Law of Privity in Malaysia

1 January 2017

The doctrine of privity prevented a third party from enforcing a benefit in a contract made between other parties. This position has clearly been altered by the enactment of the Contract (Rights of Third Parties) Act 1999. Today, third parties are no longer denied the ability to enforce benefits conferred upon them by a contract between two or more parties. 1. Examine the doctrine of privity and the problems that it faced, 2. Discuss the changes brought about by the development of the law 3. Examine the changes and whether they have abolished the doctrine or caused further problems.

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Compare the current position of the law to that of Malaysia 5. Consider all relevant judicial decisions 6. If necessary, suggest an appropriate remedy for the law in dealing with this matter. 7. Compare the current position of the law to that of Malaysia A basic rule in the law of contract is that only those who are parties to the contract or privy to the contract can sue or be sued on it. A person who is not a party to a contract may not enforce a contract even though it was made for his benefit. Similarly, the parties to a contract cannot impose liabilities upon a third party who is a stranger to the original contract.

This principle is known as privity of contract. This thesis examines the doctrine of privity in Malaysia and argues that its application to contracts made for the benefit of third parties is inadequate and requires statutory reform. The main obstacle of this doctrine is that it frustrates the contracting parties’ intention to benefit third parties. The difficulty is exacerbated by the growth of contracts made for the benefit of third parties in recent years. It is submitted that contract theory can accommodate third party rights.

The development of common law mechanisms to vercome the doctrine of privity in England, Australia and Canada are analysed to consider their application to the position in Malaysia. The common law mechanisms discussed include promisee’s remedies for breach of contract and mechanisms which grant direct rights to the third party to enforce a contract such as trust, agency, tort, Himalaya clauses and others. A comparative study of the use of these mechanisms in the jurisdictions analysed shows that a number of important judicial developments can be undertaken by the Malaysian courts.

However, this study also shows that there are limitations with judicial reform of the doctrine of privity and that the more effective solution is through statutory reform. For this purpose, a study on the statutory development of third party rights in England, New Zealand, Australia, together with the position in the United States and the Principles of European Contract Law which are applicable to members of the European Union is also included in this discussion.

This comparative study shows that the framework adopted in England now found in Contracts (Rights of Third Parties) Act 1999 is the preferred model for reform subject to a few changes to suit local conditions and circumstances, opinions and outlooks when making decisions. ABSTRACTThis thesis examines the doctrine of privity in Malaysia and argues that its application to contracts made for the benefit of third parties is inadequate and requires statutory reform. The main obstacle of this doctrine is that it frustrates the contracting parties’ intention to benefit third parties.

The difficulty is exacerbated by the growth of contracts made for the benefit of third parties in recent years. It is submitted that contract theory can accommodate third party rights. The development of common law mechanisms to overcome the doctrine of privity in England, Australia and Canada are analysed to consider their application to the position in Malaysia. The common law mechanisms discussed include promisee’s remedies for breach of contract and mechanisms which grant direct rights to the third party to enforce a contract such as trust, agency, tort, Himalaya clauses and others.

A comparative study of the use of these mechanisms in the jurisdictions analysed shows that a number of important judicial developments can be undertaken by the Malaysian courts. However, this study also shows that there are limitations with judicial reform of the doctrine of privity and that the more effective solution is through statutory reform. For this purpose, a study on the statutory development of third party rights in England, New Zealand, Australia, together with the position in the United States and the Principles of European Contract Law which are applicable to members of the European Union is also included in this discussion.

This comparative study shows that the framework adopted in England now found in Contracts (Rights of Third Parties) Act 1999 is the preferred model for reform subject to a few changes to suit local conditions and circumstances. 1. Introduction The privity rule which stipulates that no benefit can be conferred to a third party who is not a party to the contract has long been regarded as “an anachronistic shortcoming that has for many years been regarded as a reproach to English private law”. The problems created by the privity rule which prevent third parties from enforcing a contract made for their benefit are widespread. 2 Particularly, the privity rule denies the contracting parties from fulfilling their intention to benefit a third party.

A number of the Commonwealth countries had undertaken statutory reform of the privity rule and recognised third party rights in contract law. The notable reform was that undertaken by the English Parliament which resulted in the enactment of Contracts (Rights of Third Parties) Act 1999. Besides, the High Court in Australia and the Supreme Court in Canada had also created exceptions to the privity rule. In Malaysia, the privity rule is deeply entrenched in the legal system. The Malaysian courts had applied the doctrine in a variety of cases involving variety of situations. In the recent case of Razshah Enterprise Sdn Bhd v Arab Malaysian Finance Bhd,4 Abdul Malik Ishak JCA in the Court of Appeal5 stated that: Our Contracts Act 1950 (Act 136) has no express provision pertaining to the doctrine of privity of contract.

The director (borrower) failed to pay for the loan and the plaintiff sued the defendant to enforce the guarantee. The defendant sought to counterclaim the plaintiff’s action based on two letters7 written by the plaintiff to the director (borrower). The plaintiff attempted to strike out the counterclaim. One of the arguments relied by the plaintiff was that the defendant had no locus standi to bring the counterclaim as it was not a party to the loan agreement.

The Court of Appeal rejected the plaintiff’s argument because the agreement involved was a guarantee agreement where the defendant’s liability was dependent on the amount owed by the director (borrower). Thus, the defendant had the locus standi to bring the counterclaim which if successful, would reduce the amount of its liability. No effort has been undertaken to reform the privity rule in Malaysia despite the many difficulties created by the rule. However, the Malaysian Parli…

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