Privity of Contract Cases: Everything You Need to Know
The privity principle intends to protect third parties from prosecution over contracts they are not parties to. 4 min read
Popular privity of contract cases includes Alva vs. Cloninger, Vahle v. Barwick and Citizens State Bank vs. Timm, Schmidt & Co. Privity of contract is a doctrine that states that an entity that is not a party to the contract should not get benefits or be subjected to penalties arising from the contract. The privity principle intends to protect third parties from prosecution over contracts they are not parties to.
Circumstances Under Which an Entity That Is Not in Privity to a Contract Can Be Sued
Just because an entity is not in privity to a contract does not a rule out the possibility of that entity suing or being sued over matters arising from the contract. Common exceptions to the privity principle include:
- A beneficiary of the contract who is not a party to the contract, in some instances, can sue the parties to the contract.
- Third parties can sue contracting parties if it is proven that the contracting parties were negligent.
- Contracts in which an agent signs on behalf of the principal. In this case, the principal can be sued.
- When a contract is assigned to another party. The assignee can generally sue the parties to the contract.
Some popular court cases that were decided based on the interpretation of the privity principle concept are discussed below.
The Alva vs. Cloninger Case
In 1981, judgment was given in the Alva vs. Cloninger in the North Carolina Court of Appeals. Juan and Elsa Alva had sued Cloninger for failing to detect damage to the house they would soon mortgage. Cloninger had asked the court to dismiss the case because it was NCNB, the lender, which had commissioned the appraisal and the Alvas were not in privity to that contract. The court of appeals ruled that Cloninger was liable for the loss suffered by the Alvas because he was hired under the understanding the Alvas would be the beneficiaries of the appraisal.
The Vahle vs. Barwick Case
In 2001, Richa and Louis Vahle appealed to the Superior Court of Napa County, California, in a case in which they were attempting to file a malpractice lawsuit against their former attorney, Jill Barwick. The suit was related to a personal injury case in which Barwick had represented them against Silverado Country Club and Resort.
The Vahles had settled the lawsuit with Silverado and signed a mutual release agreement with Silverado. The trial court had ruled that, although Barwick was not a party to the release agreement, the agreement contained language that forbids the Vahles from filing a lawsuit against Barwick. The Court of appeals overturned the trial court judgment and allowed the Vahles to sue Barwick because Barwick was not in privity to the release agreement between the Vahles and Silverado.
Citizens State Bank vs. Timm, Schmidt & Co.
In the 1983 Citizens State Bank vs. Timm, Schmidt & Co. case in the Supreme Court of Wisconsin, Timm, an accounting firm had prepared accounting reports for Clintonville Fire Apparatus Inc (CFA) in 1974-1976. CFA received loans totaling $380,000 from Citizens State Bank in 1975. The bank relied on the financial statements prepared by Timm. Later in 1976, accountants for Timm found out that CFA had misrepresented its 1974 and 1975 financial situation. The accounting firm immediately notified Citizens State Bank of these errors. Subsequently, the bank accelerated the loans resulting into the liquidation of CFA.
Citizens State Bank later filed a lawsuit against Timm and its malpractice insurance company to recover the money the bank lost to CFA. Although the supreme court ruled that accountants are liable for negligence to third parties who are beneficiaries of the accountant's reports, the court ruled against Citizens State Bank because there was no evidence that Timm knew that the bank would be a beneficiary of CFA's 1974 and 1975 financial statements.
Logan-Baldwin vs. L.S.M. Gen. Contr., Inc.
In this 2011 case in New York in the Munroe County Supreme Court, the Logan-Baldwin family sued its contractors and subcontractor seeking damages of $250,000. The family had hired a construction company, LSM, under the understanding that the company would get skilled subcontractors to perform some of the work. The company hired subcontractors to do some of the work. The family was not satisfied with the subcontractors' work, so they filed a lawsuit for breach of contract and fraudulent misrepresentation.
The subcontractor asked the court to dismiss the case because the family was not in privity to their contract with LSM. The court sided with the subcontractors.
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