Privity of Contract

The doctrine:
- Only persons who are parties to a contract have enforceable rights and obligations to
sue or be sued on the contract.
- A contract cannot be enforced by or against third parties.
- General rule: “No stranger to the consideration can take advantage of a contract, even
if it is made for his benefit.”

Common Law position

- Tweddle v Atkinson: The plaintiff, who was the son of John Tweddle, married the
daughter of William Guy. After the marriage, William Guy and John Tweddle entered
into an agreement promising to pay £200 and £100 to the plaintiff. The sum promised
by William Guy remained unpaid and the plaintiff sued. Held: The plaintiff was not
entitled to recover the unpaid sum as he was a stranger to the contract even though
it was made for his benefit.

- Dunlop Pneumatic Tyre Company Limited v Selfridge and Company Limited: The
appellant sold Dunlop tyres to Dew & Co on condition that they were not sold for less
than a certain price each. Dew & Co agreed to make this a condition for any resale of
the tyres. The respondents, who were trade customers of Dew & Co bought the tyres
and agreed to not sell them for less than the stipulated price. However, the
respondents then sold two tyres for a lesser price. The appellants sued the
respondents for breach of contract with Dew & Co. Held: The appellants could not sue
on a contract to which they were not a party of.
Malaysian position
The Malaysian position on the doctrine of privity of contract is the same as under the
Common Law.
Sec. 2(d): Consideration may move from the promisee or any other person.
- In Malaysia, third parties can provide consideration.
- However, the rule that consideration can move from persons other than the promisee
is different from the doctrine of privity of contract.
- A person cannot sue on a contract if he is not a party to it, not if consideration has
been provided by another person.

- Kepong Prospecting Ltd v Schmidt: The respondent assisted a Mr Tan to obtain a

prospecting permit. Mr Tan promises the respondent a tribute of 1% of the selling
price of all iron produced and sold. The appellant company was then incorporated to
exploit the mining rights. In 1954, the appellant made an agreement with Mr Tan
whereby the company took over Mr Tan’s obligation to pay the appellant the tribute
of 1%. The respondent was not a party to this agreement. In 1955, the appellant
 company made an agreement with the respondent agreeing to pay the 1% tribute.
The appellant claimed against the respondent company payment of the 1% tribute
due to him under the 1954 and 1955 agreement. Held: As the respondent was not a
party to the 1954 agreement, he cannot then enforce it. Although third parties can
provide consideration, only parties to the contract can sue.
Exceptions
Exceptions have been created to help lessen the difficulties faced by third parties arising from
the doctrine of privity of contract.
These exceptions are where third parties to the contract can sue or be sued.
1. Where the third party is a personal representative
- An executor, administrator of the deceased’s estate or a trustee in bankruptcy

- Beswick v Beswick: Peter Beswick agreed to sell his business to his nephew,
John Beswick, in consideration of John employing Peter as a consultant for the
remainder of his life at £6.5 a week, and in the event that Peter dies, John is to
pay Peter’s widow an annuity of £5 a week. After Peter’s death, John made
one payment to his aunt and then repudiated his liability to do so. His aunt
took out the letters of administration to Peter’s estate and sued as the
administratrix of the estate and in her personal capacity. Held: The widow
succeeded in her claim as there was no reason why a party to an agreement
for the benefit of a third party could not recover all the damages suffered by
the third party from the breach of contract.
- However, she would have failed in her claim if she had acted in her
personal capacity as the beneficiary of the promise.

2. Guarantees
- Sec. 79: A contract of guarantee is a contract to perform the promise of a third
person in case of his default.
- E.g: Loan agreements, scholarship agreements
- A surety/guarantor is the person giving the guarantee.
- A debtor is the person for whose default the guarantee is given.
- A creditor is the person to whom the guarantee is given.
- Where there is an undertaking by the guarantor that if the debtor fails to pay,
the guarantor will perform the contractual obligation.
- Sec. 81: The liability of a guarantor arises only upon the failure of the debtor’s
obligation to pay (breach of contract).

- UKM v Zainal Abidin & Ors: There was an undertaking by the guarantors that
upon completion of his studies, Zainal will return and serve with UKM. Zainal
failed to complete his studies and with consent, he returned to serve with
UKM. He then stopped working. UKM sued Zainal and the guarantors for the
refund of the sum spent. Held: The guarantors cannot be held liable as
 payment of the sum spent would only be made by them if Zainal had
completed his studies and later defaulted in payment. Further, Zainal cannot
be held liable as he had returned to serve with the consent of UKM itself.

- Defences available for the guarantor:

i) The loan agreement was void.
- The borrower was not of the age of majority or was of unsound mind.
- The loan agreement was illegal as it contravened statutory provisions.
ii) There was a mistake as to the document.
- The guarantor though he was signing a different document, in a
different capacity.
iii) Undue influence was exercised upon the guarantor.
- There is a strict duty imposed on the creditor where the
guarantor is the wife of the debtor.

3. Restrictive covenants that “run with the land”

- Tulk v Moxhay: The owner of several parcels of land sold a plot to another
party, making a covenant to keep the Garden Square "uncovered with
buildings" such that it could remain as a park. Over the following years the land
was sold several times over to new parties, eventually to the defendant. The
defendant, who was aware of the covenant at the time of purchase, refused
to abide by the covenant as he claimed he was not in privity of contract and so
was not bound by it. Held: Although there is no contractual relationship
between the owner and subsequent buyers, all subsequent buyers were
bound by the covenant. An injunction was granted to the plaintiff to restrain
the defendant from violating the covenant.

- However, this principle of English Land Law is inapplicable in Malaysia under

Sec. 6 of the Civil Law Act 1956.

4. Insurance contracts
- A contract made between a policy holder (insured) and an insurance company
(insurer).
- The insurance company agrees to indemnify (pay a certain sum) the insured
on the occurrence of an event.
- Sec. 77: A contract of indemnity is a contract by which one party promises to
save the other from loss caused to him by the conduct of the promisor himself,
or by the conduct of any other person.
- The promisor (insurer) undertakes the obligation to indemnify.
 - Life policies:
- Where the insurer undertakes that upon the insured’s death an insured
sum will be paid to the named beneficiaries. (E.g: Parent/spouse)
- The insurer has a duty to pay to the right beneficiary.
- In the event of the insured’s death, the named beneficiary has the right
to claim the insured sum from the insurer.

5. Assignment of contractual rights

- A transfer of contractual rights from the assignor to a third party, the assignee.
- E.g: An assignment of a hire purchase contract by X to Y to continue
with payment in exchange for possession of the car.

- Perkayuan OKS v Kelantan SEDC: Appellants entered into an agreement with

the respondents whereby the appellants were allowed to carry out logging in
a timber concession. The respondents then served a notice on the appellants
to terminate the agreement alleging that they had breached it by assigning the
main agreement to a third party without the respondents’ written consent.
Held: There was no breach of contractual rights as the contract between the
appellant and the third party was merely a sub-contract and not an assignment
of the main agreement.

6. Agency
- Where an agent is authorised to represent his principal in his dealings with a
third party.
- The legal relationship between an agent and a principal is an agency.
- E.g: Client (P) and lawyer (A), employer (P) and employee (A), house
owner (P) and housing agent (A), company (P) and director (A), car
dealer (P) and salesman (A)
- In a dealing, there are three parties involved:
- Principal, agent and third party.
- The principal and agent are in an employment contract where the terms of
appointment and authority have been set out.
- The agent is employed to sell the principal’s house.
- The agent made an agreement with the third party to sell the house at a certain
price.
- The agreement made by the agent binds the third party and the principal.
- The contract is enforceable by and against the principal.
- The contract has the same consequences as though the principal made
it.
Exemption clause
The doctrine of privity of contract cannot be overridden by an exemption clause.
- A third party is not entitled to rely on an exemption clause in a contract to which he is
not a party to.
- The principle of exemption clause only applies to benefit the parties to the contract.
- The protection under an exemption clause does not extend to third parties.

- Scrutton Ltd v Midland Silicones Ltd: Goods purchased by the respondent were
damaged by the negligence of the appellants. The appellants sought to take advantage
of certain provisions in the bill of lading made between the sellers of the goods and
the carrier, which would limit their liability in the event of loss, damage or delay. Held:
The appellant was a stranger to the contract, and thus could not take advantage of
the provisions of the contract even if the provision was intended to benefit him.

- Sime Darby Ltd v Port Swettenham Authority: The plaintiff claimed damages arising
from the defendants’ failure to deliver some cases of whisky, which were lost during
carriage from the ship to the defendants’ wharf. The defendants argued that they had
accepted the goods subject to the terms and conditions of the bills of lading which
included an exemption clause excluding them from liability to the plaintiff. Held: The
defendants who were not a party to the bill of lading could not rely on any clause in
the bill of lading.
Collateral contracts
A third party can be sued for the breach of a collateral contract.
- Shanklin Pier Ltd v Detel Products Ltd: Shanklin Pier Ltd hired a contractor to paint its
pier. They spoke to a third party, Detel Products Ltd, about whether a particular paint
was suitable to be used, and Detel assured them that it was, and that it would last for
at least seven years. On the basis of this conversation Shanklin Pier Ltd instructed the
contractors to use a particular paint, which they did. The paint started to peel after
three months, and Shanklin Pier sued Detel Products for breach of warranty. Held:
Where an oral assurance or statement is made by a third party and was relied upon
by X when he entered into an agreement with Y, and the statement is untrue, X can
sue the third party for breach of collateral contract and damages even though there
was no contractual relationship between them.