PRIVITY OF CONTRACT

• -Only those who are party to the contract is that the

only parties or privy to the contract that can sue or
be sued on it.
• -A party who is not a party to the contract may not
enforce a contract
• -The parties to a contract also may not impose a liab
ilities upon a third party who is a stranger to the ori
ginal contract.

• Privity of contract has not expressly provided under

Contract Act 1950, however, it has been transplante
d into our Malaysian laws.
 PRIVITY OF
CONTRACT

The attempt to The attempt to

confer rights impose
under the contract contractual
upon third party liabilities on third party
 A. The attempt to confer rights under the
contract upon third party
• Applies to attempt to confer benefits on strangers (3rd party)to the contract.

• Example:
– A promises to do something to B and in return B promises to confer som
e benefit on C.
– The rule is C cannot recover the benefit as C is not privy to the contract
between A and B.
– C can be known as stranger to the contract
B. The attempt to impose contractual liabilities on third
party

• The doctrine of privity of contracts prohibits the original co

ntracting parties from imposing liabilities against stranger
or the third party.

• Example:

– If the contract occurred between A and B, the liability c

annot be imposed against C.
– C – is a stranger.
• The Rule of Privity of Contract
• -restated in the case of Dunlop Pneumatic Tyre Co Ltd v Selfri
dge & Co Ltd
– Fact:
• App (Dunlop Pneumatic Tyre Co) – sold Dunlop tyres to
Dew & co on condition not to sell it below certain price.
• Resp (Selfridge & co) – bought the Dunlop from Dew &
co and agreed not to sell it below certain price stipulate
d and further agreed to Dew & co to pay to the app (Du
nlop) 5 pound for each tyres sold in breach of contract.
• The resp sold 2 tyres below the market price.
• App sued the resp coz of that and claimed for the 5 pou
nd as agreed between resp and Dew & co.
HOL stated that app (Dunlop) could not recover as there wer
e not privy to the contract (between Dew and Resp) and only
a person who is a party to a contract can sue on it.
 Law in Malaysia
• Formerly doubtful whether this rule was applicable in Malaysia, becaus
e of section 2(d), but the Privy Council in Kepong Prospecting’s case dec
ided that though consideration may move from third party, in Malaysia
is still that a third party however, cannot enforce a contract.

• In Schmidt v Kepong Prospecting Ltd & Ors[1964] MLJ 416 –

the FC recognized the application of the doctrine of privity of contract in
Malaysia that a person who is not a party to a contract cannot have any
advantages over the contract.

• The facts in Kepong’s case:

– App – a mining engineer assisted Mr Tan to obtain a permit and prom
ised to pay the app 1%.
– After the incorporation in 1954 – resp had took over Mr Tan’s obligati
on to pay the app 1%.
– In 1955 – resp make an agreement to pay 1%
– The app claimed the 1% under the 1954 or the 1955 agreement.
– Held: resp cannot enforce the 1954 agreement coz he was not the pa
rty.
• Lim Foo Yong & Sons Realty Sdn Bhd
– SC held that: only a party to a contract or his estate could
sue for the compensation for loss or damages caused by b
reach of contract.
– In this case: the wife (administratrix of the estate of her d
eceased husband) could not claimed a damages caused b
y the failure of the app to pay the purchase price of her h
usband’s shares.
– Held; the wife was not a party to the contract and could n
ot claim for any loss suffered by her in her personal capaci
ty.
 EXCEPTIONS TO THE RULE

A. Exceptions by the Court

a. Undisclosed principal in agency((Commercial practice)
– Where an agent, on behalf of his principal, may mak
e a contract with another person without stating he
is contracting as agent.
– The undisclosed principal can sue and be sued on th
e contract
 Case: Siti Shamsiyah Ab Karim v Melombong &
Perumahan Sdn Bhd
• F: Pff entered into S & P agreement(SPA) with 1st Def (The Dev) for the purch
ase of condominium units in a housing devt project. In advertisement relati
ng to project, the 1st Def was described as a subsidiary of Talam Corp. Bhd. T
he 2nd Def and had represented the 2nd Def as the Princ. party in the project.
• Pff purchased based on Defs’ ad. Described as big, deluxe and luxurious but
later found out it did not match that representation. Pff claimed against the
2nd def. 2nd def contended that Pff had no locus standi in the cause of action
as 2nd def was not a party to the contract executed between Pff and its subsi
diary (1st Def).
• HC: Allowed the Pff’s claim. Though not contracting party, through various a
d., 2nd Def held out and represented to Pff that the project was their project
and managed by them.
• They were privy to the contract.
b. Administrator of an estate may sue in favour of a thi
rd party (specific performance in favour of 3rd party)

• A promises to do something for B and in return, B pro

mises to confer some benefit on C. The benefit of the
contract between A and b is for C. B did not perform
his promise. Equity regards A as trustee for C. as, if B
fails to implement his promise, A as trustee for C, cou
ld compel B to perform his promise.

• Takako Sakao’s case decision stated that ‘it is settled l

aw that trusts are an exception to the common law r
ule of privity of contract’.
c. The 3rd party may sue to enforce the promise
(constructive trust of the contractual right)
• In the above eg, if a fails in his duty to compel B to im
plement his promise, C as beneficiary under the impli
ed trust, may successfully maintain an action against
B.

• Read Ramli bin Shahdan v Motor Insurers’ Bureau

• This case applied above exception to the rule of privit
y of contract by way of the implied trust theory so th
at a 3rd party could sue on a contract made for its ben
efit.
B. Statutory Exceptions

– S29 of the Bill of Exchange Act 1949 – negotiable instruments can be sued
on by a party into whose hands they come although he is not the original
party with whom the instrument was negotiated

– Road Transport Act 1987 – S. 91 and s. 96 – gives the benefit of the insura
nce policy also to the authorised driver and the third party

– Section 4(3) of the Civil Law Act 1956 – a person may assign (assignor) an
y debt or other legal chose in action to a third party (assignee). Hv, the ass
ignee is not a party to the contract. They can transfer all the legal right pr
ovided the assignor has given an express notice to the debtor.

– S. 23 of Civil Law Avt 1956 – Life insurance policy creates a trust in favour
of the spouse and children and shall not form part of the estate of the ins
ured
 Recommendation for abolition of the doctrine

• The recommendation was made where an agreement expressly purports

to confer benefits on a third party, that party should have a right to sue
on the agreement.

• There must be an express intention to confer benefits of the third party

and not in the situation where the third party would be incidentally ben
efited.
• Although the rule was criticized in the case of Besw
ick v Beswick, but the Parliament has not abolished
the rule of privity of contract and its existence was
emphatically re-affirmed b the HOL.

• This recommendations for the abolition of the doct

rine and the criticisms by the ct of the unfairness of
the rule had resulted the English parliament passin
g the Contracts (Right of Third Parties) Act 1999.

• It is about time that our Parliament changes the ap

plication of general rule of privity of contract in Mal
aysia- Many criticisms as well as abolition of this ru
le by other part of continents. But not yet taken int
o action.