Also known as: strict privity of contract · privity of contract
Written by attorneys — see sources below.
2 senses
A doctrine limiting tort liability for economic loss or negligent misrepresentation to plaintiffs who share a direct contractual relationship with the defendant.
A doctrine limiting tort liability for economic loss or negligent misrepresentation to plaintiffs who share a direct contractual relationship with the defendant.
Sofia Stern purchased a new automobile from a local dealer. The steering mechanism failed due to a latent defect and caused an accident injuring Sofia. Sofia sued the manufacturer with whom she had no direct contract. Under the strict privity rule the claim would have been barred, yet the court permitted recovery because the product was dangerous when used as intended.
The principle that a transferor remains obligated on an express lease covenant touching and concerning the land when the obligation rests on privity of contract and the obligee has not relieved the transferor of the duty.
The principle that a transferor remains obligated on an express lease covenant touching and concerning the land when the obligation rests on privity of contract and the obligee has not relieved the transferor of the duty.
Each sense below has its own examples, sources, and questions.
The defendant Buick Motor Company manufactured automobiles and purchased ready-made wheels from the Imperial Wheel Company of Flint, Michigan. The Imperial company had furnished the defendant with eighty thousand wheels, none of which had proved defective prior to this incident. The defendant sold one such automobile to a firm of automobile dealers in Schenectady, who in turn sold the car to the plaintiff. While the plaintiff was driving the automobile at a speed of only eight miles an hour, a wheel collapsed because it was made of defective wood whose spokes crumbled into fragments. The plaintiff was thrown out and injured. The wheel had been bought from the outside manufacturer rather than produced by the defendant. Evidence showed that the defects could have been discovered by reasonable inspection, which the defendant omitted. There was no claim that the defendant knew of the defect and willfully concealed it. The car was designed to go fifty miles an hour. It had seats for three persons. The plaintiff commenced an action for negligence against the defendant. The case was tried to a jury. The New York Court of Appeals affirmed the judgment with costs.
View caseSerena Soto and Sean Steele invested in a company after reviewing an audit report prepared by Spectrum Financial. The report contained negligent misstatements that caused substantial losses. The investors had no contract with Spectrum. Strict privity would have barred their claim, but the court limited liability to parties with a direct relationship or known intended reliance.
Osborne Computer Corporation was founded in 1980 by entrepreneur Adam Osborne and began manufacturing the Osborne I portable personal computer for the mass market, with shipments starting in 1981. By fall 1982, sales of the company's sole product had reached $10 million per month, making the company one of the fastest growing enterprises in the history of American business. In 1981 and again in 1982, the company retained Arthur Young & Company to audit its financial statements and issue audit reports. Arthur Young issued unqualified audit opinions on the company's 1981 and 1982 financial statements. The 1982 opinion was issued on February 11, 1983, appeared on Arthur Young's letterhead addressed to the company, and 100 copies of the professionally printed opinion were personally delivered to the company. The 1982 financial statements reported a modest net operating profit of $69,000 on sales of more than $68 million. In late 1982 the company postponed a planned initial public offering and instead issued warrants to investors in exchange for bridge financing loans or letters of credit. Plaintiffs, a group that included individuals as well as pension and venture capital funds, invested in the company in early 1983; one plaintiff, Robert Bily, purchased 37,500 shares of stock from Adam Osborne for $1.5 million. With one exception, plaintiffs testified that they made their investments in reliance on Arthur Young's unqualified 1982 audit opinion. After the warrant transaction closed on April 8, 1983, sales declined sharply because of manufacturing problems with the company's new Executive model computer, the public offering never occurred, and the company filed for bankruptcy on September 13, 1983, causing plaintiffs to lose their investments. Plaintiffs brought separate lawsuits against Arthur Young in Santa Clara County Superior Court that were consolidated for trial. Plaintiffs' expert witness identified more than 40 deficiencies in the 1982 audit amounting to gross professional negligence, including an understatement of liabilities by approximately $3 million that turned the reported $69,000 profit into a loss of more than $3 million, and testified that Arthur Young had discovered but failed to disclose material weaknesses in the company's internal accounting controls. After a 13-week trial the jury returned a verdict for plaintiffs on the professional negligence claim and awarded approximately $4.3 million in compensatory damages, but found for Arthur Young on the fraud and negligent misrepresentation claims. The trial court granted Arthur Young's motion for judgment notwithstanding the verdict on the negligence claim. The Court of Appeal reversed the judgment in favor of Arthur Young. The Supreme Court of California granted review.
View caseSamantha Stone, an employee at Silverline Industries, was injured when a pneumatic tool exploded. The tool had been sold by the manufacturer to an intermediate distributor and then to Silverline. Samantha had no contractual relationship with the manufacturer. Strict privity would have prevented recovery, yet the court allowed the claim because the product was expected to reach the ultimate user.
In the mid-1960s through 1987, the plaintiffs worked as grinders at the General Dynamics Corporation Electric Boat facility in Groton, Connecticut, where their duties required them to use pneumatic hand tools manufactured by the defendants Chicago Pneumatic Tool Company, Stanley Works, and Dresser Industries, Inc., to smooth welds and metal surfaces. During this employment the plaintiffs developed permanent vascular and neurological impairment of their hands, manifesting as blanching of the fingers, pain, numbness, tingling, reduction of grip strength, cold intolerance, and clumsiness, symptoms diagnosed as hand arm vibration syndrome. Ronald Guameri, an industrial hygienist at Electric Boat, performed extensive testing of tools used at the shipyard and found that a large number of the defendants' tools violated vibration exposure limits established by the American National Standards Institute and exceeded the threshold limit promulgated by the American Conference of Governmental and Industrial Hygienists. Richard Alexander, a mechanical engineering professor, testified that methods to reduce vibration through isolation, dampening, and balancing had been available to manufacturers for at least thirty-five years. Charles Suggs, a research engineer, testified that he had reduced vibration hazards in chain saws by inserting rubber mounts in the 1960s, reduced vibration by 70 percent in tools without handles in the 1970s by wrapping them with resilient foam rubber and a metal sleeve, and in 1988 reduced vibration levels in the defendants' die grinders by between 35 and 60 percent using similar techniques. After a six-week trial the jury returned verdicts awarding the plaintiffs compensatory damages on their design defect claims, found that the defendants had provided inadequate warnings but awarded no damages on that claim because the plaintiffs failed to prove causation, and declined to award punitive damages. The defendants appealed from the judgment, and the plaintiffs cross-appealed. The Supreme Court of Connecticut transferred the appeal and cross-appeal from the Appellate Court to itself pursuant to Practice Book § 4023 and General Statutes § 51-199(c). Electric Boat followed a regular maintenance program involving daily inspection of tools. It purchased chucks and other replacement parts from outside vendors. It periodically removed certain safety features and used longer burr attachments on the tools.
View caseSpencer Silver worked as a coachman for a customer who had contracted with a wheelwright for repair of a carriage. The wheelwright performed the work negligently and Spencer was injured when the carriage collapsed. Spencer had no contract with the wheelwright. Under the strict privity rule Spencer could not recover because he lacked any direct contractual relationship with the defendant.
The plaintiff, Winterbottom, initiated legal proceedings against the defendant, Wright, following an injury sustained in the operation of a mail coach. Wright had previously entered into a contract with the Postmaster-General under which he assumed responsibility for the repair and maintenance of the mail coaches. Winterbottom was employed by Atkinson, who had a separate contract with the Postmaster-General to provide the horses and drivers for the mail service, and the coach in question was supplied to Atkinson by the defendant. Subsequently, the coach overturned due to its defective condition, resulting in personal injury to the plaintiff. The declaration in the action alleged that the defendant had taken upon himself the sole and exclusive duty to keep the mail coach in a fit, proper, safe, and secure state and condition by virtue of his contract with the Postmaster-General. The plaintiff was not a party to the contract between Wright and the Postmaster-General. The case was heard before the Court of Exchequer, with opinions delivered by Lord Abinger, C.B., Alderson, B., and Rolfe, B. The proceedings culminated in the entry of judgment for the defendant after consideration of the parties' positions.
View case2 common questions
Yes. Under a strict privity approach liability for negligent misrepresentation extends only to parties with whom the defendant has contracted directly. This rule protects defendants from an unlimited class of potential plaintiffs and is more favorable to defendants than foreseeability-based standards.
Yes. The court held that a manufacturer may be liable to a remote purchaser for negligence when the product is dangerous if used in the ordinary manner, even without contractual privity. This created an exception to the general rule that a vendor is not liable to third parties lacking contractual relations.
Supporting sources
Spencer Silver leased commercial space from Stella Shapiro under a written lease containing an express covenant to maintain structural supports. Spencer assigned the entire leasehold to Samantha Stone with Stella's written consent. The assignment document contained no release of Spencer. Stella later sued Spencer for breach of the maintenance covenant after the supports failed. Because the obligation rested on privity of contract, Spencer remained liable despite the transfer.
Stella Shapiro leased property to Spencer Silver under a lease with an express promise to resurface a shared access road. Spencer assigned the lease to Samantha Stone after promising in writing to perform the resurfacing obligation. Samantha then assigned the lease to Serena Soto. When the road deteriorated, Stella sued Samantha. Samantha's liability rested on privity of contract and therefore survived the subsequent transfer.
2 common questions
The original promisor remains liable after assignment if the obligation rests on privity of contract and the person entitled to enforce the promise has not relieved the promisor. Consent to the assignment or acceptance of rent from the assignee does not by itself constitute relief.
Supporting sources
Privity of contract arises from the original lease agreement and survives transfer unless the obligee grants relief. Privity of estate arises from the landlord-tenant relationship and ends upon transfer of the interest, so obligations resting solely on estate privity terminate with the transfer.
Supporting sources
…If he can maintain the suit, it is because an anomaly has found its way into the law on this subject. In general, there must be privity of contract. The party who sues upon a promise must be the promisee, or he must have some legal interest in the undertaking. In this case, it is plain that Holly, who loaned the money to the defendant…