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Understanding Privity in Contracts

The Privity rule does not apply when a party acts as an agent for a non-involved party or when contractual benefits are transferred to a third party through assignment or novation. An agent can be established through express or implied consent, and their actions may bind them as principals if they exceed mere agency. The Himalaya clause allows third parties to benefit from contracts in transportation, extending liability limitations to non-contracting parties involved in the process.

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23 views1 page

Understanding Privity in Contracts

The Privity rule does not apply when a party acts as an agent for a non-involved party or when contractual benefits are transferred to a third party through assignment or novation. An agent can be established through express or implied consent, and their actions may bind them as principals if they exceed mere agency. The Himalaya clause allows third parties to benefit from contracts in transportation, extending liability limitations to non-contracting parties involved in the process.

Uploaded by

gabriellahe1998
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© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

The Privity rule doesn’t apply if

1. a party involved acts as an agent for the non-involved party


2. one party transfers contractual benefits to the a 3rd party by way of an assignment or
novation of the contract
 Agent: no formality is necessary – words of parties are sufficient, or implied from
prior habits, or course of dealings
o can be created expressly or by implication (eg. from prior habits or a course
of dealings between parties when the agent has repeatedly been appointed
to perform similar acts in the past [Pola])
o must show that the Principal expressly/impliedly consented to the Agent
acting on his/her behalf
 ‘Consent’ may be implied where a reasonable man in such situation
would understand the other to have the principal’s authority to act on
his behalf [Pola]
 [Carminco Gold]
 Fact: Carminco Gold engaged Findlay & Co as
brokers/underwriters to secure financings for purchasing a
mining asset. The broker advanced money under the
agreement.
 Issue: Did the broker act solely as an agent (so only the
principals could enforce or be bound by the contract), or did
they make themselves a direct contracting party—effectively
becoming a principal themselves?
 Held: The fact that identity of the principal was unidentified
under loan agreement + broker’s financial contribution +
participation beyond mere agency suggested the broker
entered contract on its own behalf. So the broker has
enforceable rights and were bound under the contract (viz.
can sue or be sued under the contract). So Agent becomes
principal by their role/conduct.
o The Himalaya clause: is utilized in a carrier/transportation/shipping contract
or a bill of lading, and establishes rights for those who are a 3rd party and not
privy to provisions given by the contract. They are clauses that extend the
carrier’s liability limitations to cover loss or damage caused by the carrier’s
employees, agents, or subcontractors etc., such as stevedores (who are not
contract parties). This is where ratification (meaning adoption/confirmation
of a contract by a person who was not originally bound by it) is relied upon to
application of privity rule

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