English doctrine of privity of contract

The common law doctrine of privity of contract dictates that only persons who are parties to a contract are entitled to take action to enforce it [1] . It means that only those who are parties to the contract or privy to the contract can sue or be sued on it [2] . A contract generally, cannot confer rights or impose obligations arising under it on any person except the parties to it. A person who is not a party to a contract may not enforce a contract even though he stands to gain a benefit from the contract (a third party beneficiary).

For example, John agrees to sell his watch to Jack for RM 1000. John delivers the watch to Jack but jack fails to pay the agreed sum to John. The parties privy to this contract are John and Jack. Only john has the legal right to sue Jack. Similarly, where Jack has paid John for his watch and John fails to deliver the watch to Jack, only Jack can sue John for breach of contract because both John and Jack are privy to the contract.

A classic authority for this principle is Tweddle v Atkinson [3] . The plaintiff’s father and father-in-law agreed with each other to pay the plaintiff $100 and $200 respectively in consideration of his intended marriage in a written agreement. The plaintiff sued the executor of his father-in-law for the unpaid sum. The court held that plaintiff was unable to sue the executor, because he had not provided any consideration to the contract. Consideration must move from the party entitled to sue upon the contract.

Applicability of the Doctrine in England

The privity rule emerged as established law in England in the middle nineteenth century. The doctrine of privity emerged alongside the doctrine of consideration, one of the rules which state that consideration must move from the promisee. In the case of Price v Easton [4] , Easton agreed to do certain work in consideration of which he would pay a specified sum to Price, a third-party. The work was done, however, Easton failed to pay Price. Price sued to enforce the contract but it was held that he was not privy to the contract so his claim failed.

The rule was further developed in Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co [5] , a leading House of Lords case on the doctrine. The plaintiffs sold tyres to Dew & Co, wholesale distributors, on terms that Dew would obtain an undertaking from retailers that they should not sell below the plaintiffs' list price. Dew sold some of the tyres to the defendants, who retailed them below the list price. The plaintiffs sought for injunction and damages. The action failed because although there was a contract between the defendants and Dew, the plaintiffs were not a party to the contract.

Lord Haldane said:

My Lords, in the law of England certain principles are fundamental. One is that only a person who was party to a contract who had provided consideration can sue on it. Our law knows nothing of a jus quaesitum tertio (third party right of action) arising by way of contract.

The rule has been subsequently reaffirmed by the House of Lords in various cases, including Beswick v Beswick [6] . Old Beswick was a coal merchant. Old Beswick and his wife were both over 70 years old. He had had his leg amputated and was not in good health. He agreed to transfer a business to his nephew in exchange for a salary and the payment of a weekly annuity to his widow on his death. On Beswick’s death, the nephew refused to pay the annuity. The nephew argued that Mrs Beswick was not a party to the contract, she was unable to enforce it due to the doctrine of privity of contract. The House of Lords held that she was not entitled to enforce the contract in her personal capacity, but as administratrix of the estate (as her deceased husband’s representative), she was entitled to specific performance of the contract.

However, the second rule of the doctrine, that a third party cannot claim benefits from a contract, has been widely criticised by academics, members of the judiciary and legal professionals.

Applicability of the Doctrine in Malaysia

In Malaysia, the Contracts Act 1950 does not expressly provide for this principle but it is firmly acknowledge that the doctrine has been transplanted into our law in Malaysia. It is a fundamental rule of the common law that apart from special circumstances, for example in cases of agency, trust, assignment or statutory exception, a person who is not a party to a contract has no right to sue on a contract [7] .

It is necessary for us to look at the position in India first as the Malaysian Contracts Act 1950 is modelled on the Indian Contract Act 1872 which is in turn, mainly a codification of the English common law. It is established that the doctrine of privity applies in India [8] . In N C Chacko v State Bank of Travancore [9] , the Supreme Court held that a person who is not privy to a contract, cannot, subject to certain well recognised exceptions, enforce the terms of the contract [10] .

In Malaysia position, it was doubtful formerly whether this principle applies in Malaysia because of the wide import of section 2(d) of the Contracts Act 1950. Section 2(d) provides that:

When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise.

However, the decision of Privy Council in Kepong Prospecting Ltd & Ors v Schmidt [11] affirmed that the rule applies in Malaysia. In this case, Schmidt who was a consulting engineer has assisted another in obtaining a permit for mining iron ore in the state of Johore. He also helped in the subsequent formation of the company, Kepong Prospecting Ltd, and was appointed Managing Director. After the company was formed, an agreement was entered into between them under which the company undertook to pay him 1% of the value of all ore sold from the mining land. This was in consideration of the services rendered by the consulting engineer for and on behalf of the company prior to its formation, after incorporation and for future services. The issue in this case was whether services rendered after incorporation but before the agreement, were insufficient to constitute a valid consideration even though they were clearly past. It was held that past consideration did constitute a valid consideration. So Schmidt was entitled to his claim on the amount.

The Court of Appeal and the High Court also uphold the application of the doctrine throughout all these years.

In a recent case of Razshah Enterprise Sdn Bhd v Arab Malaysian Finance Bhd [12] , Abdul Malik Ishak JCA in the Court of Appeal stated that [13] :

Our Contracts Act 1950 (Act 136) has no express provision pertaining to the doctrine of privity of contract. In fact, Kepong Prospecting gives the gloom picture that the doctrine still applies in Malaysia. Indeed Mohamed Dzaiddin J (who later rose to be the Chief Justice of Malaysia) relied on Kepong Prospecting and aptly said in Fima Palmbulk Services Sdn Bhd v Suruhanjaya Pelabuhan Pulau Pinang & Anor [14] :

It is clear that the English doctrine of privity of contract applies to our law of contract.