It stands to reason that many sub-contractors will assume that such an insurance is an effective indemnity in their favour and that they will refrain from making their own arrangements for insurance on that footing. That, it seems, is what happened in the present case…”
The impact of this ruling
While the full impact of this case on the doctrine of privity may still be somewhat uncertain, it appears at least in relation to insurance policies and perhaps in relation to contracts of indemnity generally, the doctrine of privity does not prevent the enforcement of such a contract by a third party beneficiary to the contract.
Issues like this require construction contract lawyers with an eye for detail and an in depth analysis of the law and the construction industry.