The Need For Legislative Reform Of The Privity Doctrine In Commercial Contracts In Malaysia: A Comparative Analysis

The Need for Legislative Reform of the Privity
Doctrine in Commercial Contracts in Malaysia:
A Comparative Analysis

Anida Mahmood
LLB (Manchester Metropolitan University)
LLM (National University of Malaysia)

A Thesis Submitted in fulfillment of the requirements of the degree of
Doctor of Philosophy

Faculty of Law
Queensland University of Technology

January 2013

1



Abstract

This thesis commences with the proposition that the first limb of the doctrine of privity
causes injustice to third party beneficiaries in Malaysia, particularly in commercial
contracts. The doctrine of privity has been the subject of criticism by the judiciary and
academic commentators in common law jurisdictions, mainly directed at the first limb of
the doctrine, whereby only parties to a contract can sue and be sued. The first limb
prevents a third party from enforcing benefits conferred on them by those contracts
thereby resulting in third parties suffering loss and injustice to those parties. In several
common law countries, such as England, Australia, New Zealand and Singapore,
legislative reform of the doctrine has occurred. The legislative reform has abrogated to a

significant extent the doctrine of privity in commercial contracts. Malaysia is a common
law country, where the doctrine of privity is still applied to contracts. An analysis of
Malaysian case law demonstrates that the most affected third party beneficiaries are
those seeking to enforce insurance and construction contracts. While a small number of
other third parties to commercial contracts, such as agreements to pay for work done,
sale and purchase agreements and tenancy agreements are also affected, the detriment is
not as significant. As a consequence, this thesis focuses primarily on the impact of the
doctrine of privity on commercial contracts in the areas of insurance and construction in
Malaysia

The thesis aims to recommend appropriate reforms to address the injustices arising from
the privity doctrine for third parties seeking to obtain the benefit of insurance and
construction contracts, which may also benefit third parties to other types of commercial
contracts. While the Malaysian insurance, consumer protection, negotiable instruments
and agency laws allow third party beneficiaries to enforce benefits in contracts, the
rights are found to be inadequate. As not all third parties seeking to enforce an insurance
or construction contract can rely upon the legislation, the injustice arising from the
doctrine of privity remains and needs to be addressed. To achieve this aim, a
comparative analysis of the rights of third party beneficiaries under insurance and
construction contracts in Malaysia, Australia and England is undertaken. The results of
ii


the analysis are used to identify appropriate elements for a legislative framework guided
by the three essential criteria for effective law reform developed in the thesis. The three
criteria are certainty, public interest and justice.

The thesis recommends first the enactment of general legislation applicable to all
commercial contracts including insurance contracts. Secondly, the thesis recommends
specific targeted legislation to address the injustice faced by third party beneficiaries in

construction contracts.

iii


List of Abbreviations

BCIPA

Building and Construction Industry Security of Payment Act 2004
(Queensland)

BEA 1949

Bills of Exchange Act 1949 (Malaysia)

1999 Act

Contracts (Rights of Third Parties) Act 1999 (England)

CA 1950

Contracts Act 1950 (Malaysia)

CIDB

Construction Industry Development Board Malaysia

CIPAA

Construction Industry Payment and Adjudication Act 2012 (Malaysia)

CLA 1956

Civil Law Act 1956 (Malaysia)

CLJ

Current Law Journal

CPA 1999

Consumer Protection Act 1999 (Malaysia)

IA 1996

Insurance Act 1996 (Malaysia)

MBAM

Master Builders Association Malaysia

MLJ

Malayan Law Journal

MLRC

Malaysia Law Reform Committee

PLA 1969

Property Law Act 1969 (Western Australia)

PLA 1974

Property Law Act 1974 (Queensland)

RTA 1987

Road Transport Act 1987 (Malaysia)

SCA 1974

Subcontractors’ Charges Act 1974 (Queensland)

iv


Keywords

Doctrine of Privity - Third Party Rule - Third Party Beneficiaries – Malaysian
Commercial Contracts- Insurance Contracts - Construction Contracts - Legislative
Reform

v


Acknowledgments

First and foremost, I would like to express my gratitude to the Malaysian Ministry of
Higher Education and MARA University of Technology for providing me with a
scholarship that enabled me to pursue this PhD study.
I would also like to thank my two wonderful supervisors, Professor Sharon Christensen
and Dr Bill Dixon for their insight, guidance and encouragement. Without them, the
completion of this thesis would have been impossible.
I am also very grateful to the staff in the QUT Law Research and Justice Centre for
assisting me during my journey as PhD student.
Finally, no words are enough to express my appreciation and gratitude to my family,
especially my loving husband for his understanding, support and encouragement during
my candidature.

This thesis reflects the law as of January 2013.

vi


Table of Contents
Declaration ..........................................................................................................................i
Abstract ............................................................................................................................. ii
List of Abbreviations ........................................................................................................iv
Keywords ........................................................................................................................... v
Acknowledgments .............................................................................................................vi
Table of Tables..................................................................................................................xi
Table of Legislation ........................................................................................................ xii
Chapter One

Introduction ...................................................................................... 1

1.1 Overview ...................................................................................................................... 1

1.2 Statement of the Problem ............................................................................................. 2
1.3 Purpose and Objective of the Research........................................................................ 4
1.4
Scope of the Research ............................................................................................. 5
1.4.1 First Limitation on the Research Scope..............................................................5
1.4.2 Second limitation on the Research Scope.........................................................15
1.5

The Importance of this Research........................................................................... 16

1.6
Research Methodology ......................................................................................... 20
1.6.1 Research Questions...........................................................................................20
1.6.2 Research Method..............................................................................................21
1.6.3 Research Design...............................................................................................25
1.6.4 Research Plan...................................................................................................25
1.6.4.1 Chapter Outlines........................................................................................26
Chapter Two ..................................................................................................................... 30
The Underlying Theories and Principles of the Doctrine of Privity ................................ 30
2.1
Introduction ........................................................................................................... 30
2.1.1 The historical Foundation of the Doctrine of Privity............................................31
2.2
Common Law Exceptions to the Doctrine of Privity ............................................ 38
2.2.1 Agency..............................................................................................................38
2.2.2 Trust..................................................................................................................41
2.2.3 Assignment.......................................................................................................43
2.2.4 Estoppel............................................................................................................44
2.2.5 Restitution/Unjust Enrichment.........................................................................46
2.3

The Rationale For, Justifications For and Defence of the Doctrine of Privity ..... 47
vii


2.4

Criticisms of the Doctrine of Privity ..................................................................... 53

2.5

Conclusion ............................................................................................................ 63

Chapter Three ................................................................................................................... 65
A Case Based Comparative Analysis of the Application of the Privity Doctrine ........... 65
3.1

Introduction ........................................................................................................... 65

3.2

Purpose of the Analysis......................................................................................... 65

3.3
Comparative Analysis of Judicial Decisions ....................................................... 66
3.3.1 Malaysia............................................................................................................66
3.3.1.1 The extent of the problem in Malaysia ....................................................... 67
3.3.1.2 Privity and Insurance Contracts .................................................................. 72
3.3.1.3 Abrogation by Malaysian courts of the application of the doctrine of privity
to insurance contracts ............................................................................................... 73

3.3.1.4 Privity and Construction Contracts ............................................................. 84
3.3.1.5 The Abrogation of the Doctrine of Privity in Construction Contracts. ...... 89
3.3.2 Australia............................................................................................................94
3.3.2.1 The extent of the problem in Australia ......................................................... 94
3.3.2.2 Privity and Insurance Contracts ................................................................ 102
3.3.2.3 The abrogation of the doctrine of privity in insurance contracts .............. 105
3.3.2.4 Privity and Construction Contracts ........................................................... 109
3.3.2.5 The abrogation of the doctrine of privity in construction contracts ......... 110
3.3.3 England...........................................................................................................116
3.3.3.1 The extent of the problem in England ...................................................... 116
3.3.3.2 Privity and Insurance Contracts ................................................................ 120
3.3.3.3 The Abrogation of the Doctrine of Privity in Insurance Contracts .......... 123
3.3.3.4 Privity and Construction Contracts ........................................................... 127
3.3.3.5 The Abrogation of the Doctrine of Privity in Construction Contracts ..... 129
3.4
Position of Third Parties in Malaysia Compared with Australia and England ... 134
3.4.1 Third Parties in Other Types of Commercial Contracts..................................134
3.4.2 Third Parties in Insurance Contracts..............................................................136
3.4.3 Third Parties in Construction Contracts.........................................................139
3.5

Is Reform in Malaysia Required? ....................................................................... 140

Chapter Four .................................................................................................................. 144
An Analysis of Legislative Reform and Judicial Decisions in Australia and England .. 144
4.1

Introduction ......................................................................................................... 144

4.2

Purpose Of Analysis............................................................................................ 144

4.3

Australia .............................................................................................................. 145
viii


4.3.1 General Legislation: Western Australia.........................................................146
4.3.2 Judicial Decisions: Western Australia............................................................148
4.3.3 Legislation: Queensland.................................................................................154
4.3.3.1 General legislation: Property Law Act 1974 ............................................ 154
4.3.3.2 Construction Contracts ............................................................................. 156
4.3.4 Judicial Decisions: Queensland......................................................................166
4.3.4.1 Property Law Act 1974 ............................................................................ 167
4.3.4.2 Subcontractors’ Charges Act 1974 .......................................................... 175
4.3.5 Legislation: The Australian Commonwealth..................................................186
4.3.5.1 Section 48 of the Insurance Contracts Act 1984 (Cth) ............................ 186
4.3.6 Judicial Decisions: The Australian Commonwealth......................................187
4.3.7 Conclusion......................................................................................................193
4.4
England ............................................................................................................... 195
4.4.1 General Legislation.........................................................................................195
4.4.2 Judicial Decisions: England............................................................................202
4.5
Analysis and Conclusion ..................................................................................... 210
4.5.1 Efficacy of the Reforms..................................................................................210
4.5.1.1 Australia .................................................................................................. 210
4.5.1.2 England ................................................................................................... 216

4.5.2 Third Party Beneficiaries who are not covered by the reform.......................224
4.6

Conclusions Relevant to Reform in Malaysia.................................................... 230

Chapter Five ................................................................................................................... 233
Legislative Reform in Malaysia ..................................................................................... 233
5.1

Introduction ......................................................................................................... 233

5.2

Purpose of Analysis ............................................................................................ 233

5.3
Legislative Intervention To Protect Third Party Beneficiaries ........................... 234
5.3.1 Insurance Contracts: Insurance Act 1996.......................................................234
5.3.2 Insurance Contracts: Civil Law Act 1956.......................................................241
5.3.3 Insurance Contracts: Road Transport Act 1987.............................................245
5.3.4 Construction Contracts: Construction Industry Payment and Adjudication Act
2012 251
5.3.5 Contracts Act 1950.........................................................................................254
5.3.6 Negotiable instruments: Bills of Exchange Act 1949.....................................255
5.3.7 Consumer contracts: Consumer Protection Act 1999....................................258
5.4

Effectiveness of Malaysian Reforms .................................................................. 262

5.5

Justification for Further Reform in Malaysia ...................................................... 266

ix


Chapter Six ..................................................................................................................... 271
A Framework for Reform in Malaysia ........................................................................... 271
6.1

Introduction ......................................................................................................... 271

6.2
Criteria For Law Reform..................................................................................... 272
6.2.1 Relevant considerations for inclusion in criteria............................................272
6.2.2 Proposed criteria on basis of distributive and corrective justice....................274
6.3
Assessment of Reform Options Against the Criteria .......................................... 281
6.3.1 General legislation..........................................................................................283
6.3.1.1 Western Australia ................................................................................... 284
6.3.1.2 Queensland .............................................................................................. 288
6.3.1.3 England .................................................................................................... 291
6.3.2 Specific Legislation........................................................................................297
6.3.2.1 Insurance Contracts Act 1984 (Cth) ....................................................... 297
6.3.2.2 Subcontractors Charges Act 1974 (Qld) ................................................. 299
6.4
Proposed Legislative Framework for Malaysia Based on the Criteria ............... 302
6.4.1 General Legislation.........................................................................................302
6.4.1.1 Draft Proposed Provision ........................................................................ 309
6.4.2 Specific legislation........................................................................................314

6.4.2.1 Proposed amendments to CIPAA ........................................................... .315
6.4.2.2 Draft Proposed Provision...............................................................................317
6.5

Summary of Recommendations .......................................................................... 318

Chapter Seven ................................................................................................................ 323
Recommendations and Conclusions .............................................................................. 323
7.1

Introduction ......................................................................................................... 323

7.2 The Key Issues/Research Findings ...................................................................... 324
7.2.1 Chapter Two...................................................................................................325
7.2.2 Chapter Three.................................................................................................326
7.2.3 Chapter Four..................................................................................................330
7.2.4 Chapter Five...................................................................................................332
7.2.5 Chapter Six.....................................................................................................334
7.3 Recommendations for Reform ............................................................................. 336
7.3.1 General legislation..........................................................................................338
7.3.2 Specific and targeted legislation.....................................................................341
7.4

Implementing the Recommendations.................................................................... 350

7.5

Benefits of the Research ....................................................................................... 353

x

Bibliography................................................................................................................... 356

Table of Tables
Table 1.1:
Number of cases involving burden rule in Malaysia (1968-2011). ................................... 9
Table 1.2:
Number of commercial cases involving third party beneficiaries affected by the doctrine
of privity (1968-2011)......................................................................................................10
Table 4.1:
Third Party Beneficiaries who are not covered by legislative reform in Australia and
England .......................................................................................................................... 229
Table 5.1:
The position of third party beneficiaries under the present legislation in Malaysia ...... 265
Table 6.1:
Problems caused by the doctrine of privity and proposed reform in Malaysia.............. 320
Table 7.1:
How the proposed reform will resolve the problems presently faced by third party
beneficiaries in Malaysia ............................................................................................... 343
Table 7.2:
How the proposed reform benefits third parties not provided for by the present
legislation inMalaysia.............................................................................................. .....348

xi


Table of Legislation
Malaysia
Adoption Act 1952

Bills of Exchange Act 1949
Civil Law Act 1956
Companies Act 1965
Construction Industry Payment and Adjudication Act 2012
Consumer Protection Act 1999
Contracts (Malay States) Ordinance 1950
Contracts Act 1950
Insurance Act 1963
Insurance Act 1996
Married Women Act 1997
Penal Code
Road Traffic Ordinance 1958
Road Transport Act 1987
Sale of Goods Act 1957
Australia
Building and Construction Industry Security of Payment Act 1999 (NSW)
Building and Construction Industry Security of Payment Act 2002 (Vic)
Building and Construction Industry Security of Payment Act 2004 (Qld)
Construction Contracts (Security of Payments) Act 2004 (NT)
Construction Contracts Act 2004 (WA)
Contractors' Debts Act 1897 (NSW)
Conveyancing Act 1919 (NSW)
Conveyancing and Law of Property Act 1884 (Tas)
Insurance Act 1984(Cth)
Law of Property Act 1958 (SA)
Property Law Act 1958 (Vic)
Property Law Act 1969 (WA)
Property Law Act 1974 (Qld)
Road Transport (General) Act 1999 (Cth)
Road Transport (Third-Party Insurance) Act 2008 (Cth)

xii


Road Transport (Third-Party Insurance) Regulation 2000 (Cth)
Subcontractors’ Charges Act 1974 (Qld)
Trade Practices Act 1974(Cth)
Workmen's Liens Act 1893 (SA)

England
Companies Act 1948
Consumer Protection Act 1987
Contracts (Rights of Third Parties) Act 1999
Housing Grants, Construction and Regeneration Act 1996
Married Women’s Property Act 1882

Law of Property Act 1925
New Zealand
Construction Contracts Act 2002
Consumer Guarantees Act 1993
Contracts (Privity) Act 1982

xiii


CHAPTER ONE

INTRODUCTION

1.1 OVERVIEW
For decades, the doctrine of privity has been a part of the law of contract in many

common law countries. The doctrine has two limbs which have been strictly applied in
many judicial decisions. 1 It is the first limb, the rule that prevents third parties from
obtaining rights or benefits under a contract, which has attracted the most debate and
criticism. This thesis will be limited to discussion of the first limb of the doctrine of
privity, which may be stated as:
Only parties to the contract are legally entitled to enforce the contract, i.e. third parties
do not obtain rights or benefits under the contract. Any future reference to the doctrine
of privity refers to this rule.
The criticisms surrounding the doctrine of privity may be summarised as:
i)

application of the rule fails to uphold and respect the intention of the
parties to a contract to benefit particular third parties,

ii)

third party beneficiaries are unable to rely on the benefits promised,

iii)

the existing common law exceptions are ineffective in protecting third
parties’ rights, and last, but not least,

iv)

significant injustice and hardship is suffered by third party beneficiaries
who are unable to obtain the benefit of the contract. 2

These criticisms have underpinned numerous calls to abrogate the doctrine of privity
and implement a new regime that will give third party beneficiaries the right to enforce

promises in contracts. Several common law countries, for example, England, certain
States of Australia (Western Australia and Queensland), New Zealand and recently

1

2

The first limb is that only parties to the contract are legally entitled to enforce the contract, i.e.
third parties do not obtain rights or benefits under the contract. The second limb prevents parties
to the contract from imposing liabilities or obligations on third parties. See Pollock & Mulla,
Pollock & Mulla on Indian Contract & Specific Relief Acts (12 ed, 2001), 25-26.
Chapter 2 of this thesis considers these criticisms in greater detail.

1


Singapore have already legislatively reformed the doctrine of privity either by
introducing general legislation or by provisions in industry specific legislation.
This thesis argues that the criticisms are equally applicable to the law of Malaysia and
that reform of the doctrine of privity in Malaysia should also take place. In Malaysia,
the debate to date has focused on reform of the doctrine of privity in the law of contract
generally. This thesis however, aims to analyse the impact of the doctrine of privity on
third party beneficiaries in order to determine the types of contracts and third parties
most affected by the doctrine. The main objective of this thesis is to provide a set of
recommendations for the reform of the doctrine of privity in Malaysia in order to
resolve the specific problems suffered by the identified categories of third party
beneficiaries most affected by the doctrine.
1.2 STATEMENT OF THE PROBLEM
This thesis aims to examine the effect of the doctrine of privity in Malaysia on third
party beneficiaries under commercial contracts with a view to recommending reform of

the law. Preliminary case analysis indicated that third party beneficiaries under
insurance and construction contracts were most affected by the application of the
doctrine of privity in Malaysia. Other than insurance and construction contracts, the
impact of the doctrine of privity is also present in other types of commercial contracts,
such as agreements to pay, sale agreements and tenancy agreements, though not as
significant as in the former types of contracts. For this reason, the thesis examines the
potential for reform in Malaysia specifically aimed at insurance and construction
contracts while also addressing the injustices created by the doctrine of privity in
commercial contracts more generally.
The problems caused by the doctrine of privity are evidenced by judicial decisions
which illustrate that existing regimes are inadequate and inefficient to protect the rights
of third party beneficiaries, especially in insurance and construction contracts.
Presently, the rights of third party beneficiaries in insurance contracts in Malaysia are
contained in the Insurance Act 1996, the Civil Law Act 1956, the Road Transport Act
1987 and the existing common law exceptions to the doctrine of privity. In the context
2


of construction contracts, sub-contractors, being third parties, have no statutory
protection. Reliance may only be placed on the common law exceptions to the doctrine
of privity.
Judicial decisions demonstrate that despite a promise to benefit designated third parties
contained in the contract, the doctrine of privity generally prevents third parties from
claiming or suing for the benefit conferred by the contract. The denial of this right
results in injustice and unfairness to third party beneficiaries who have acted on the
promises made. The harsh effect of the doctrine of privity is clearly seen in the
construction industry where sub-contractors are refused due payment for work done
despite promises by the employers to pay the sub-contractors directly. In the case of life
insurance contracts, the operation of the doctrine of privity also means that the wish and
intention of the parties to the contracts to confer benefits and to provide a financial

security to loved ones (such as parents, siblings and other family members) is being
denied and not respected.
The key problem here is, being third parties and thus not the parties to the contracts, the
application of the doctrine of privity prevents the sub-contractors, parents, siblings or
other family members from suing for the benefits and promises made by the parties to
the contracts.
For other types of commercial contracts, Malaysia, has at present enacted several
statutes with provisions that empower third party beneficiaries to enforce the benefits
promised in a contract. The rights are contained in the Consumer Protection Act 1999,
the Bills of Exchange Act 1949 as well as s 184 of the Contracts Act 1950 (which is a
codification of the common law of agency). Lack of judicial decisions that deal with the
rights of third parties and the doctrine of privity suggest that the problems in these types

3


of contracts are not alarming. 3 Nonetheless, these Acts are limited in their scope and are
not applicable to third parties in other types of contracts. Not all types of third parties
benefit from these Acts. In addition, even the third parties that fall within the scope of
these Acts face uncertainty about their rights due to the various interpretations of the
related provisions adopted by the courts. 4 This situation needs to be improved so as to
secure further the rights of third party beneficiaries in these types of contracts.
In light of these issues, it is argued in this thesis that the doctrine of privity in Malaysia
should be reformed in order to protect, enhance and strengthen the rights of third party
beneficiaries with particular attention focused on the rights of third parties in insurance
and construction contracts. To achieve this outcome, this thesis argues that legislative
reform must take place. Legislative reform provides certainty and predictability in its
application compared to judicial reform. The proposed reform must not only be able to
protect rights of third party beneficiaries in insurance and construction contracts
particularly, but at the same time benefit third parties under other types of commercial

contracts.
1.3 PURPOSE AND OBJECTIVE OF THE RESEARCH
While it is intended in this thesis to take full account of the need to reform the doctrine
of privity and introduce legislation that abrogates the doctrine in commercial contracts,
the main aim of the thesis is to analyse the impact of the doctrine of privity on third
party beneficiaries in two common commercial contracts; insurance and construction
contracts, and provide recommendations that will resolve the problems identified in
these two types of contracts. The proposed recommendations are also intended to
provide benefits to third parties in other commercial contracts as well.

3

It should be noted that aside from Magistrates, Sessions and High Courts, the Small Claims

Courts
and Consumer Tribunal may also deal with the rights of third parties in the doctrine of privity.
However, the civil jurisdiction of the Small Claims Courts is small resulting the commercial
contracts involving construction and insurance are not litigated there. As for the Consumers
Tribunal, its jurisdiction only covers consumers’ dispute with the manufacturer/supplier, which
is not within the scope of this research, which focuses on construction and insurance contracts.
4

See Chapter 5 of this thesis for more information about the scope and limitation of these pieces
of legislation.

4


Generally, the objective of this research is to:
i) analyse the impact of the doctrine of privity in Malaysia on third party

beneficiaries of commercial contracts most disadvantaged by the doctrine of
privity; and
ii) make recommendations for the reform of the doctrine of privity in order to
improve the position of these third party beneficiaries.
The specific objectives of this research are:
i) to propose viable legislative reform that alters the doctrine of privity applying to
commercial transactions in Malaysia;
ii) to conduct a comparative analysis of categories of third party beneficiaries most
affected by the application of the doctrine of privity in Malaysia and prior to
legislative reform in Australia and England; and
iii) to compare legislative regimes which have altered the privity rule in selected
jurisdictions and consider their impact on commercial transactions.

1.4

SCOPE OF THE RESEARCH

There are two limitations on the scope of this thesis regarding the subject matter of the
judicial decisions analysed and the selected comparative jurisdictions. The limitations
are:
(1) The thesis only focuses on the impact of the doctrine of privity on third party
beneficiaries in commercial contracts with particular emphasis on insurance and
construction contracts; and
(2) Only England and Australia are chosen as comparative jurisdictions.

1.4.1

First Limitation on the Research Scope

The thesis only focuses on the impact of the doctrine of privity on third party

beneficiaries in commercial contracts, with particular emphasis on insurance and
construction contracts. Justification of the first limitation on the scope of this thesis
involves three questions.
5


The first, why is the study on the impact of the doctrine of privity limited to commercial
contracts only? According to Wu Min Aun and Beatrix Vohrah, commercial contracts
applied to contracts relating to traders, merchants, business persons and others engaged
in commercial transactions. 5
It is accepted that the doctrine of privity causes problems and difficulties for third
parties to commercial contracts. It is commercially inconvenient. 6 Past judicial
decisions in other common law countries, especially in England, evidence significant
numbers of third party beneficiaries in commercial contract cases that suffered due to
the continued application of the doctrine of privity. 7 This fact is further supported in the
reports produced by the English Law Commission which repeatedly stated that doctrine
of privity caused commercial difficulties. 8 In Malaysia, the doctrine of privity has also
been applied in many commercial cases and third party beneficiaries have been denied
their rights in enforcing the benefit in the contracts. 9
As such, it is apparent that the doctrine of privity has a significant impact on the
economy, particularly in the areas of consumer sale of goods, carriage of goods,
insurance contracts and the construction industry. A significant number of commercial
cases substantiate the argument that the doctrine of privity is detrimental in a
commercial setting and its continued application has caused economic loss. If not
resolved, it will impact negatively on the commercial viability of certain contracts.
Reforming the doctrine of privity is not an option, but a must for greater economic
benefit to countries, including Malaysia.
5
6
7

8

9

Wu Min Aun and Beatrix Vohrah, The Commercial Law of Malaysia, (1994), xxviii.
John Adams and Roger Brownsword, Key Issues in Contract, (1995), 143.
For example, Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847, 855;
Scruttons Ltd v Midland Silicones Ltd [1962]AC 446; Vandepitte v Preferred Accident Insurance
Corporation of New York [1933] AC 70; Re Schebman [1944] Ch 83; Woodar Investment &
Development Ltd v Wimpey Construction UK Ltd [1980] 1 WLR 138, Wilson v Darling Island
Stevedoring and Lighterage Co Ltd (1956) 95 CLR 43; Trident General Insurance Co Ltd v
McNeice Bros Pty Ltd (1988) 165 CLR 107, Port Jackson Stevedoring Pty Ltd v Salmond and
Spraggon (Aust) Pty Ltd (1978) 139 CLR 231 (‘The New York Star’); Life Savers (Australasia)
Pty Ltd v Frigmobile Pty Ltd [1983] 1 NSWLR 431; Strahinya (Steve) Visic v State Government
Insurance Commission (1990) 3 WAR 122; to name a few.
UK Law Commission, Privity of Contract: Contracts for the Benefit of Third Parties,
Consultation Paper No. 121 (1991) and UK Law Commission, Privity of Contract: Contracts for
the Benefit of Third Parties, Report No 242 (1996)
See Table 1.2, 10.

6


In short, while the doctrine of privity operates in both commercial and non-commercial
contracts (such as will, probate and trust), the focus of this research is on commercial
contracts. This is due to the fact that, most contracts are commercial in nature. Further,
majority of reported case laws involving the doctrine of privity in Malaysia revolved
around commercial contracts. A focus on the commercial contracts can also be justified
by the fact that, most of literature on the injustices arising from the doctrine of privity

was centered on commercial contracts. Similarly, most of the calls for reform of the
doctrine of privity were focusing on the harsh effects of the doctrine on commercial
contracts.
Secondly, why are contracts that only confer benefits on third party beneficiaries
examined? In other words, the second limb of the doctrine, which is the burden rule, is
excluded. The burden rule of the doctrine of privity does not give rise to many cases and
any injustice can be remedied by resort to an exception or another cause of action such
as negligence.

An attempt to impose a liability on a third party is exemplified in Badiaddin bin Mohd
Mahidin v Arab Malaysian Finance Bhd 10 where a bank under a loan contract sought an
order to compel a third party who received some of the loan monies in payment of a
debt, to restore the money received under the loan agreement entered into between the
lender and the debtor. The appellants were the registered co-owners of a piece of Malay
reserve land in Tampin. The appellants in assisting their business associate, Ismail
Omar, charged their land to the respondent (the bank) to furnish security for Ismail
Omar’s personal loan. After the loan was made, Ismail Omar breached the loan
agreement and the bank obtained an order for the sale of the property. Ismail Omar also
used the loan money to pay his debt to the appellants. Hence the bank invoked s 66 of
the Contracts Act 1950 which states that when a contract becomes void, any person who
has received any advantage under the contract is bound to restore it or to make
compensation for it to the person from whom he or she received such advantage.

10

[1998] 1 MLJ 393.

7

The Federal Court in applying the doctrine of privity held that since the appellants were
not parties to the loan agreement, s 66 could not be invoked against them. To extend the
meaning of 'any person' in s 66 to strangers to the agreement would be in violation of an
elementary principle of contract. Since the loan agreement was strictly between the
respondent and Ismail, the court had no jurisdiction to order the appellants to pay under
s 66 merely because the appellants had received a part of the loan money from Ismail.

An attempt to impose contractual liability on a highway authority was discussed in
Parimala a/p Muthusamy v Projek Lebuhraya Utara-Selatan 11 The deceased, while
driving along the North-South Highway, died when his car collided with a stray cow
that had found its way to the highway through a breach in the fencing system. The
plaintiffs, the passengers in the car, suffered injury and sued the defendant, the highway
authority, for breach of contract in not ensuring the safety of road users. The court
considered whether the passengers were parties to the contract with the highway
authority. In the view of the court only the deceased, as the driver of the car, made a
contract with the highway authority and not the plaintiffs who were only passengers in
the car. Based on the doctrine of privity, only the deceased had the right to sue and the
correct course of action for the plaintiffs was under the tort of negligence. 12

The use of agency in abrogating the effect of the doctrine of privity to impose a liability
on a third party was seen in The Viva Ocean. 13 In this case, the High Court held that a
ship owner, despite being a third party to the contract, could be sued for damage to
cargo. It was argued by the ship owner that the carriage of goods contract was entered
11
12

13

[1997] 5 MLJ 488.
The decision allowing the plaintiffs to sue indicates that the court has resorted to the concept of

breach of duty arising from contractual obligation, instead of law of tort. Nevertheless, the
approach adopted by the court poses a query whether the court in finding the defendant liable,
regard the plaintiffs as the parties to the contract? It is observed earlier by the learned judge that
the contract is formed the moment the ticket is extracted at the toll gate. By this it means that
there has been a proposal by the highway authority and acceptance by the driver upon payment
for the ticket. Acceptance here was made by the deceased, the driver as he was the one who paid
for the ticket. If we peruse this analogy, it seems awkward that the learned judge considered the
plaintiffs as the parties to the contract since they were not the promisees. Based on the doctrine
of privity, only the deceased driver could sue for breach of contract, not the plaintiffs. The
plaintiffs however could claim damages under negligence. See Syed Ahmad Alsagoff, Principles
of the Law of Contract in Malaysia (Second ed., 2003), 149.
[2004] 2 AMR 284.

8


into between the carrier and the cargo owner and being a third party, the ship owner was
not liable. It appears that in sidestepping the doctrine of privity, the court resorted to the
use of the concept of agency in holding the ship owner liable. It was held that the carrier
entered into the contract as an agent for the ship owner.
To sum up, the examples provided above demonstrate why it is not essential to examine
the burden rule and there is no necessity to alter the status quo in Malaysia with regard
to the burden rule of the doctrine of privity. First, the application of the burden rule in
Malaysia involves only a small number of cases. Secondly, the outcome of the cases can
be overcome by using the available exceptions to the doctrine of privity or other
branches of law, such as suing for negligence, can also provide appropriate remedies to
the third party concerned as exemplified in
Lebuhraya Utara-Selatan.

14

Parimala a/p Muthusamy v Projek

Thirdly, the cases were not situations where justice

required the third parties to be made liable to a party to the contract. As such, reform of
the second limb of the doctrine of privity is not an imperative.
The relative numbers of cases on burden rule in Malaysia are shown below.
Table 1.1: Number of cases involving burden rule in Malaysia (1968-2011)

Burden Rule
MLJ and CLJ

3 15

Even though the impact of the doctrine of privity can be seen in various circumstances,
it is in the situation where a contract confers a benefit on third parties that valid
criticisms of the doctrine exist. 16 Therefore, the scope of this thesis is limited to the first
limb of the doctrine of privity.
Thirdly, it is necessary to justify why there is a particular focus on insurance and
construction contracts relative to other types of commercial contracts. A search of the
14
15

16

[1997] 5 MLJ 488.
Badiaddin bin Mohd Mahidin v Arab Malaysian Finance Bhd [1998] 1 MLJ 393, Parimala a/p
Muthusamy v Projek Lebuhraya Utara-Selatan [1997] 5 MLJ 488 and The Viva Ocean [2004] 2
AMR 284.

Refer to Chapter 2 for debate and criticism surrounding the doctrine of privity.

9


Malayan Law Journal (MLJ) and the Current Law Journal (CLJ) 17 conducted during
preliminary study revealed that insurance and construction cases formed the majority of
the cases concerning the doctrine of privity and third party beneficiaries. Therefore, they
are the most disadvantaged third party beneficiaries identified in this research.
In the context of this research, “the most disadvantaged third party beneficiaries” is
measured using the following yardstick “which types of commercial contract have the
highest percentage of third party beneficiaries who have to go to the court to enforce their rights
in the contract?” The result from the above measurement is interpreted as follows: the

higher the recorded percentage means the more disadvantaged the third party
beneficiaries in one contract is, compared to another. Using the above yardstick, the
two most disadvantaged third party beneficiaries in commercial contracts have been
identified. By applying such measurement method, the validity of such measurement
can be substantiated.
The relative numbers of cases on third party beneficiaries in insurance and construction
cases are shown below in comparison with other types of contracts.

Table 1.2: Number of commercial cases involving third party beneficiaries affected by the
doctrine of privity (1968-2011). 18

MLJ and CLJ
17

18

19

Insurance Contracts

Construction
Contracts

Other types of
commercial
contracts

9 19

8 20

3 21

MLJ and CLJ are the two most important legal information databases of court judgments,
legislation and laws of Malaysia.
The analysis of Malaysian judicial decisions is restricted to the past 40 years, as the reception of
the doctrine of privity into Malaysian law only happened in 1968. See Kepong Prospecting Ltd v
Schmidt [1968] 1 MLJ 170.
Malaysian Australian Finance Co Ltd v The Law Union & Rock Insurance Co Ltd [1972] 2 MLJ
10; GR Nair v Eastern Mining & Metals Co Sdn Bhd [1974] 1 MLJ 176, Kishabai v Jaikishan
[1981] 2 MLJ 289; Manonmani v Great Eastern Life Assurance Co Ltd [1991] 1 MLJ 364, Bank
Bumiputra Malaysia Bhd v Mohamed Salleh [2000] 2 MLJ 412; Poominathan Kuppusamy v
Besprin Stationers Sdn Bhd [2003] 3 CLJ 118; Lim Siew Hong v Contraves Advances Devices
Sdn Bhd [2006] MLJU 0029; Ramli bin Shahdan v Motor Insurers’ Bureau of West Malaysia
[2006] 2 MLJ 116; Standard Chartered Bank v KTS Sdn Bhd [2006] 4 MLJ 617.

10


It has been more than 40 years since the first case where a third party was prevented
from enforcing the benefit of a contract and despite the small number of judicial
decisions as shown in the table above, the third parties in those cases suffered loss and
injustice as a consequence of being denied the benefit promised in the contracts. From
the cases identified in the table above, the particular issue surrounding the doctrine of
privity in insurance cases involves life insurance policies and group insurance policies
where the doctrine of privity has operated to prevent third parties from claiming
insurance moneys as designated by the parties to the contracts. These third parties were
not covered and were outside the ambit of the existing statutory regime, such as the
Insurance Act 1996 and the Civil Law Act 1956. As for construction contracts, the
doctrine of privity has the effect of denying sub-contractors (who were the third parties
in the principal contract) from getting paid for the works done. The cases involve claims
of direct payment by the sub-contractors from the employers due to the default of
payment by the main or head contractor.
The loss suffered by these third parties is substantial. In construction contracts, for
example, the doctrine of privity has caused economic loss to many sub-contractors. The
cases indicated above demonstrate an average loss suffered by sub-contractors in the
range of RM60 000 to RM500 000. For insurance contracts, it is hard to tell the exact
amount of money involved as there was no mention of this in the cases, but it is certain
that by preventing the third party beneficiaries from enforcing the insurance policy, the
doctrine of privity has caused them to suffer loss by being unable to recover the
insurance monies. 22

20

21

22

Fimatic Engineering Sdn Bhd v Bumi Negeri Sdn Bhd [1995] 2 BLJ 121; Syarikat Ong Yoke
Lin Sdn Bhd v Giant Cash & Carry Sdn Bhd [2000] MLJU 519; Mahkota Technologies Sdn Bhd
v Bina Jati Sdn Bhd [2001] MLJU 749; Artic Building and Civil Engineering Sdn Bhd v Ahmad
Zaki Sdn Bhd [2009] 9 MLJ 328; Fordeco Construction Sdn Bhd v Wong Sin Ten [2008] 1 LNS
854; Mahfar bin Alwee v Jejaka Megah Sdn Bhd [2004] MLJU 107; ESPL (M) Sdn Bhd v Radio
& General Engineering Sdn Bhd [2005] 2 MLJ 422; Tropical Profile Sdn Bhd v Kerajaan
Malaysia Jabatan Kerja Raya Malaysia [2007] 8 MLJ 419.
Two of these cases were concerned with sale and purchase agreements and one case related to a
tenancy agreement. See Kepong Prospecting Ltd v Schmidt [1968] 1 MLJ 170; Bacom
Enterprises Sdn Bhd v Jong Chuk [2011] 5 MLJ 820; Chung Shan Kwang v Ise Ichi Japanese
Restaurant Sdn Bhd [2005] 3 MLJ 471.
Samuel Williston, 'Contracts for the Benefit of a Third Person' (1902) 15(10) Harvard Law
Review 767.

11