Privity

What is privity?

Privity is a legal term for a relationship or association between two parties. Generally, people need privity to have an enforceable contract.

Privity can arise through a mutual interest, such as a shared stake in an inherited estate, or through entering into a contract, such as two parties agreeing to buy or sell a house. Parties with privity have certain legal rights, including the option to sue. Third parties lack those rights, but they are also protected from lawsuits that might arise due to the contract.

Contract management software helps companies create and manage contracts so they can be shared with appropriate teams to ensure legal compliance. Most software offers customizable contract templates and integrations with project management tools and customer relationship management (CRM) platforms.

Types of privity

Privity is especially important in contract and property law. Understanding the main types of privity is key to knowing the legal rights of connected parties. 

1. Privity of contract means the parties bound by a contract are the only ones who determine its benefits or enforcement. In most cases, an outside party can’t sue.
2. Privity of estate occurs when two or more parties have an interest in the same real property. For example, the landlord-tenant relationship has privity of estate – even if the tenant has a sublease agreement. 

Exceptions to the privity concept

While privity is the rule in most legal cases, there are some notable departures. Exceptions to privity of contract include: 

• Agency. An agent acts on behalf of the person they represent, also known as the principal. The principal is considered to have privity even if they aren’t part of the contract. The principal is liable if the agent has acted within their authority. If the agent has acted out of bounds, they are liable. 
• Collateral contracts. A collateral contract is a side contract, often made orally before or at the same time as the main contract. For example, a museum needs its roof replaced. If a local manufacturer claims its shingles last 30 years and the museum agrees to use its products, resulting in a collateral contract. If the museum contracts a roofing company for the installation and the shingles fail in ten years, the museum can still sue the local manufacturer who did not have privity in the actual contract. The collateral contract allowed an exception.
• Trusts. With a trust, a person gives assets to a second party, known as the trustee, to manage. The beneficiary is technically a third party, but could still sue the trustee for mismanaged funds.

Benefits of privity

The main purpose of privity is to provide protection and regulation for parties involved in legal matters like contracts or real estate. Two of the primary advantages include:

• Stopping third parties from enforcement. Privity prevents third parties from demanding a contract to further their advantages. 
• Protects third parties from lawsuits. Because non-contractual parties typically are not in privity, they are then considered safe from legal action, including lawsuits. This is formally called lack of privity.