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Impacts of privity of contract on business contracts in Bangladesh

Fozia Afrin Lizna | June 05, 2023 00:00:00

The privity of contract, also known as 'The Doctrine of Privity', is not much of a talked or practised doctrine in Bangladesh. It is an uncodified doctrine that says that when two parties form a contract, a third party that is not a part of the contract cannot intervene in the contract. It is one of the most significant doctrines to protect the rights or impose any obligations of parties entering a contract.

When it comes to business contracts, this doctrine has some specific impacts that helps to protect rights and impose obligations on the parties involved in the contract. To form any business contract hassle-free, every businessman should be aware of these impacts.

Firstly, it restricts limited rights and obligations to the only parties entering into the contract so that the third parties originally not involved in the contract cannot hold anyone liable for its terms. For instance, if a company and a supplier enters into a contract, no other party has legal rights and responsibilities toward it.

Secondly, it highly affects the ability of enforcing contractual term which means only the parties involved have the right to sue for any non-performance or seek specific performance. For instance, if a garments company forms a contract with a retail shop owner, only the garments company and the retail shop owner will be liable for any breach of contract.

Thirdly, a party involved in a contract cannot randomly assign the contractual rights and obligations to any third party without the consent of the other relevant party in the contract. This shall violate the doctrine undoubtedly. For instance, if a farmer in Kurigram, Rangpur, who cultivates and delivers Aman rice directly to the residents of the village decides to assign the sales of rice to the grocery shopkeepers of the village, the villagers need to agree to this arrangement.

Though privity of contract usually limits the involvement of third parties not included in the contract, there are certain exceptions where third parties are affected by the contract. In such circumstances, when a contract specifically signifies the third party beneficiary that is intended to give benefit to the third party from the contract, the parties relevant to the contract are bound to provide rights and damages to the third party. This includes life insurance policies, trust agreements, construction contracts, employee benefits, assignment of contracts as well. For example, when a construction company enters a contract with a realtor, he gets paid for high quality raw materials. But if the constructor buys raw materials of half the price and low quality, and after the completion of building the complex 1 year later, if the building demolished due to its poor quality raw materials, the residents that were injured and the relatives of the dead from the accident have the right to sue the construction company.

Moreover, the doctrine of privity provides a level of assurance and certainty on the rights and obligations of the parties involved, which has a significant impact on the business relationships and transactions that helps reduce breaches of contracts and public sufferings. However, according to some of the advocates of Bangladesh, the rate of violation cases of the privity of contract is quite low that shows us how people are ignorant of the significance of the privity of contract.

Fozia Afrin Lizna is a student of Bachelor of Laws, North South University, Dhaka.

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