Where a valid contract is breached by any of the parties, the innocent party can bring an action in court to compel the defaulting party to fulfill his obligations under the contract. He can also claim damages for the breach, or injunction to prevent further breach. “Damages” is the amount of money awarded by the court to compensate a party for the breach of contract or wrongful action of another party. A contract is therefore, said to be enforceable when any of the parties can sue on it.
However, it is not just anybody that can sue to enforce a contract. The law is that it is only the parties to a contract themselves who can sue to enforce it. As a general rule, a third party cannot sue to enforce a contract even when it is made for his benefit. This is what is known as privity of contract. Thus, if ‘A’ enters into an agreement with ‘B’, requiring ‘B’ to build a house for ‘C’, ‘C’ cannot sue ‘B’ for failure to build the house, simply because ‘C’ was not a party to the agreement between ‘A’ and ‘B’.
The doctrine of privity of contract has its roots in English law, and was expounded in the age-long case of Dunlop Pneumatic Tyre Co Ltd V. Selfridge & Co  AC 847, at 853, where Viscount Haldane made the following apt remarks:
“My Lords, in the law of England certain principles are fundamental. One is that only a person who was party to a contract can sue on it. Our law knows nothing of a jus quaesitum tertio [third party right of action] arising by way of contract”
.Another aspect of the doctrine is that a contract can only bind the parties thereto. A third party cannot be bound by a contract between ‘A’ and ‘B’ to which he is not himself a party. In other words, both benefits and obligations created under a contract are enforceable only by the parties to the contract, and not by third parties.
The above-stated position is however, a general rule, and as is the case with all general rules, there are some exceptions. A third party may therefore be able to enforce a contract in any of the circumstances described below:
1. Where the contract is a third party insurance contract Third party insurance contracts are agreements between an insurer (usually the insurance company) and the insured (the person taking up the insurance policy) by which the insurer in consideration of payment (premium) made by the insured, assumes the obligation to pay a specified sum of money to a person or class of persons upon the occurrence of a given incident. A good example is motor vehicle third party insurance.
Section 6 (3) of the Motor Vehicles (Third Party Insurance) Act – CAP M22 Laws of the Federation of Nigeria, 2004, provides as follows:” Notwithstanding anything in any written law contained, a person issuing a policy of insurance under this section shall be liable to indemnify the persons or classes of person specified in the policy in respect of any liability which the policy purports to cover in the case of those persons or classes of person”.
Under the above law, it is mandatory for every vehicle owner to take out a third party insurance policy. The insurance contract, even though made between the insurer and the insured is for the benefit of third parties, and upon the occurrence of the insured risk (accident or damage caused by the insured vehicle), the third party can legally claim benefit of the contract from the insurer. This constitutes a statutory exception to the doctrine of privity of contract.
2. Where the parties enter into contract as agentsAgency is a fiduciary relationship between two parties in which one (the ‘agent’) is authorized by the other (the ‘principal’) to perform certain acts, for and on behalf of the principal. It is based on the maxim qui facit per alium facit per se (He who acts through another does the act himself).The principal is bound by the acts of the agent performed within the scope of the agent’s authority. An agency can be created in any of the following ways:
i. By express agreement, whether oral or written,
ii. By implication, based on the custom or practice of the trade, or
iii. By conduct of the principal.
The rule here is that if one of the contracting parties contracts as an agent, then either the agent or the principal, but not both, can sue to enforce the contract.…to be continued.