Contract law is based in three different areas. The first, and rarer, basis for contract law is a specific statute governing a contract. The second area is the Uniform Commercial Code. The more pervasive foundation of contract law is common law. Common law is not written down or codified in any particular place. Common law is instead the tradition of law in a particular jurisdiction.
Common law as it reflects on contract law is influenced by the findings of British common law in effect at the time of the American Revolution in 1775. The common law decisions that have been handed down by individual states since British common law ceased to be the governing principle of the location and any relevant finding by a Federal judge.
Common law is a general term for any legal precedent that is taken from a judge's individual ruling. The main statute which provides the foundation of English common law is based on the interpretation of the 1677 Statute of Frauds. It has been incorporated into the common law heritage of all fifty states in the United States at some point.
The main concern in a common law system regarding contracts is if one party is allowed to sue another person. Contract law in a common law system calls this idea the concept of privity of contract. In contract law, privity answers the question of whether an individual party has the legal standing to sue another party, as well as what the responsibility is of the party being sued. Privity in contract law says that rights cannot be extended to an individual who has not entered into the contract in question, and that a third party not involved in the contract has no liability for the terms of the contract.
Privity is a complicated but essential aspect in contract law in common law systems. The 1968 English case of Beswick v. Beswick examines the complications when two parties enter into a contract to provide for the welfare of a third party. The elderly Mr. Beswick and his nephew created a contract in which Mr. Beswick sold his company to his nephew. One of the terms of the contract was that Mr. Beswick's would-be widow, Mrs. Beswick, be provided with stipend after Mr. Beswick's death.
The nephew agreed to the contract, but after the death of his uncle declined to provide the stipend. The nephew claimed he was under no obligation to provide the stipend because his aunt had not been involved in the original contract. The court in this case upheld the nephew's contention. However, because Mrs. Beswick was the administrix of his estate, and thus a party to the contract because the estate maintained an interest in the contract he was still compelled to uphold the terms of the contract.
Outside of circumstances such as that in Beswick v. Beswick where the third party assumes the interests in one of the original parties, the only other time a third party can become directly involved in a contract under the concept of privity inherent in a common law system is when one of the original parties to the contract has been acting on behalf of the third party from the beginning.
For instance, John is working for Joe. Joe and Jack enter into a contract. John would then be able to compel Jack to fulfill the contract because the duties in a contract can be transferred. If Joe were not working for John, John would be unable to force Jack to complete the contract.