Privity of contract is the relationship that exists between the parties to an agreement. This relationship is necessary in contracts. If you want to file a lawsuit involving a contract, you therefore need to show that you and the other person were in privity of contract. In other words, you were both involved in the contract and had an established contractual relationship.
The doctrine of privity of contract is that a contract cannot confer rights or impose those obligations arising under it, on any person except the parties to it. The term “parties” may seem simple enough but there are situations where it may become doubtful as to exactly who the parties are and resultantly, who, in the eyes of the law should be liable or should be compensated in event of inevitable breaches that may occur from time to time. The concept of privity is part of the bedrock called common law which was made up of the
collective judicial decisions derived from court decisions.
Imagine that you visit your local supermarket and buy a frozen dinner. You come home, heat it up, and get sick immediately after eating the dinner. It turns out that the dinner was tainted with bacteria. You want to sue the supermarket and the manufacturer of the meal. However, you also want to sue the middleman who delivered the meal to the store. This will be a potential problem, because you were not in privity of contract with the middleman; in other words, you had no direct relationship with the middleman at all. He did not sell you the item or market the frozen dinner.
Privity of contract occurs only between the parties to the contract, most commonly contract of sale of goods or services. Horizontal privity arises when the benefits from a contract are to be given to a third party. Vertical privity involves a contract between two parties, with an independent contract between one of the parties and another individual or company. If a third party gets a benefit under a contract, it does not have the right to go against the parties to the contract beyond its entitlement to a benefit. An example of this occurs when a manufacturer sells a product to a distributor and the distributor sells the product to a retailer. The retailer then sells the product to a consumer. There is no privity of contract between the manufacturer and the consumer.