Real Estate Council of Alberta Fundamentals Practice Exam

What does 'privity of contract' refer to?

1. Legal actions can only be taken by contracting parties

2. All parties involved can sue for damages

3. Any third party can enforce contract terms

4. Contracts can be voided by any party

The correct answer is: Legal actions can only be taken by contracting parties

'Privity of contract' refers specifically to the relationship that exists between the parties to a contract, which grants them certain rights and duties under that agreement. The concept fundamentally establishes that only the parties directly involved in the contract can sue each other for breach of the contract or fulfill other legal actions concerning it. This means that if someone is not a party to the contract, they cannot claim rights or obligations under it, nor can they enforce its terms. Thus, the correct choice highlights the limitation of legal actions to those who are in direct contractual relationships, effectively underscoring the exclusivity of the rights and responsibilities defined in the contract. In contrast, the other options misinterpret the implications of privity. For instance, the idea that all parties involved can sue for damages is incorrect unless they are parties to the contract. Similarly, the notion that any third party can enforce contract terms misrepresents the exclusivity inherent in privity. The assertion that contracts can be voided by any party is also not accurate because it does not account for the specific conditions under which a contract may be rendered void, which typically involve mutual agreement or clear legal grounds recognized by the involved parties.