Under the legal doctrine of privity of contract, only the parties to a contract owe duties to one another and realize any benefits under the contract. The contracting parties also have the ability to sue one another for breach of contract. While the contracting parties have rights and responsibilities, third parties typically do not enjoy any rights or have any obligations.
For example, John and Jane are parties to a contract, pursuant to which John has agreed to provide Jane, who runs a tuxedo rental company, with 200 tuxedos by a certain date. In turn, Jane has agreed to provide Bob with 50 tuxedos for an upcoming concert. If John fails to provide Jane with the tuxedos, Jane can sue him because they are in privity of contract with one another. Bob could also sue Jane for breach of contract, if Jane fails to deliver the tuxedos. Bob could not, however, sue John because Bob and John do not have a contract with one another, and John does not owe Bob any duties.
In some cases, third parties can obtain the right to privity of contract, however. Assignment is one of these ways, and it occurs when one of the contracting parties, called the assignor, transfers his or her rights or duties under the contract to a third party, called the assignee. After the assignment occurs, the assignor loses his or her contract rights, and the assignee receives any rights that were previously enjoyed by the assignor. The assignor is no longer liable for performing duties under the contract, and the assignee must perform any of the assignor’s duties.
It can also be given to third parties through delegation of duties. In this case, one of the contracting parties, called the delegator, gives some of his or her duties to a third party, known as the delegatee. The delegetee is obligated to perform those duties. Unlike with an assignment, if the delegetee fails to perform, the delegator would ultimately remain responsible for performing the contract duties.
Some contracts designate third-party beneficiaries, who then enjoy privity of contract to some extent. In a typical third-party beneficiary contract, the contracting parties expressly agree that a third party is intended to benefit from the contracting parties’ performance of the contract. If the contracting parties fail to perform their duties, the third-party beneficiary usually has the right to sue for damages. In the tuxedo example above, for instance, if Bob had been a third-party beneficiary, he could have sued John for damages if John failed to deliver the tuxedos to Jane.
