5/10/2013 PRIVITY OF CONTRACT Contractual relationship of the partis: Who can sue? Who has locus standi? RANLAH MOHD NOH 2013 Docirine > Only parties to the contract can sue or be sued > Patties toa contract must provide Consideration [ ie consideration must move from Promisee, not a Third Party (TP )] Case: Easton v Price ‘Tweddle v Atkinson DOCTRINE + Only parties to the contract are bound tothe terms of contract + No benefits can be conferred on strangers J Third Party [ TP] + No contractual obligations can be imposed on TP + Rationale: Contract is a bargain between parties to the contract ‘Attempts to confer benefits of contract on TP + Cases: 4, Tweddle v Atkinson 2. Dunlop Tyres v Selfridges 3, Scruttons v Midland Siicones Case: Tweddle v Atkinson + Agreement between two fathers, X and Y, to give Pla sum of money ‘when he married Y's daughter. + Afier the marriage, Y did not pay PI the sum. Y died & PI sued Def, the ‘executor to enforce the promise Held: Pl was not entitled to sue. He was @ stranger to the contract. Dunlop Pneumatic Tyres v Selfridges 1.Dunlop , sold tyres to Dew Co (wholesale cistrbutor). Term that Dew would get an Undertaking from retailers that they shoule rot sell:yres below the price fixed by Dunop. 2.Selfrridge & Co (the retailer) bought Dunlop tyres from Dew & Co and signed 2 price maintenance agreement. en we > ball pio. (red by Danley 4 d-deleatl £ oeS5NORatS > Selfidges agreed to. pay Dunlop § pounds for each of the goods sold if breach this agreement. 3.Selfidges sold tyres at less than the stated price. Dunlop then sued Selfridges. + Cause of action : Broach of contract + Defence: No contractual relationship between the parties, Attempt to impose liability or burden on TP Decision by HL = Dunlop could not recover the 5 pound from the retailer (Selfridge). + Contract / undertaking was between Selridge & Dew & Co, but Dunlop was not ‘a party to + Only a person whois a party toa contract can sue on it + There was no consideration flowing from Dunlop to Selfridge. Not possible for Dunlop to enforce contract Malaysian position = Acceptance of the doctrine of privity of contract in Malaysia ie only partes to the agreement can sue & be sued + Privity of Consideration : different postion in Misia Kepong Prospecting Ltd v Schmidt [1986] 1MLJ 170[ PO} >TP can provide consideration : See 2 (d) > Agreement can enly be enforced by parties to the contract Kepong Prospecting v Schmidt [PC] Facts + Company was formed for the purpose of exploiting the mining rignts. + MrTan & Co signed an agreement. ‘Agreed that it was to take over Mr Tan's obligations to pay 1% to the appellant. Kepong Prospecting [ cont] ‘App claimed payment due to him. Resp Co. argued that agreement was not enforceable In 1954, the company was not the party to it The parties were the appellant (the ‘enginee*) and Mr Tan. Note: Though TP can provide consideration, it's only parties to the contract who can sue for breach of contract Badiaddin Mohd Mahidin & Anor v Arab Msian Fin [1998] FC + Loan RM$00,000 to Ismail. Land owned by B was charged 2s security. + Action against owner of land. + Ismail failed to repay the loan. Charge on land & order for sale was declared null & void. Malay Reserve land cannot be charged to lender Issue: Must owner of the land repay the loan? Note: B was not a party to the contract or a guarantor5/10/2013 EXCEPTIONS to the Rule: TP can sue or be sued Exception 4 ‘Where TP is a personal representative ie Executor / Administrator of the deceased's estate or Trustee in Bankruptcy > Executor: Appointment by Deceased ina wi > Administrator: Deceased died intestate, ie leaving no wil. Next of kin applied for Letters of Administration Sf Effect Put Executor ! Administrator into the shoes. of the deceased person Has the locus standi to sue on behalf of Dec & enforce the contract ~ i, Beswick v Beswick [CA] per Lord Denning Action by widow to enforce term of contract [to sell business ] made between late husband & Def, a nephew Beswick v Beswick Terms: i pay Vendor purchase price, parly cash & anit ding Ne ietmers " ite pay annuiy to widow for her Hetime if Fisbane Sed Breach by Defwho made a few payments, then ‘stopped. Held: Pl succeeded inher capaciy 2s, ‘miristratic of Dec's esate \Woul fal acted in personal capaciy as Benofciay of promise > Simiar approach by Mian cout in Datuk Eric Taylor vLim Foo Yong San Bhd Exc 2: Covenant that run with land + Tulk v Moxhay Promize by a Purchaser that the use of land bought from Vendor will remain 2s a park & no building would be buit on ittinds subsequent Buyers with notice, though ne contractual Relationship between V & subsequent Buyer. Note: > Doctrine isnot applicable in Malaysia Eng land law principles is not apolied in Msia ‘see Sec 6 Gh taw act 1960 > Leicoster Square sill stand today in London! Exception 3 :Guarantees + Seo 78: whois @ guarantor / surety? ‘Gn: Whe are the parties to the agreement? Contractual obligation of Guarantors? Eg Loan agreements, scholarship ‘agreements > Undertaking by G thot if perty [eg Debtor] defaulted his contractual obligation fie non payment of loan pay], G will perform i [ie to repay the loan] Liability of Guarantor / Surety Ans oes he bit ofa Guarantor Suet + See 61 Contracts Act 1950 : co-entensive with that of debior /borower >> upon breacr by Party to contract5/10/2013 QUESTIONS. + Must the creditor [eg Bank] go after the Debtor ist? + Does the Creditor have a choice who to demand payment from / sue? + Legal effect of Bank Negare's directive that Bankers are to exhaust all remedes against Borrowers before suing Guarantor? + Legal implication if Bank sued G 1#2 UKM v Zainal Abidin & Ors. [1988] Sc + Tutor sont on study leave fo obtain PRD butcourse was not competed. Tutor returned to serve university. + Disappearance of tutor. Tutor was subsequently dismissed for misconduct * Action against tutor & 2 guarantors for breach of contract TERMS ‘An agreement had been entered into between the tutor and his two guarantors (the respondents) and the Universty whereby + the University agreed to defray the cost of the Ph.D. course and the tutor agreed to pursue the course diligently end + on completion of the said course to retum to Malaysia and serve the University for a number of years Issues + i, Whether agreement to serve university after completion of course of study stil ‘subsist + Ti Liability of guarantore DEFENCE + Defis to serve the Plaintiff only after he has first completed the course. No evidence that he has obtained his PhD. Therefore, Def are not liable under the said agreement + Alleged misconduct was not done within the period of yeare during which Def had agreed to serve Pl as expressly stated Under the agreement as he had not obtained his Ph.D. Held LEE HUN HOE CJ + 2nd 8 3rd Def could only be liable if the ‘1st Def were dismissed for misconduct, negligence or indifference to his duties within the period of years of service after the completion of his Ph.D. course. This is clearly set outin paragraph (3) of clause 7 + Ashe had not obtained his Ph.D. butwas recalled to continue his service to the University, behaved in the way he did, his dismissal following the disciplinary nroceedinas. then the sureties cannot b5/10/2013 Defences: Guarantor has no liability to pay because i. Loan agreement was void > Borrower lacked legal capacity, or of unsound ming : Mohori Dhurmodas Ghose (PC) > Loan agreement was illegal as it contravened statutory provision [eg Gompanies Act 1268] Chung Khiaw Bk v Hotel Resa Sayang (Sc) Defences li, Mistake as to document eg G thought he ‘was signing a different decument, in a different capacity >>Test applied Case: Saunders v Anglia Bldg Soc Defences ii Undue influence Note: Stringent duty imposed on the Bank where the guarantor Is a wife, Voldable contract, Case : O'Brien v Barclay Bank Exception 4: Insurance contracts + Contract made between Policy holder [Incured] & insurance company [insurer Insurer agree to indernnify / pay a certain sum on the occurrence of anevent + Type of policies ‘a. Life policy > Undertaking by Incurer that upon I's death, insured sum will be paid to named Beneficiaries Insurance contract [ cont] °3 >> Parent / Spouse, Wife & child named as Beneficiary [TP] in event of policyhoider's death. Right to claim the Insured sum from Insurer >> duty of Insurer to pay to the ‘proper ebimant >> To ensure the polcy money does notform as part ofthe estete & claimed by Credites, the ‘non Muslim policyholder must ensure creation of statutory trust of life policies. LL Sec 166 Insurance Act 1996: spouse, chidren "er parents [f policynolcer wae single ) li. See 167 : covers cther nominees Lee Heng Moy v John Hancock Life Insurance (Mt) Bhd & Anor [2010] 1 NLJ624CA\ > 2° wife, Policy money is Subject to claim by creditors iii See 167 : Musim nominees5/10/2013 ‘Type of policies b. Compulsory Third Party motor insurance policy: Sec 90 Road Tratfic Act 1967 >>Every vehicle on the road must be insured by owner, >> Policy covered damage or injury caused by insured or permitted ériver [TP] >>Accident victims’ right to cleim direct from Insurer: >> Right to enforce judgement award for injuries suffered [2g in accidents] against Insurer Exception 5: Assignment of contractual rights + Meaning > Transfer + Parties : AssionorAssignes Examples: {Assignment of Hire Purchase contract by X10 Y[ tocontinue wan the payment in exchange {for possession ofthe car ii Assignment of S&P agreement by X to for purchase of a house bought from ABC > [house not completed yet] Case: Perkayuan OKS v Kelantan SEDC [ 1995] + Facto: Timber licence awarded to App. Condition that it was “not assignable * Resp claimed the condition was breached when App entered into contract with TP. + Issue: Was the contract between App & TP to fell n extraci timber a subcontract or assignment of the licence? Held: No breach of contractual rights. Contract was a sub contract Exception 6: Agency Definiton + Relationship between a party { Principal] & another [ Agent] where Ais authorised to represent in dealings wih 2 3°Party P| Greation i By consent li. operation of tow Ti, estoppel definition + Fridman: The Law of Agency [1996] * ..telationship that exist between two persons when one, called the agent, is considered in law to represent the other, called the principal, in Such a way as to be able to affect the principal's legal position in respect of strangers to the relationship by the making of contracts or the disposition of property.” Examples of relationship [Principal / agent] + Olient—Broker / remisier + Client -Lawyer + Employer—Employes + House owner—Housing Agent + Company--Director + Car dealer —-Salesman Ss.5/10/2013 Agency relationship Parties: Principal, Agent , Third Party + 2contracts namely 41. Between Principal & Agent >> Terms of appointment & authority are set outeg > Ais employed to sell P's house in S ‘Alam , min price RM 500,000 at 2% commission; 2.A made an agreement with TP to sell the house at RM600,000 + Effect : Agreement with TP binds P Consequence + Contract made by Awitn TP in the exercise of his authority is enforceable by and against P >> has the same consequence 4s if P msde t himsett + Case: Mdm Loh 1.Claim by widow failed. 2.No valid insurance contract was formed {at time cof Employee's death] between policyhcder n AA lyah v AIA [ 1992] CA Insurance agent can only receive premiums but has no authority to enter inio a bincing contract fon behalf of principal, AIA Privity vs Exemption clause + Can doctrine on privity be overridden by exemption clause ? >=NO. Principle applies to benefit only the parfies to the contract >>No protection extended to employees / TP. Employer is not the agent of the ‘employee when partios onter into contract ‘See: Scrutton v Midland Silicones Adler v Dickson FACTS? Privity of contract vs Collateral Contract ‘Shanklin Pler v Detel Product ( 1950] Facts Pwarted to paintits pier & consulted D. a paint ‘manufacturers. D orally recommended the use of a particular paint for the pier [weatherproof Based Con the statement, P made contract wih TP. Term that ho was to use D's product. The paint proved Unsuitable. P sued D for breach of warranty Issue: Can Pl sued Gef for abreach of contract nen P &D did not make any agement? Shanklin Pier v Detel Product Ratio: Where an oral assurance / statement was made by a TP and was relied upon by X when he made an agreement with Y and the statement was untrue, X can sue TP {or breach of collateral contract and damages though there was no contractual relationshio between them Suwiri Sdn Bhd v Govt of State of Sabah [2008] 1 MLJ 743 FC + Agroomont to extract timber + Iecues- )Whether letter from civil servant created a valid and binding contract to extend timber licence — ii)Whether Secretary of Hasil Buri can for and on behalf of the Sabah State Govt ‘approvelgrant any rights in or over a forest reserve or state landinSaban id5/10/2013 decision + Afnrmation of the general rue that a contract cannct confer rights or impose abligations on strangers + Ref to Duniop Pneumatic Tyres, Schmidt v Kepong Prospecting & Badiaddn v Arab Msian Finance { 1988] + Sec3 of the Government Contracts Act 1949 mustbe satisfied. Clearly states that the public officer must show thet he hos the writen authorization of the Chief or State Minister before he could act on Dehaif of the respondent + Letter of approval dated 25 November 41897 relied upon by App was letter viritten By Sluseha Hasil Bum to Director of Forestry indicating his approval to renew the Appellant's timber licence... an internal communication between them i App who is regarded a stranger to such ‘communication ii-Following doctrine of privity of contract, App hrave no locus or right to enforce the content in his favour Razshah Enterprise Sdn Bhd v Arab Msian Fin [ 2004] 2 MLJ 102 CA App guaranteed 2 loan extended by AMF 10 one of its directors (the borrower’) by ‘executing a charge over its lands in AMF'sfavour. The borrower defaulted when App failed to pay the outstanding amount AMF moved to foreclose the defendant's lands Held : Abd Malik Ishak JCA + Doctrine of privity of contractis a creature of the common law. Altho the Contracts Act 1950 does not expressly provide for the doctrine, nevertheless the doctrine applies : Keoong Prospecting Ltd & Ors v Schmidt [1968] 1 MLJ 170, PC referred. + If App/ Def had no locus stand), there was no reason for AMF to sue. Borrower could not exist without the App/Def. He was not a stranger to the loan agreement. TAKAKO SAKAO v. NG PEK YUEN & ‘Anor [2010] 1 CLJ 381 FCt lasue: Whether trusts an excoption to the common law rule of orivty of contract Per Gopal Sri Ram FCJ the doctrine of privity of contract had nothing to withthe fact pattern here. For it is setted law tnat tusts are an ‘exception to the common law rulo of privity of contract. See, Beswick v. Beswick [1968] AC 58.“ WOOLLEY DEVELOPMENT SDN BHD v. ‘STADCO SDN BHD [2010] 7 CLJ 73 CA + Application to set aside injunction against ‘App which restrained it & 1st Def from dealing with lands [subject matter of SPA made between Resp and 1st Def] + Issue: Whetier Resp could sustain any claim against App based on a contract between App and 1st Def? + Principle: Privity5/0/2013 FACTS. + Sale & Purchase Agreements between Resp &st Det, Cherating Development Sdn. Promised to build & transfer 192 units of shop-offices on Def's vacant land in Seberang Prai, Penang to Resp within 36 months. Cheque RM 40m was paid Buildings not completed. Project was ‘abandoned + Appellant entered into dealings with 1% Def 8 months later Malek Ishak JCA + No nexus between App and Resp. This is clear as daylight because the App entered the scene after the 36 months period stipulated in the agreements between Resp and tst Def had expired. + There was never any contract made between App and Resp. In basic legal terms, there was never in existence any privity of contract between them. ‘There is no privity of contract to enable Resp to rely on contracts made between the tet & 2rd parties which were nat intended to benefit Resp. Only had a cause of action for breach of contract against the 1st Def. judgment had been entered against 1st Def but it had been wound-up. ~ The fact that the first defendant hae been wound-up certainly did not give the respondent any additional right to kaa claim anainct th an PROBLEMS ‘QUESTION 3 Pt A Nov 2005, + Allhas entered into a lean agreement with MARA to study medicine in Ireland for 5 years. His uncee, Roni, was the guarantor forthe foan, ‘A fefused to return to Malaysia upon ‘compotion of his etudies, MARA then sued Reni for the contractual sum of RM 15 milion. State THREE (3) possi grounds of defence {or Ron to avoid lability to pay under the law Pt B QUESTION 3 Apr 2008 Kalam hae obteines a business loan of RM200,000 from Bank Buci Berhad. The said loan wes guaranteed by Datuk Karim, Kalem’s father in law. When Datuk Kerim executed th ‘ueraniee agreement, ne was told by Saleem, the bank manager, that the bank requited @ {quranior forthe seid loan as e matier of formaliy. His liabily as the quarartor was only secondary and he need worry about his ibility. ‘A few months ago, Kalam divorced his wif ‘Nana, due to a misunderstanding, Since then, Kalam faced financial diffultios and was unable to servee fis loan, As he was nowhere tobe found, Sank Budi Berhad had recenty nes @ lagal proneading against Datuk Karim to recover the outstarding loan of RM120,009. Datuk Kerim seeks your advice whether he = lable to pay the loan