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PRIVITY OF

CONTRACT
LAW OF CONTRACT II
Outline

A.Privity of contract under common


law
B. Privity of contract in Malaysia
C. Exception to privity of contract
Introduction
The Doctrine of Privity of Contract means that
only persons who are parties to a contract can
sue and be sued on the contract. A contract
cannot be enforced by or against third parties.

The doctrine of privity of contract is often dealt


with the topic on consideration as it has its
origins from the rule that no stranger to the
consideration can take advantage of a contract,
although made for his benefit.

This is the decisive statement from the classic


case of Tweddle v. Atkinson which is the
established authority on privity of contract.
Denial of third party rights under a contract may
be justified on four bases:

1. A contract is a private affair which should only


affect the parties to it.
2. It would be unjust to allow a person to sue on a
contract on which he or she could not be sued.
3. If third parties could enforce contracts made for
their benefit, the rights of contracting parties to
rescind or vary such contracts would be unduly
hampered.
4. The third party is often merely a donee and a
system of law which does not give a
gratuitous promisee a right to enforce the
promise is not likely to give this right to a
gratuitous beneficiary who is not even a
promisor.
Collins explains three principal justifications for the doctrine
of privity:

1) Autonomy
2) Mutuality of rights
The doctrine of privity is also justified by the argument that
since the third party provides nothing in return for the
promised benefit and cannot be liable for breach of
contracts; it is inequitable to give the third party the right to
sue upon the contract.
3) Indeterminate range of liability
If such broad liability to a third party could be created by
contracts, then this would certainly discourage entry into
transactions, with the consequence of serious harm to the
whole market system for the creation of wealth. In
discussing the role of mutuality of rights, it was argued that
the real issue is whether the
Promisor should answer to the third party. It must be
remembered that the promisor has agreed to benefit the
third party at the time of the formation of contract.
A. Privity of Contract under
common lawTweddle v. Atkinson
Case:
The plaintiff was the son of John Tweddle. He married
the daughter of William Guy. After the marriage,
Wiliam Guy and John Tweddle entered into an
agreement whereby they mutually agreed to pay 200
and 100 respectively to the plaintiff. The sum
promised by William Guy remained unpaid and the
plaintiff sued for it.

The court held that he was not entitled to recover as


he had provided no consideration for the contract.
Wightman J stated:

Some of the old decisions appear to support the


proposition that a stranger to the consideration of a
contract may maintain an action upon it, if he stands in
such a near relationship to the party from whom the
consideration proceeds, that he may be considered a
The main criticism on the doctrine is that it does not give
effect to the contracting parties intention and expectation
to benefit a third party. This is particularly vital in
commercial contracts where expediency and efficiency
require that third party rights be recognised.

It also allows contract breakers to escape breaches of


their obligations where the promisee, the party to the
contract, suffers no loss while a third party who suffered
loss is not able to enforce the promise made for his
benefit.

In order to resolve this difficulties, the legislature and the


courts have created exceptions to the doctrine whenever
the need arises. However, the numerous exceptions
created have led to further uncertainties and complexities
in the law.

The English Parliament had enacted the Contracts


(Rights of Third Parties) Act 1999 which allow third
parties to enforce a contract if the contract expressly
A. Privity of Contract in Malaysia
The common law doctrine of privity applies in Malaysia.

By virtue of the different position in s2(d) of the


Contracts Act that consideration may move from the
promise or any other person, it has been argued that this
has changed the position in relation to privity of contract
which was derived form the consideration rule in Tweedle
v. Atkinson.

The position is that the rule on consideration moving from


persons other than the promisee is distinct from the rule
on privity of contract. Thus, in Malaysia, the position is the
same as under the common law that only persons who are
parties to the contract can sue or be sued under the
contract. A third party cannot enforce a contract even if it
is made for his benefit.
Case: Kepong Prospecting Ltd. v. Schmidt
Privy Council stated:
The real question which arises as to this agreement is
whether it could be enforced by Schmidt who in his
personal capacity was not party to it if the agreement
were governed by English Law, Schmidt would be unable
to enforce it But it was suggested that in this respect
the law of Malaysia differed from the law of England in
admitting the principle of jus quaesitum tertio Their
lordship were not referred to any statutory provision by
virtue of which it could be said that the Malaysian law
as to contracts differ in so important a repsect from
English law.

It is true that s2(d) of the Contract (Malay States)


Ordinance gives a wider definition of consideration
than that which applies in England particularly in that it
enables consideration to move from another person
than the promisee, but the appellant was unable to
show how this affected the law as to the enforcement of
contracts by third parties, and it was not possible to
The application of the privity rule also means that a third
party is not entitled to rely on an exclusion clause
in a contract which he is not privy.

Case: Sime Darby Ltd. v. Port Swettenham


The plaintiff claimed Authority
damages arising from the
defendants failure to deliver some cases of whisky
discharged form a vessel into the custody of the
defendants as bailees for reward for delivery to the
plaintiff's warehouse. The goods were lost and the
evidence showed they had been lost during carriage
from the ship to the defendants wharf.

The defendant argued that they had accepted the goods


subject to the terms and conditions of the bills of lading
which included an exclusion clause which exempted
them from liability to the plaintiff. The Federal Court
held that the defendants who were not a party to the
bill of lading could not rely on any clause in the bill of
lading.
Ong Hocjk Thye FJ stated:

As regards exemption clauses the defendants, in


my opinion, are disentitled to avail themselves of
any such as were contained in the bill of lading, by
reason of the fact that the delivery orders to the
defendant were expressed as being subject to the
terms and conditions of the bill of lading covering
this cargo This defendants, therefore, cannot rely
on any clause in the bill of lading, not being a party
to the contract.
Case: Phua Siong Hoe v. RHB Bank Bhd & Anor
Abdul Malik Ishak J:
The doctrine of privity of contract is a subject of
interest to every lawyer. It is an established principle in
the law of contracts and should not be set aside or
discarded lightly. To simply abolish the doctrine of
privity of contract or to ignore it totally, without more,
would certainly represent a major change to the
common law involving complex and uncertain
ramifications. Of course, the doctrine of privity has
come under attack for its refusal to recognise the right
of a third party beneficiary who seeks to enforce
contractual provisions made for his benefit. Judges and
text books writers have come out in the open and
pointed out the gaps that sometimes exist between the
strict contract theory on the one hand and the
commercial reality on the other. To relax the law of
privity by allowing third party beneficiary to succeed
would result in floodgates of litigation in our courts. To
me, a contract is a very personal affairs, affecting only
the parties to it. This court must uphold a strict
EXCEPTIONS TO PRIVITY RULE

Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd


[1915] AC 847 (HL)
Viscount Haldane LC: a principal not named in the
contract may sue upon it if the promisee really
contracted as his agent. For example, a third party may
be able to take the benefit of an exclusion clause by
proving that the party imposing the clause was acting as
his or her agent, thereby bringing the third party into a
direct contractual relationship with the promisor.
Trust
When two parties enter into a contract and one
party promises the other that the promisor will do
something for a third party for example, pay
money, the courts have occasionally treated the
promisee as a trustee of the rights of the third
party beneficiary. If the promisor fails to carry out
the promise, the trustee and the beneficiary are
allowed to join together as co-claimants to sue the
promisor for breaking the promise.
To quote Lord Haldane in Dunlop Pneumatic Tyre
Co Ltd v Selfridge & Co Ltd [1915] AC 847, 853:
such a right [jus quaesitum tertio] may be
conferred by way of property, as for example, by
way of trust.
Malaysian Australian Finance Co Ltd v
The Law Union & Rock Insurance Co
Ltd [1972] 2 MLJ 10
declared that by relying on the Indian
Contract Act which is pari passu with the
Malaysian Contracts Act 1950, even if the
applicant is a stranger to the contract of
insurance, there are ways to enable a
stranger in these circumstances to enforce
the contract of insurance and one of them
is trust. See also Bank Bumiputra Malaysia
Bhd v Mohamed Salleh [2000] 2 MLJ 412.
Assignment
Assignment is an important means of avoiding
the effects of the doctrine of privity and the
assignment of contractual rights is common in
business transactions. In assignment, a party to
a contract (the assignor) is able to transfer the
benefit he or she is to receive under that contract
to another person (the assignee).
The assignee can enforce performance even
though he or she is not a party to the original
contract. For example, where a contract is
entered into between A and B, and B assigns the
benefit of the contract to C, C can enforce the
contract against A. Assignment is governed by
judge made and statutory rules.
Darlington Borough Council v Wiltshire Northern
Ltd [1995] 3 All ER 895

Darlington wanted to build a recreation centre on land


which it owned. Darlington employed Morgan Grenfell
(MG) to organise this task. MG entered into a contract
with the building contractor, Wiltshire.
A separate agreement was entered into between MG
and Wiltshire whereby MG assigned to Darlington all of
the rights it had against Wiltshire. When Darlington
found serious defects in the building works and
brought an action against Wiltshire, it was recognised
that Darlington, as the assignee, had the right to sue
Wiltshire.
The only prerequisite for a third party beneficiarys
right to sue was ensuring that a legal assignment had
been created.
Estoppel
The concept of estoppel may assist where a third
party has relied on an assumption induced by
another that a benefit would be conferred upon
him or her. To rely on estoppel, the third party
must prove that the promisor has engaged in
unconscionable conduct by inducing the third
party to believe that a benefit would be conferred
upon the third party. Estoppel will prevent the
promisor from denying the promise. As such,
even though the third party is not privy to the
contract, the third party can still enforce the
benefit against the promisor.
Curvet Transport SA v Shapadu Trans-System Sdn
Bhd [1994] 4 MLJ 150
In this case, the first plaintiff was the owner of the vessel
MV Enlivener and the second plaintiff acted as an agent
for the first plaintiff. The second plaintiff bid for the Ocean
Transportation contract for the project under which the
defendant has been appointed as the official freight
forwarder. Save for the formality of a contract being
drawn between the first plaintiff and the defendant, a
confirmation was made by the defendant awarding the
contract to the first plaintiff.
Acting on this assurance, the vessel MV Enlivener
proceeded to South Korea to be ready for the loading of
the first shipment. The defendant, however, awarded the
contract to Gajah Navigation Sdn Bhd. The plaintiffs sued
for breach of contract, which was denied by the
defendant. The defendant claimed that there was no
contract between them.
The High Court in allowing the plaintiffs claim
concluded that based on the conduct of the
defendant in accepting the plaintiffs revised offer on
the final freight and responding, Good, at least we
can be sure that there will be no delay when the
defendant was notified that the MV Enlivener had
been dispatched to South Korea, the defendant was
estopped and precluded from denying that there was
a valid and concluded binding contract between the
parties.
Thank you for your attention