Privity of Contract Meaning: Everything You Need to Know
What is privity of contract meaning? Within the scope of contract law, privity allows the members of a contract to take legal action against one another, if need be. 3 min read
2. Horizontal Privity Contract vs. Vertical Contract
3. When a Third Party has Rights
Privity of Contract Meaning
What is privity of contract meaning? Within the scope of contract law, privity allows the members of a contract to take legal action against one another, if need be. It is important to note, however, that this right applies only to the signatories of a contract and does not permit a third party to pursue legal action. For example, if you are the beneficiary of a spouse’s life insurance policy, you do not have legal standing to take action against the insurance company, as you were not the owner of the policy, but rather your spouse was.
Should a privity of contract case require legal action, it is often pursued in civil court, rather than criminal court. In civil court, any restitution that is provided to the plaintiff is monetary, whereas in a criminal court, the ruling of the judge or jury may result in jail time. Either type of court case, however, is subject to being a part of the public record, allowing for other citizens to look into the case and find out the terms of the judges ruling, or any settlement that was reached.
Horizontal Privity Contract vs. Vertical Contract
There are generally two types of privity contracts: horizontal and vertical. The differences between them include:
- Horizontal privity exists when the beneficiary of a contract is a third party, and not one of the signatories of the original contract. The aforementioned life insurance example would be considered a horizontal contract. Again, the beneficiary of the insurance policy would not typically be in a position to take legal action against either the insurance company or the policy holder.
- A vertical contract exists when the two signers of the contract are the ones who would directly benefit from the agreement. An example of this would be someone who purchases an Individual Retirement Account (IRA) with the expectation that the money be paid to them upon their retirement. In this case, the owner of the IRA would have legal standing to take action against the administrator of the IRA (typically, a bank or other type of financial institution) for failure to pay or other type of negligence.
When a Third Party has Rights
While generally speaking, the privity of contract does not provide a third party the right or opportunity to take legal action against one of the parties who entered into the contract, there are some occasions in which it is permissible. Examples of such, include:
- Trusts. A trust is essentially a promise to hold property (money, real estate, etc.) for someone else. We often think of trusts in the scope of trust funds: money that was set aside by one party (perhaps a parent or grandparent) to be paid out to someone (a child or grandchild) at a certain point, or points, in time. If a trust was established to pay money to someone on their 25th birthday, and the administrator of the trust does not honor this agreement, the aforementioned individual could have legal standing to take action against the administrator.
- Collateral Contract. This type of contract may exist when one of the two parties involved in the original contract enters into another contract with a third party, provided that it falls within the scope of the original contract. It is worth noting, however, that all parties involved with the original contract must be on board with the creation of the collateral contract. An example of this would be if a publicist hires a stylist to outfit a client for an awards show. That stylist may then enter into a collateral contract with a particular designer to make the gown for the client. If the publicist then does not pay for services rendered, the designer could take legal action, provided that the publicist and stylist had been in agreement, from the onset, regarding this collateral contract.
- Agency. This potentially allows for a third party to take action against one of the parties involved in a contract, if it is generally understood or accepted that the third party is entitled to acting on the behalf of one of the contract signatories. For example, if you have an elderly or infirmed parent, for whom you are responsible, then you may be able to take action against someone on their behalf, if it is accepted that you are permitted to act on their behalf. This is also where having well-documented power of attorney is important.
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