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

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)

Keywords

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

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.

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

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

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

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 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. 2 Chapter 2 of this thesis considers these criticisms in greater detail.

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.

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.

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 Wu Min Aun and Beatrix Vohrah, The Commercial Law of Malaysia, (1994), xxviii. 6 John Adams and Roger Brownsword, Key Issues in Contract, (1995), 143. 7 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. 8 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) 9 See Table 1.2, 10.

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 Bhd10 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.

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 [1997] 5 MLJ 488. 12 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. 13 [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 Parimala a/p Muthusamy v Projek Lebuhraya Utara-Selatan. 14 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 315

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 [1997] 5 MLJ 488. 15 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. 16 Refer to Chapter 2 for debate and criticism surrounding the doctrine of privity.

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

Insurance Contracts Construction Other types of Contracts commercial contracts

MLJ and CLJ 919 820 321

17 MLJ and CLJ are the two most important legal information databases of court judgments, legislation and laws of Malaysia. 18 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. 19 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.

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 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. 21 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. 22 Samuel Williston, 'Contracts for the Benefit of a Third Person' (1902) 15(10) Harvard Law Review 767.

Other than insurance and construction cases, as pointed out in the table above, there are other types of commercial contract and third party beneficiaries who were also affected by the doctrine of privity. The rationale in refering to other types of commercial contracts is to justify the aim of this thesis; i.e. 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.

The areas of concern in those cases include agreements to pay for work done, sale and purchase agreements and tenancy agreements. The facts of the cases are briefly described below:

Agreement to pay for work done

In Kepong Prospecting Ltd v Schmidt,23 Tan Chew Seah applied to the government of the State of Johore for a prospecting permit for iron ore. He was assisted by Schmidt, a consultant engineer (the third party in this case).When a permit was granted, Tan Chew Seah in December 1953 wrote to Schmidt stating that Schmidt was to be paid 1% of the selling price of all ore that might be sold from any portion of the said land. The payment was for the work that Schmidt had done in assisting to obtain the permit and also for any work that Schmidt might do in assisting to commence mining operations. On 27 July 1954, the appellant company, Kepong Prospecting Co, was incorporated with a view to taking over the benefit of Tan’s prospecting permit. On 31 July 1954, Tan Chew Seah entered into an agreement with Kepong Prospecting Co where the latter was to take over the obligation to pay Schmidt the 1% payment. Another agreement was entered between Kepong Prospecting Co and Schmidt in September 1955 whereby the company inter alia agreed to pay Schmidt 1% of all ore that might be won from any land comprised in the 1954 agreement in consideration of the services by the consulting engineer for and on behalf of the company prior to its formation, after incorporation and for future services. Later, Schmidt claimed for all the moneys payable to him under the 1954 agreement, the 1955 agreement or one or other of them. The Privy Council, on

23 [1968] 1 MLJ 170.

12 appeal from the Federal Court, inter alia held that Schmidt was entitled to the payment under the 1955 agreement, but not under the 1954 agreement since he was not a party to that agreement even though the 1954 agreement conferred a benefit on him.

Sale and purchase agreement

Being a third party in a sale and purchase agreement means the third party cannot enforce any provisions in the agreement even though some of them confer benefits upon the third party. This principle has been upheld in Bacom Enterprises Sdn Bhd v Jong Chuk.24 Among the issues that the Court needed to resolve in this appeal was, whether the plaintiff (Jong Chuk, a third party) had any right of action against Bacom Enterprises, in particular to enforce the terms of the development agreement entered into between the plaintiff and the first to fifth defendants.

The first to fifth defendants (defendants) entered into a development agreement (DA) with the plaintiff (Jong Chuk) to develop land they owned. Three months after the execution of the DA, the defendants granted the plaintiff a power of attorney (the first PA) to do certain acts such as appearing before all relevant authorities in respect of the land and to submit all requisite plans for the development of the land. Later, the defendants entered into a sale and purchase agreement (the SPA) to sell the land to Bacom Enterprises Sdn Bhd (Bacom) and simultaneously revoked the first PA. According to the recitals to the SPA, Bacom as the purchaser was fully aware of and understood all the terms of the DA and the first PA and agreed to honour and abide by the provisions in the development agreement. Bacom granted the plaintiff a power of attorney (the second PA) that was identical to the first PA. However, as the relationship between the plaintiff and Bacom deteriorated, Bacom revoked the second PA which left the plaintiff with no power of attorney to proceed with any works on the land. Thus, the plaintiff commenced a civil suit seeking, inter alia, a declaration that Bacom Enterprises was bound by the provisions in the development agreement as promised in the sale and purchase agreement entered into between Bacom and the defendants. It was held by the Court of Appeal that:

24 [2011] 5 MLJ 820.

the plaintiff was not a party to the sale agreement and hence cannot hitch a ride upon it just because there is some provision therein which was intended to benefit him, albeit, as a contractor to build houses and shophouses and the infrastructure that goes with it.25

Tenancy agreement

The application of the doctrine of privity in tenancy agreements arose in Chung Shan Kwang v Ise Ichi Japanese Restaurant Sdn Bhd.26 In this case, a sale and purchase agreement was entered into in August 1997 between Yusoff bin Mohd and the appellant (the third party) whereby Yusoff agreed to sell premises currently rented by the first respondent (Ise Ichi Japanese Restaurant). Prior to this, on June 1997, Yusoff had entered into a tenancy agreement with the first respondent. A deed of assignment was also entered into in December 1997 between Yusoff and the appellant whereby allegedly Yusoff assigned all his rights, title, interest, benefits and obligations in the said premises to the appellant. The appellant relying on the sale and purchase agreement and also the deed of assignment claimed outstanding rental from the first respondent.

The High Court dismissed the appeal on the basis that it was trite law that an appellant who was not a party to the tenancy agreement (between Yusoff and Ise Ichi Japanese Restaurant) could not claim the benefit of any of the terms in the tenancy agreement. The appellant could only claim the benefit if there was a valid assignment entered into between Yusoff and the appellant. As claimed by the respondent and later agreed by the High Court, the assignment entered into between Yusoff and the appellant did not expressly refer to or mention the benefit in the tenancy agreement. It is clear that what were assigned were the rights, title, interests, benefits and obligations under the principal sale and purchase agreement entered into between the proprietor, developer and the first owner, in respect of the said premises. In the circumstances, it was observed that there was no valid assignment of the rights, title, interests, benefits and obligations in the tenancy agreement from Yusoff to the appellant in respect of the said premise. In short, the tenancy agreement was not assigned to the appellant at all. The exception to the doctrine of privity did not apply in this case. As the appellant was not a

25 Ibid 113 (Mohd Ghazali JCA). 26 [2005] 3 MLJ 471.

14 party to the tenancy agreement, the appellant therefore could not enforce the term of the agreement regarding the rental payment.27

Altogether there are 20 cases on commercial third party beneficiaries that have been affected by the application of the doctrine of privity in Malaysia. Of those 20 cases, 17 are insurance and construction contracts and only 3 involve other types of commercial contracts. Based on these figures, insurance and construction contracts represent 85% of the cases identified and, as such, the percentage itself indicates that these two areas of contracts are most affected by the doctrine of privity. Therefore, any suggested reforms must deal specifically with the right of third parties in these two types of contracts and at the same time provide remedies to other deserving third parties in other types of commercial contracts.

1.4.2 Second limitation on the Research Scope

Another limitation on the scope of the thesis is that notwithstanding the fact that the doctrine of privity had been abrogated in other common law countries such as New Zealand, Singapore, Scotland, the United States of America and also in European countries that rely upon a civil law system, Australia and England are chosen as comparative jurisdictions. The reason is because unlike European countries, Scotland and the United States of America, Malaysia shares the same common law system with Australia and England. Singapore is not chosen because of the similarity of the legislative reform with England. As for New Zealand, other than the reform being more or less similar to England, a preliminary case analysis indicated that the impact of the doctrine of privity on third party beneficiaries was not similar to Malaysia. Furthermore, there are only a small number of cases that have contributed to the reform of the doctrine of privity in New Zealand.

27 In the first place, the situation and problem in this case could have been avoided if the assignment between Yusoff and the appellant was done properly to include the tenancy agreement.

1.5 THE IMPORTANCE OF THIS RESEARCH

As a common law country, the reform of the doctrine of privity that took place in several other common law countries has affected Malaysia as well. There have been academic criticisms and several research studies conducted in relation to the doctrine of privity in Malaysia. To place the relevance and importance of this thesis in context, it is necessary to refer to research undertaken by others to date.

Clarence Balan 28 has published material about the history, origin and basis of the doctrine of privity. It was the main objective of Balan’s thesis to conduct research into the historical aspect of the doctrine. In addition to this analysis, the thesis also includes a discussion about whether there is any basis for the continued existence of the doctrine of privity of contract within the Malaysian law of contract.29 Based on the arguments put forward in the literature that attacks the doctrine of privity and also discussion of the deficiencies of the existing legislation like s 23 of the Civil Law Act 1956 and the Road Transport Act 1987, the thesis suggests that the doctrine of privity in Malaysia should be reformed and Malaysia should enact general legislation based on England’s Contracts (Rights of Third Parties) Act 1999. Discussion of the features and elements of the Contracts (Rights of Third Parties) Act 1999 appears in an article published in 2000.30

In another thesis, Chan Wai Meng confines her discussion of the doctrine of privity to the rights of third parties in insurance law only.31 Her writing investigates the rights of a person who is not a party to an insurance policy. She identifies that the rights of a third party in insurance law are affected by the doctrine of privity, defences available to the insurer and the application of laws in other areas. In her discussion of the doctrine of privity and the rights of third parties, she examines the evolution of the rights of third parties in England and highlights the weaknesses in the English common law and also

28 Who also writes under the name of Clarence Edwin. 29 Clarence Balan, The History of the Beneficiary Action and the Need for Reform of the Parties- Only Rule in Malaysia (PhD Thesis, St. Clements, 2001). However, further examination of this thesis could not be undertaken as the thesis is not publicly available. 30 Clarence Edwin, 'Will our Common Law See the Demise of Privity of Contract?' (2000) 4 Malayan Law Journal i. 31 Chan Wai Meng, Third Party Rights in Insurance Law in Malaysia (2008).

16 the legal framework that exists in England, Singapore and Malaysia. As her discussion is not restricted to the doctrine of privity, but also extends to other issues like rights of a nominee or an assignee as a third party, rights of an injured third party against the Motor Insurer’ Bureau, and professional indemnity insurance policy, among others, she suggests that the Malaysian Insurance Act 1996 be amended to cover various weaknesses as disclosed in the thesis and this includes the extension of the list of third party beneficiaries in life, personal and group insurance policies. She comments however that in respect of the rights of third parties in relation to the doctrine of privity, the enactment of the English Contracts (Rights of Third Parties) Act 1999 has improved and strengthened the rights of third parties in insurance law.

The doctrine of privity has also been discussed by Ng Sock Hooi in relation to building contracts.32 He acknowledges that problems may arise if there are defects in the sub- contractor’s work and the main contractor becomes insolvent. Due to the privity doctrine, the employer cannot sue the sub-contractor directly. Similarly, the sub- contractor cannot bring an action against the employer for payment owing for work done. However, Ng Sock Hooi does not discuss reform of the doctrine of privity.

In 2000, Sakina Shaik Ahmad Yusoff called for reform of the doctrine of privity in Malaysia but her material is primarily in the context of consumer protection. 33 Subsequently, in 2007, she and Suzanna Mohamed Isa recommended reform of the doctrine of privity in Malaysian contract law and suggested that the doctrine of jus quaesitum tertio should be adopted instead. 34 Various literature reviews written by

32 Ng Hock Sooi, Legal Position of the Issues Associated with Main Contractor's Insolvency (Master Thesis, Universiti Teknologi Malaysia, 2006). 33 Sakina Shaik Ahmad Yusoff, 'Kontrak jualan barang : Doktrin priviti sebagai halangan tuntutan pengguna' (2000) 3 Malayan Law Journal cclvii. 34 Sakina Shaik Ahmad Yusoff and Suzanna Mohamed Isa, 'Doktrin Privity ke Jus Quaesitum Tertio: Rasional Peralihannya' (2007) 11 Jurnal Undang Undang & Masyarakat 41. See also Suzanna Mohamed Isa, Sakina Shaik Ahmad Yusoff and Azimon Abdul Aziz, 'Hak Pihak Ketiga Dalam Kontrak: Pembukaan Ruang oleh Daya Kreatif Kehakiman Menerusi Kaedah Kontraktual' (2011) 4 MLJ xxvi.

17 commentators35 were included in the article justifying the need to replace the doctrine of privity with jus quaesitum tertio. The relationship between the doctrine of privity and consideration was also discussed in order to show that these two concepts were not inter-related to each other.

In short, there are several articles written by Sakina Shaik Ahmad Yusoff that call for reform of the doctrine of privity in Malaysia. However, the rationalisation for reform is based on theoretical aspects of the doctrine and no evidenced based research of the actual problems that occur in the Malaysian context is offered. No case analysis is undertaken to further support the reform.

Suzanna Mohamed Isa published a thesis 36 discussing the current operation of the doctrine of privity and jus quaesitum tertio in Malaysian contract law. The thesis is divided into two parts; the first part focuses on the theoretical arguments on the jus quaesitum tertio, the evolution of the doctrine of privity and the restriction on the development of jus quaesitum tertio, the fall of the doctrine of privity and the rise of jus quaesitum tertio in historical aspects. Discussion of the relationship between the doctrine of privity and doctrine of consideration also features in this part of the thesis. The second part of this thesis analyses the judicial and legislative abrogation of the doctrine of privity in contract law and the development of jus quaesitum tertio in the United Kingdom, Australia, New Zealand, Singapore, Hong Kong as well as Malaysia. Judicial creativity and the legislative approach in Malaysia are analysed in order to compare the evolution of the doctrine of privity and whether there is room for jus quaesitum tertio in the Malaysian law of contract. Finally, the thesis proposed the enactment of general legislation based on England’s Contracts (Rights of Third Parties) Act 1999.

35 Such as Robert Flannigan, 'Privity - The End of an Era (Error)' (1987) 103(Oct) Law Quarterly Review 564; Rodney H. Newman, 'The Doctrine of Privity of Contract: The Common Law and the Contracts (Privity) Act 1982' (1982) 4 Auckland University Law Review 339; F. E. Dowrick, 'A Jus Quaesitum Tertio by Way of Contract in English Law' (1956) The Modern Law Review 374; Al Corbin, 'Contracts for the Benefit of Third Persons' (1930) 46 Law Quarterly Review 12. 36 Suzanna Mohamed Isa, Jus Quaesitum Tertio: Regim Pemakaian di Malaysia (PhD Thesis, National University of Malaysia, 2009). Further examination of this thesis could not be undertaken as the thesis is not publicly available.

Tan Pei Meng has also published a thesis examining the doctrine of privity in Malaysia. The thesis discusses three main elements; the consistency of third party rights with contract theory, the necessity for reform in contract law and the mode of reform. The thesis argues that the application of the privity doctrine to contracts made for the benefit of third parties is inadequate and requires statutory reform. The thesis also examines the various statutory exceptions available in Malaysia and the common law mechanisms utilised by Malaysian judges to evade the doctrine of privity. Further, the strengths and weaknesses of all the common law mechanisms are evaluated in order to provide insights as to the possible judicial development that can be adopted in Malaysia. A study on the statutory development of third party rights in England, New Zealand, Australia, the United States and member States of the European Union is also included in her thesis.37 Tan Pei Meng also recommends sweeping reform of the doctrine of privity by enacting a general statute to abrogate the effect of the doctrine of privity on the law of contract.

The literature reviewed evidences a wide spread acknowledgement of the problems and difficulties caused by the doctrine of privity in Malaysia. Compared to the existing postgraduate theses, this thesis will not focus on the theoretical aspect of the doctrine of privity and jus quaesitum tertio. The previous theses have not analysed Malaysian case law to determine which third party beneficiaries are most affected by the application of the privity doctrine. Previous reform recommendations were based on theoretical considerations and the adoption of justifications from other jurisdictions.

In addition to the literature discussed above, the English Law Commission Report (No 242) also contained recommendations for reform of doctrine of privity. The Law Commission has made a recommendation for a general legislation to be introduced as part of reform. However it was found that Law Commission prior to making the recommendations did not investigate the types of third parties most affected by the doctrine of privity. Hence, this thesis investigates the types of third parties most affected by the doctrine of privity, with special reference to

37 Tan Pei Meng, The Doctrine of Privity in Malaysia: The Need for Reform and the Way Forward (PhD Thesis, Malaya University, 2009).

Malaysian law. Further, the findings of the Law Commission Report were made based on feedback from a consultation process in England. On the other hand, the recommendations to be made by this thesis are based on a comprehensive analysis of case law and legislation that covers several jurisdictions, i.e. Malaysia, Australia and England.

This thesis will justify reform through a case based analysis identifying the exact nature of the detriment suffered and the circumstances in which it commonly arises. Preliminary analysis of Malaysian case law indicated that third party beneficiaries under insurance and building contracts are most affected by the doctrine of privity. Therefore, these types of commercial contracts are the focus of this thesis. In addition, as a result of the analysis, several options for legislative reform will be considered as compared to the existing postgraduate theses which only consider one type of legislative reform, which is by enacting a statute of general application. It is the aim of this thesis to suggest reform based upon an analysis of the detriment actually suffered by third parties.

1.6 RESEARCH METHODOLOGY

1.6.1 Research Questions

This thesis aims to undertake a comparative case based analysis to determine the categories of third party beneficiaries most affected by the application of the doctrine of privity in Malaysia with the results to form the basis of a viable reform of the law for commercial agreements. In proposing a suitable reform, a comparative analysis of the case law and legislation in Australia and England will be undertaken and comparisons drawn with Malaysian case law and legislation in order to determine whether sufficient justification for reform is evident and the most suitable reform framework for Malaysia.

In order to fulfill the research aims and objectives as stated above, the following research questions will be addressed:

(i) What was the original rationale for the doctrine of privity of contract? (ii) What factors underpinned the legislative amendment of the privity doctrine in Australia and England?

(iii) Was there any evidence of disadvantage or detriment to third parties evident in the case law in Australia and England that led to reform of the doctrine of privity of contract? (iv) Have the same changes in commercial relations or the common law occurred in Malaysia as in these other jurisdictions and are the same disadvantages evident in Malaysian case law? (v) What rationale can be offered for abolition or amendment of the doctrine of privity in Malaysia, having regard to the commercial and legal context? (vi) If the doctrine of privity in Malaysia is to be reformed, what principles should underpin this reform?

1.6.2 Research Method

Purposes, Objectives and Benefits of Adopting a Comparative Methodology

Zweigert and Kotz 38 state that the primary aim of comparative law is knowledge. Comparison provides a broader range of model solutions for preventing or resolving conflicts, which increases the number of possible solutions and allows the scholar to find the best solution.39

Zweigert and Kotz also state that the practical benefits of comparative law include the following:

• an aid to the legislator; • a tool of construction; • a component of the curriculum of the universities; • a contribution to the systematic unification of law; and • for the development of a private law common to the whole of Europe.

However, two questions must be asked before the legislator proposes to adopt a foreign solution:

38 Konrad Zweigert and Hein Kotz, Introduction to Comparative Law (Third Revised ed, 1998), 15-16. 39 See also Terry Hutchinson, Researching and Writing in Law (2nd ed, 2006), 106.

1. Whether the solution has proved satisfactory in its country of origin. 2. Whether the solution will work in the country where the legislator proposes to adopt it.

According to Gutteridge,40 part of the significance of comparative law is law reform through the facilitation of more effective legislation. Comparison of laws is often the most valuable method for producing new material law reform.

This thesis uses comparative law to compare various models of legislation in Australia and England. These models are used to develop a model legislative framework for the reform of the privity doctrine in Malaysia.

Criteria for Comparison

Comparison begins with comparing the similarities and differences between the relevant legal systems. It is necessary to determine the scope of comparison before this process commences.41

Reitz42 states that comparative studies involve a comparison of the special or unique features of the legal systems, particularly with respect to the issue in question. Hence, as suggested by Schmitthoff, 43 it is essential that certain criteria are applied when undertaking the comparative process.

These criteria are:

a) The relevant topic must be comparable. The issue or problem must be present in all legal systems involved in the comparison, as the central question is always how other legal systems react to the same legal problem. Comparison must extend to the evolutionary stage of different legal systems.44

40 H.C. Gutteridge, Comparative Law: An Introduction to the Comparative Method of Legal Study & Research (2nd ed, 1949), 35. 41 Ibid 73. 42 John C. Reitz, 'How to Do Comparative Law' (1998) 46(4) The American Journal of Comparative Law 617. 43 M. Schmitthoff, 'The Science of Comparative Law' (1939) 7(1) The Cambridge Law Journal 94. 44 Gutteridge, n 36 noted that ‘like must be compared with like, and the concepts, rules or institutions under comparison must relate to the same stage of legal, political or economic development.’

b) The legal and social background of all legal systems to be compared is relevant. c) An analytical classification of an impartial and scientific character must be applied to the jurisdictions under comparison. Zweigert and Kotz45 state that a critical evaluation must be made of the information gathered, in order to find the right solution to the problem under investigation.

Based on the above criteria, Australia and England have been chosen as jurisdictions to compare. These jurisdictions are all common law jurisdictions in which the doctrine of privity forms part of their law of contract. Due to criticisms of the doctrine of privity, reforms have been made in both jurisdictions. The evolutionary stages of comparison will include both the pre-legislative reform and the post legislative reform periods in these jurisdictions.

The criteria to be compared between these jurisdictions and Malaysia are as follows:

i) The impact of the doctrine of privity on third party beneficiaries. A study will be conducted to examine the impact of the doctrine of privity on third party beneficiaries in Australia, England and Malaysia, particularly focusing on the classes of third party beneficiaries which are most affected. This will determine whether the same groups of third parties throughout these jurisdictions suffered injustice due to the doctrine of privity. The extent of the detriment to third parties will be measured by reference to the decided case law in these jurisdictions. The case law will be analysed and compared to determine the similarities of the detriment suffered by third parties. ii) The efficacy of the doctrine of privity reforms in Australia and England, and a comparison of these reforms. The rationale of this comparison is to evaluate the success of various international reforms and thereby develop a legislative reform suitable to the Malaysian context.

Process of Comparison

45 Konrad Zweigert and Hein Kotz, n 38, 47.

There are several stages of conducting comparative studies. Zweigert and Kotz46 state that comparative studies are comprised of:

a) The posing of a question or the setting of a working hypothesis. This may be due to a feeling of dissatisfaction with the solution in the researcher’s own system which drives the researcher to inquire whether other legal systems contain a more effective solution. b) The identification of foreign jurisdictions where the law is functionally equivalent to the relevant law in the researcher’s own legal system. c) The determination of the choice of materials by the researcher. d) The creation of a research system which is very flexible and conceptually large enough to encompass the various legal systems which are under comparison. e) A critical evaluation of the information which has been discovered by the researcher.

De Cruz47 splits the comparative process into eight distinct phases as follows:

1. Identify the problem and state it as precisely as possible. 2. Identify which foreign jurisdictions will be compared to the domestic jurisdiction. 3. Decide which primary sources of law will be needed. 4. Collect the material relevant to the jurisdiction being under comparison. 5. Organize the material in accordance with headings reflecting the legal philosophy and ideology of the legal system under comparison. 6. Map out possible solutions, taking note of any differences between legal systems which may affect the comparison. 7. Critically analyse the legal principles. 8. Set out conclusions within a comparative framework, ensuring that they relate to the original purpose of the enquiry.

46 Ibid 35-47. 47 Peter de Cruz, Comparative law in a changing world (3rd ed, 2007), 242-245.

1.6.3 Research Design

This thesis uses doctrinal legal research to analyse the injustices arising from the operation of the privity doctrine.

Being legal research, the research design is purely qualitative. Though often considered as non-empirical and less rigorous compared to quantitative research, qualitative research is more suitable for legal research as it is more in-depth and flexible. Such depth and flexibility are important as they give more room for critical analysis prior to providing a recommendation for reform of the doctrine of privity in Malaysia.

In conducting this legal research, this thesis is using a comparative approach. The comparative approach is used to compare and contrast the law one country to another. Besides that, historical approach and jurisprudential approach are also used. The historical approach is used to trace the development of the privity doctrine in Malaysia. A jurisprudential approach is used to critically analyse various theories underlying the privity doctrine.

A literature review (of both digital and non-digital libraries) was conducted in order to collect information relevant to answering the research questions. Being legal research, the collected information is drawn mostly from primary legal sources in the form of legislative texts comprising of statutes, codes and regulations. Also collected are primary legal sources in the form of non-legislative texts which include procedures, guidelines, reported and unreported case law. Apart from that, secondary legal sources from law text books, law journals and law committee reports were also collected.

Analysis of the primary and secondary legal sources involved content analysis (analysis of statutes, codes, regulations, law text books, law journals and law committee reports) and doctrinal analysis (analysis of judicial decisions from reported and unreported case laws).

1.6.4 Research Plan

A comparative methodology and doctrinal analysis will be used to examine the doctrine of privity and legislative reform thereof in the selected common law jurisdictions. These

25 are Australia, England and Malaysia. The purpose of this comparison is to examine the justifications for the legislative reforms of the privity doctrine, the implementation of these reforms and the effect of the reforms on third party beneficiaries.

The focus of this comparison is limited to insurance and construction contracts only, and the rationale for this was explained above.48

1.6.4.1 Chapter Outlines

THESIS

Stage 2 Stage 3 Stage 4 Stage 1 Pre-Legislative Post Reform Analysis and Introduction Reform Analysis Recommendations

Chapter 3 Chapter 4 Chapter 1 Case analysis in Legislation and Chapter 6 Introduction Malaysia, Australia post refom case Analysis and England analysis

Chapter 5 Chapter 7 Chapter 2 Legislation in Recommendations Doctrine of Privity Malaysia and Conclusions

The Chapters in this thesis are divided into four stages:

Stage 1 - Introductory Chapters (Chapter 1 and 2);

Stage 2 - Analysis of the Pre-Legislative Reform Cases (Chapter 3)

Stage 3 – Comparison of Legislation in Selected Jurisdictions and Post Reform Analysis (Chapter 4 and 5)

48 See 9-11 [1.4].

Stage 4 – Analysis and Recommendations for Reform (Chapter 6 and 7)

The content of each of these chapters will briefly outlined below:

Stage 1: Introductory Chapters

Chapter 1 – Introduction

This chapter outlines the aims, objectives and relevance of this thesis. The chapter also describes the comparative methodology adopted in this thesis, criteria for comparison and an explanation of the reasons why England and Australia have been chosen as jurisdictions for comparison.

Chapter 2 – Doctrine of Privity

This chapter briefly explains the origin, rationale and arguments in defence of the doctrine of privity. In response to the defences of the doctrine, this chapter also provides counter arguments for the justifications advanced by those who preferred the retention of the doctrine of privity. The doctrine of privity has been the subject of criticism which explains why several common law countries have opted to legislatively reform the doctrine. This chapter therefore also discusses the criticisms made by the judiciary, law commission bodies and academic commentators.

Stage 2: An Analysis of the Pre-Legislative Reform Cases

Chapter 3 – A case based comparative analysis of the application of the privity doctrine

In this chapter, the pre-legislative reform judicial decisions from Australia and England are analysed and compared with Malaysian judicial decisions. This analysis and comparison will focus on: a) Identifying the categories of third party beneficiaries disadvantaged by the application of the doctrine of privity; b) the nature of the contracts involved; c) the nature of the detriment suffered by the third parties; and d) the circumstances in which another legal principle was used to abrogate the doctrine.

The purpose of the analysis is to ascertain the impact of the doctrine of privity on third party beneficiaries in Australia and England and the similarities of the impact on third party beneficiaries in Malaysia. An analysis of Malaysian judicial decisions is also essential to identify the categories of third party beneficiaries most affected by the doctrine of privity.

Stage 3: Comparison of Legislation in Selected Jurisdictions and Post Reform Analysis

Chapter 4 - An analysis of legislative reform and judicial decisions

This chapter involves a comparison of the legislative reform in the selected common law jurisdictions (Australia and England) in order to gather information on the legislative model that may suit Malaysia best. The legislation from each of these jurisdictions is examined and analysed to see whether it is appropriate and suitable to the Malaysian context. This analysis includes:

a) the objectives of the Acts; b) the main features of the Acts; c) the practical operation and judicial interpretation of the Acts; and d) third parties who do not benefit from the Acts.

An analysis of the judicial interpretation of the legislative reform is also conducted in order to evaluate the efficacy of the reforms.

Chapter 5: Legislative reform in Malaysia

The purpose of this chapter is to explain the existing legislative reforms in Malaysia to lighten the burden and hardship caused by the doctrine of privity. Several Acts containing specific provisions dealing with third party rights are discussed. The relevance of this discussion is to identify which categories of third parties benefitted from the legislative interventions and those who remain subject to the common law doctrine. The outcome of this analysis justifies the urgent need for further reform in Malaysia.

Stage 4: Analysis and Recommendations for Reform

Chapter 6: A framework for reform in Malaysia

Chapter 6 builds upon the conclusion in Chapter 5 that further reform of the doctrine of privity is urgently needed. Chapter 6 establishes three reform criteria that are recommended as essential for a viable and valid legislative reform process. The three criteria are then applied to determine the most appropriate model of reform for the Malaysian context.

Chapter 7: Recommendations and conclusion

Finally, recommendations are made for amendments to existing Malaysian laws in relation to the doctrine of privity, especially for insurance and construction contracts. The proposed reforms are essential with the aim of providing certainty of rights, to benefit and protect the public interest and accord fairness to third party beneficiaries in insurance and construction contracts specifically and to other types of commercial contracts, generally.

CHAPTER TWO THE UNDERLYING THEORIES AND PRINCIPLES OF THE DOCTRINE OF PRIVITY 2.1 INTRODUCTION

This chapter examines the background to the doctrine of privity including its origin, the rules governing the doctrine and the common law exceptions developed by the courts over the years in an attempt to abrogate the doctrine. The arguments for and against the abolition of the doctrine as propounded by the judiciary, law commission bodies and academics are analysed together with criticisms and rationales for the doctrine in reaching a conclusion about whether the doctrine should be abolished or reformed.

The doctrine of privity states that only the parties to a contract are legally entitled to enforce it, or be bound by it. In other words, while performance of a contract may in the circumstances result in a benefit or a burden as a matter of fact upon a third party to the contract, as a matter of law, a third party cannot enforce the contract or be subject to liabilities imposed by the contract.49 Treitel defines the doctrine of privity as that a contract cannot, as a general rule, confer rights or impose obligations arising under it on any person except the parties to it.50 The English Law Commission links the concept with the theory of consideration, that is “…a contract cannot confer rights or impose obligations arising under it on any person except the parties to it ….”51

The doctrine has two distinct components or aspects. On the one hand, it prevents third parties from obtaining rights or benefits under a contract- it refuses to recognise a jus quaesitum tertio52 and on the other hand, it prevents parties to a contract from imposing liabilities or obligations on third parties. This first aspect, which is the focus of this research, has not only been applied to deny strangers from enforcing contractual provisions but has also been applied in cases where the contract attempts, either expressly or impliedly, to confer benefits on a third party. Persons who stand to gain a

49 Lindy Willmott et al, Contract Law (Third ed, 2009). 50 GH Treitel, The Law of Contract, (10th ed, 1999), 538. 51 In Report No 121. For other definitions see for example, Anson's Law of Contract (25th ed, 1979), 411, Cheshire, Fifoot and Furmston's Law of Contract (12th ed, 1991); 450-68; Chitty on Contracts (25th ed, 1983), vol 1, 662-91. 52 A right acquired or vested in a third party.

30 benefit from the contract (third party beneficiaries) are not entitled to take any enforcement action if they have been denied the promised benefit. Such benefits can be financial, services, goods or other advantages, such as an exclusion of liability or an indemnity in favour of a third party.

A simple example of the dilemma faced by a third party who is promised the benefit under a contract might be where under a contract, A promises B to pay a sum of money to C as a consequence of a defined event. If A fails to pay C and B does not pursue A for breach of contract, then there is little C can do to receive or enjoy the benefit of A’s promise. The doctrine of privity will act as an obstacle to C in pursuing an action against A or B.

Where the parties to a contract intend to confer a benefit on a third party the rights of the third party are directly affected by the operation of the doctrine of privity. For instance, in insurance contracts, where the insured party names a third party as a person who is to benefit from the insurance money (in the event of the insured’s death), the third party’s rights are subject to the doctrine of privity. Similarly, a construction contract between the employer and the main contractor may benefit the sub-contractor (the third party) by defining the sub-contractor’s rights (such as in terms of payment). In most situations, the strict application of the doctrine of privity will prevent these third parties from obtaining the benefit of the contract, unless an exception to the doctrine of privity applies.

2.1.1 The historical foundation of the doctrine of privity

This part of the thesis will provide only a brief summary of the origin and the history of the doctrine of privity as this has been exhaustively examined by many other authors.53

53 For example, see Clarence Balan, The History of the Beneficiary Action and the Need for Reform of the Parties-Only Rule in Malaysia (PhD Thesis, St. Clements, 2001); Tan Pei Meng, The Doctrine of Privity in Malaysia: The Need for Reform and the Way Forward (PhD Thesis, Malaya University, 2009); Suzanna Mohamed Isa, Jus Quaesitum Tertio: Regim Pemakaian di Malaysia (PhD Thesis, National University of Malaysia, 2009); V. Palmer Vernon, 'The History of Privity - The Formative Period (1500-1680)' (1989) 33(1) The American Journal of Legal History 3; Gordon Samuel, 'Contracts for the benefit of third parties' (1967-1968) 8 U W Austl L Rev 378; Robert Flannigan, 'Privity - The End of an Era (Error)' (1987) 103(Oct) Law Quarterly Review 564; Sir Guenter Treitel, The Law of Contract (Tenth ed, 1999); NC Seddon and MP Ellinghaus, Cheshire & Fifoot's Law of Contract (Ninth ed, 2008); Edwin Peel, The Law of Contract (Twelth ed, 2007).

The word “privy” is derived from the French “privé” and it originally denoted a friend or an acquaintance as opposed to a stranger. Deriving from the original significance of the word, privity was later given a legal connotation, namely, “interest” or “relationship”.54

The development of the doctrine of privity can be explained by four individual theories. These are the interest theory, the benefit theory, the agency theory and the consideration theory.55 In the earlier period of Elizabethan common law (1500-1670), there was no principle of common law which prevented a third party from obtaining the benefit of a contract where the contracting parties intended the third party to obtain a benefit.56 The conditions under which relief could be granted in those times were determined by the notions of interest, benefit, agency and consideration.

The interest theory can be traced to the early 17th century (1610) until it diminished in popularity in 1680. The rationale for permitting an action by a third party beneficiary was that non-performance of the promise caused an injury to the third party beneficiary’s interest. The third party had a clear interest which entitled the third party to an enforcement action and compensation for injury.57

The benefit theory also made its debut in the early period of the 17th century. The judicial trend at this time was to recognise promises of gifts, marriage contracts and family agreements even though the third party beneficiary gave no consideration and had no compensable interest. The notion of benefit provided a basis for the third party beneficiary’s action. For example, in Rookwood’s Case,58 it was held that two brothers

54 Clarence Balan, The History of the Beneficiary Action and the Need for Reform of the Parties- Only Rule in Malaysia (PhD Thesis, St. Clements, 2001). 55 V. Palmer Vernon, 'The History of Privity - The Formative Period (1500-1680)' (1989) 33 The American Journal of Legal History 3. 56 S. J. Stoljar, A History of Contract at Common Law (Australian National University Press, Canberra, 1975). 57 See cases like Hadves v Levit (1632) Het 176; Brand v Lisley (1610) Yelv 164; De La Bar v Gold (1662) 1 Keb 44; Corny & Curtis v Collidon (1674) 1 Freem K B 284. 58 (1588) Cro Eliz 164.

32 had the right to sue the defendant for a promise made by the defendant to their father. The promise was that the defendant would pay the brothers if the father charged his land for this annuity. This action was allowed on the basis that the promise was made for the benefit of the brothers.59

However, by the late 17th century, the development of the benefit theory60 was halted by Bourne v Mason61 where a third party beneficiary’s action failed on the ground that he had not provided consideration for the bargain. The Court stated, “here the plaintiff did nothing of trouble to himself or benefit to the defendant, but is a mere stranger to the consideration.”62 In other words, since the third party had given no consideration for the promise, he had no right to maintain an action to enforce it. This reasoning was based on the principle that only those who provide consideration have the right to sue and it provided the basis for the emergence of the consideration theory.63 Despite this, in Dutton v Poole,64 the eldest son asked the father not to cut down trees, and promised him that, if the father did not cut them down, he would pay £1,000 to the daughter. In reliance on the promise, the father did not cut down any of the trees. After the father died, the eldest son inherited the estate. The daughter claimed £1,000 from the eldest son. The court held that in special circumstances, the daughter could sue on the contract even though she was not a party to it and did not provide any consideration for the promise. Nonetheless, the decision was criticized and was not followed in later cases.

The interest and benefit theories were replaced by the consideration theory resulting in relief for third party beneficiaries being curtailed at common law. However, throughout the 17th and 18th centuries, there were a number of inconsistent statements about support for the doctrine of privity. Judges in a few cases claimed the doctrine of privity was unsupported and some decisions were made in ignorance of an established line of

59 See also Lever v Heys (1599) Moo K B 740. 60 See also Jordan v Jordan (1595) Cro Eliz 369; Provender v Wood (1630) Het 30; Starkey v Mill (1651) Sty 296. 61 (1669) 1 Vent 6, 2 Keb 457, 527. See also NC Seddon and MP Ellinghaus, Cheshire & Fifoot's Law of Contract (Ninth ed, 2008). 62 (1669) 1 Vent 6, 2 Keb 457, 527. 63 See also Clypsam v Morris (1669) 2 Keb 401 which was also decided on the basis that there was no consideration provided by the plaintiff. 64 (1677) 1 Vent 318.

33 authority. In 1724, the court in Crow v Rogers65 referred to both Bourne v Mason66 and Dutton v Poole67 and without much debate, decided that the third party’s claim should be refused simply because he was a stranger to the consideration. Later in 1797, the court in The Master, Wardens and Commonality of Felt Maker v Davis68 referred to the unrecorded judgment of Marchington v Vernon 69 where the right of a third party beneficiary to maintain an action on the promise was approved.

In the 19th century, it was affirmed by the court in Pigott v Thompson70 that a third party can sue upon a parol promise made to another for his benefit. Thereafter, various contradictory cases were decided without any satisfactory determination of the matter. At last, in 1861, the requirement for consideration to be provided by a party as a condition of enforcement of the contract was restated and firmly accepted in Tweddle v Atkinson.71 This case ended the uncertainty and confirmed that a third party is unable to sue on a contract between two others even though it was made for the benefit of the third party. In this case, 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. After the marriage they confirmed the agreement in writing. The plaintiff sued his father-in-law’s executors for the £200. The action failed because it was held that a party who does not provide consideration for a promise in a contract cannot enforce the contract, even though it was one which was made for his benefit.

Later, in the case of Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd,72 Viscount Haldane ruled that only parties to a contract can sue and be sued on it. His Lordship based his decision on three grounds:

65 (1724) 93 E R 719. 66 (1669) 1 Vent 6, 2 Keb 457, 527. 67 (1677) 1 Vent 318. 68 Cited in Robert Flannigan, 'Privity - The End of an Era (Error)' (1987) 103(Oct) Law Quarterly Review 564. 69 (1797) 1 Bos & Pul 101. 70 (1802) 3 Bos & Pul 149. 71 (1861)1B &S 393. Nevertheless, it should be noted that, to equate the doctrine of privity with the doctrine of consideration is not justifiable as consideration is not about who is able to enforce a binding promise but is rather a requirement for a promise to be legally binding. 72 [1915] AC 847 (HL).

i) The doctrine of privity requires that only a party to a contract can sue under that contract. ii) The doctrine of consideration requires that a person with whom a contract (not under seal) is made is only able to enforce it if there is consideration from the promisee to the promisor. iii) The doctrine of agency requires that a principal not named in the contract can only be sued if the promisee contracted as an agent.

On the facts, His Lordship could not find any consideration passing between Dunlop and Selfridge and there was no agency relationship between the relevant parties. Consequently, Dunlop's action failed.

Following this case, privity of contract was firmly established as a doctrine in English contract law and was reaffirmed by the House of Lords in Scruttons Ltd v Midland Silicones Ltd.73

The modern landmark case of the doctrine of privity is Beswick v Beswick.74 In this case, a coal merchant transferred his business to his nephew who made various promises in return. One of them was that he would, after his uncle’s death, pay £5 per week to the uncle’s widow. The uncle died and the widow became his administratrix. The widow brought an action to enforce the nephew’s promise, suing both in her own right and as administratrix. The House of Lords held that the widow could only enforce the nephew’s promise in her capacity as an administratrix and that she was entitled to an order of specific performance against the nephew.

In Australia, Fullagar J in Wilson v Darling Island Stevedoring and Lighterage Co Ltd75 affirmed that the principle established in Tweddle v Atkinson76 was part of the law of Australia. In this case, the defendant stevedore damaged the plaintiff consignee’s goods after discharge from the carrier’s vessel. The plaintiff brought proceedings against the stevedore, claiming damages for the stevedore’s negligence. The High Court of

73 [1962] AC 446. 74 [1966] Ch 538. 75 (1956) 95 CLR 43. 76 (1861) 1 B & S 393.

Australia was required to rule on the availability of protection or immunity afforded by the bill of lading to the carrier or its agents. The defendant was held not to be entitled to the benefit. Further, it was stated that only the ship owner was protected by the clause in the bill of lading. Being a stranger to the bill of lading, the doctrine of privity prevented the stevedore from seeking the benefit of the exclusion clause contained in the bill of ladings.

Justice Fullagar’s assertion was supported in Coulls v Bagot's Executor and Trustee Co Ltd,77 where Barwick CJ said that “it must be accepted that, according to our law, a person not a party to a contract may not himself sue upon it so as directly to enforce its obligation”78 and Windeyer J concurred by saying “By the common law of England only those who are parties to a contract can sue upon it. For us, that statement is incontrovertible.”79

In summary, the effect of the privity doctrine is that a person who is not a party to the contract is prohibited from suing a party under the contract or enforcing the benefit of the contract. This rule has been applied in many later Australian and English cases.80

In Malaysia, Kepong Prospecting Ltd v Schmidt 81 was the first case in which a Malaysian court was faced with the issue of the doctrine of privity. In this case, The Privy Council held that the doctrine of privity of contract in Malaysia was applicable

77 (1967) 119 CLR 460. 78 Ibid 477. 79 Ibid 483. 80 See, eg, Rookes v Barnard [1964] AC 1129; Hepburn v A Tomlinson (Hauliers) Ltd [1966] AC 541; The Eurymedon [1975] AC 154; The New York Star [1981] 1 WLR 138; Woodar Investment & Development Ltd V Wimpey Construction UK Ltd [1980] 1 WLR 138; The Mahkutai [1996] AC 650; The Giannis N K [1998] AC 605. In Australia, the doctrine of privity has been applied in Wilson v Darling Island Stevedoring and Lighterage Co Ltd (1956) 95 CLR 43; Coulls v Bagot's Executor and Trustee Co Ltd (1967) 119 CLR 460; Olsson v Dyson (1969) 120 CLR 365; Jovanic v Broers (1979) 25 ACTR 39; Ziel Nominees Pty Ltd v VACC Insurance Co (1975) 50 ALJR 667; to name a few. 81 [1968] 1 MLJ 170. Refer to Chapter 1, 12[1.4.1].

36 under s 2(d) of the Contracts (Malay States) Ordinance 1950.82 Further, Thompson L.P. indicated that the application of the doctrine of privity in Malaysia was similar to that approved in Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd.83

In Phua Siong Hoe v RHB Bank; Persatuan Pemilik Tanah Taman Pandan (Intevenor)84Abdul Malik J declared that:

It is an established principle in the law of contracts and should not be set aside or discarded easily. To simply abolish the doctrine of privity of contract or to ignore it totally, without more, would certainly represent a major change to the common law involving complex and uncertain ramifications. Of course, the doctrine of privity has come under attack for its refusal to recognise the right of a third party beneficiary who seeks to enforce contractual provisions made for his benefit. Judges and text book writers have come out in the open and pointed out the gaps that sometimes exist between the strict contract theory on the one hand and the commercial reality on the other. To relax the law of privity by allowing third party beneficiary to succeed would result in floodgates of litigation in our courts. To me, a contract is a very personal affair, affecting only the parties to it. This court must uphold a strict application of the doctrine of privity as it is not desirable to change the law overnight. Complex changes with uncertain ramifications must be left to the wisdom of Parliament. My duty is only to apply the law as it stands. It is not my duty to make an incremental change to the law by developing the common law to make it more consistent with the modern notions of commercial reality and justice.85 Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd86 had also been cited by the Malaysian court in Emar Sdn Bhd (under receivership) v Aidigi Sdn Bhd,87 in declaring that it was not open to the contractor who was a stranger to the debentures, to impugn them.

82 The finding received criticism as there was nothing in the s 2(d) of the Contracts (Malaya States) Ordinance 1950 that relates to the application of the doctrine of privity in Malaysia. All the provisions are about defining consideration. See K.L. Koh, 'Privity of Contract and the Contracts (Malay States) Ordinance, 1950' (1968) 10 Malaya Law Review 125. Koh argues that to rely on s 2(d) is inappropriate since the provision does not espressly provide for the doctrine of privity. To relate the doctrine of privity with consideration is unjustifiable as s 2(d) provides a wider definition of consideration than of English law as it enables consideration to move from a person other than the promisee. 83 [1915] AC 847 (HL). 84 [2006] 6 CLJ 326. 85 Ibid, 334. 86 [1915] AC 847 (HL). 87 [1992] 2 MLJ 734.

Since the Privy Council’s decision in Kepong Prospecting Ltd v Schmidt,88 the doctrine of privity has been part of Malaysian contract law and has been applied in numerous later cases.

2.2 COMMON LAW EXCEPTIONS TO THE DOCTRINE OF PRIVITY

Over time, acknowledging the harshness of the doctrine of privity, the courts have given legal recognition to some of the devices which have been developed to circumvent the doctrine of privity. Some of the devices or exceptions that are relevant to this research are the following:

2.2.1 Agency

Agency is the relationship that exists when one person (the agent) is appointed by another person (the principal) to act as their representative. A contract entered into by the agent on behalf of the principal will be legally binding on the principal.

Agency was mentioned as an exception to the privity doctrine in Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd89 where Viscount Haldane LC stated “a principal not named in the contract may sue upon it if the promisee really contracted as his agent”. For example, a third party may be able to take the benefit of an exclusion clause by proving that the party imposing the clause was acting as his or her agent, thereby bringing the third party into a direct contractual relationship with the promisor.

In Malaysia, the use of agency in circumventing the doctrine of privity can be seen in a case concerning a pre-incorporation contract, The Golf Cheque Book Sdn Bhd v Nilai Springs Bhd.90 In this case, there was a contract, evidenced by a letter between the defendant, Nilai Springs Bhd’ and the second plaintiff, LH Wong & Associates, and it was a term of the contract that a sum of RM80000 was to be paid to the defendant. In return, the defendant was to allow persons producing golf cheques issued to them by the second plaintiff to use the golf course owned by the defendant. The letterhead on the

88 Ibid. 89 [1915] AC 847 (HL). 90 [2006] 1 MLJ 554. See also The Viva Ocean [2004] 2 AMR 284 where the court used agency to impose liability upon a third party.

38 letter read “The Golf Cheque Book”. Five months later, a company by the name of The Golf Cheque Book Sdn Bhd was incorporated. The defendant, after realizing that the company did not exist at the time the contract was made, returned the money which the defendant had received. The Golf Cheque Book Sdn Bhd sued the defendant for breach of contract. In defence, the defendant argued that the Golf Cheque Book Sdn Bhd was not a party to the contract made between the defendant and the second plaintiff, and therefore did not have locus standi in the case.

In circumventing the effect of the privity doctrine, the Court of Appeal resorted to the concept of agency and s 35(1) of the Companies Act 1965.91 The contract used the letterhead “The Golf Cheque Book” and it was signed by one Md Ibrahim A Karim under whose signature appeared the typewritten words “for The Golf Cheque Book’. These facts provided proof that the second plaintiff purported to contract on behalf of The Golf Cheque Book Sdn Bhd, acting as an agent for The Golf Cheque Book Sdn Bhd. After The Golf Cheque Book Sdn Bhd was incorporated, it made payment to the defendant from time to time. This amounted to ratification of the contract.92

In Australia and England, agency as a device to abrogate the doctrine of privity is commonly used by third parties in claiming the benefit of exclusion clauses in contracts. For example, in New Zealand Shipping v Satterthwaite93 it was held that the plaintiff (the stevedore) was able to take advantage of an exclusion clause contained in a bill of lading as all the four stipulated conditions were fulfilled. 94 Those four stipulated conditions were the following:

91 Section 35(1) reads “Any contract or other transaction purporting to be entered into by a company prior to its formation or by any person on behalf of a company prior to its formation may be ratified by the company after its formation and thereupon the company shall become bound by and entitled to the benefit thereof as if it had been in existence at the date of the contract or other transaction and had been a party thereto.” 92 By contrast, at common law, a pre-incorporation contract is void and subjects to no ratification. This principle was illustrated in Newborn v Sensolid (Great Britain) Ltd [1954] 1 QB 45 where the court held that on the facts, the plaintiff did not purport to contract as an agent for the company. Even if it did, the company still could not ratify the contract under the capacity of an agent since one of the conditions to ratify is that the principal must be in existence at the time the contract was made by the agent. See also Kelner v Baxter (1866) LR 2 CP 174. 93 [1975] AC 154 (The Eurymedon). 94 Set out by Lord Reid in Scruttons Ltd v Midland Silicones Ltd [1962] AC 446.

39 a) The main contract made it clear that the third party was intended to be protected by the clause.

(b) The main contract made it clear that the contracting party was acting as agent for the third party for the purpose of obtaining the benefit of the clause.

(d) The third party had provided consideration for the exemption clause contained in the main contract.

Following the House of Lords decision in Midland Silicones Ltd v Scruttons, 95 stevedores can rely on the benefit of an exclusion clause when the stevedore causes damage, subject to the conditions outlined above being fulfilled.

In Australia, this principle has been applied in Port Jackson Stevedoring Pty Ltd v Salmond and Spraggon (Aust) Pty Ltd.96 The case concerned shipment of razor blades from Canada to Australia. Following usual practice, on arrival in Sydney the packages of razor blades were discharged from the ship by the stevedores and placed in a shed under its control. Later, servants of the stevedores delivered the packages to persons who had no right to receive them and from whom they were not retrieved. The consignee brought the action against the stevedores alleging negligence. The stevedores relied on a Himalaya clause purporting to extend the benefit of immunities in the bill of lading to independent contractors of the carrier. On appeal to the Privy Council, Lord Wilberforce rejected the assignee’s claim that the immunity clauses did not extend to liability for loss of the goods once the goods had been unloaded from the ship. His Lordship stressed that while there will be room for evidence as to the precise relationship between the carrier and stevedore and as to the practice at the relevant port, typically there will be a contract between the shipper and the stevedore so that the latter will be entitled to contractual immunity.

95 Ibid. 96 (1978) 139 CLR 231. (The New York Star). The High Court decision was reversed by the Privy Council which endorsed The Eurymedon [1975] AC 154.

The principle that a stranger to the contract may enforce exemption clauses expressed to be for the stranger’s benefit is not restricted to contracts for carriage of goods by sea. The right of the third party to claim the benefit of an exemption clause can also be seen in road carriage cases97 and regarding negligent design in an engineering project.98

2.2.2 Trust

When two parties enter into a contract and one party promises the other that the promisor will do something for a third party, for example, pay money, the courts have occasionally treated the promisee as a trustee of the rights of the third party beneficiary. If the promisor fails to carry out the promise, the trustee and the beneficiary are allowed to join together as co-claimants to sue the promisor for breaking the promise. To quote Lord Haldane in Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd 99 “such a right [jus quaesitum tertio] may be conferred by way of property, as for example, by way of trust”.

A trust is commonly applied in England, Australia and Malaysia as a means to confer a benefit promised in a contract to a third party. In England, for example, in Gregory and Parker v Williams,100 Parker was a debtor with two creditors, Gregory and Williams. Parker entered into a contract with Williams assigning all of Parker’s property to Williams, in return for Williams’ promise to pay Gregory the money which Parker owed Gregory. Williams did not honour his promise. Under the doctrine of privity, Gregory was a third party who could not bring an action against Williams at common law. However, in this case Gregory could join with Parker and sue Williams in equity. Parker, the promisee, was regarded as a trustee of the contractual rights of Gregory, the

97 See Life Savers (Australasia) Pty Ltd v Frigmobile Pty Ltd [1983] 1 NSWLR 431; Celthene Pty Ltd v WKJ Hauliers Pty Ltd [1981] 1 NSWLR 606. 98 Noosa Shire Council v Farr [2001] QSC 60. 99 [1915] AC 847, 853. 100 (1817) 3 Mer 582.

41 beneficiary of the rights.101 In Re Gordon,102 a question arose as to whether an officer’s widow was entitled to retain a lump sum payable on his death from a fund of the Society for the Benefit of Widows of the Royal Regiment of Artillery and it was held on construction of the Society’s rules that they constituted a trust in the widow’s favour.

It has been held in Australia that in order to create a trust, the third party must show that the promisee intended to create a trust. In Trident General Insurance Co Ltd v McNiece Bros Pty Ltd,103 there was a contract of insurance between Blue Circle, a construction company, and Trident. The insurance policy defined “the assured” as “Blue Circle, its subsidiaries and all contractors and sub-contractors.’’ McNiece was a principal contractor for Blue Circle and relied on the insurance policy for indemnity when he was sued by a crane driver for negligence. This claim was denied by Trident on the ground that McNiece was not a party to the insurance contract. However, the Court allowed McNiece’s claim partly because Blue Circle held part of the contractual rights on trust for McNiece.

Whether a trust is created will usually depend upon the intention of the parties as gleaned from the agreement. In Eslea Holdings Ltd v Butts,104 the New South Wales Court of Appeal held that in commercial cases, the element of commercial necessity may be taken into account for the purpose of inferring intention to create a trust. This case involved a guarantee of reinsurer’s liability issued by the appellant company which

101 See also Les Affreteurs reunis SA v Walford (London) Ltd [1919] AC 801, House of Lords. The contract, a charterparty, was between the owners and charterers of a ship. One of the terms of the contract stated that the owners would pay the brokers (Walford) of the charterparty a commission. This was not paid. Walford sued the owner. Under the common rule of privity, he could not succeed as he was a third party. However, the House of Lords said that the charterer could be regarded as a trustee of Walford's right to receive a commission. The court allowed Walford's action against the owner to proceed as if the charterer had been joined as a co- claimant. 102 [1940] Ch 851. 103 (1988) 165 CLR 107. 104 (1986) 6 NSWLR 175. See also Goodwin v Goodwin (1916) 16 SR (NSW) 503 where it was held that no trust existed in respect of the maintenance or education of children; Cohen v Cohen (1929) 42 CLR 91 where it was held that a trust was inferred even though there was no intention to create a trust. The same result can be seen in later cases such as Thwaites v Ryan [1984] VR 65; Green v Green (1989) 17 NSWLR 343. In Ryder v Taylor (1936) 36 SR (NSW) 331, it was held that there was no intention to create a trust because the parties wanted to retain the right to vary the terms of obligation without consulting the beneficiary.

42 was addressed to one company, Fenchurch Brokers. The purpose of the guarantee was to provide goodwill to Southlands Insurance Ltd, a company incorporated in London by the appellant. The question to be answered was whether the guarantee extended to the clients (the respondents) of two other related companies, Fenchurch International and Fenchurch Reinsurance Brokers Ltd. It was held that the guarantee was not limited to covering the clients of Fenchurch Brokers only. The appellant was estopped from denying that the benefit of the guarantee should be available to the clients of any other member of the Fenchurch group of companies. In arriving at that decision, the Court of Appeal concurred with the trial court that Fenchurch Brokers held the guarantee upon trust for its principal (Fenchurch Group) and also other members of Fenchurch Group.

In Malaysia, the courts often discuss the availability of a trust as an exception to the doctrine of privity. For instance, Mohamad Azmi J in Malaysian Australian Finance Co Ltd v The Law Union & Rock Insurance Co Ltd105 declared that by relying on the Indian Contract Act which is pari passu with the Malaysian Contracts Act 1950, even if the applicant is a stranger to the contract of insurance, there are ways to enable a stranger in these circumstances to enforce the contract of insurance and one of them is trust.

2.2.3 Assignment

Assignment is an important means of avoiding the effects of the doctrine of privity and the assignment of contractual rights is common in business transactions. In assignment, a party to a contract (the assignor) is able to transfer the benefit he or she is to receive under that contract to another person (the assignee). The assignee can enforce performance even though he or she is not a party to the original contract. For example, where a contract is entered into between A and B, and B assigns the benefit of the contract to C, C can enforce the contract against A. Assignment is governed by judge made and statutory rules.

For example, in Darlington Borough Council v Wiltshire Northern Ltd,106 Darlington wanted to build a recreation centre on land which it owned. Darlington employed Morgan Grenfell (MG) to organise this task. MG entered into a contract with the

105 [1972] 2 MLJ 10. See also Bank Bumiputra Malaysia Bhd v Mohamed Salleh [2000] 2 MLJ 412. 106 [1995] 3 All ER 895, Court of Appeal.

43 building contractor, Wiltshire. A separate agreement was entered into between MG and Wiltshire whereby MG assigned to Darlington all of the rights it had against Wiltshire. When Darlington found serious defects in the building works and brought an action against Wiltshire, it was recognised that Darlington, as the assignee, had the right to sue Wiltshire. The only prerequisite for a third party beneficiary’s right to sue was ensuring that a legal assignment had been created.

In most Australian jurisdictions, the requirement for a legal (as opposed to equitable) assignment of a chose in action is prescribed by statute.107

2.2.4 Estoppel

The concept of estoppel may assist where a third party has relied on an assumption induced by another that a benefit would be conferred upon him or her. To rely on estoppel, the third party must prove that the promisor has engaged in unconscionable conduct by inducing the third party to believe that a benefit would be conferred upon the third party. Estoppel will prevent the promisor from denying the promise. As such, even though the third party is not privy to the contract, the third party can still enforce the benefit against the promisor.

Traditionally, the doctrine of promissory estoppel was intended to be relied upon only as a defence; it could be used as a shield but not as a sword. 108 However, recent developments in Australia indicate a departure from the traditional view that promissory estoppel can only be used as a shield and not as a sword. In Waltons Stores (Interstate) Ltd v Maher,109 Waltons negotiated with Maher to lease land owned by Maher. Waltons proposed the demolition of an existing building and construction of a replacement building. Waltons’ solicitor indicated that he had received verbal instructions to accept amendments proposed by Maher and followed up with a letter to Maher indicating that he believed approval would be forthcoming and they would be notified if any

107 Property Law Act 1974 (Qld) s 199; Conveyancing Act 1919 (NSW) s 12; Property Law Act 1958 (Vic) s 134; Law of Property Act 1958 (SA) s 15; Property Law Act 1969 (WA) s 20; Conveyancing and Law of Property Act 1884 (Tas) s 86. 108 See Hughes v Metropolitan Railway Co [1877] 2 App Cas 439; Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130. 109 (1988) 164 CLR 387.

44 amendments were not accepted. Maher was not notified of any objections and proceeded with the demolition and partial construction of a new building. During this time, they sent a new copy of the amended proposed lease to Waltons, which was returned at a later date indicating that Waltons no longer intended to enter into the leasing arrangement. Maher sued, relying on the doctrine of promissory estoppel, for a declaration that a binding contract existed and for specific performance or damages in the alternative. The High Court of Australia held that Waltons was estopped from denying the existence of a binding agreement for a six year lease of land owned by Maher, because Maher’s mistaken belief that there was a binding agreement between them had been effectively caused by Waltons’ conduct. According to Brennan J, the doctrine of estoppel can be relied on to create a cause of action if:

…the promisor induces the promisee to assume or expect that the promise is intended to affect their legal positions and he knows or intends that the promisee will act or abstain from in reliance on the promise, and when the promisee does so act or abstain from action and the promisee would suffer detriment by his action or inaction if the promisor were not to fulfill the promise.110

In Malaysia, the High Court directly applied the decision in Waltons Stores (Interstate) Limited v Maher111 in the case of Curvet Transport SA v Shapadu Trans-System Sdn Bhd.112 In this case, the first plaintiff was the owner of the vessel MV Enlivener and the second plaintiff acted as an agent for the first plaintiff. The second plaintiff bid for the Ocean Transportation contract for the project under which the defendant has been appointed as the official freight forwarder. Save for the formality of a contract being drawn between the first plaintiff and the defendant, a confirmation was made by the defendant awarding the contract to the first plaintiff. Acting on this assurance, the vessel MV Enlivener proceeded to South Korea to be ready for the loading of the first shipment. The defendant, however, awarded the contract to Gajah Navigation Sdn Bhd. The plaintiffs sued for breach of contract, which was denied by the defendant. The defendant claimed that there was no contract between them.

110 Ibid 424. 111 (1987-1988) 164 CLR 387. 112 [1994] 4 MLJ 150.

The High Court in allowing the plaintiffs’ claim concluded that based on the conduct of the defendant in accepting the plaintiffs’ revised offer on the final freight and responding, “Good, at least we can be sure that there will be no delay” when the defendant was notified that the MV Enlivener had been dispatched to South Korea, the defendant was estopped and precluded from denying that there was a valid and concluded binding contract between the parties.113

It appears that the concept of estoppel as a means of abrogating the effect of the doctrine of privity has gained popularity in Australia. This has been followed by Malaysian courts which now allow third parties to use estoppel to sue parties to a contract.

2.2.5 Restitution/Unjust Enrichment

Unlike England and Malaysia, the law of restitution and the principle of unjust enrichment has been recognised and widely applied in Australia. It was said that Australia at one time led the way in its development and application of a principled law of restitution.114 Cases such as Pavey & Matthews Property v Paul,115 David Securities Property Ltd v Commonwealth Bank of Australia116 and Commissioner of State v Royal Insurance Australia Ltd117 have shown that Australia is a step ahead in its application of the law of restitution.

When a promisor receives consideration for a promise, but later refuses to fulfill the promise on the ground that a third party was not a party to the contract, this may give rise to a cause of action by the third party for unjust enrichment. Unjust enrichment will allow a person to recover a benefit given to another party in circumstances where it is now unjust that the party retains the benefit.118 This may allow a third party to recover a benefit obtained at the expense of the third party from the promisor. In brief, the requirements that need to be satisfied for a claim to succeed are as follows:

113 See also Boustead Trading Sdn Bhd v Arab-Malaysian Merchant Bank Bhd [1995] 3 MLJ 331 where the Federal Court decided that mere silence can also constitute active encouragement and give rise to an estoppel. However, the case was not a third party beneficiary case. 114 Andrew Burrows, The Australian Law of Restitution: Has the High Court Lost Its Way?, Draft Paper (2008). 115 (1987) 162 CLR 221. 116 (1992) 175 CLR 353. 117 (1994) 182 CLR 51. 118 Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221.

i) The defendant has been enriched by the receipt of a benefit. ii) The benefit has been obtained at the plaintiff’s expense. iii) It is unjust to allow the defendant to retain the benefit.

The concept of unjust enrichment as applied to a third party beneficiary gained popularity following Trident General Insurance Co Ltd v McNiece Bros Pty Ltd.119 Unjust enrichment was used by Gaudron J to justify a claim by McNiece for indemnification by Trident under the insurance policy. In her Honour’s view, where consideration is wholly executed in favour of the promisor under a contract for the benefit of a third party, adhering to the rule that the third party may not claim against the promisor had the potential to unjustly enrich the promisor. This led to the suggestion that the promisor is unjustly enriched to the extent the promise is unfulfilled. In the word of Gaudron J, “it should now be recognised that a promisor who has accepted agreed consideration for a promise to benefit a third party is unjustly enriched at the expense of the third party…”120

2.3 THE RATIONALE FOR, JUSTIFICATIONS FOR AND DEFENCE OF THE DOCTRINE OF PRIVITY

As previously mentioned, there are two aspects of the doctrine of privity: no one except a party to a contract can acquire rights under it and no one except a party to a contract can be subjected to liabilities under it. The reason for the second aspect is clear and easy to justify: a person should not as a general rule have contractual obligations imposed on him or her without his or her consent. The reason for the first aspect however is harder to justify.121 This, thesis concentrates on the rationale for the doctrine of privity in relation to the first aspect that no third party can acquire and enforce the benefits conferred upon them by the parties to the contract.

Numerous justifications have been advanced for this limb of the doctrine of privity.

119 (1988) 165 CLR 107. 120 Ibid 176. 121 Sir Guenter Treitel, The Law of Contract (Tenth ed,1999), 545.

Treitel claims that the denial of third party rights under a contract may be justified on four bases:

i) A contract is a private affair which should only affect the parties to it. ii) It would be unjust to allow a person to sue on a contract on which he or she could not be sued. iii) If third parties could enforce contracts made for their benefit, the rights of contracting parties to rescind or vary such contracts would be unduly hampered. iv) The third party is often merely a donee and a “system of law which does not give a gratuitous promisee a right to enforce the promise is not likely to give this right to a gratuitous beneficiary who is not even a promisor”.122

Collins explains three principal justifications for the doctrine of privity:123

a) Autonomy

The concept of autonomy provides that contractual rights and duties remain personal to those who create them, that is, the parties to the contract. Under the principles governing the ascription of contractual responsibility, only consent to an agreement engenders contractual responsibility. Without consent to the agreement, the third party should not have rights and obligations under the contract.

Additionally, Stephen A. Smith argues that contractual obligations are voluntary obligations. Voluntary obligations are obligations undertaken by and extending only to a

122 Sir Guenter Treitel, The Law of Contract (Tenth ed,1999), 588. These suggestions however, were rebutted by Sir Anthony Mason who stated that unilateral contracts are enforceable by a party who cannot be sued. On the second point, there are various ways in which the impact upon the parties’ right to rescind or vary the contract can be protected and lastly, the suggestions by Treitel ignores the fact that there is consideration for a promise to a third party which is unenforceable by the third party only because that party is a stranger to the contract. See Sir Anthony Mason, 'Privity - A Rule in Search of Decent Burial?' in Peter Kincaid (ed), Privity: private justice or public regulation (Ashgate Publishing Company, 2001), 92. See also Robert Flannigan, 'Privity - The End of an Era (Error)' (1987) 103(Oct) Law Quarterly Review 564. 123 Hugh Collins, The Law of Contract (Fourth ed, 2003), 314-318.

48 particular person: in the case of a promise, a promisee. Third parties are not promisees and hence should not be able to enforce promises made to others.124

b) Mutuality of rights

The doctrine of privity is also justified by the argument that since the third party provides nothing in return for the promised benefit and cannot be liable for breach of contracts; it is inequitable to give the third party the right to sue upon the contract.125

c) Indeterminate range of liability

A danger of introducing third party rights is the possibility of exposing the promisor “to an indeterminate amount for an indeterminate time to an indeterminate class.”126 If such broad liability to a third party could be created by contracts, then this would certainly discourage entry into transactions, with the consequence of serious harm to the whole market system for the creation of wealth. This was made clear in the American case, Martinez v Socoma Co Inc127 where the California Supreme Court denied the plaintiff’s claim on the ground that the plaintiff was simply an incidental beneficiary of the contract. The plaintiff was a member of the class intended to benefit from legislative aid who alleged that the company had failed to comply with its contractual obligation to hire and train the required number of local residents. The court was concerned about extending rights to such a wide class of beneficiaries, that is, all the poor and unemployed persons in the Special Impact Areas, and this fear provided the reason for preserving a modified privity rule.

124 Stephen A. Smith, 'Contracts for the benefit of third parties: In defence of the third party rule' (1997) 17 Oxford Journal of Legal Studies 643. 125 In discussing the role of mutuality of rights, it was argued that the real issue is whether the promisor should answer to the third party. It must be remembered that the promisor has agreed to benefit the third party at the time of the formation of contract. Thus it cannot be said that the third party is a total stranger to the promisor. Having received performance, how could the promisor ignore his or her own promise? Additionally, the law will enforce unilateral contracts which may result in a stranger suing to enforce the contract. See G D Pearson, 'Privity of Contract: Proposed Reform in New Zealand' (1981-1984) 5 Otago L Rev 316; Robert Flannigan, 'Privity - The End of an Era (Error)' (1987) 103 (Oct) Law Quarterly Review 564. 126 Cardozo CJ in Ultramares Corpn v Touche (1931) 174 NE 441, 444. 127 11 Cal 3d 394, 521 P 2d 841 (1974).

This justification is premised on the fundamental principle that the law of contract must limit liability and English law had established this line firmly at the point where a person was a party to the contract.

Peter Kincaid128 questions the rationale of giving a third party a right under the contract as the promise creates a right only in the promisee, who should be the only one able to enforce it. The third party has paid nothing for the promise so he or she has no strong claim to the benefit of the promise. It is not enough that there is a moral reason to make the defendant pay. He also argues that any attempt to allow third parties to enforce the terms of contracts is wholly abhorrent to the underlying justification of the doctrine of privity, which is to uphold the bargain entered into between the original parties to the contract. A third party is, ex hypothesi, not a participant as such in the original bargain and hence any conferment of a benefit on a third party would be a derogation from the principle of individual freedom. Any justification for benefitting third parties could only be justified by the principle of societal efficiency.129

In exemption clause cases, Tetley130 criticises the need to allow a third party (in this case, stevedores) to seek the benefit of exclusion clauses. However, he does not rule out such a need if the third party is carrying out at least part of the duties of the parties. He bases his opinion on the fact that the carrier undertakes no responsibility after discharge, which is when the stevedore would usually seek to claim the benefit.

128 Peter Kincaid, 'Privity and Private Justice in Contract. (Australia)' (1997) 12(n1) Journal of Contract Law 47. See also Peter Kincaid, 'Privity reform in England' (2000) 116 Law Quarterly Review 43; Peter Kincaid, 'Third parties: rationalising a right to sue. (Great Britain)' (1989) 48(n2) Cambridge Law Journal 243; Peter Kincaid, 'The UK Law Commission's privity proposals and contract theory' (1994) 8(n1) Journal of Contract Law 51. 129 According to Andrew Phang in Andrew Phang, 'On Justification and Method in Law Reform – The Contracts (Rights of Third Parties) Act 1999' (2002) 18 Journal of Contract Law 32, the tension between individual freedom and societal efficiency is not as inevitable or as intractable as it would appear. Individual freedom is a necessary prerequisite to creativity and entrepreneurship that is essential to the promotion of societal welfare. Andrew Phang thus argues that the real issue is not so much ascertaining which side of the spectrum we support, but rather, ascertaining how to balance individual rights on the one hand and societal welfare and efficiency on the other. 130 William Tetley, ‘The Himalaya Clause –Revisited’ (2003) 9 Journal of International Maritime Law 40-64.

The doctrine of privity also receives support from Waddams131 who states that to reform the rule in relation to the rights of third parties would create difficulty for incidental third party beneficiaries; persons who have benefitted by performance of a contract, but on whom the contracting parties did not intend to confer rights. The second difficulty is that allowing third parties to enforce benefits would interfere with the rights of the parties to the contract to rescind or modify the contract.

It appears that the justifications for and defence of the doctrine of privity are centered on the doctrinal aspect of the doctrine of privity and its relationship to the law of contract. The defenders of the doctrine of privity also base their defence on the concept of autonomy of the parties where a contract is a private arrangement between the parties to the contract only. Fears regarding the rights of the parties to the contract to vary or rescind the contract as well as the potentially wide range of liabilities resulting from the creation of third party rights also contribute to the defence of the doctrine of privity.

It is submitted, with all due respect, that most of the justifications analysed above are insufficient. It is argued that the bargain theory prevents a third party who provides no consideration and is not the contracting party from suing under the contract. According to the bargain theory, it is only bargains which are justifiably enforced by the law. Bargains are agreements between parties in which the promise of each is purchased by the other. For a bargain, the parties must exchange or promise to exchange value called consideration. Only a person who provides consideration has the right to enforce the contract.

However, it can be argued that the need for consideration and the doctrine of privity are not connected with each other. The function of consideration in this context is to notify the parties that they are undertaking legal rather than merely voluntary obligations. It is a function which focuses on the promisor being under a legal obligation to fulfill the promise made. Whether the party providing consideration is a party to the contract is irrelevant to whether consideration is provided. There is a conflation of the requirement

131 Stephen Waddams, ‘Modern Notions of Commercial Reality and Justice’: Justice Iacobucci and Contract Law' (2007) 57 University of Toronto Law Journal 331.

51 for consideration and the doctrine of privity in some judicial decisions masking the true position that whether the promisor is a party to the contract is a separate requirement to the requirement to provide consideration.132

It also appears that allowing third parties to sue would conform to the will theory of contract which prioritises the will and intention of the contracting parties.133 The will theory does not require the doctrine of privity. The common law of contract can survive even if the bargain theory is compromised.134 Furthermore, by allowing a third party to sue, the contractual relationship ceases to be simply a private affair between the parties and it becomes a larger relationship that includes others (third parties) who are affected by the relationship created by the parties to the contract. This change is consistent with the will theory.135 Under the will theory, every citizen has an interest in the enforcement in the sense that everyone will eventually become involved in the contracting process. The integrity of the contracting process must be upheld. It follows therefore that every citizen should be permitted to seek enforcement of any particular incomplete agreement. Accordingly, it could be said that there is a public interest in seeing that a promise to a third party is enforceable by the third party. As mentioned by Robert Flannigan,136 “there is a public interest, implicit in will theory, in seeing to the enforcement of individual agreements in order to maintain the integrity of the contracting process”.

In relation to the argument that allowing a third party to sue would jeopardise the rights of the parties to the contract to vary or rescind the contract, there are various ways in which such rights can be protected. One of them is by defining the point where the third party no longer has the right to enforce the promise.

132 Robert Flannigan, 'Privity - The End of an Era (Error)' (1987) 103(Oct) Law Quarterly Review 564, 578. 133 Under the will theory, an agreement will be enforced for the sole reason that to do so would gives effect to the demonstrated intention of the parties. 134 Sir Anthony Mason, 'Privity - A Rule in Search of Decent Burial?' in Peter Kincaid (ed), Privity: private justice or public regulation ( 2001), 88. 135 Ibid 100. Under the will theory, a contract is binding because the will or intention of the parties creates the liability. It is their decision, and their free choice, which makes the contract binding, and determines its interpretation, and its result in the event of breach. See P.S. Atiyah, ‘Contracts, Promises and the Law of Obligations’ (1978) 94 Law Quarterly Review 193, 195. 136 Robert Flannigan, 'Privity - The End of an Era (Error)' (1987) 103(Oct) Law Quarterly Review 564, 576.

Similarly, empowering the third party to sue would not result in liability for “an indeterminate time to an indeterminate class.” Not all third parties would have the right to sue. Only the ones chosen by the parties to a contract will have such a right. The contracting parties can always specify in the terms of the contract who is able to benefit from their promises and who is not.

It is submitted that for the doctrine of privity to be retained in its current form, the justifications must be based of requirements of fairness and justice. Evidence is required that the doctrine of privity does not cause hardship and injustice to third parties intended by the parties to the contract to be entitled to the benefit of the contract. In the author’s view none of the defenders of the doctrine provide such evidence.

2.4 CRITICISMS OF THE DOCTRINE OF PRIVITY

The doctrine of privity has been subjected to extensive criticism by the judiciary, law commission bodies and academics alike. Most of the criticism has been directed at the first limb of the rule that only parties to the contract can sue on the contract preventing a third party from obtaining a right or benefit under a contract.

In England, there are judicial condemnations of the doctrine of privity and the third party rule. Lord Denning, being the most outspoken, on several occasions tried unsuccessfully to abolish the doctrine and to replace it with jus quaesitum tertio. In cases such as Smith and Snipes Hall Farm Ltd v River Douglas Catchment Board,137 Drive Yourself Hire Co (London) Ltd v Strutt,138 Adler v Dickson139 and in his Court of Appeal judgment in Beswick v Beswick,140 Lord Denning questioned the accuracy and necessity of the fundamental principle that no one who is not a party to a contract can sue or be sued on it or take advantage of the stipulations or conditions that it contains. He was quick to note that the principle is far from ancient and that there are judicial ways to avoid its application when desired.

137 [1949] 2 KB 500. 138 [1954] 1 QB 250. 139 [1955] 1 QB 158. 140 [1966] Ch 538.

Lord Denning’s criticism received support from his fellow Lords who expressed similar discontent and called for a reconsideration of the doctrine prohibiting a third party from enforcing contractual provisions made for his or her benefit. For example, in Darlington Borough Council v Wiltshier Northern Ltd,141 Steyn LJ said the following:

The autonomy of the will of the parties should be respected. The law of contract should give effect to the reasonable expectations of contracting parties. Principle certainly requires that a burden should not be imposed on a third party without his consent. But there is no doctrinal, logical or policy reason why the law should deny the effectiveness to a contract for the benefit of a third party where that is the expressed intention of the parties. Moreover, often the parties, and particularly third parties, organize their affairs on the faith of the contract. They rely on the contract. It is therefore unjust to deny effectiveness to such a contract.142

Even Lord Reid in Beswick v Beswick143 acknowledged the harshness of the privity rule even though according to his Lordship, it was for the Parliament to make or amend the law, not the judges. His Lordship further observed that if there was a long period of delay in passing legislation, the House of Lords might have to deal with the matter. Twelve years later, Lord Scarman in Woodar Investment Development Ltd v Wimpey Construction UK Ltd144 reminded the House of Lords that it might be necessary to review all the cases which “stand guard over this unjust rule.” In Fortser v Silvermere Golf and Equestrian Centre Ltd,145 Dillon J described the rule as “a blot on our law and thoroughly unjust.”

In Australia, the injustice that results from the application of the doctrine of privity was also pointed out by Mason CJ in Trident Insurance Co Ltd v McNiece Bros Pty Ltd146 when his Honour stated the following:

In the ultimate analysis the limited question we have to decide is whether the old rules apply to a policy of insurance. The injustice which would flow from such a result arises not only from its failure to give effect to the expressed intention of the person who takes out the insurance but also from the common intention of the parties and the

141 [1995] 1 WLR 68. 142 Ibid 76. See also Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107, 168 where Toohey J stated that the privity rule is based on shaky foundations and, in its widest form, lacks support in both logic and jurisprudence. 143 [1967] 2 All ER 1197, 1201, [1968] AC 58, 72. 144 [1980] 1 All ER 571, 591. 145 (1981) 125 Sol Jo 397. 146 (1988) 165 CLR 107.

circumstances that others, aware of the existence of the policy, will order their affairs accordingly…147

Additionally, Windeyer J reflected the sentiments of Lord Scarman when Windeyer J referred in Olsson v Dyson 148 to the possibility “that someday this Court too, expounding the common law as Australia has inherited it, will see the way clear” to reform the doctrine of privity.149 In the case of insurance contracts, McHugh JA in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd 150 ruled that the two common law rules that only a party to a contract can sue on it and consideration must move from the promisee create injustice in many situations. According to his Honour, the law should allow an intended beneficiary to sue on a policy when commercial convenience and practice demand it.

In addition to judicial criticism, the case against the doctrine of privity has been made by law commission bodies. The English Law Commission’s main justification for the recommendation of a departure from the third party rule was the following:

If the theoretical justification for the enforcement of contracts is seen as the realization of the promises or the will or the bargain of the contracting parties, the failure of the law to afford a remedy to the third party where the contracting parties intended that it should have one frustrates their intentions, and undermines the general justifying theory of contract.151

The other justification for the departure from the third party rule as given by the Law Commission was “injustice to the third party”, in conformity with Lord Steyn’s remarks. The concept of injustice to the third party arises from the ‘reasonable expectation’ generated in the third party, that is, the expectation of having the right to enforce the third party promise. The injustice is increased when the third party acts in reliance on the promise. 152 It is unfair that the third party is unable to enforce the

147 Ibid [32] (Mason CJ). 148 (1969) 120 CLR 365. 149 Ibid 393, (Windeyer J). 150 (1987) 8 NSWLR 270. 151 Law Commission, 'Privity of Contract: Contracts for the Benefit of Third Parties' (No. 242, 1996) [31]. 152 Ibid [3.2] Other reasons given by Law Commissions have been the development of non- comprehensive exceptions, complexity, artificiality and uncertainty, widespread criticism through the common law world and the legal systems of most member states of the European Union allow third parties to enforce contracts.

55 benefit, particularly if the third party has altered its position in reliance on the availability of the benefit.

Further, the Law Commission identified two areas where the doctrine of privity caused practical difficulties which should be avoided. The first was construction contracts and the second was insurance contracts. In construction contracts, the problems that may arise as a consequence of the doctrine of privity are the use of collateral contracts or collateral warranties and the management of payment obligations. At present, when a main contractor fails to pay a sub-contractor for work performed, the sub-contractor will have no right to sue the employer/client directly for payment even though the employer will be entitled to take the benefit of the sub-contractor’s work. It may be also that the participants in a construction project might wish to provide for payment directly by the employer to the sub-contractor for work performed under a subcontract. Even if this intention was expressed in the contract, the doctrine of privity will prevent the sub- contractor from enforcing this express term.153

In insurance contracts, the Law Commission explained that there are still a number of insurance contracts where legislation has not intervened to give third party beneficiaries a right to enforce the contract against the insurer, such as a life insurance policy taken out for the benefit of dependants other than spouses and children. Another example is liability insurance taken out by a company on behalf of its employees. An employer may take out an insurance policy on behalf of its employees to cover the employees in case of a workplace accident. The employees have no right to claim the insurance money directly from the insurance company as they are not party to the insurance contract.154

Commentators against reform of the privity doctrine argue that the third party could always use existing common law exceptions in order to bypass the rule. For instance, in

153 Ibid [3.21]. See also John Swan, 'The Rights of Third Parties to Contracts: A Suggested Basis for Recognition' in Peter Kincaid (ed), Privity: Private justice or public regulation (2001), 233. 154 Law Commission, 'Privity of Contract: Contracts for the Benefit of Third Parties' (No. 242, 1996), [ 3.24].

Darlington Borough Council v Wiltshier Northern Ltd155 Mr Furst QC for the council, (the third party) made it clear that he would not directly challenge the doctrine of privity but was content to try to bring the case within an exception to the doctrine of privity which was described by Lord Diplock in Swain v Law Society 156 as “juristic subterfuges…to mitigate the effect of the lacuna resulting from the non-recognition of a jus quaesitium tertio…”

However, according to McCamus,157 the common law exceptions have limitations and sometimes prove to be ineffective in protecting third parties’ rights. For example, the application of the agency principle is based on the genuine intention of the contracting parties to create an agency relationship. Yet, such an intention may be difficult to establish. For instance, in New Zealand Shipping Co Ltd v AM Satterthwaite & Co Ltd158 where the rights of a stevedore (third party) to enforce an exclusion clause were in issue, Viscount Dilhorne dissented on the ground that there was no intention, either express or implied, in the contract to make the stevedore an agent of the carrier. Similarly, in Dunlop Pneumatic Tyre Co v Selfridge & Co159 it was held that there was no separate contract conferring rights on the wholesaler as an agent of the manufacturer. These cases indicate that the exception of agency is not always successful in overcoming the privity rule.

As with agency, reliance on the existence of a trust is often unsuccessful, as it depends on the establishment of the genuine intention of the contracting parties to create a trust. According to Sir Anthony Mason, the uncertainty surrounding the concept of trust arises from the difficulty in ascertaining whether there is an intention to create a trust from the language employed, the nature of the transaction and the circumstances. There are many

155 [1995] 1 WLR 68. 156 [1982] 2 All ER 827, 832. 157 John D. McCamus, 'Loosening the privity fetters: should common law Canada recognise contracts for the benefit of third parties?' (2001) 35(2) Canadian Business Law Journal 173. 158 [1975] AC 154 (PC). 159 [1915] AC 847 (HL).

57 cases of contracts involving a promise for the benefit of a third party in which no trust will be brought into existence.160

Uncertainty and unpredictability may arise as there are no specific means to establish the intention to create a trust. The lack of agreement is clearly illustrated in the approaches adopted by England, Australia and Malaysia. The Malaysian judiciary generally applies the more lenient approach established by English courts in the 18th and the 19th centuries. It is sufficient that the intention to benefit the third party is shown in order to create a trust.161 In contrast, cases from the 21st century162 in England indicate that English judges started to deviate from the lenient approach to a stricter one, that is, a clear intention to create a trust must be shown. Intention to benefit the third party is no longer sufficient. In Australia, as in Malaysia, an intention to benefit a third party is sufficient. There is no need for a clear intention to create a trust by the parties to the contract.

However, in Australia, the courts not only look at the intention to benefit a third party, but also commercial necessity to support the creation of a trust. In Eslea Holdings Ltd v Butts,163 Samuels JA in supporting the use of commercial necessity gave evidence that in the instant case, both the appellant and Fenchurch Brokers were aware that Fenchurch International and Fenchurch Reinsurance were introducing business to Southlands solely because of the appellant’s guarantee. It was evident also that both of them intended that Fenchurch Brokers should hold the benefit of the guarantee for all those principals who might offer business through any member of the Fenchurch Group.

160 Sir Anthony Mason, 'Privity - A Rule in Search of Decent Burial?' in Peter Kincaid (ed), Privity: private justice or public regulation (2001), 97. See also Al Corbin, 'Contracts for the Benefit of Third Persons' (1930) 46 Law Quarterly Review 12, 17. 161 See, eg, Bank Bumiputra Malaysia Bhd v Mohamed Salleh [2000] 2 MLJ 412; Lim Siew Hong v Contraves Advances Devices Sdn Bhd [2006] MLJU 0029. 162 See, eg, Re Clay’s Policy of Assurance [1937] 2 All ER 548; Re Sinclair’s Life Policy [1938] Ch 799; Re Schebsman [1944] Ch 83; Green v Russell [1959] 1 QB 226. 163 (1986) 6 NSWLR 175. Relying on commercial necessity to infer a trust gained support from Mason CJ, Wilson J and Deane J in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107. In their Lordships words “In divining intention from the language which the parties have employed the courts may look to the nature of the transaction and the circumstances, including commercial necessity, in order to infer or impute intention,” 121.

The question of intention was further addressed in Bahr v Nicolay (No 2).164 In that case, the appellants sold land to the first respondents with a lease for a period of three years. The contract of sale gave the appellants a right of re-purchase at a specified price once the three years expired. However, during that time, the land was sold to the second respondent with the second respondent acknowledging the right of the appellants to buy back the said land. Despite the acknowledgment, after three years, the second respondent refused to sell the said land to the appellants.

The High Court held that the appellants had intended a trust that obliged the second respondent as trustee to hold the land subject to the appellants’ right to re-purchase the land by the original contract of sale. Chief Justice Mason and Dawson J stated the following:

…if the inference to be drawn is that the parties intended to create or protect an interest in a third party and the trust relationship is the appropriate means of creating or protecting that interest or of giving effect to that intention, then there is no reason why in a given case an intention to create trust should not be inferred.165 Therefore, the decision in Bahr v Nicolay (No 2)166 indicates that intention to create a trust is not necessary. A two-stage analysis is required in order to establish a trust. It is sufficient if the parties to the contract intend to benefit the third party and a trust is the appropriate vehicle to deliver the benefit.

These developments indicate the uncertainties and irregularities in deploying a trust as a device to abrogate the doctrine of privity. Lord Lindley in Keighley, Maxted & Co v Durant167 warned that “care must be taken not to treat a fiction as a fact” and as noted by Gordon Samuel, “once the fiction is treated as a fact, analysis of the concrete factual and legal consequences expose the fallacy of the fiction. Attempts to use a fiction as a mitigating device often produce revulsion at the clumsiness and basic implausibility of the means.”168

164 (1988) 164 CLR 604. 165 Ibid 618. Nevertheless, three other judges disagreed. Justices Wilson, Toohey and Brennan were of the opinion that a constructive trust should be inferred, not an express trust. 166 (1988) 164 CLR 604. 167 [1901] AC 240, 262. 168 Gordon Samuels, 'Contracts for the benefit of third parties' (1967-1968) 8 U W Austl L Rev 378, 391.

The situation is more complex in the case of assignment. The possibility of assignment does not provide a conclusive solution to the problems posed by the doctrine of privity. Not all agreements are capable of being assigned, for instance, personal contracts or contracts for services. Employment contracts, publishing contracts and insurance contracts are examples of personal contracts. Contracts of sale or credit are also not capable of being assigned even though these types of contracts are not necessarily personal. The distinction between a personal contract and an assignable contract remains unclear.169 The use of assignment as a device to avoid the privity doctrine continues to be ineffective because the contract itself may expressly forbid any assignment of a contractual benefit to a third party.170

It has been stated that the enormous growth in the use of collateral warranties in the construction industry is a waste of money, effort and time. 171 The developer, sub- contractor, architect and financier must provide undertakings separately to each other as well as to the owner, any subsequent owner and any other occupiers of the building for defective building work. It would be more efficient if the same obligations arose from a single provision in the contract.172 Additionally, due to the doctrine of privity and non- availability of an action by the third party against the promisor, multilateral contracts may need to be made between the promisor and the promisee and between the promisor and the third party. The second contract between the promisor and the third party will incur additional costs for the same outcome.173

In relation to insurance contracts, the Australian Law Reform Commission concluded that the injustice caused to third parties could not be resolved by the application of the principles of trust and agency. The Commission recommended that persons falling within the class of persons expressed by a policy to be entitled to indemnity should be

169 Robert Merkin, 'Privity of Contract The Impact of the Contracts (Rights of Third Parties) Act 1999' in Robert Merkin (ed), (First ed, 2000). 170 Ibid. 171 Ireland Law Reform Commission, Privity of Contract and Third Party Rights, Report No 88 (2008). 172 Hugh Beale, 'Privity of Contract: Judicial and Legislative Reform. (United Kingdom)(Special Issue: Essays for Professor Brain Coote)' (1995) 9(n1) Journal of Contract Law 103. 173 Robert Flanningan, ‘Privity- The End of an Era (Error)’ (1987), 103 Law Quarterly Review 564, 589.

60 able to sue on the policy. 174 Similarly, the limitation on the use of common law exceptions was also recognised by Mason CJ and Wilson J where their Honours stated “We doubt that the doctrine of estoppel provides an adequate protection of the legitimate expectations of such persons and, even if it does, the rights of persons under a policy of insurance should not be made to depend on the vagaries of such intricate doctrine.”175

The doctrine of privity has also caused difficulty where a third party seeks to benefit from an exclusion clause. In this regard, contracts of carriage of goods by sea under bills of lading are particularly problematic. Prima facie, the privity doctrine prevents the third party from obtaining the benefit of the exclusion clause, but there is also a desire by the judiciary to allow the third party to obtain the benefit. Changing judicial opinion was first seen in Elder, Dempster & Co Ltd v Paterson, Zochonis & Co Ltd.176 In this case, although the contract was between the shipper and the charterer, the shipowner was allowed to rely on the exclusion clause in the bill of lading based on the principle of vicarious immunity.

Later, a series of cases emerged based on different reasoning. The concept of vicarious immunity was rejected in Scruttons Ltd v Midland Silicones Ltd, 177 which was a decision based on the concept of agency. The concept of unilateral contract was adopted in New Zealand Shipping Co Ltd v A M Satterthwaite & Co Ltd,178 which allowed a stevedore to rely on an exemption clause. The idea of a contract limiting the scope of a duty of care under the law of tort was also considered by the judges in Southern Water Authority v Carey179 and Norwich City Council v Harvey.180

A contract can be drafted in a way that circumvents the privity doctrine. Furthermore, the existing exceptions such as assignment and collateral warranties make it possible to

174 Australian Law Reform Commission, Report No 20 on Insurance Contracts [122]. 175 In Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107, 123. 176 [1924] AC 522. 177 [1962] AC 446. 178 [1975] AC 154, also known as The Eurymedon. 179 [1985] 2 All ER 1077. This case involved engineering sub-contractors sued for negligence under law of tort. 180 [1989] 1 WLR 828.

61 avoid the effect of the doctrine. This has resulted in the argument that the doctrine causes little difficulties in practice because it can be avoided by altering the structure of a particular transaction or contract.181 However, Trebilcock has carried out an economic analysis of the privity doctrine and warns that

Even if parties are fully informed of the rule and its effects, structuring their contracts to circumvent the rule entails wasteful transaction costs that a different rule could eliminate… [an] efficient rule should minimise the transaction costs necessary for most parties to achieve their preferred outcomes…182

In support, Henley states that such an assertion fails to take into account three important propositions:183 i) Unless the circumstances are identical to those of a decided case, it will always be open to unfavourable reconsideration by a court. ii) The cost of restructuring a transaction solely to avoid the doctrine of privity of contract may be excessive in relation to the benefit achieved. iii) The fact that so many cases have been heard by the appeal courts reflects the fact that the effect of any legal devices to avoid the third party rule is not sufficiently clear to make such devices worthwhile.

Other than the above criticisms, there are other reasons that could justify the need to depart from the doctrine of privity. One reason is the inability of the promisee under the contract to recover substantial damages for the promisor’s failure to perform the promise in favour of the third party. The governing principle has been that a contracting party can only recover by way of damages the loss that it has suffered. In a contract whereby there is a promise to confer a benefit on the third party, failure by the promisor to honour the promise only entitles the promisee to recover nominal damages from the promisor as the promisee suffered no loss. The matter is aggravated as the promisee is under no obligation to pay the recovered damages to the third party.

181 Ireland Law Reform Commission, Privity of Contract and Third Party Rights, Report No 88 (2008). 182 Michael Trebilcock, 'The Doctrine of Privity of Contract: Judicial Activism in the Supreme Court of Canada.(Education, Administration, and Justice: Essays in Honour of Frank Iacobucci)' (2007) 57(2) University of Toronto Law Journal 269. 183 Christopher Henley, 'Insurance' in Robert Merkin (ed), Privity of Contract: The Impact of the Contracts (Rights of Third Parties) Act 1999, (2000), 213.

Moreover, the promisee may be entitled to specific performance of the contract in which event the restriction on recovery of damages will be of no consequence except that one of the grounds for granting specific performance is that damages are not adequate. In both situations, it is not the promisee who suffers at the hand of the doctrine of privity, but the third party beneficiary who is not able to claim the benefit promised from the promisor or recover the damages paid to the promisee.

Another justification for reforming the doctrine of privity is advanced by Collins184 who criticises the doctrine by saying that it can lead to unjust enrichment. This refers to a general concept where one person has unjustifiably obtained a benefit at another’s expense. Unjust enrichment will occur whenever the promisor has received consideration under the contract, but seeks to avoid the reciprocal obligation to confer a benefit on the third party. This effect can clearly be seen in the case of Beswick v Beswick185 where the nephew received valuable property in return for an unenforceable promise to benefit a third party.

In summary, the objections to the doctrine of privity are best summarised by quoting Professor Stephen Guest when he states that “[I]t is said that it serves only to defeat the legitimate expectations of the third party, that it undermines the social interest of the community in the security of bargains and it is commercially inconvenient.”186 All of these problems together with the injustice and hardship caused by the doctrine of privity must be remedied by reforming the doctrine of privity.

2.5 CONCLUSION

The doctrine of privity has been a feature of English law for more than 150 years. Despite criticisms and attempts to abrogate the doctrine of privity, the doctrine continues to be applied and incorporated in other common law countries including Malaysia.

184 Hugh Collins, The Law of Contract (Fourth ed, 2003), 324. Other than unjust enrichment, the other two criticisms advanced by Collins are intention of the parties and justifiable reliance. See 319-324. 185 [1966] Ch 538. See also the Australian case, Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107. 186 Stephen Guest, quoted in Robert Flannigan, 'Privity - The End of an Era (Error)' (1987) 103(Oct) Law Quarterly Review 564.

The criticisms of the doctrine of privity, when weighed against the rationales for the doctrine, indicate that reform is desirable. The arguments advanced in defence of the doctrine of privity are mostly premised upon the theoretical and doctrinal aspects of the doctrine of privity. It seems that the concept of autonomy of the contract whereby the contract remains personal to the parties to the contract and thus the contract could only be affected by them, dominates arguments in defence of the doctrine of privity. However, it is necessary to bear in mind that theoretical justification alone is not sufficient to preserve the doctrine of privity. To quote Sir Anthony Mason, “[p]racticality rather than theoretical coherence has been the hallmark of the development of the common law.” 187 Furthermore, as noted by Robert Flannigan, “arguments offered to justify the doctrine of privity only rarely get beyond the level of axiomatic assertion. …Argument, as it turns out, is not something to which the doctrine stands up well.”188 Evidence must be produced to justify that the doctrine of privity has not caused difficulties and injustice in commercial life. This is what the defenders of the doctrine fail to do.

In practice, the doctrine of privity has caused difficulties, hardship and injustice for third party beneficiaries. Real effects produced by the doctrine of privity are far more important in justifying the need to reform the doctrine of privity than the theory that has long supported the existence of the doctrine.

The following chapters will analyse the doctrine of privity to determine if it causes hardship and injustice to third party beneficiaries in Malaysia, the nature of this injustice and whether reform is necessary and, if so, what model of reform is suitable to be adopted in the Malaysian context.

187 Sir Anthony Mason, 'Privity - A Rule in Search of Decent Burial?' in Peter Kincaid (ed), Privity: private justice or public regulation (2001), 103. 188 Robert Flannigan, 'Privity - The End of an Era (Error)' (1987) 103(Oct) Law Quarterly Review 564.

CHAPTER THREE A CASE BASED COMPARATIVE ANALYSIS OF THE APPLICATION OF THE PRIVITY DOCTRINE

3.1 INTRODUCTION

Schmitthoff189 states that when undertaking a comparative process, certain criteria must be applied. One of them is that the issue or problem must be present in all legal systems involved in the comparison. This chapter undertakes a comparative case based analysis of the pre-reform judicial decisions in the selected jurisdictions of Australia, England and Malaysia about the application of the doctrine of privity to insurance and construction contracts. The legal principles used to abrogate the effects of the doctrine and the willingness of courts to use these tools are highlighted. The approach of the courts in the case of insurance and construction contracts is compared to the approach to abrogation of the doctrine in other types of commercial contracts. This comparison will assist in ensuring that the proposed reform (if any) benefits third parties intended to have the benefit of other commercial contracts as well.

The chapter will conclude with a summary of the similarities and differences in the impact of the doctrine of privity on third party beneficiaries in insurance and construction contracts within the different jurisdictions. These findings will be used as the basis for a decision as to whether the doctrine of privity in Malaysia is in need of reform and if so, the most viable model for reform within the Malaysian context. Any proposed reform of the doctrine of privity must, while paying particular attention to remedying the position of third party beneficiaries in insurance and construction contracts, be beneficial for all third party beneficiaries in commercial contracts.

3.2 PURPOSE OF THE ANALYSIS

The purpose of this analysis is to compare the categories of third party beneficiaries most affected by the application of the doctrine of privity in Malaysia and the pre-

189 M. Schmitthoff, ‘The Science of Comparative Law’ (1939) 7(1) The Cambridge Law Journal 94.

65 legislative reform period in Australia and England. The comparative analysis will focus on: i) Identifying the categories of third party beneficiaries disadvantaged by the application of the doctrine of privity; ii) the nature of the contracts involved; iii) the nature of the detriment suffered by third parties; and iv) the circumstances in which another legal principle was used to abrogate the doctrine.

It is important for any suggested reform model to determine if the same groups of third party beneficiaries throughout these jurisdictions are affected by the doctrine of privity and the similarities and differences in the scope of the affectation. The extent of the impact on third party beneficiaries will be measured by reference to whether: (i) the parties to the contract evinced an intention to benefit the third party; (ii) the third party was aware of the intended benefit; (iii) the third party relied upon the intended benefit and suffered loss; (iv) the third party provided consideration for the benefit whether to the parties to the contract or not; (v) the quantum of the loss suffered by the third party; and (vi) the third party was able to recover the loss from another person or by proving an exception to the doctrine.

Additionally, cases impacting on other types of commercial contracts will also be considered as this thesis aims to provide recommendations beneficial to third party beneficiaries in commercial contracts generally even though the emphasis is on insurance and construction contracts. 3.3 COMPARATIVE ANALYSIS OF JUDICIAL DECISIONS

3.3.1 Malaysia

A preliminary analysis of Malaysian judicial decisions indicated that third party beneficiaries are most affected by the doctrine of privity in the area of insurance contracts and construction contracts. This part of the thesis analyses the Malaysian cases

66 applying the doctrine of privity to general commercial contracts with a focus on the impact of the doctrine on insurance and construction contracts, including an analysis of relevant exceptions applied to abrogate the doctrine.

3.3.1.1 The extent of the problem in Malaysia

A search of the Malayan Law Journal (MLJ) and the Current Law Journal (CLJ) disclosed that there were a number of claims by third parties to the benefit of commercial contracts. The relevant decisions were outlined in Chapter 1.190 The cases concerned agreements to pay for work done, sale and purchase agreements and tenancy agreements. These three cases are essential to illustrate the extent of the problem in Malaysia as they demonstrate that the doctrine of privity has affected other types of commercial contract in addition to insurance and construction contracts.

The first application of the doctrine of privity in Malaysia to a commercial contract was to a contract where the parties to the contract had promised to pay a third party for work undertaken for the benefit of the parties to the contract. In Kepong Prospecting Ltd v Schmidt,191 Tan Chew Seah applied to the government of the State of Johore for a prospecting permit for iron ore. He was assisted by Schmidt, a consultant engineer. When a permit was granted, Tan Chew Seah in December 1953 wrote to Schmidt stating that Schmidt was to be paid 1% of the selling price of all ore that might be sold from any portion of the said land. The payment was for the work that Schmidt had done in assisting to obtain the permit and also for any work that Schmidt might do in assisting to start mining operations. On 27 July 1954, the appellant company, Kepong Prospecting Co, was incorporated with a view to taking over the benefit of Tan’s prospecting permit. On 31 July 1954, Tan Chew Seah entered into an agreement with Kepong Prospecting Co where the latter was to take over the obligation to pay Schmidt that 1% payment. Another agreement was entered into between Kepong Prospecting Co and Schmidt in September 1955 whereby the company inter alia agreed to pay Schmidt 1% of all ore that might be won from any land comprised in the 1954 agreement in consideration of the services of the consulting engineer for and on behalf of the

190 See Chapter 1, 12 [1.4]. 191 [1968] 1 MLJ 170. See also Chapter 1, 12 [1.4.1].

67 company prior to its formation, after incorporation and in the future. Later, Schmidt claimed for all the moneys payable to him under the 1954 agreement, the 1955 agreement or one or other of them. The Privy Council, on appeal from the Federal Court 192 held, inter alia, that Schmidt was entitled to the payment under the 1955 agreement but not under the 1954 agreement as he was not a party to that agreement even though the 1954 agreement conferred a benefit on him. In this case, the rights of the third party beneficiary did not receive significant attention by the Court. The significance of Kepong Prospecting is the acceptance by the Privy Council that the doctrine of privity of contract was applicable under s 2(d) of the Contracts (Malay States) Ordinance 1950.193

The finding by the Privy Council has been criticised by Koh who argues that to rely on s 2(d) is inappropriate since the provision does not expressly provide for the doctrine of privity. Section 2(d) reads “when at the desire of the promisor, the promisee or any other persons has done or abstained from doing, or does or abstains from doing something, such act or abstainence or promise is called consideration for the promise.” To relate the doctrine of privity with consideration is unjustifiable as s 2(d) provides a wider definition of consideration than of English law as it enables consideration to move from a person other than the promisee.194

The second case in which the doctrine of privity was applied to a commercial contract occurred in 2005, when a third party beneficiary under a tenancy agreement was denied the right to enforce a tenancy agreement in Chung Shan Kwang v Ise Ichi Japanese Restaurant Sdn Bhd.195 In this case, a sale and purchase agreement was entered into in

192 The Federal Court’s decision is reported in (1964) 30 MLJ 416. The Federal Court in dealing with the 1954 agreement did not consider the issue of the privity doctrine arising under the Contracts (Malaya States) Ordinance 1950 but applied the principle in Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847; Scruttons Ltd v Midland Silicones Ltd [1962] AC 446. 193 The Contracts (Malaya States) Ordinance 1950 was based on the Indian Contracts Act 1872 and only applies to the nine Malay States (Perak, Selangor, Negeri Sembilan, Pahang, Johor, Kedah, Kelantan, Perlis and Terengganu). 194 See K.L. Koh, 'Privity of Contract and the Contracts (Malay States) Ordinance, 1950' (1968) 10 Malaya Law Review 125. 195 [2005] 3 MLJ 471.

August 1997 between Yusoff bin Mohd and the appellant (the third party) whereby Yusoff agreed to sell premises that were rented by the first respondent (Ise Ichi Japanese Restaurant). Prior to this, in June 1997, Yusoff entered into a tenancy agreement with the first respondent. A deed of assignment was also entered into in December 1997 between Yusoff and the appellant where allegedly Yusoff assigned all his rights, title, interest, benefits and obligations in the said premises to the appellant. The appellant relying on the sale and purchase agreement and the deed of assignment claimed for outstanding rental from the first respondent.

The High Court in dismissing the appellant’s appeal stressed that the appellant, who was not privy to or a party to the tenancy agreement (between Yusoff and Ise Ichi Japanese Restaurant) could not claim the benefit of any of the terms in the tenancy agreement. The appellant could only claim the benefit if there was a valid assignment entered into between Yusoff and the appellant. As claimed by the respondent and later agreed to by the High Court, the assignment entered into between Yusoff and the appellant did not expressly refer to or mention the benefit of the tenancy agreement. It is clear that what was assigned in the deed of assignment was the right, title, interest, benefit and obligations under the principal sale and purchase agreement entered into between proprietor, developer and the first owner, in respect of the said premises. The tenancy agreement which was entered into between Yusoff and Ise Ichi Japanese Restaurant was neither referred to nor stated in the deed of assignment. In other words, the tenancy agreement was not assigned to the appellant at all as it was not included in the deed of assignment. Therefore, there was no assignment of the tenancy agreement and the appellant was unable to claim any benefits under it. As there was no valid assignment of the rights, title, interests, benefits and obligations in the tenancy agreement from Yusoff to the appellant the exception to the doctrine of privity did not apply. As the appellant was not a party to the tenancy agreement, the appellant was unable to enforce the term of the agreement regarding the rental payment.

More recently, the application of the doctrine of privity in a commercial context arose in Bacom Enterprises Sdn Bhd v Jong Chuk. 196 Among the issues that needed to be resolved in this case was whether the plaintiff (Jong Chuk, the third party) had any right against Bacom Enterprises, in particular, to enforce the terms of the development agreement entered into between the plaintiff and the first to fifth defendants. The defendants had entered into a development agreement (DA) with the plaintiff (Jong Chuk) to develop land that the defendants owned. Three months after the execution of the DA, the defendants granted the plaintiff the power of attorney (the first PA) to do certain acts such as appearing before all relevant authorities in respect of the land and to submit all requisite plans for the development of the land. Later, the defendants entered into a sale and purchase agreement (the SPA) to sell the land to Bacom Enterprises Sdn Bhd (Bacom) and simultaneously revoked the first PA. According to the recitals to the SPA, Bacom as the purchaser was fully aware of and understood all the terms of the DA and the first PA and agreed to honour and abide by the provisions in the development agreement. Bacom granted the plaintiff a power of attorney (the second PA) that was identical to the first PA. However, as the relationship between the plaintiff and Bacom deteriorated, Bacom revoked the second PA which left the plaintiff with no power of attorney to proceed with any works on the land. Thus, the plaintiff commenced a civil suit and sought, inter alia, a declaration that Bacom Enterprises was bound by the provisions in the development agreement as agreed in the sale and purchase agreement entered into between Bacom and the defendants.

The Court of Appeal held that the plaintiff was not a party to the sale agreement and could not take advantage of it just because there was some provision in the agreement which was intended to benefit him as a contractor to build houses and shophouses and the infrastructure.

Preliminary conclusions

196 [2011] 5 MLJ 820.

Based on the criteria outlined above,197 the impact of the doctrine of privity on third party beneficiaries in these three cases is demonstrated by the fact: a) all third parties in the three cases outlined were prevented by the courts from enforcing the benefit contained in the contract even though the benefit was intended by the parties to the contract to be bestowed on the third party. b) each third party was aware of the intended benefit in the contract and acted in the belief that they would receive or be entitled to the payments as promised in the contracts. For example, in Kepong Prospecting Ltd v Schmidt,198 Schmidt, placing reliance upon on the 1954 and 1955 agreement that he would be paid for his services has provided services as consulting engineer for the company. Similarly in Bacom Enterprises Sdn Bhd v Jong Chuk,199 Jong Chuk, the third party, proceeded with the construction works in the belief that he had the power to continue with the construction works and would eventually be paid for the works completed. c) Except for the third party in Chung Shan Kwang v Ise Ichi Japanese Restaurant Sdn Bhd,200 each third party provided consideration for the benefits promised.

The doctrine of privity has operated to disadvantage these third parties, resulting in them suffering loss as a result of being unable to enforce the benefit under the terms of the contracts. If the privity doctrine was reformed the third parties in these cases would be able to sue for the benefits in the contracts. They would obtain payment for the work done. For instance, Schmidt would be entitled to the 1% profit of the selling price of ore as promised, or would be able to collect the rent for their rented premises which amounted to RM10 500 in Chung Shan Kwang v Ise Ichi Japanese Restaurant Sdn Bhd,201 or would be able to proceed with the remainder of the construction works as they had contracted to do and be paid for the works. None of them would suffer loss and not be compensated for it. Therefore, reform of the doctrine of privity would allow justice to be served for these types of third parties.

197 Refer to 66 [3.2]. 198 [1968] 1 MLJ 170. 199 [2011] 5 MLJ 820. 200 [2005] 3 MLJ 471. 201 [2005] 3 MLJ 471.

3.3.1.2 Privity and Insurance Contracts

In Malaysia, insurance contracts are governed by the Insurance Act 1996.202 For life insurance contracts, the Insurance Act 1996 confers rights on spouses, children and parents (where the insured does not have a spouse or children). In the case of group insurance contracts, 203 a right is only given to third parties who have an insurable interest. Therefore, certain groups of third party beneficiaries are unable to enforce their right to payment under an insurance contract. The analysis reveals that the most common situations in which third parties are affected by the doctrine of privity are under life insurance and group insurance contracts. In the case of group insurance contracts, third parties do not have an insurable interest. Although the Malaysian judiciary recognises the difficulty caused by the doctrine of privity and applies exceptions to the doctrine where possible, uncertainty still exists for third party beneficiaries where the terms of the policy or the agreement between the insured party and the insurance company do not allow the court to apply an exception to the doctrine.

In Malaysia, the doctrine of privity prevents third party beneficiaries under group insurance policies from acquiring a benefit under the policy taken out by their employers. For example, in GR Nair v Eastern Mining & Metals Co Sdn Bhd204 both plaintiffs (GR Nair and Mohamed Dom bin Lassim) were employees of the defendant company and were medically declared to be unable to perform and continue working. The plaintiffs' claim was for benefits payable under a Group All Sickness Policy of insurance taken out by the defendant company (the employer) with an insurance

202 See also s 23 of the Civil Law Act 1956 which creates a statutory trust in favour of a spouse and children in a life insurance policy. 203 A group insurance contract is a single insurance policy or contract taken out by an employer that covers a group of people, normally employees and/or their dependents. 204 [1974] 1 MLJ 176. The case is similar to Green v Russell [1959] 2 QB 256. In that case a group accident policy was taken out by the employer, who was therein described as "the assured," and the protected employees were named in a schedule, with the sums payable on death or disablement in each case. The policy provided that "the (insurance) company shall be entitled to treat the insured as the absolute owner ... and shall not be bound to recognise any equitable or other claim or interest in the policy and the receipt of the insured ... alone shall be an effectual discharge." It was held by the Court of Appeal that an employee on whose death by accident a sum became payable under the policy had no rights at law, because he was not a party to the contract or to the consideration, and had no rights in equity because an intention to provide benefits for someone else, and to pay for them, does not in itself give rise to a trust.

72 company in the amount of RM67 000 and RM32 300 respectively. The plaintiffs' claim was based on the contention that a trust had been created in their favour by the act of the company taking out the policy.

In dismissing the plaintiffs’ claim, the Court held that the defendant company had chosen to insure itself for its own purposes. The terms of the policy indicated quite clearly that no express trust had been created in favour of the plaintiffs. There was no mention of a trust in the policy and the policy was not stated to be for the benefit of the employees. It was the defendant company which paid the insurance premium, was the insured under the policy and was entitled to receive any sum payable by the insurance company under the policy. There was neither an express trust nor a constructive trust created in favour of the plaintiffs.

The impact of the doctrine of privity in this case is harsh because due to the doctrine and coupled with the unwillingness of the court to infer a trust, the employees were denied compensation for their disabilities suffered in the course of their employment. The expectation of compensation was high as the employees were aware that on previous occasions, seven other disabled employees had been paid sums under the same policies.

3.3.1.3 Abrogation by Malaysian courts of the application of the doctrine of privity to insurance contracts

Trust

The Malaysian judiciary has developed exceptions to overcome the effect of the doctrine of privity in insurance contracts. The most popular device used by Malaysian courts is the trust exception. The law of equity has developed a general exception to the doctrine of privity by the use of trusts, which may be express or implied. Where a trust is established, a third party may enforce the promise against the promisor and even the promisee if the promisee failed to enforce the promise on the beneficiary’s behalf. Nevertheless, many problems and uncertainties may arise in determining the scope and effects of using a trust device as an exception to privity. In particular, there is

73 uncertainty about whether a clear intention to create a trust is necessary or whether an intention to benefit a third party is sufficient. The issue is illustrated in the cases discussed below.

In Malaysian Australian Finance Co Ltd v The Law Union & Rock Insurance Co Ltd,205 Choong Kok Hing, a contractor, purchased a caterpillar tractor under a hire purchase scheme and subsequently took out an insurance policy with the respondent to cover any losses. As the owner of the tractor and consequently a party who may be affected by any claim under the insurance policy, the applicant had an interest under the insurance policy. Furthermore, in the actual policy the applicant was acknowledged as the owner of the tractor. However, when Choong Kok Hing reported the loss of the tractor to the respondent, the respondent disclaimed any liability.

Although the applicant was considered a party to the insurance contract because it had been affected on behalf of the applicant, Mohamed Azmi J stated that even if the applicant was not a party to the contract, there are ways in which the applicant could enforce the contract of insurance. The learned judge relied on Sanjiva Row's commentaries:206 Yet another exception to the general rule is afforded where the promisor, between whom and the stranger no privity exists, creates privity by his personally agreeing with the stranger to pay him direct or becomes estopped from denying his liability to pay him personally.

The other exception is where a trust is created: A third party who is to be benefited under a contract between A and B acquires equitable rights ex contractu if the agreement between the parties is so framed as to make one of them a trustee for the third party.207

Applying this principle to the present case, the respondent undertook in the relevant endorsement to pay any money liable to be paid under the policy to the applicant directly. Due to this and the fact that the insurance policy was made for the applicant's benefit, the respondent was regarded as a trustee and/or agent for the applicant.

205 [1972] 2 MLJ 10. 206 Indian Contract Act and Law Relating to Tenders, 6th Edition, Volume 1, 282. 207 Indian Contract Act and Law Relating to Tenders, 6th Edition, Volume 1, 278.

From the comments made by Mohamed Azmi J in this case, it appears that in this instance, a promise of direct payment to a third party coupled with an intention to benefit him was sufficient to create a trust. In the case of GR Nair v Eastern Mining & Metals Co Sdn Bhd, 208 the Court chose to adopt the principle that if the promisee intends the promise to be for his own benefit, there is no trust created in favour of the third party. A clear intention to create a trust in favour of the third party beneficiary must exist.

Malaysian Australian Finance Co Ltd v The Law Union & Rock Insurance Co Ltd209 and GR Nair v Eastern Mining & Metals Co Sdn Bhd 210 illustrate the inconsistent judicial approaches to determining whether a trust created in Malaysia. The Court in Malaysian Australian Finance Co Ltd v The Law Union & Rock Insurance Co Ltd211 was more inclined to follow the approach in the earlier English cases decided between the 18th and 19th century212 in which an intention to benefit the third party was sufficient to create a trust. Conversely, GR Nair v Eastern Mining & Metals Co Sdn Bhd 213 supports England’s current strict approach to the creation of a trust.

In Kishabai v Jaikishan,214 the deceased took out a life insurance policy while alive. The policy was affected under s 23 of the Civil Law Act 1956 for the benefit of his nephew, the defendant. Subsequently, the deceased purported to reassign the benefit to himself and to his daughter. After his death, the daughter (the plaintiff) extracted a grant of probate in respect of the deceased’s estate. The Court was faced with the question of whether the trust allegedly created under s 23 of the Civil Law Act 1956 was valid or not. Justice Lee adopted a complicated approach in declaring that the nephew was the sole beneficiary of the life insurance policy. At one point his Honour declared that the

208 [1974] 1 MLJ 176. 209 [1972] 2 MLJ 10. 210 [1974] 1 MLJ 176. 211 [1972] 2 MLJ 10. 212 Tomlinson v Gill (1756) 27 ER 221; Gregory and Parker v Williams (1817) 3 Mer 582; Fletcher v Fletcher (1844) 67 ER 30 564; Lyold’s v Harper (1880) 16 Ch D 290. 213 [1974] 1 MLJ 176. 214 [1981] 2 MLJ 289.

75 life insurance policy was valid, but the nephew could not rely on the benefit conferred by s 23 of the Civil Law Act 1956 as the nephew was not the intended beneficiary upon construction of the section.215 The learned judge held that the purpose of s 23 was to protect the interests of the widow and children of the deceased. However, his Honour concluded that the nephew was the sole beneficiary under an ordinary trust as the deceased clearly intended to create a trust in favour of the nephew. The policy read

This policy is effected under section 23 of the Civil Law Ordinance, 1956 Federation of Malaya and the Trustees or Trustee for the time being hereof shall hold this policy and all monies assured hereby or payable hereunder in trust for Jaikishan Rewachand, nephew of the Assured.

The deceased established an intention to confer a benefit upon his nephew by referring to s 23 in the policy, and the court gave effect to that intention. Although the benefit could not be conferred pursuant to s 23 due to the wording of the section, the court held that an ordinary trust was created in order to give effect to the deceased’s intention. The approach of the court in Kishabai v Jaikishan216 reflects the statutory creation of a trust under the contract. Where a provision in the contract allows the promisee to divert the benefit to a third party of his or her choice, this provision will not defeat the existence of a trust.

Malaysian judicial decisions in the 21st century support the approach adopted in Malaysian Australian Finance Co Ltd v The Law Union & Rock Insurance Co Ltd.217 In Bank Bumiputra Malaysia Bhd v Mohamed Salleh, 218 a case concerning a group insurance policy, the respondent was employed by the appellant and his employment was governed by a document known as the ‘officer’s handbook’. There was a term in the handbook which provided that officers would be insured for 24 hours in respect of

215 Section 23 reads “A policy of assurance effected by any man on his own life and expressed to be for the benefit of his wife or of his children or of his wife and children or any of them, or by any woman on her own life and expressed to be for the benefit of her husband or of her children or of her husband and children or any of them, shall create a trust in favour of the objects therein named, and the moneys payable under any such policy shall not so long as any object of the trust remains unperformed form part of the estate of the insured or be subject to his or her debts.” 216 [1981] 2 MLJ 289. 217 [1972] 2 MLJ 10. 218 [2000] 2 MLJ 412.

76 death or total permanent disablement due to any accident. The appellant took out an insurance policy with Malaysia National Insurance that covered various risks in respect of its employees. The insured under this policy was the appellant and not the employees. The appellant denied the respondent’s claim by relying on the doctrine of privity. The Court of Appeal held that the employees were the beneficiaries under a trust even though they did not pay any insurance premium. However, the Court did not provide any authority for the decision, but merely stated it was reached “by relying on the ordinary principles governing the law of trust”.219

Bank Bumiputra Malaysia Bhd v Mohamed Salleh220 was followed by the High Court in Lim Siew Hong v Contraves Advances Devices Sdn Bhd.221 In this case, the company implemented a Group Staff Recruitment Gratuity and Pension Scheme (the Scheme) by taking out a policy with an insurance company for the benefit of its senior staff, including the applicant. The Scheme established a matured sum intended to be paid to an employee who was terminated from the company. The company also created a trust to manage the Scheme.

The plaintiff was terminated after 25 years of service with the company and claimed a benefit under the Scheme. This claim was rejected by the company. Justice Low Hop Bing allowed the plaintiff’s claim. He held that the company, being the insured-cum- policy holder, was bound by the terms of the Scheme to make the necessary claim on behalf of the applicant as its employer. The existence of a trust deed further supported the decision. This case is different from Bank Bumiputra Malaysia Bhd v Mohamed Salleh222 where there was no express trust created by the employer. 223

219 415 (Gopal Sri Ram JCA). 220 [2000] 2 MLJ 412. 221 [2006] MLJU 0029. 222 [2000] 2 MLJ 412.

Poominathan Kuppusamy v Besprin Stationers Sdn Bhd224 was also a group insurance policy case. Justice Zaleha Zahari allowed an appeal from the appellant and took a different approach in declaring a trust. The learned judge was of the view that:

As to who is entitled to be paid/receive the benefits under the policy, this would of course depend on the terms of the policy. On this issue I am in agreement with the appellant counsel's submission that the fact that the respondent was named as the policy holder, expressly referred to as "beneficiary" and the person who paid the premium for the insurance policy is not conclusive. Such a practice may well be a matter of expediency so as to avoid the hassle of a multitude of claims as held by the Court of Appeal decision in Bank Bumiputra Malaysia Bhd v Mohamed Salleh [2000] 2 CLJ 13.

If the policy was to benefit the respondent (the employer), an express clause to that effect was essential. The absence of such a clause resulted in an implied trust existing in respect of the insurance monies. Under this implied trust the respondent was a trustee and the appellant was the real beneficiary.

An issue concerning a claim by the third party beneficiary of a fire insurance policy is illustrated in Standard Chartered Bank v KTS Sdn Bhd.225 A joint fire insurance policy was taken out by Lampak (M) Timber Sdn Bhd and the appellant (Standard Chartered Bank) with Hong Leong Assurance Sdn Bhd to insure all materials, stocks-in-trade, other properties and assets covered by the debenture against loss or damage by fire. The respondent (KTS Sdn Bhd) had entered into various contracts with Lampak (M) Timber Sdn Bhd for the purchase of sawn timber. Before Lampak could deliver the timber, a fire broke out at the sawmill and destroyed the timber. Lampak and the appellant successfully made claims against Hong Leong Assurance to recover their losses from the fire. Following this, the respondent filed an action against Lampak for non-delivery

223 Bank Bumiputra Malaysia Bhd v Mohamed Salleh was also followed in a motor insurance policy case, Ramli bin Shahdan v Motor Insurers’ Bureau of West Malaysia [2006] 2 MLJ 116. The Court noted in dismissing the appeal that where the contract was made between the Bureau (the first respondent) and the Minister of Transport (the second respondent) for the benefit of the appellants, the second respondent could sue the Bureau for failure to perform the promise for the benefit of the appellants. The second respondent could also recover all that the appellants would have as if the contract had been made by the appellants themselves. This caseindicates that to establish a trust, a term that indicates an intention to benefit the third party is sufficient. No express wording establishing a trust is required. 224 [2003] 3 CLJ 118. 225 [2006] 4 MLJ 617.

78 of the timber, but Lampak had since been wound up. The respondent then claimed the insurance money which had been paid out and alleged that the appellant held the insurance money on trust for the respondent.

Even though the respondent was not a party to the insurance policy, the Federal Court held that a trust in their favour was established despite the fact that: a) there was no intention to create a trust in favour of any third party in the Insurance Policy; b) the subject matter of the trust was not certain and c) the beneficiary was not clearly identified in the policy.

The Court examined the purpose of the fire insurance policy, which was to protect the goods belonging to the owner. The respondent was a third party owner of the goods and therefore entitled to the insurance money. The insurance money could not be kept by the insured, who suffered no loss, but it had to be paid to the third party who had actually suffered the loss.

Further, the detrimental effect of the doctrine of privity on insurance contracts is illustrated in Manonmani v Great Eastern Life Assurance Co Ltd.226 In this case, the High Court was faced with a conflict of interest between the personal representative and the nominated beneficiary. The deceased had taken out two life insurance policies. He named his mother as a beneficiary in the first policy and his wife as a beneficiary in the second policy. When a claim was made, the defendant refused to pay the mother and claimed that payment should only be made to the deceased’s personal representative (the wife) upon the production of letters of administration of estate under the law of intestacy. The mother made an application for payment of the insurance money as a sole beneficiary under the first policy.

Justice Eusoff Chin held that the mother was entitled to sue the insurer for the money on the ground that although she was not a party to the insurance contract, she was privy to the consideration. It is respectfully submitted that the decision was correct, as to deny

226 [1991] 1 MLJ 364.

79 the mother payment of the insurance money would have caused injustice to her and would not have been in accordance with the deceased’s intention to provide financial security to his mother upon his death. However, little reasoning was provided for the decision. The decision generated comment in one article, where the author queried whether there can be a legal distinction between privity of contract and privity of consideration.227

Restitution and unjust enrichment

In Malaysia, the law of restitution is governed by s 71 of the Contracts Act 1950 which reads:

Where a person lawfully does anything for another person, or delivers anything to him, not intending to do so gratuitously, and such person enjoys the benefit thereof, the latter is bound to make compensation to the former in respect of, or to restore, the thing so done or delivered. As for the principle of unjust enrichment, there are no reported cases that suggest Malaysian courts will adopt the principle of unjust enrichment as a cause of action. Nevertheless, it has been argued that s 71 of the Contracts Act 1950 reflects the principle of unjust enrichment 228 and hence it could be said that at present there is application of unjust enrichment in Malaysia via this statutory provision but not at common law.

Agency

The basis of the law of agency is if an agency relationship exists between A and C, and A contracts with B as C’s agent, C can sue and be sued by B. Agency is generally created by express wording or can be inferred based on the circumstances of the case. The law of agency in Malaysia is governed by the Contracts Act 1950.229 There are two

227 Stanley Jeremiah, 'Nominated Beneficiaries under Life Policies: Bound to Benefit?' (1994) 3 Malayan Law Journal i. 228 See Cheong May Fong, Restitutionary Developments under Part VI, Malaysian Contracts Act 1950, Australian Journal of Asian Law, Vol 7, Issue 1, May 2005; David Fung, 'Restitution and Section 71 of the Contracts Act 1950' (1994) 2 Malayan Law Journal lxxix. Note that there has been a missed opportunity by the Malaysian courts in applying the principle of unjust enrichment in Badiaddin bin Mohd Mahidin v Arab Malaysian Finance Bhd [1998] 1 MLJ 393. The case however was not an insurance case. 229 Section 183-186.

80 types of agency: disclosed and undisclosed agency. Disclosed agency refers to a situation where the agent made a contract with another person to secure a benefit to the principal. The principal who is the third party in this situation is known by the other person. As a third party, the principal has the right to enforce the contract. Undisclosed agency on the other hand refers to a situation where the identity and the existence of the principal are unknown to the other person. The undisclosed principal is also entitled to the benefits of the contracts even though it is the agent who has rights and liabilities under the contract. The agency device is not suitable for sidestepping the doctrine of privity in insurance contracts, unless it is clear that A is contracting as agent due the personal nature of the insurance contract and the existence of the duty of disclosure.230 This could explain the lack of legal decisions in insurance contracts where courts apply the agency exception. The doctrine of undisclosed principal, nevertheless could apply if it is clear that A is acting as someone’s agent or the third party has impliedly agreed to dispense with the need for the identity of the principal. The concept of agency has been used by Malaysian courts231 as an exception to the doctrine of privity, but has not been applied to insurance contracts and third party beneficiaries.

Assignment

The common law operated as a serious barrier to the effectiveness of commercial transactions and the law and equity came to recognise the general right of an assignee to bring actions in an assignee’s name. The insured in an insurance contract can assign the rights in the insurance policy to a third party beneficiary as an assignee. There are two methods of assigning policies: by way of legal assignments and by equitable assignments. In Malaysia, a statutory assignment is governed by s 4(3) of the Civil Law Act 1956 which reads: Any absolute assignment, by writing, under the hand of the assignor, not purporting to be by way of charge only, of any debt or other legal chose in action, of which express notice in writing has been given to the debtor, trustee or other person from whom the assignor would have been entitled to receive or claim the debt or chose in action, shall

230 Robert Merkin, 'Privity of Contract The Impact of the Contracts (Rights of Third Parties) Act 1999' in Robert Merkin (ed), (First ed, 2000), 37. 231 See The Golf Cheque Book Sdn Bhd v Nilai Springs Bhd [2006] 1 MLJ 554; Anika Insurance Brokers Sdn Bhd v Public Bank Bhd [2004] 6 MLJ 268.

be, and be deemed to have been, effectual in law, subject to all equities which would have been entitled to priority over the right of the assignee under the law as it existed in the State before the date of the coming into force of this Act, to pass and transfer the legal right to the debt or chose in action, from the date of the notice, and all legal and other remedies for the same, and the power to give a good discharge for the same, without the concurrence of the assignor.

Under s 4(3), an assignee of a valid statutory assignment can sue the debtor in his or her own name. Compliance with s 4(3) transfers to the assignee from the date of notice of assignment the legal right to a debt or chose in action, all legal and other remedies and the power to give a good discharge for the same without the concurrence of the assignor.

Rights under contracts of insurance are choses in action and the assignment of life insurance policies may be affected by the insured through a legal assignment under s 4(3) of the Civil Law Act 1956 provided these three conditions are fulfilled:

(a) the assignment must be in writing and signed by the assignor (the insured);

(b) it must be absolute and not by way of charge only; and

However, there are no reported cases considering the application of s 4(3) to an insurance contract involving a third party beneficiary.

An equitable assignment is an assignment which gives an assignee a title which, though not recognisable at law, is recognised and protected in equity. The general effect of an assignment of a policy of insurance is to pass a right to the insurance money, as against the insurers, to the assignee. Hence, the third party beneficiary, as the assignee, possesses those rights (a chose in action) that the assignor had in the insurance policy (prior to the assignment) and is entitled to enforce the benefits of the insurance policy against the insurance company despite not being privy to the contract of insurance. It is crucial to note that a chose in action is not freely assignable. Contracts that impose a personal obligation on the promisor in favour of the promisee cannot be assigned and

232 Santhana Dass, Law of Life Insurance in Malaysia (2000), 274

82 this includes insurance contracts.233 Hence, in Malaysia so far, there is no reported case on the use of equitable assignment of the insurance contract as a means to sidestep the doctrine of privity.

Preliminary conclusions

In summary, the doctrine of privity is a well accepted doctrine in Malaysia. In insurance contracts, it can be seen from the cases analysed above that the doctrine of privity has a major impact in relation to benefits or insurance monies promised to third parties by the insured especially in life insurance and indemnity insurance. Cases like GR Nair v Eastern Mining & Metals Co Sdn Bhd234 confirm the harsh application of the doctrine of privity in Malaysia. Despite the fact the third parties in the cases analysed were aware of the intended benefit in the insurance policies, the courts have denied the right of the third parties to claim due to the doctrine of privity. Aggravating the matter, the inference of a trust was also denied even though on previous occasions, other employees had been paid sums under the insurance policies.

Nonetheless, acknowledging the problems and injustice caused by the doctrine, Malaysian courts have found ways to abrogate the doctrine. As trusts are commonly and largely associated with insurance contracts, it seems to be the most common device adopted by the Malaysian courts in allowing third party beneficiaries to claim the monies promised. Cases like Malaysian Australian Finance Co Ltd v The Law Union & Rock Insurance Co Ltd235 illustrate how a trust may be imposed abrogating the doctrine of privity due to the intention to benefit the third party. Kishabai v Jaikishan236 and Bank Bumiputra Malaysia Bhd v Mohamed Salleh237 further illustrate how a trust is inferred resulting in the third party beneficiaries in both cases being able to benefit from the insurance money.

233 However, life insurance policies are assignable by way of statutory provisions under s 4(3) of the Civil Law Act 1956. 234 [1974] 1 MLJ 176, 70 [3.3.1.2]. 235 [1972] 2 MLJ 10. 236 [1981] 2 MLJ 289. 237 [2000] 2 MLJ 412.

Despite the fact Malaysian courts manage in most circumstances to abrogate the doctrine of privity in insurance contracts through the imposition of a trust, the methods and approaches used in determining the existence of a trust differ and the approach is inconsistent with the current English approach This creates uncertainty for third parties in relation to their rights. Other traditional devices available to abrogate the doctrine of privity, such as agency and assignment, are not suitable for use in insurance contracts. In summary, the impact of the doctrine of privity in insurance contracts is demonstrated where third parties in insurance contracts suffer detriment in the form of loss of expectation. In nearly all cases the third parties were aware of the existence of the intended insurance moneys and relied on the rights under the policy in the belief that they would be able to claim the insurance money upon the occurrence of a prescribed event. The amount of money at stake in the cases examined is approximately RM157 000.238 Even though courts are willing to infer a trust in the case of insurance contracts, there is significant uncertainty in relation to the circumstances in which a trust may be imposed. Unless there is reform of the doctrine of privity in insurance contracts, it leaves the courts with no other option except to continue to rely upon the trust concept which has proven to yield varying outcomes.

3.3.1.4 Privity and Construction Contracts

Malaysian judicial decisions illustrate that in the context of construction contracts, sub- contractors (the third parties) have often been prevented from claiming payment as promised by the employer due to the privity doctrine. The cases verify the argument put forward by the English Law Commission 239 that the doctrine of privity may cause problems in the area of payment to sub-contractors. In Malaysia, the relationship between parties to construction contracts such as the employers, the main contractors and the sub-contractors are not regulated by statute. Apart from a standard form construction contract, the parties are self-regulated.

238 In GR Nair v Eastern Mining & Metals Co Sdn Bhd [1974] 1 MLJ 176 the amount claimed was RM99 300 and in Manonmani v Great Eastern Life Assurance Co Ltd [1991] 1 MLJ 364, the amount claimed was RM57 717. Other cases examined however, did not state the amount claimed. 239 Law Commission in Privity of Contracts: Contracts for the Benefit of Third Parties (No. 242, 1996), 47.

Provision for the security of payment by the main contractors to sub-contractors was unregulated until the recently enacted Construction Industry Payment and Adjudication Act 2012 (CIPAA).240 CIPAA does not regulate or make provision for the recovery of payment for work done by a subcontractor from the employer or owner under the main contract, but puts in place a process aimed at securing payment under the subcontract from the main contractor. In this part of the thesis it is argued that despite the enactment of CIPAA the privity doctrine still has application within the construction industry and it is relevant to examine how Malaysian courts have abrogated the doctrine of privity in construction contracts to date.

A common problem in the Malaysian construction industry is delay in payment and non-payment. 241 The standard form contract is one of the factors underpinning the dominance of the doctrine of privity. The use of the standard form contract between employers and main contractors can operate to the disadvantage of the third parties i.e. the sub-contractors. For example, the use of clause 27(f) of the PAM 2006242 in the main contract which reads ‘neither the existence nor the exercise of any of the foregoing powers nor anything else contained in these conditions shall render the employer in any way liable to any nominated sub-contractor’ will prevent the sub-contractors from claiming benefits (if any) from the employers as stated or promised in the contract. The Construction Industry Development Board (CIDB) has also issued a standard form of contract for building works which includes a Main Contract Form and one for the Nominated Sub-Contract. For example, Clause 3 states:

240 The Act was passed on the 18 June 2012. However, as at the time of writing the thesis, the Act has not commenced. 241 Noushad Ali Naseem Ameer Ali, 'A "Construction Industry Payment and Adjudication Act": Reducing Payment-Default and Increasing Dispute Resolution Efficiency in Construction.' (2006) (3rd Quarter) Master Builders. 242 PAM 2006 is the successor of the PAM 1998 and PAM 1969. The PAM standard form of contract (prepared by Malaysian Institute of Architects) is used extensively in Malaysia and it was estimated that 90 per cent of the construction contracts in private sector are based on the PAM form. See Sundra Rajoo, 'The PAM 2006 Standard Form of Construction contract - A Change in Risk Allocation' (2010) 4 MLJA cxlvii. Other types of standard form of contract are those prepared by Institution of Engineers Malaysia (‘IEM’) and Public Works Department (‘PWD’). See also clause 28(g) of the PWD 203A which reads: "Nothing in this Clause nor anything else contained in this Contract shall render the Government in any way liable to any Nominated Sub-contractor or Nominated Supplier."

“Provided that nothing in this sub-contract contained shall impose any liability on the sub-contractor in respect of any negligence or breach of duty on the part of the Employer, the Contractor, his other sub-contractors or their respective servants or agents nor create any privity of contract between the sub-contractor and the Employer or any other sub-contractor.”

These provisions in the standard form contract strengthen the doctrine of privity in construction contracts. The clauses clearly state that sub-contractors, being third parties, are unable to make any claim whatsoever against employers.

The doctrine of privity will prevent a sub-contractor from enforcing a clause in the standard form contract even though the clause may confer a benefit on the sub- contractor. Therefore, even if a clause in the standard form contract provides for payment by the employers directly to the sub-contractors, the existence of the standard terms outlined above will diminish the sub-contractors’ right to enforce such a clause against the employer. Other than the direct payment clause in the standard form contract, another way whereby a sub-contractor may be promised to be paid directly by the employers is through a promise made by the employer itself. This could be made either expressly or by conduct.

The operation of the doctrine of privity arising from the use of the standard form contract is evident in Fimatic Engineering Sdn Bhd v Bumi Negeri Sdn Bhd.243 This case involved a petition for the winding up of the respondent (Bumi Negeri) on the ground that the respondent (as the employer) failed to pay a debt of RM108, 819.60 to the petitioner (a nominated sub-contractor) for the installation of fire protection works in the commercial complex owned by the respondent. The High Court applied the doctrine of privity and ruled that the petitioner had no locus standi as there was no contract between the parties. The lack of privity of contract between the respondent and the

243 [1995] 2 BLJ 121.

86 petitioner was stated in cl 27 (f) of the Main Contract244 and the proviso to cl 3 of the sub-contract.245 Therefore, the alleged debt was not due and owing to the petitioner.

Further in Syarikat Ong Yoke Lin Sdn Bhd v Giant Cash & Carry Sdn Bhd,246 the plaintiff was the nominated sub-contractor of the second defendant to supply, deliver, install, test, commission and maintain the air-conditioning and mechanical system of the Giant supermarket. The second defendant was the main contractor of the first defendant for the construction and completion of superstructure works for the proposed hypermarket (Giant hypermarket). Hence, the first defendant was the employer or owner of the Giant hypermarket. In order to finance the project, the second defendant (as the main contractor) obtained banking facilities from the bank, who was the fourth defendant. As security for the loan, the second defendant assigned the proceeds of its contract to the fourth defendant. All of the payments made by the first defendant were assigned to the fourth defendant by the second defendant. The plaintiff's claim was a monetary claim for moneys due and owing by the second defendant for the completed work in the amount of RM146.050.00. In a claim against the first defendant, the plaintiff sought an order directing the first defendant to pay the final contract sum directly to the plaintiff when the second defendant had defaulted on the payment.

The High Court held that the contract for the construction of the Giant hypermarket was entered into between the first defendant, as the employer, and the second defendant, as the main contractor and that the privity rule should be strictly applied to the detriment of the plaintiff. The common law principle stated that there was no privity of contract between the employer and the sub-contractor. The plaintiff argued in the alternative that money due under the contract was held on trust for the plaintiff by the first defendant. However, the High Court held that there was no trust created as the details of the alleged trust were not sufficiently particularised. There was also no fiduciary

244 Clause 27(f) stated “Neither the existence nor the exercise of the foregoing powers nor anything else contained in these Conditions shall render the Employer in any way liable to any nominated sub-contractor.” 245 Clause 3 stated “Provided that nothing in this sub-contract contained shall impose any liability on the sub-contractor in respect of any negligence or breach of duty on the part of the Employer, the Contractor, his other sub-contractors or their respective servants or agents nor create any privity of contract between the sub-contractor and the Employer or any other sub-contractor.” 246 [2000] MLJU 519.

87 relationship between the first defendant and the plaintiff. Overall, no exception to the doctrine of privity applied for the benefit of the plaintiff. It must be noted that the plaintiff had completed the work and the main contractor had defaulted on the final contract sum. As a result of the application of the doctrine of privity, the plaintiff was left without any method of recovering payment for work already done. Furthermore, the expenses incurred by the plaintiff in completing the work had not been compensated.

The English Law Commission247 has acknowledged the effect of the doctrine of privity on payment obligations as one of the main problems that arise in the construction industry. It suggests that the parties (the employer/client and the main contractor) may provide for payment to be made directly from the employer/client to the sub-contractor for work done under the subcontract. However, the doctrine of privity would prevent the sub-contractor from taking the benefit of this provision.

This situation occurred in Mahkota Technologies Sdn Bhd v Bina Jati Sdn Bhd 248 where despite the promise that the sub-contractor (Mahkota Technologies) would be paid directly by the employer (Sum-Projects (Brothers) Sdn Bhd), the Court did not allow enforcement of the promise due to the doctrine of privity.249 The plaintiff was a sub- contractor employed by the first defendant, the main contractor. The first defendant was employed by the second defendant, the employer. It is trite that such a situation does not bring about or establish any actionable privity of contract between the second defendant and the plaintiff per se. The plaintiff sued the second defendant for the failure of the first defendant to make payment for the work done. The plaintiff claimed that a collateral contract existed by virtue of a letter of award which stated that 'Payment on certificates duly certified by the consultants shall be made directly by our client, Sum- Projects (Brothers) Sdn Bhd' and the fact that this letter was carbon copied to the second

247 Law Commission, 'Privity of Contract: Contracts for the Benefit of Third Parties' (No. 242, 1996), 47. 248 [2001] MLJU 749. 249 See also Artic Building and Civil Engineering Sdn Bhd v Ahmad Zaki Sdn Bhd [2009] 9 MLJ 328 where there was uncertainty as to whether the court would acknowledge the letter of undertaking to pay the sub-contractor directly from the employer’s account. See also clause 27(f) of the PAM/ISM 69 which refers to the fact that there is no privity of contract between the employer and the nominated sub-contractor. 'Neither the existence nor the exercise of any of the foregoing powers nor anything else contained in these conditions shall render the employer in any way liable to any nominated sub-contractor.'

88 defendant. The fact that the second defendant made the first payment directly to the plaintiff meant that the second defendant should be estopped from denying liability to the plaintiff. The plaintiff contended that the doctrine of privity should not prevent the plaintiff from enforcing the right to payment from the second defendant.

Justice Vincent Ng held that a letter of award did not amount to a collateral contract between the plaintiff and the second defendant. His Honour noted that it was common for one payment on the works to be made by the second defendant to the plaintiff, and the rest of the payments to be made by the first defendant. Therefore, the collateral contract exception to the privity doctrine did not apply in this case.250

3.3.1.5 The Abrogation of the Doctrine of Privity in Construction Contracts.

Malaysian courts have had the opportunity to apply various common law exceptions to the doctrine of privity such as trust, estoppel and suing in tort. The trust exception has been used in circumstances where there has been a breach of a sale and purchase agreement and also where there has been default in payment. In addition, sub- contractors have been able to enforce a promise of payment via the operation of the doctrine of estoppel.

Trust

As in insurance contracts, Malaysian courts have resorted to applying the trust exception to avoid the doctrine of privity. Intention to create a trust has been inferred based on circumstantial evidence and no express words have been necessary to show that a trust exists. Under a construction contract, if trust is invoked, the employer is said to hold the money on trust for the sub-contractor as the beneficiary. In the event of default in payment by the main contractor, the employer, as a trustee, must pay the sub- contractor for the works done but yet to be paid.

250 See also Fordeco Construction Sdn Bhd v Wong Sin Ten [2008] 1 LNS 854 and more recently in Artic Building and Civil Engineering Sdn Bhd v Ahmad Zaki Sdn Bhd [2009] 9 MLJ 328 where the High Court rejected the plaintiff’s claim against the first and the second defendant on the ground that the plaintiff was appointed by the third defendant and hence the first and the second defendant were not privy to the contract despite there existing a letter of undertaking from the employers to pay the sub-contractors directly. These two cases show the strict adherence to the doctrine of privity in Malaysia.

In Mahfar bin Alwee v Jejaka Megah Sdn Bhd,251 the Court applied Bank Bumiputra Malaysia Bhd v Mohamed Salleh 252 in the context of a construction contract. The plaintiff purchased a house from a developer who promised to deliver the house to the plaintiff within 24 months. The developer failed to do so. Subsequently, the first defendant took over the abandoned project and took out a loan from the second defendant to finance the project. The plaintiff alleged that the first and the second defendants did not protect the plaintiff's interest in the house as the ultimate beneficiary nor did they complete the construction of the house. The plaintiff also alleged that the second defendant had permitted the first defendant to commit a breach of the sale and purchase agreement. The plaintiff based his claim on the project loan agreement executed between the first and second defendant which was for the benefit of the plaintiff. The High Court held that the project loan agreement was executed for the benefit of, inter alia, the plaintiff. Therefore, the plaintiff could bring a cause of action based on the implied trust in their favour. It is noteworthy that the Court, in allowing the plaintiff’s claim, did not discuss the requirement of the contracting parties’ intention to create a trust.

In ESPL (M) Sdn Bhd v Radio & General Engineering Sdn Bhd,253 the Court of Appeal held that a trust was established based on the documentary evidence. In this case, the appellant sought to enforce a benefit contained in clause 27.1 which reads as follows:

Sub-contractor will receive the payments made by Contractor and will hold the right to receive such payments as a trust fund to be applied first to the payment of labourers, suppliers, sub-sub-contractors and others responsible for the Work justifying such payments, and all taxes and insurance applicable thereto, and sub-contractor will so apply the payments from Contractor.

The appellant was appointed by Econoler Singapore Pte Ltd, who was appointed by the respondent/sub-contractor (Radio & General Engineering Sdn Bhd) as the sub-sub- contractor for the electrical and mechanical works. A sub-contract was entered into between the respondent and Henz (the main contractor) and among the contract terms was clause 27.1 above. A dispute arose between the respondent and the appellant

251 [2004] MLJU 107. 252 [2000] 2 MLJ 412. 253 [2005] 2 MLJ 422.

90 regarding the quality of the appellant’s work and the respondent refused to pay the appellant.

The Court of Appeal concluded that there was an intention to create a trust because of the clear language of clause 27.1 which states “….such payments as a trust fund…” Furthermore, the learned judges also stated that a trust could be proved based upon the circumstantial evidence demonstrating an intention to create a trust. The learned judges cited Re Kayford Ltd254 where Megarry J concluded that a trust had been created even though no express words were used in any document.

Estoppel

The doctrine of promissory estoppel operates to ensure fairness and justice in parties’ dealings. Where a party has made an unequivocal promise or representation to another that he or she will not enforce his or her strict legal rights and the promise or representation is intended to be relied on and is in fact relied on, the first party may be estopped from successfully asserting his or her strict legal rights if it would be unconscionable or unjust to allow him or her to do so.255

In construction contracts, estoppel may be raised where there is a promise either expressly or impliedly by the employer to pay the sub-contractor in the event of default by the main contractor to make payment to the sub-contractor. If the sub-contractor, having relied on the promise, continues with the construction works and incurs further cost, it may give justification for the courts to apply the doctrine of estoppel.

For example, in Tropical Profile Sdn Bhd v Kerajaan Malaysia Jabatan Kerja Raya Malaysia,256 the High Court declared that the first defendant was estopped from making payments to the second defendant and that the first defendant held the money on trust for the benefit of the plaintiff. In this case, the first defendant made a contract with the sixth defendant to build a highway. The sixth defendant was an unincorporated joint venture body formed by the second and fifth defendants. The sixth defendant appointed

254 [1975] 1 All ER 604. 255 Hughes v Metropolitan Railway Co (1877) 2 App Cas 439. 256 [2007] 8 MLJ 419.

91 the second defendant as a sub-contractor to carry out part of the project, and the second defendant later appointed the plaintiff for technical services work. When the second defendant defaulted in payment to the plaintiff, the plaintiff sued the first defendant in reliance on a term of the contract between the first and the sixth defendant which stated that payments for the works were to be made from the employer to the sub-contractor. When sued by the plaintiff for the default, the first defendant argued that there was no privity of contract between the first defendant and the plaintiff. The plaintiff was not privy to the contract that conferred a benefit upon it and was prevented by the privity doctrine from enforcing the benefit. However, evidence showed that when the second defendant defaulted, the first defendant had actually met with the plaintiff and promised that payments for the project which, should have been made to the plaintiff, would be paid by the first defendant directly to the plaintiff. This created an estoppel and the High Court held that any money not yet paid to the plaintiff was held by the first defendant on trust for the plaintiff.

Unjust enrichment

Unjust enrichment has never been applied by the Malaysian Courts in construction contracts. Judging by past judicial decisions in other common law countries, it is unlikely that Malaysian sub-contractors will be successful in raising unjust enrichment as one of the requirements is that the owner or the employer must be enriched at the expense of the sub-contractor. This would not be the case as it is the main contractor who employs the sub-contractor to do the work. The benefit received by the owner is at the expense of the main contractor, not the sub-contractor.257

Agency

In construction contracts, there are two aspects of third party rights that are of particular relevance to sub-contracting arrangements:

257 Refer to the judgment of the High Court of Australia in Lumbers v W Cook Builders Pty Ltd [2008] HCA 27.

(a) What is the scope of the agency exception? This is to determine the criteria which a sub-contractor must satisfy in order to establish that the main contractor acted as the sub-contractor’s agent. (b) Can a person’s contractual obligations affect the duty of care owed to them by someone with whom there is no privity? This question involves the relationship between contractual and tortious obligations.

Agency as a device to avoid the doctrine of privity is closely associated with the rights of a sub-contractor to obtain the benefit of an exclusion clause in a contract between the employer and the main contractor. It follows therefore that the use of agency is not appropriate in the matter of payment to the sub-contractors as discussed above.

Preliminary conclusions

In Malaysia, the case law analysed above demonstrated that the doctrine of privity has impacted significantly on promises made by employers to pay sub-contractors. Despite the existence of promises to pay the sub-contractors directly, the courts have obediently followed the common law doctrine of privity. The detriment suffered by the sub- contractors is severe. In all of the cases analysed above,258 there was evidence that the parties to the contracts intended to benefit the sub-contractors by promises that the sub- contractors would be paid directly by the employers. Reliance on the benefit had prompted the sub-contractors to perform the construction works and in doing so they provided consideration for the promises. The doctrine of privity has however prevented these sub-contractors from claiming payments due to them and as a consequence, these sub-contractors suffered an average loss in the range of RM60 000 to RM600 000.259

The impact of the doctrine of privity in Malaysia could also be seen through the unwillingness of the Malaysian courts to apply available common law exceptions to the privity doctrine to construction contracts. At present, Malaysian courts are prepared to use only trust and promissory estoppel as methods to circumvent the doctrine of privity

258 Refer to 84-86[ 3.3.1.4]. 259 For examples, in Fimatic Engineering Sdn Bhd v Bumi Negeri Sdn Bhd [1995] 2 BLJ 121, the claim was for RM108 819 60; Fordeco Construction Sdn Bhd v Wong Sin Ten [2008] 1 LNS 854, the claim was for RM68 72 770 and in Artic Building & Civil Engineering Sdn Bhd v Ahmad Zaki Sdn Bhd [2009] 9 MLJ 328, the claim was for RM587 029 63.

93 in construction contracts as evidenced in cases like Mahfar bin Alwee v Jejaka Megah Sdn Bhd, 260 ESPL (M) Sdn Bhd v Radio & General Engineering Sdn Bhd 261 and Tropical Profile Sdn Bhd v Kerajaan Malaysia Jabatan Kerja Raya Malaysia and Ors.262 It is also to be noted that, with due respect, there have been missed opportunities by the courts in Mahkota Technologies Sdn Bhd v Bina Jati Sdn Bhd 263 and also in Fordeco Construction Sdn Bhd v Wong Sin Ten264 to apply the doctrine of promissory estoppel even though all the essential elements of the doctrine were present in both cases. Failure or reluctance of the courts to apply the principle of estoppel have caused the sub-contractors in these two cases to suffer more financial loss and it is respectfully submitted that justice has not been served.

3.3.2 Australia

3.3.2.1 The extent of the problem in Australia

As already identified, the doctrine of privity has caused significant problems for third parties in insurance and construction contracts and also in other types of commercial contracts (albeit with lesser impact) in Malaysia. The next part of the comparative analysis is to examine the impact of the doctrine of privity in Australia on commercial contracts with particular attention on insurance and construction contracts. In commercial contracts, the doctrine of privity had been recognised and frequently applied in Australia. However, as far as the third party beneficiary rule is concerned, it was sparingly applied until Trident General Insurance Co Ltd v McNiece Bros Pty Ltd,265 an insurance case.

The doctrine of privity gained primacy in Australia in the case of Wilson v Darling Island Stevedoring and Lighterage Co Ltd,266 a case concerning a contract of carriage of goods. In this case the defendant company was engaged by the agent of the owners of the ship to act as a stevedore for the ship and to discharge, sort, stack and store all of its

260 [2004] MLJU 107. 261 [2005] 2 MLJ 422. 262 [2007] 8 MLJ 419. 263 [2001] MLJU 749. 264 [2008] 1 LNS 854. 265 (1988) 165 CLR 107. 266 (1956) 95 CLR 43.

94 cargo. While performing the contract, the defendant stevedore damaged the plaintiff consignee’s goods after discharge from the carrier’s vessel. The plaintiff brought proceedings against the stevedore, claiming damages for the stevedore’s negligence.

Among the issues to be decided by the High Court of Australia was whether the defendant was entitled to the benefit of any protection or immunity afforded by the said bill of lading to the carrier or its agents? In rejecting the defendants’ plea, Fullagar J held that only the ship owner was protected by the clause in the bill of lading. Being a stranger to the bill of lading, the doctrine of privity prevented the stevedore from seeking the benefit of the exclusion clause stated in the bill of lading. Further, his Honour stated: The defendant was not a party to the contract evidenced by the bill of lading, that it can neither sue nor be sued on that contract, and that nothing in a contract between two other persons can relieve it from the consequences of a tortuous act committed by it against the plaintiff. 267

The High Court of Australia, in applying the doctrine of privity, concurred with the House of Lord’s statement in Beswick v Beswick268 that the doctrine of privity and the doctrine of consideration are two separate and distinct rules.

In Coulls v Bagot's Executor and Trustee Co Ltd,269Arthur Leopold Coulls died, having made a will by which he appointed Bagot's Executor and Trustee Co Ltd (Bagots) to be his executor and trustee of his estate. He also entered into a contract with O'Neil Construction Pty Ltd giving a right to quarry and remove stone from an area of approximately fifty acres of his property. One of the terms of the contract was that O'Neil Construction Pty Ltd has to pay all money connected (royalties) with the agreement to his wife, Doris Sophia Coulls. The issue before the High Court of

267 Ibid (Fullagar J). The High Court in deciding that the stevedores were not entitled to rely on the protection in the bill of lading overruled Waters Trading Co v Dalgety & Co Ltd (1951) 52 SR (NSW) and Gilbert, Stokes & Kerr Pty Ltd v Dalgety & Co Ltd (1948) SR (NSW) 435. 268 [1966] Ch 538. 269 (1967) 119 CLR 460.

Australia was whether O'Neil Construction Pty Ltd was bound to pay the royalties to Bagot’s Executor and Trustee or to the wife, Doris Sophia Coulls.

It was held by the High Court that the contract was between the deceased (Mr Coulls) and Bagot's Executor and Trustee Co Ltd. Mrs Coulls was not a party to it. Even if she was, she would not be able to enforce it, as she gave no consideration. Bagots was entitled to the benefit of this contract as executor of Mr Coull's Estate. However, Barwick CJ and Windeyer J in their dissenting judgment argued that Mrs Coulls was a party to the contract and not a third party. They construed the promise to pay royalties as being made jointly to the deceased and Mrs Coulls. Further Windeyer J was of the opinion that since the promise was made to both the deceased and Mrs Coulls, it was sufficient that only one consideration had been provided. Consideration need not be furnished by them separately.270

In short, by taking into account the reasons given by both the majority learned judges and the dissenting judges, it can be said that Coulls v Bagot's Executor and Trustee Co Ltd 271 supported the principle that there must be consideration provided by the parties to the contract, either individually or jointly in order to enforce the promise. Being a stranger to the consideration, one cannot enforce the promise even though the promise was made for the stranger’s benefit.

The High Court decision to deny the payment of royalties to be made to Mrs Coulls clearly resulted in injustice to the deceased who intended to see that his widow would be well provided for in the event of his death. His good intention was undermined by the doctrine of privity. The doctrine also has resulted in Mrs Coulls being deprived of the right to live comfortably after the death of her husband. The husband’s intention should have been respected and to deny that means justice has not been done.

270 Ibid 493 (Windeyer J). 271 (1967) 119 CLR 460.

The effect of the doctrine of privity can further be seen in Olsson v Dyson.272 In this case, the High Court of Australia upon the issue of whether a debt of £2000 which at the death of Dyson had been owed to him by a company called RTE Constructions Ltd for money lent and interest, was payable to his executors or to his widow, held that the executors (the appellant) could enforce the deceased’s contracts, including his contract with RTE Constructions Ltd that it would pay his wife, the respondent. The doctrine of privity had been applied against the respondent in the sense that she personally could not sue directly for the money. No promise was made by RTE Constructions Ltd to her and in addition, the respondent did not provide any consideration.273 The view adopted by the High Court that the third party beneficiary must provide consideration for the benefit promised was in line with Coulls v Bagot’s Executor and Trustee Co Ltd.274

The use of Common Law Exceptions

In other types of commercial contracts, Australian courts have on several occasions relied on the concepts of trust and agency in abrogating the doctrine of privity.

Trust

It has been recognised a lack of clarity about the circumstances in which a trust will exist has created uncertainty for third parties. In Eslea Holdings Ltd v Butts,275 there was a guarantee of a reinsurer’s liability issued by the appellant company which was addressed to one company, Fenchurch Brokers. The purpose of the guarantee was to provide goodwill to Southlands Insurance Ltd, a company incorporated in London by the appellant. The question to be answered was whether the guarantee was extended to the clients (the respondents) of two other related companies, Fenchurch International and Fenchurch Reinsurance Brokers Ltd. It was held that the guarantee was not limited to cover the clients of Fenchurch Brokers only. The appellant was estopped from

272 (1969) 120 CLR 365. 273 Nevertheless, Windeyer J was of the opinion that the exception of the trust could operate to the advantage of the wife. Dyson should be regarded as holding as a trustee for his wife his right to enforce the new contract which for her benefit he had made with the company. The use of the word “trust” is not necessary for this result, 392. 274 (1967) 119 CLR 460. 275 (1986) 6 NSWLR 175.

97 denying that the benefit of the guarantee should be available to the clients of any other member of the Fenchurch group of companies. In arriving at that decision, the Court of Appeal concurred with the trial judge and held that Fenchurch Brokers held the guarantee upon trust for its principal (Fenchurch Group) and also other members of Fenchurch Group. The Court of Appeal held that in commercial cases, the element of commercial necessity may be taken into account for the purpose of inferring an intention to create a trust.

The pattern has changed. 276 Not only will courts look at intention to benefit third parties, in addition, commercial necessity may also support the creation of a trust. Samuels JA in supporting the use of commercial necessity gave evidence that in the instant case, both the appellant and Fenchurch Brokers were aware that Fenchurch International and Fenchurch Reinsurance were introducing business to Southlands because of the appellant’s guarantee. It was evident also that both of them intended that Fenchurch Brokers should hold the benefit of the guarantee for all those principals who might offer business through any member of the Fenchurch Group.

In the area of property law, the question of intention was further addressed in Bahr v Nicolay (No 2).277 The appellants sold land to the first respondents with a lease for a period of three years. The contract of sale gave the appellants a right of re-purchase at a specified price once the three years expired. However, during that time, the land was sold to the second respondent on the condition that the second respondent acknowledged the right of the appellants to buy back the land. Despite the acknowledgment, after three years, the second respondent refused to sell the said land to the appellants.

276 Prior to Eslea Holdings Ltd v Butts (1986) 6 NSWLR 175, the approaches argued before the courts were whether there must be clear wording or intention to create a trust or whether an intention to benefit the third party would suffice. See Goodwin v Goodwin (1916) 16 SR (NSW) 503 where it was held that no trust existed in respect of the maintenance or education of children, Cohen v Cohen (1929) 42 CLR 91 where it was held that a trust was inferred even though there was no intention to create trust. The same result can be seen in later cases such as Thwaites v Ryan [1984] VR 65 and Green v Green (1989) 17 NSWLR 343. In Ryder v Taylor (1936) 36 SR (NSW) 331 it was held that there was no intention to create a trust because the parties want to retain the right to vary the terms of the obligation without consulting the beneficiary. These cases however were not commercial cases. 277 (1988) 164 CLR 604.

…if the inference to be drawn is that the parties intended to create or protect an interest in a third party and the trust relationship is the appropriate means of creating or protecting that interest or of giving effect to that intention, then there is no reason why in a given case an intention to create trust should not be inferred.278 It is obvious that from the statement above that Bahr v Nicolay (No 2)279 indicates that an intention to create a trust is not necessary.

Agency

The use of agency as a means of overcoming the effect of the doctrine of privity in Australia is widespread especially in relation to a third party’s right to claim the benefit of an exclusion clause. Following the House of Lords decision in Midland Silicones Ltd v Scruttons,280 a stevedore is able to rely on the benefit of an exclusion clause provided certain conditions are met. The conditions are:

a) the bill of lading makes it clear that the stevedore is intended to be protected by the provisions in it which limit liability, b) the bill of lading makes it clear that the carrier in addition to contracting for these provisions on his own behalf, is also contracting as agent for the stevedore that these provisions should apply to the stevedore, c) the carrier has authority from the stevedore to do that, or perhaps later ratification by the stevedore would suffice, and d) that any difficulties about consideration moving from the stevedore were overcome.

In Australia, this principle has been applied in Port Jackson Stevedoring Pty Ltd v Salmond and Spraggon (Aust) Pty Ltd.281 That case concerned shipment of razor blades

278 Ibid 618. Nevertheless, three other judges disagreed. Justices Wilson, Toohey and Brennan were of the opinion that a constructive trust should be inferred, not an express trust, 638. 279 (1988) 164 CLR 604. 280 [1962] AC 446. 281 (1978) 139 CLR 231. (The New York Star). The High Court decision was reversed by the Privy Council which endorsed the The Eurymedon [1975] AC 154.

99 from Canada to Australia. Following usual practice, on arrival in Sydney the packages of razor blades were discharged from the ship by the stevedores and placed in a shed under its control. Later servants of the stevedores delivered the packages to persons who had no right to receive them, and from whom they were not retrieved. The consignee brought an action against the stevedores alleging negligence. The stevedores relied on a Himalaya clause282 purporting to extend the benefit of immunities in the bill of lading to independent contractors of the carrier. On appeal to the Privy Council, Lord Wilberforce rejected the assignees’ claim that the immunity clauses did not extend to liability for loss of the goods once the goods had been unloaded from the ship. His Lordship stressed that while there will be room for evidence as to the precise relationship between the carrier and the stevedore and as to the practice at the relevant port, in the typical case there will be a contract between the shipper and the stevedore so that the latter will be entitled to contractual immunity.

The principle that a stranger to the contract may enforce exemption clauses expressed to be for the stranger’s benefit where a party to the contract acts as the agent of the stranger is not restricted to contracts for carriage of goods by sea only. The right of the third party to claim the benefit in the exemption clause can also been seen in road carriage cases. For example, in Life Savers (Australasia) Pty Ltd v Frigmobile Pty Ltd,283 the first respondent agreed to carry goods for the appellant. The contract was evidenced by an invoice, signed by an employee of the second respondent, upon accepting delivery of the goods. The invoice specified that the goods were to be chilled and carried at a specified temperature but by an exemption clause, which included ‘sub- contractors’, liability for any damage however caused was exempted. The second respondent, as a sub-contractor carried the goods and they were damaged. It was held by the Court of Appeal that the sub-contractors were able to obtain the contractual

282 The Himalaya clause is a clause which confers benefit to a third party in maritime matters; purporting to extend the limitations of liability which benefits the carrier, to others who acts as agents for the carrier, such as stevedores. See William Tetley, 'The Himalaya Clause -Revisited' (2003) 9 Journal of International Maritime Law 40. 283 [1983] 1 NSWLR 431. See also Noosa Shire Council v Farr [2001] QSC 60 where it was held that the employees of the promisee were allowed to rely on an exclusion clause found in the contract between the plaintiff and the employer (promisee) in relation to a design of a water augmentation scheme.

100 immunity of the carrier if they proved the four conditions laid down by Lord Reid in Scruttons Ltd v Midland Silicones Ltd.284

Preliminary conclusions

In summary, the use of the doctrine of privity in commercial contracts, such as contracts for payment of debts, contracts of guarantee, contracts for sale of land and contracts for carriage of goods, has prevented third parties from enforcing the benefits set out for the benefit of third parties in the contracts. However, in the cases where the doctrine of privity has been applied, there was no actual financial loss suffered by third party beneficiaries. Except for the third party in Coulls v Bagot's Executor and Trustee Co Ltd285 and Olsson v Dyson,286 there was nothing in the contract that intended to benefit the third party as shown in Wilson v Darling Island Stevedoring and Lighterage Co Ltd.287 In all of the three cases, the benefit was also denied on the ground that neither of them had provided consideration for the benefit claimed.

Therefore, it can be concluded that the real impact of the doctrine of privity is exemplified by Coulls v Bagot's Executor and Trustee Co Ltd288 and Olsson v Dyson289 where the third parties (the wives) were denied the benefit of an insurance policy and maintenance payments respectively intended by their husbands to be given to their wives. It can also be argued that the wives experienced a loss of expectation that they would benefit from the money promised in the contracts. However, the same could not be said of the third party in Wilson v Darling Island Stevedoring and Lighterage Co Ltd290 as the promise was never intended to benefit the stevedore and the stevedore also did not provide any consideration for the promise. The effect of the decision in this case however has been overcome in the latter cases, Port Jackson Stevedoring Pty Ltd v

284 [1962] AC 446. 285 (1967) 119 CLR 460. 286 (1969) 120 CLR 365. 287 (1956) 95 CLR 43. 288 (1967) 119 CLR 460. 289 (1969) 120 CLR 365. 290 (1956) 95 CLR 43.

101

Salmond and Spraggon (Aust) Pty Ltd 291 and Life Savers (Australasia) Pty Ltd v Frigmobile Pty Ltd292 where the courts were willing to use the concept of agency as a way of abrogating the doctrine of privity.

Based on the analysis of the impact of the doctrine of privity in commercial contracts, the rationale for reforming the doctrine of privity in these kind of cases would be to fulfil the expectation of third party beneficiaries that they would be paid as promised by the parties to the contracts as well as respecting and fulfilling the wishes of the parties to the contract to benefit the designated third party beneficiaries.

3.3.2.2 Privity and Insurance Contracts

Insurance contracts fall into several categories such as personal (life insurance, personal accident insurance and sickness insurance), property (marine insurance, fire insurance and burglary insurance) and public liability insurance (motor vehicle insurance and professional indemnity insurance) depending on the nature of the interest affected.293 Alternative insurance contracts may be classified according to the nature of the insurance itself, such as indemnity insurance or payment of a sum of money on the happening of the specified event irrespective of whether any pecuniary loss is incurred.294

In Australia, the doctrine of privity has caused injustice for parties to contracts of general insurance based upon the indemnity principle. 295 One example is property damage insurance where recovery under the insurance policy is dependent upon the insured party establishing that he or she has suffered loss before the insured can claim on the policy. Where an insured party takes out a policy that purports to cover the personal chattels of third parties who are not parties to the contract of insurance and loss is suffered by these third parties, the insured will be unable to prove personal loss. The

291 (1978) 139 CLR 231. (‘The New York Star’). 292 [1983] 1 NSWLR 431. 293 A. A.Tarr, Kwai-Lian Liew and W. Holligan, Australian Insurance Law (Second ed, 1991), 11. 294 Kenneth Sutton, Insurance Law in Australia (Third ed, 1999), 12. 295 Ibid 110.

102 third parties on the other hand who have suffered actual loss will be unable to claim as they are not parties to the contract. While Australia has abrogated the doctrine of privity by legislation in certain instances, such as motor vehicle compulsory third party insurance, the doctrine of privity continues to cause injustice to third parties in other insurance contracts, especially in indemnity insurance as mentioned above.

The relationship between the doctrine of privity and insurance contracts can be seen as early as in the 19th century case of Phillips v Pacific Fire & Marine Insurance Co (Sydney). 296 In this case, a buyer took out a marine insurance policy over goods purchased from overseas, the policy being expressed to be not only in the name of the buyer, but also in the names of those “to whomsoever the same might apply”. The seller stopped the goods in transit because of the buyer’s insolvency, paid the premium due and sued the insurer on the policy in his own name for damage to the goods suffered in transit. It was held that the seller could not succeed for the reason that the buyer had insured in his own name and not as agent for anyone else and the contract was not made by or on behalf of the seller.297

A modern case on the application of the doctrine of privity in the insurance contracts can be seen in an Australian Capital Territory case concerning a compulsory third party insurance contract, Jovanic v Broers.298 In this case, A, the owner of a motor vehicle took the car to a garage for repairs. With the owner’s permission, an employee of the garage proprietor took the car for a test drive. Due to the employee’s negligence, the car collided with another vehicle which was owned by the plaintiff. At the time of the accident, both vehicles were insured by the same insurer under separate comprehensive motor vehicle insurance policies in the name of their respective owners. The insurer

296 (1894) 10 WN (NSW) 149. 297 In contrast, see the English case Waters v Monarch Fire & Life Assurance Co (1856) 5 E & B 870 indorsed in A Tomlinson (Hauliers) Ltd v Hepburn [1966] AC 451 where it was held that a bailee could insure goods for their value, retain the insurance money to cover the bailee’s own interest and hold the balance on trust for the owners of the goods. In light of these cases, it is worth querying in the instant case whether the buyer could be joined as defendant and hold the money as trustee for the seller since the buyer intended to insure the interest of the seller as well, by abrogating the doctrine of privity in this kind of case. 298 (1979) 25 ACTR 39.

103 indemnified the plaintiff and then brought an action in the plaintiff’s name against the garage proprietor and his employee. The employee joined the insurer as a third party, claiming from it as the insurer of A’s vehicle.299 It was held that since the employee was not a party to the contract of insurance, the employee was not entitled to be indemnified by the insurer, unless the insured (the owner of the vehicle) in taking out the policy acted as an agent or a trustee to those whom the insured permitted to drive the vehicle and nobody had been given express permission in the present case.300

The doctrine of privity and the indemnity principle have given rise to problems in relation to the extension of a vendor’s insurance cover to a purchaser of real property and in connection with insurance that is expressed to cover third parties. In Ziel Nominees Pty Ltd v VACC Insurance Co,301 the doctrine of privity continued to prevail in relation to contract of insurance for property damage. The purchaser of a property did not take out insurance, relying instead on the fact the vendor already had insurance. During the period between contract and completion, the property was substantially damaged by fire. The vendor signed an authority addressed to the insurance company, authorising the insurance company to pay any moneys due under the policy to the purchaser. The purchaser completed the purchase. However, the insurer refused to make any payment under the policy. The High Court accepted the insurers’ argument that it was not liable to the purchaser:

It is settled law that upon the signature of an enforceable contract of sale of land the purchaser is bound to complete, irrespective of the destruction of the improvements on the land in the meantime…302

A vendor who receives the price as agreed under the contract of sale suffers no loss as a result of the destruction of the improvements on the land. In this case it was the purchaser who incurred a pecuniary loss, because as a third party the purchaser was

299 Clause 9 of the A’s policy stated “The Company will extend the indemnities…hereof to any person who is in charge of or driving the Insured Vehicle with the permission of the Insured.” 300 The effect of this case for the third party beneficiary in a motor accident case is no longer significant since the ACT passed Road Transport (Third-Party Insurance) Act 2008 as well as the Road Transport (General) Act 1999 and the Road Transport (Third-Party Insurance) Regulation 2000. 301 (1975) 50 ALJR 667. 302 Ibid 669 ( McPherson J).

104 unable to claim the insurance money under the insurance policy. Making the vendor the agent of the purchaser to claim from the insurance company was also of no benefit as payment under the policy was conditioned upon the vendor suffering a loss. The vendor will only be indemnified by the insurance company if a loss is suffered.303

3.3.2.3 The abrogation of the doctrine of privity in insurance contracts

Trust

Trust is a remedy provided by the law of equity. The use of trust as a method to evade the doctrine of privity in Australia was recognised by Fullagar J when his Lordship stated that:

Equity could and did intervene in many cases involving circumstances in which the common law requirement of privity could operate unjustly by treating the promisee as a trustee of a promise made for the benefit of a third party, allowing the third party to enforce the promise, making the promisee a trustee, if necessary, a defendant in an action against the promisor.304

In insurance contracts, a trust could be expressly created by the parties to the contract or could be inferred by the court based on the words used by the parties. Once a trust exists, the third party will be treated as the beneficiary of the insurance money and the insured as the trustee of the insurance money. As a trustee, the insured has the right to sue the insurance company in the event of refusal by the latter to pay the third party. As a beneficiary of a trust, the third party will acquire equitable rights to sue the trustee (if the trustee refuses to sue the insurance company) as well as the insurance company.

The concept of trust was invoked by Deane J in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd305 as a means of allowing McNiece’s claim against Trident on the basis that Blue Circle held some of their contractual rights against Trident on trust for McNiece. The case involved a workers’ compensation insurance policy. There was a

303 The same facts later occurred in Kern Corporation v Walter Reid Trading Pty Ltd (1987) 163 CLR 164 where the High Court of Australia held that a policy of insurance against loss by fire was a contract of indemnity and ultimate settlement by a purchaser, bound by contract to complete, meant that the vendor suffered no loss against which the vendor might be indemnified. 304 Wilson v Darling Island Stevedoring (1956) 95 CLR 43, 67. 305 (1988) 165 CLR 107.

105 contract of insurance between Blue Circle, a construction company and Trident. The insurance policy defined the insured as Blue Circle, its subsidiaries and “all contractors and sub-contractors.” McNiece, who was Blue Circle’s principal contractor, relied on the insurance policy for indemnity when he was sued by a crane driver for negligence. When the claim was denied by Trident on the ground that McNiece was not a party to the insurance contract, the High Court by a majority of 5-2 held that Trident was under an obligation to pay back McNiece. In the words of Deane J:

If there be a doctrinal basis for the recognition by the Court of Appeal of a right of action in the third party assured to enforce the insurer’s promise of indemnity in the present case, it must be found, either directly or by way of analogy, in the law of trusts.306

Trident General Insurance Co Ltd v McNiece Bros Pty Ltd 307 could be seen as a landmark case in Australian contract law, being the first case that represents a departure from the doctrine of privity by declaring that the doctrine was no longer applicable to insurance contracts. This declaration has been criticised. The decision was however reached on different grounds. In finding that Trident was liable, Mason CJ and Wilson J in their joint judgment and Toohey J formulated a specific exception to the doctrine of privity which only applied to insurance cases. According to their Honours, a person who, though not a party to a public liability insurance policy, falls within the class of persons expressed to be insured by it, may enforce the indemnity for which the policy provides.308

The approach adopted by Deane J in declaring a trust differs from the current approach of English courts. Before declaring the requisite intention to create a trust, English courts require that clear words creating a trust must be present in the contract or policy of insurance. Deane J, on the other hand, contended that all that is required is the

306 Ibid 146. 307 (1988) 165 CLR 107. 308 It must be noted that Deane J, although agreeing that Trident was liable, did not share the same enthusiasm as Mason CJ, Wilson and Toohey J in abolishing the doctrine of privity. Justice Deane in allowing McNiece’s claim was of the opinion that Blue Circle held some of the contractual rights on trust for McNiece whereas Gaudron JJ relied on the basis of restitution and unjust enrichment. Justices Brennan and Dawson on the other hand opposed the creation of a new exception as well as the abolishment of the privity doctrine in general and in insurance contracts.

106 express or implied intention to allow the third party to enforce the contract or the intention to benefit the third party.

Restitution and Unjust enrichment

The concept of unjust enrichment was accepted as part of Australian law in the case of Pavey & Mathews Pty Ltd v Paul309 where Deane J described the concept of unjust enrichment as “a unifying legal concept which explains why the law recognises, in a variety of distinct categories of case, an obligation on the part of a defendant to make fair and just restitution for a benefit derived at the expense of a plaintiff”.310 Unjust enrichment is closely associated with the principle of restitution in the sense that the defendant, if found to be unjustly enriched at the expense of the plaintiff (or the third party), must return the benefit received to the plaintiff (or the third party). In order to claim unjust enrichment, the elements that must be proved are as follows: i) There must be a benefit received by the defendant; ii) The defendant received the benefit at the plaintiff’s expense; and iii) For the defendant to retain the benefit would cause injustice.311

The concept of unjust enrichment in insurance contracts was explained in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd,312where Gaudron J relied on the principle of restitution and unjust enrichment in allowing McNiece’s claim. Her Honour put forward the novel proposition that “it should now be recognised that a promisor who has accepted agreed consideration for a promise at the expense of the third party to the extent that the promise is unfulfilled and the non-fulfillment does not attract proportional legal consequences.” 313 On this basis, as Trident received the agreed consideration specified in the policy from Blue Circle, Trident came under an obligation to McNiece to fulfil its promise to indemnify as stated in the policy. Refusing to pay McNiece amounted to Trident being unjustly enriched at the expense of McNiece.

309 (1987) 162 CLR 221. 310 (1986) 162 CLR 221, 256-257. 311 K Mason, J W Carter and G J Tolhurst. Restitution Law in Australia (Second ed, 2008), 43. 312 (1988) 165 CLR 107. 313 (1988) 165 CLR 107, 176.

107

Gaudron J further argued that there was no legal principle to prevent the recognition of an obligation and corresponding right as between the promisor and the third party separate from the contractual obligation existing between promisor and promisee.314 This proposition adds a new dimension to the concept of unjust enrichment in the sense that now every promisor who fails to perform his or her contractual obligation be it to the promisee or to the third party beneficiary, is unjustly enriched to the value of the promisor’s promised performance provided there was consideration for the promise.315

Agency

Agency is not a suitable device for assisting third party beneficiaries to sidestep the application of the doctrine of privity to insurance contracts, due the personal nature of an insurance contract and also because of the existence of the duty of disclosure, which requires the parties to the contract to disclose all the material facts.316 There are no reported cases in Australia where the courts have applied the agency exception to an insurance contract.

Preliminary conclusions

Unlike Malaysia, the focus of discussion in relation to insurance contracts and the doctrine of privity in Australia has not concerned life insurance policies. The doctrine of privity has had the most influence in indemnity insurance cases and recently in liability insurance cases such Trident General Insurance Co Ltd v McNiece Bros Pty Ltd.317 The court in this case was willing to infer the existence of a trust which enabled the third party to be indemnified for the loss suffered following the employee’s negligence. Either way, the doctrine of privity has been abrogated in this case. Following the decision, the extent of the impact of the doctrine of privity on third party beneficiaries in insurance contracts is minimal, as third parties can rely on s 48 of the Insurance

314 (1988) 165 CLR 107, 176. 315 Kenneth Sutton, Insurance Law in Australia (Third ed, 1999), 107. 316 See Robert Merkin, 'Privity of Contract The Impact of the Contracts (Rights of Third Parties) Act 1999' in Robert Merkin (ed), (First ed, 2000), 37. 317 (1988) 165 CLR 107.

108

Contracts Act 1984 (Cth), which was passed following the decision in Trident General Insurance.318

In relation to indemnity insurance policies, the doctrine of privity has caused third parties to suffer pecuniary loss, despite the fact the policies on their face were clearly intended to benefit the third party. The impact is worse when the third party was aware of the intended benefit, has relied on it and suffered loss as a result of being denied the right to enforce such benefit as happened in Ziel Nominees Pty Ltd v VACC Insurance Co.319

In summary, in Australia the doctrine of privity has had an impact on third party beneficiaries under insurance contracts. The impact can be seen in the cases analysed above and also in the extent of the detriment suffered by those third parties.

3.3.2.4 Privity and Construction Contracts

This part will analyse the application of the doctrine of privity to construction contracts in the context of the recovery of payments due to sub-contractors from an employer after default by a main contractor.

As far as construction contracts are concerned, the doctrine of privity prevails in circumstances where the sub-contractor sues the employer for default in payment by the main sub-contractor. Unless and until a contractual relationship is established between the sub-contractor and the employer, the employer is not liable.

An example of an unsuccessful attempt by a sub-contractor to enforce a promise by a building owner to pay retention moneys due under a subcontract is to be found in the decision of the High Court in Railways Commissioners for (Vic) v James L Williams Pty Ltd.320 At a time when a contractor with the Victorian Railways Commissioners was in

318 Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107. 319 (1975) 50 ALJR 667. 320 (1969) 44 ALJR 32. See also Dodwell v Phillips [1940] St R Qd 185, which provides another example of an unsuccessful attempt by a sub-contractor to recover from the proprietor the cost of work done after the failure of the main contractor on the assurance of the architect that the sub- contractor would be paid.

109 financial difficulties, the sub-contractors discontinued work. Thereafter the Commissioners wrote to them:

In connexion with an agreement entered into with [the head contractor] this department is now prepared to pay nominated sub-contractors direct for all work carried out after 2nd May 1963, and I will follow up to ensure payment of all amounts outstanding prior to that date.

A sub-contractor resumed work on these terms and gave the Commissioners the information requested in the letter. At that time, the Commissioners were holding the maximum retention money under the head contract (£30 000) of which £6 858 referred to work done by the particular sub-contractor and the head contractor had retained that amount from the sub-contractor. The whole of the retention money had previously been assigned by the head contractor and the Commissioners had notice of the assignment. The High Court of Australia held that the Commissioners were not under a contractual liability to pay the sub-contractor the amount of the retention money as there was no privity of contract between the Commissioners and the sub-contractor.

It is respectfully submitted that by this decision, the sub-contractor suffered injustice because after the sub-contractor received assurance by the Commissioners that the sub- contractor would be paid, the sub-contractor continued construction work and thereby incurred further cost. The sub-contractor acted in reliance on the promise made by the Commissioners to pay the sub-contractor and therefore suffered further loss.

3.3.2.5 The abrogation of the doctrine of privity in construction contracts

Trust

In the context of construction contracts, if the trust exception is successfully invoked, the employer is said to hold the money on trust for the sub-contractor as the beneficiary. In the event of default in payment by the main contractor, the employer, as trustee, must pay the sub-contractor for the work done but yet to be paid.

In Australia, the court is willing to invoke the trust exception and hold the employer liable to pay the sub-contractor if there is money put in the trust account under the management of the employer as trustee.

110

In Stork Electrical Pty Ltd v Leighton Contractors Pty Ltd,321 Stork was engaged by Leighton to supply, install, test and commission electrical services for the Brisbane Convention Centre. A Trust Deed had been entered into between the State of Queensland and Leighton whereby the State of Queensland promised to pay all payments due to the consultants and sub-contractors. Management of the Trust Fund would be held by Leighton, as trustee. Later, a Deed of Variation was executed between the State of Queensland and Leighton which extinguished the State of Queensland’s promise to pay into the trust account. Prior to this, a cheque for $45,248,773 was deposited into Leighton’s account. Leighton submitted that this sum was never subject to the trust and hence it was under no obligation to pay Stork, the sub-contractor. The Supreme Court of Queensland disagreed. In the words of Atkinson J

Once paid into the Trust Account, those moneys were subject to the trusts created by the Trust Deed. The beneficiaries of the State of Queensland’s promise were the sub- contractors and the consultants. The property of the trust was not just the money once it came into the trust Account.322 The learned judge continued

Although, according to orthodox doctrine, Stork could not sue under the contract between Leighton and the State of Queensland because it was not a party to that contract, it had rights enforceable in equity because Leighton constituted itself a trustee for Stork and other third parties of the rights given to third parties under the contract33. By varying the contract so that the third parties, which included Stork, lost those rights, Leighton acted in breach of that trust.323

Unjust Enrichment

Unjust enrichment in construction contracts operates where the plaintiff claims that the defendant has been enriched by the receipt of a benefit (construction or work completed) at the plaintiff’s expense (the plaintiff incurred loss but cannot recover the price) and it would be unjust for the defendant to retain the benefit (because the defendant requested the plaintiff to do the work).

321 [2000] QSC 48. 322 [2000] QSC 48 [41]. 323 Ibid [42].

111

For a third party claim, for unjust enrichment to succeed, those three elements must be proved.324 A sub-contractor may provide materials for the owner's construction and be unable to recover the price from the main contractor but, if the owner is bound to pay the main contractor, there is no unjust enrichment of the owner. However, if the main contractor has abandoned the contract and has no claim against the owner, it is possible that the owner has no contractual liability to pay for the materials and thus has been enriched.

Justice Gaudron’s approach of using the principles of restitution and unjust enrichment325 seems to have received support in Winterton Constructions Pty Ltd v Hambros Australia Ltd. 326 In this case, the first respondent (H) and the second respondent (P) entered into a finance agreement which provided for a loan facility for use by P for the purpose of acquisition of a property and the construction on the property of an office block. The property was used a security for the loan. Several months later, P and the applicant (W) entered into a contract for the construction of the office block on the property, by way of a standard form contract. W, on completing the building work, sued H claiming that H was responsible for the two remaining progressive payments following default by P and H was unjustly enriched at W’s expense because by completing the building work, it had improved the value of the property “at least equal to the sum of the unpaid progress claims” and hence improved the value of the security to H. The Federal Court of Australia allowed the claim to proceed on the ground of unjust enrichment. Justice Gummow concurred with Gaudron J in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd327 that in a situation where the promisor accepted consideration for a promise to benefit a third party and the promisor has been unjustly enriched at the expense of the third party, the promisor

324 The elements are benefit, at the plaintiff’s expense and injustice. 325 See Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107. 326 [1991] ALR 363. 327 (1988) 165 CLR 107.

112 comes under a legal obligation to the third party and the third party can personally bring an action to secure the benefit of the promise.328

However, an attempt by the sub-contractor to rely on unjust enrichment was denied by the Tasmanian Supreme Court in Goliath Portland Cement Company Pty Ltd v McNally Australia Pty Ltd (No 4). 329 The sub-contractor by way of counterclaim sought to recover payment directly from the owner when the main contractor became insolvent leaving the sub-contractor unpaid. The basis of the claim was that the owner would be unjustly enriched if the owner had the benefit of the sub-contractor’s work and the sub- contractor was not paid. The owner claimed that by virtue of the insolvency of the main contractor, the owner was entitled to avoid the existing contract between it and the main contractor. Justice Underwood in rejecting the sub-contractor’s claim said that the sub- contractor’s right to recover the sum claimed was governed by the existence of a valid enforceable contract and at the relevant time, such contract was already discharged. This was based on the principles expressed by the majority in Pavey & Matthews Pty Ltd v Paul330 where Deane J stated that

The quasi-contractual obligation to pay fair and just compensation for a benefit which has been accepted will only arise in a case where there is no applicable genuine agreement or such an agreement is frustrated, avoided or unenforceable….it is the very fact that there is no genuine agreement or that the genuine agreement is frustrated, avoided or unenforceable that provides the occasion for [and part of the circumstances giving rise to] the imposition by the law of the obligation to make restitution.331

Justice Underwood held that the claim by the sub-contractor was contrary to this principle.332

A recent attempt to rely on unjust enrichment as a cause of action by a third party can be seen in Lumbers v W Cook Builders Pty Ltd.333 In this case, the issue was whether a sub-

328 [1991] ALR 363, 375. See also Marriott Industries Pty Ltd v Mercantile Credits Ltd [1991] SASC 2874 where the Supreme Court of South Australia was divided on the question of allowing the use of unjust enrichment as a mean to abrogate the doctrine of privity. King CJ did not agree with Gaudron J but Olsson and Mohr JJ were prepared to accept Gaudron J’s approach. 329 (Unreported, Underwood J, Tas Supreme Court, 2 February 1993). 330 (1986) 162 CLR 221. 331 (1986) 162 CLR 221, 256 (Deane J). 332 Philip Davenport in his book, Construction Claims (1995), opined that the existence of a valid and enforceable contract between the sub-contractor and the main contractor does not necessarily mean that the owner has not been unjustly enriched. 333 [2008] HCA 27.

113 contracting builder (Cook Builders), working under a contract with the head contractor (Cook & Sons), was entitled to restitution from the building owner (the Lumbers). The background to the claim was that four years after completing the work in constructing a large house, the sub-contractor has not been paid for all it should have been for construction the house. The sub-contractor did not proceed to sue the head-contractor but instead sued the owner, despite there being no direct contractual relationship between the sub-contractor and the owner, on two grounds: that the sub-contractor had been assigned the benefit of the head contractor’s contract with the owner or that it had a direct claim for restitution against the owner. The assignment argument was rejected by the majority of the Full Court of the Supreme Court of South Australia but the Court upheld the restitution claim. However, on appeal to the High Court of Australia, the decision of the trial court was overturned.

The reason why restitution was rejected by the High Court of Australia was because it failed to fulfil one of the requirements for restitution, that is, the owner must have received a benefit at the expense of the plaintiff (the sub-contractor). The High Court held that the benefit received by the owner was at the expense of the head contractor and not at the expense of the sub-contractor given that the head contractor had contractually procured the sub-contractor to carry out the work. In the words of Gleeson CJ, “If [the Lumbers] have been enriched, it is at the expense of Sons.”334

Judging by the decision in this case and how the concept of unjust enrichment operates in construction contracts, it is unlikely that a sub-contractor would succeed in using unjust enrichment as a cause of action as it is questionable whether the employer is unjustly enriched at the expense of the sub-contractor, unless the courts are willing to adopt the approach formulated by Gaudron J above. As stated by K.B. Soh,335

It is not at all obvious why restitution should be used to deal with the third party's position. Any enrichment would seem to be at the expense of the original promisor. It will be more relevant to deal with restitution (or damages) to the promisee when the promisor refuses to perform to the benefit of the third party. If the third party has a restitutionary claim, difficult problems will arise when the promisee attempts to waive (or vary) his contractual right to performance to the prejudice of the third party. The

334 [2008] HCA 27, 54. 335 K. B. Soh, Privity of Contract and Restitution (1989) 105 Law Quarterly Review 4.

114

promisor may have a counterclaim against the promisee, and it is uncertain how this will affect the restitutionary claim. The more sensible approach is surely to use the trust or agency concepts more readily in such situations. With all respect, this attempt to develop the law of unjust enrichment may actually impede its acceptance rather than promote it.

Preliminary conclusions

The doctrine of privity has also been applied in Australian construction contracts in regard to promises made by employers to pay sub-contractor for work done. For example, in Railways Commissioners for (Vic) v James L Williams Pty Ltd,336 as a result of the application of the doctrine of privity, the sub-contractor was refused payment for the work done even though there was promise from the employer to pay the sub- contractors directly. In this case, the sub-contractor who was aware of the promise and therefore acted in reliance on it has suffered loss in the amount of £6,858. The completed work amounted to consideration provided by the sub-contractor for the promise made. The doctrine of privity therefore has had significant impact on the sub- contractor because despite being able to provide consideration for the benefit, being aware of the intended benefit and relying on it, the sub-contractor was still prevented from enforcing the benefit as promised by the employer.

In lessening the effect of the doctrine, the trust exception has been utilised where a trust fund was established in the contract between the employer and the main contractor,337 but otherwise there is a lack of case law abrogating the privity rule in the context of construction contracts. Following Trident General Insurance Co Ltd v McNiece Bros Pty Ltd,338 there were attempts made by the sub-contractors to rely on unjust enrichment to force employers to make payments as promised, but it was held that the sub- contractors could not succeed in unjust enrichment as the benefit received by the employer was not received at the sub-contractor’s expense. Unless the courts are prepared to apply the approach suggested by Gaudron J, unjust enrichment is not an appropriate device to circumvent the doctrine of privity in construction contracts.

336 (1969) 44 ALJR 32. See also Dodwell v Phillips [1940] St R Qd 185, which provides another example of an unsuccessful attempt by a sub-contractor to recover from the proprietor the cost of work done after the failure of the main contractor on the assurance of the architect that the sub- contractor would be paid. 337 See Stork Electrical Pty Ltd v Leighton Contractors Pty Ltd [2000] QSC 48, 108 [ 3.3.2.5]. 338 (1988) 165 CLR 107.

115

3.3.3 England

3.3.3.1 The extent of the problem in England

In the formative period of the doctrine of privity (circa 1500-1900), the majority of the cases involving the doctrine of privity and third party beneficiaries were non- commercial cases, for example, an agreement to pay money or allowances to family members upon the occurrence of an anticipated event.339 Later, from 1900 onwards, the cases that have been mostly affected by the doctrine of privity were insurance cases which are discussed in the next part. As for other types of commercial contracts, they were sometimes discussed and some were regarded as landmark cases on the principles governing the doctrine of privity. These cases are discussed below.

If the third party is not a promisee under the contract, the third party is prevented from enforcing the promise in the contract for the reason that the third party is not a party to the contract. In Dunlop Pneumatic Tyre Co v Selfridge and Co Ltd,340 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 list price. The plaintiffs sought an injunction and damages. The action failed because although there was a contract between the defendants and Dew and although the promise made by Selfridge to Dew (not to sell below list price) had been made for the benefit of Dunlop under its RPM scheme, Dunlop was not entitled to enforce the contract against Selfridge because it was not a party to the contract. Lord Haldane explained:

My Lords in the law of England certain principles are fundamental. One is that only a person who is a party to a contract can sue on it. Our law knows nothing of a jus quaesitum tertio arising by way of contract. Such a right may be conferred by way of property, as, for example, under a trust, but it cannot be conferred on a stranger to a contract as a right to enforce the contract in personam.341

339 See, eg, Jordan v Jordan (1595) Cro Eliz 369; Provender v Wood (1630) Het 30; Starkey v Mill (1651) Sty 296; Bourne v Mason (1669) 1 Vent 6, 2 Keb 457, 527; Crow v Rogers (1724) 93 E R 719; Tweddle v Atkinson (1861)1B &S 393; to name a few. 340 [1915] AC 847. 341 Ibid 853.

116

The doctrine of privity has the effect of leaving third parties with no remedies due to the rule relating to the recovery of damages whereby the promisee can sue for the promisee’s own loss and not for that of the third parties. This effect was seen in Woodar Investment Development v Wimpey Construction UK Ltd.,342 where Woodar agreed to sell land to Wimpey for £850 000. It also required Wimpey to pay £150 000 to a third party. The covenant for this payment was in the following terms:

Upon completion of the purchase of the whole or any part of the land the purchaser shall pay to Transworld Trade Limited of 25 Jermyn Street, London, S.W.I, a sum of £150 000.

When Wimpey refused to pay part of the purchase price to the third party as instructed, the House of Lords held that the third party had no remedy, because the English law of contract did not recognise jus quaesitum tertio.

The use of the common law exceptions

Realising that the doctrine of privity caused difficulties and injustice to third party beneficiaries, English courts resorted to common law exceptions in order to reduce the harsh effect of the strict application of the doctrine of privity.

Trust

In commercial contracts, English courts appeared to be reluctant to apply the trust exception especially by way of implied trusts. The reason was competing priorities between creditors, who happen to be beneficiaries of a trust, over ordinary unsecured creditors.343 The only commercial case in which it was held that a trust could be inferred from a commercial contract was Les Affreteurs Reunis Societe Anonyme v Leopold Walford Ltd.344 In this case, a shipping broker negotiated a charterparty which contained a clause providing for payment from the owners to the broker. It was held by the House of Lords that the charterers, as trustees of the promise for the broker, were entitled to

342 [1980] 1 WLR 277. See also Forster v Silvermere Golf and Equestrian Centre (1981) 125 SJ 397 where Dillon J allowed the vendor to recover damages for her own loss but refused any damages in respect of losses by her children. 343 Robert Merkin, 'The Enforcement of Promises Made for the Benefit of a Third Party' in Robert Merkin (ed), Privity of Contract The Impact of the Contracts (Rights of Third Parties) Act 1999 (2000), 32. 344 (1919) AC 801.

117 enforce payment. Their Lordships regarded the relationship between the charterers and the broker as that of trustee and beneficiary.

Agency

The agency principle has proved to be useful in conferring the benefit of an exclusion clause on third parties, especially an exclusion clause in a bill of lading, i.e. the Himalaya Clause.345

The term Himalaya Clause arose as a result of Adler v Dickinson.346 In this case, Mrs Adler, a passenger on the S.S. Himalaya, had been injured when a gangway fell, throwing her 16 feet to the quay below. Because the passenger ticket contained a non- responsibility clause exempting the carrier, Mrs Adler claimed against the master (Mr Dickson) and the boatswain. The Court of Appeal declared that in the carriage of passengers as well as in the carriage of goods the law permitted a carrier to stipulate not only for the carrier, but also for those whom the carrier engaged to carry out the contract. It was held that the stipulation might be express or implied. In the case of Captain Dickson, however, the Court held that the passenger ticket did not, expressly or by implication benefit servants or agents and thus Dickson could not take advantage of the exception clause.

Later, servants or agents (the stevedores) were held to be entitled to rely on an exemption clause as a result of Lord Reid’s approach in Scruttons Ltd v Midland Silicones.347 Lord Reid stipulated four conditions to be fulfilled before the stevedores could rely on the benefits of the exemption clause:

345 In the past, English courts had tried to extend the concept of agency to situation, where the husband ordered and paid for food at the hotel for him and his wife. When the wife suffered food poisoning caused by the food, they sued the hotel for compensation. It was held that the husband when he ordered and paid for the wife was acting as an agent for the wife and thus she succeeded in her suit against the hotel. See Lockett v A & M Charles Ltd [1938] 4 All ER 170. The approach however was criticized by the Court of Appeal in Jackson v Horizon Holidays [1975] 3 All ER 92. The Court of Appeal held that there was no agency relationship between the father and his family when the father made a holiday reservation and paid for it. It was unrealistic and fictional to imply the existence of the agency relationship in these types of circumstances. 346 [1955] 1 QB 158 (Court of Appeal). 347 [1962] AC 446.

118

I can see a possibility of success of the agency argument if (first) the bill of lading makes it clear that the stevedore is intended to be protected by the provisions in it which limit liability, (secondly) the bill of lading makes it clear that the carrier in addition to contracting for these provisions on his own behalf, is also contracting as agent for the stevedore that these provisions should apply to the stevedore, (thirdly) the carrier has authority from the stevedore to do that, or perhaps later ratification by the stevedore would suffice, and (fourthly) that any difficulties about consideration moving from the stevedore were overcome. And then to affect the consignee it would be necessary to show that the provisions of the Bills of Lading Act, 1855, apply.348 Nevertheless, unlike the position in Australia where third parties could rely on the benefits of the exclusion clause in other circumstances, the position in England is that the Himalaya clause is limited to contracts regarding carriage of goods by sea.349

Preliminary conclusions

In brief, the operation of the doctrine of privity in contracts for the sale of goods and agreements to pay as depicted in Dunlop Pneumatic Tyre Co v Selfridge and Co Ltd,350 and Woodar Investment Development v Wimpey Construction UK Ltd351 demonstrates that the doctrine operates to the detriment of third party beneficiaries. The cases also evidence injustice and unfairness to third parties due to the doctrine. The third party (plaintiff) in Dunlop Pneumatic Tyre Co v Selfridge and Co Ltd352 for example, suffered loss and was treated unfairly due to the inability to enforce the undertaking that the retailer should not sell below the plaintiff’s price despite the undertaking being made for the benefit of the third party. This undertaking made between the wholesale distributors and the retailers was known to the plaintiff and but for this promise, the plaintiff would have not agreed in the first place to sell tyres to the wholesale distributors. This fact aggravates further the injustice caused by the doctrine. The doctrine of privity also impacts recover damages being restricted to the loss suffered by the party to the contract

348 Ibid 474. See later cases such as The Eurymedon (New Zealand Shipping Co Ltd v A M Satterthwaite & Co Ltd) [1975] AC 154, [1974] 1 Lloyd’s Rep 534 (PC); The Owners of the Ship ‘Borvigilant’ v The Owners of the Ship ‘Romina G’ [2003] 2 Lloyd’s Rep 520 which applied Lord Reid’s approach. 349 J.L.R, Davis, “Privity and Exclusion Clauses in Kincaid, Peter, ed., Privity: Private Justice or Public Regulation, (2001), 297. 350 [1915] AC 847. 351 [1980] 1 WLR 277. See also Forster v Silvermere Golf and Equestrian Centre (1981) 125 SJ 397 where Dillon J allowed the vendor to recover damages for her own loss but refused any damages in respect of the losses by her children. 352 [1915] AC 847.

119 and not the loss suffered by a third party.353 As in Australia, English courts also resorted to the use of common law exceptions to mitigate the harsh effect produced by the doctrine of privity. While Australian courts struggled with ascertaining the existence of a trust, England took a different approach. Trust was considered an inappropriate device to abrogate the doctrine of privity in commercial contracts, other than in insurance and construction contracts. In situations involving contracts conferring benefit on third parties by way of an exclusion clause, the English courts were willing to apply the concept of agency but in the limited context of contracts for the carriage of goods by sea only.

3.3.3.2 Privity and Insurance Contracts

Rigid insistence on the doctrine of privity in insurance contracts can cause serious inconvenience and injustice in England.354 Various statutes have intervened to permit actions on insurance policies by beneficiaries under such policies. For instance, a life insurance policy expressed to be taken out for the benefit of a wife or a husband or a child may be enforced by the beneficiary. 355 There is, however, still a variety of insurance contracts in which policies are clearly taken out for the benefit of third parties, and yet are not enforceable by those third parties, for instance, a life insurance policy taken out for any other person (other than a spouse or a child) as well as policies taken out by employers to provide accident or sickness benefits to their employees. Those policies are still subject to the common law doctrine of privity.

In England, insurance contracts, particularly, life policies are commonly associated with the law of trust. The parties to the contract can create a trust for the benefit of a third party without the participation of the third party. Indeed, it might happen that the third party is not even in existence when the trust is created such as an unborn child. If a trust can be shown to exist, it has two distinct advantages. The first is that on the death of the person insured, the insurance money will pass directly to the beneficiary and not

353 See Woodar Investment Development v Wimpey Construction UK Ltd [1980] 1 WLR 277 where the third party suffered loss in the amount of £150 000. 354 P.S. Atiyah, An Introduction to the Law of Contract (Fifth ed., 1995), 367. 355 See Married Women’s Property Act 1882 s 11. The Act was later amended by the Married Women’s Property Act 1907.

120 become part of the deceased’s estate and secondly, if the insured becomes bankrupt, the beneficiary can claim the policy without being subjected to the creditor’s claim.

However, English judicial decisions are divided into two periods of time, one where there is no trust created, hence the doctrine of privity applies, and another where the creation of a trust is recognised. By the end of the 19th century courts were more willing to use trusts as a general method of abrogating the doctrine of privity. At first this method proved fairly successful,356 but in the next century judicial attitudes to its use changed and the approach was rejected.

In Vandepitte v Preferred Accident Insurance Corporation of New York,357 a claim was brought by a person who was injured in a car accident due to the negligence of the daughter of a person who had taken out insurance with the defendant insurer. The insurer promised in the policy to indemnify the insured and “any person operating the car with permission of insured.” The plaintiff failed because the daughter had no direct contractual relation with the insurer. The Privy Council held that the insurance was affected by the father (Mr. Berry) of the negligent driver and provided that an indemnity would be available to an authorised driver. The claim was also rejected as there was no evidence that the father contracted on behalf of anybody but himself or that he intended to create a beneficial interest for his daughter. On the issue of whether a trust was created in the daughter’s favour, Lord Wright held that the intention to create a trust must be affirmatively proven and cannot generally be inferred from the words stated in the policy.358

A stricter approach in deciding whether a trust exists in a contract made for the benefit of a third party applies today. In Re Schebsman,359 a firm agreed with its employee (Schebsman), in consideration of his retirement, to pay certain sums to him and after his death to his widow. On the subsequent bankruptcy of Schebsman followed by his death, the trustee in bankruptcy claimed the payments. Even though the Court agreed that the

356 Tomlinson v Gill (1756) 27 ER 221, Fletcher v Fletcher [1884] 67 ER 561, Lloyd’s v Harper (1880) 16 Ch D 290, Re Flavell (1883) 25 Ch D 89, Walford’s Case [1919] AC 801. 357 [1933] AC 70. 358 [1933] AC 70, 79. 359 [1944] Ch 83.

121 widow should benefit under the agreement, the Court refused to find any trust as there was no clear intention to create a trust in the policy due to the parties retaining the right to vary the benefits.

In Re Sinclair’s Life Policy,360A took out an endowment policy on his own life but on behalf of his godson, B. While acknowledging that A intended to benefit B in making provision for him by means of the policy, Farwell J held that this was not sufficient to constitute a trust and therefore B had no entitlement to the policy money.361

Similarly, in Re Engelbach’s Estate, 362 a father took out an endowment policy to provide for the payment of a sum assured on 3 February 1923, if his daughter should live. The father died in 1916 but the daughter survived to the fixed date and the policy moneys were paid to her. She was however asked to pay them to a stakeholder pending a decision as to the legal rights of the parties. The question to be decided was whether the policy money belonged to the daughter or the estate. It was held that, not only could the daughter not sue on the contract, but the money belonged to the estate of the father and hence must be paid to his executors.363

The application of the doctrine of privity in a group insurance policy can be seen in Green v Russell.364 In this case, a group accident policy was taken out by the employer, who was therein described as "the assured," and the protected employees were named in a schedule, with the sums payable on death or disablement in each case. The policy provided that "the (insurance) company shall be entitled to treat the insured as the absolute owner ... and shall not be bound to recognise any equitable or other claim or interest in the policy and the receipt of the insured ... alone shall be an effectual discharge." It was held by the Court of Appeal that an employee on whose death by accident a sum became payable under the policy had no rights at law to the sum because he was not a party to the contract or to the consideration and he had no rights in equity

360 [1938] Ch 799. 361 [1938] Ch 799, 802- 804. 362 [1924] 2 Ch 348. 363 See also Re Clays’ Policy [1937] 2 All ER 548 where an adopted child was named as a beneficiary in an endowment policy and it was held that there was no effective trust for the adopted child and hence she had no legal right to claim the policy money from the insurance company. 364 [1959] 1 QB 28, [1959] 2 QB 226 (Court of Appeal).

122 because an intention to provide benefits for someone else, and to pay for them, does not in itself give rise to a trust.

Green v Russell365 evidences a firm intention on the part of the Court of Appeal to reject third party beneficiary rights. The Court unanimously refused to accept the view repeatedly expressed by Lord Denning that a person interested can sue on a contract expressly made for his benefit.

3.3.3.3 The Abrogation of the Doctrine of Privity in Insurance Contracts

Trust

Insistence on the creation of a trust has resulted in inconsistent decisions so that the outcome of a case cannot be predicted with certainty.366 When the courts wish to enable the beneficiary to sue they make the promisee a trustee, and when they wish to prevent the beneficiary from doing so, they fall back on the shibboleth of privity of contract.367

Cases with similar facts often have different outcomes. For example, in Williams v Baltic Insurance Association of London, 368 Roche J took a commonsense view and decided that the main object of the insurance policy was to indemnify the owner of the car against any damage. When the owner’s sister while driving the car was involved in an accident, the owner was treated as a trustee for his sister.369

In Re Webb370 a father took out a policy of insurance on the life of each of his two infant children payable to their personal representatives on the death of either of them after their attaining the age of 21 years. If a child died before attaining 21 years, the father had the right to recover part of the premiums paid. The policies, and all the powers

365 [1959] 1 QB 28, [1959] 2 QB 226 (Court of Appeal). 366 G. Williams, 'Contracts for the Benefit of Third Parties' (1944) 7(3) Modern Law Review 123. 367 Winfield, Province of the Law of Tort, 107, cited in G. Williams, 'Contracts for the Benefit of Third Parties' (1944) 7(3) Modern Law Review 123, 131. 368 [1924] 2 KB 282. Compare with Vandepitte v Preferred Accident Insurance Corporation of New York, n 357. Both involved a claim that an insurance policy covered a third party for damage sustained whilst the third party was driving the car of the insured. In both case the policy contained a clause relating to third party risks. 369 It is worth noting that the case came before the learned judge as a case stated by arbitrators who found as a fact that the sister knew and approved of the insurance before the accident occurred. Hence, the arbitrators considered the claim to be based in agency as the sister had ratified the contract which the owner as her agent had made. 370 [1941] 1 All ER 321.

123 exercisable thereunder, were stated throughout to be "for the benefit" of the children, and, on their attaining the age of 21 years, the father's own interest in the policy moneys terminated. It was held that the terms of the policies created a trust in favour of the children, and the policies were held not for the benefit of the father's estate, but in trust for the children.371

Re Webb372 was followed in Re Foster’s Policy373 where the policy provided that upon the child turning 21, the right to surrender or charge the policy which until then vested in the father was to be vested in the child. Justice Plowman held that the fact that these rights were vested absolutely in the child at 21 was inconsistent with the father thereafter retaining any beneficial interest and a trust was necessarily implied.

In Bowskill v Dawson (No 2)374 the trustees of a trust fund established by an employer for its employees affected a master policy. The trust deed provided that the scheme was to provide benefits for an employee’s dependants if the employee died whilst in the company’s employment. An employee was killed. The issue before the court was whether the moneys were paid by the trustees under the trust deed. The Court of Appeal held that the trustees affected the insurance as the employee’s trustees. It seems that in this case, despite the employer’s power to terminate or revoke the payment and the contributions to the fund, Romer LJ held that the employees were to be regarded as beneficiaries under a voluntary trust.375

In Royal Exchange Assurance v Hope,376 a policy of life insurance was assigned to the defendant and the assurer was given written notice. The policy was later extended for a further three months on payment of an additional premium, but the benefit of the extension was not assigned to the defendant. It was held that the extension of the policy

371 In contrast, see decision in Re Englebach’s Estate [1924] 2 Ch 348. 372 [1941] 1 All ER 321. 373 [1966] 1 All ER 432. 374 [1955] 1 QB 1. 375 In contrast, see the subsequent case, Green v Russell [1959] 1 QB 28 where it was held that no trust was created by the employer, notwithstanding that the policy recited the employer’s wish to benefit the employees. 376 [1928] Ch 179.

124 had been designed for the benefit of the defendant and a trust had been created in the defendant’s favour, she was therefore entitled to the proceeds of the policy.377

In a contract of hire for the hirer to insure the vehicle, it was held that the owner of the vehicle could not claim directly against the insurer when the vehicle was lost. In D G Finance v Scott & Eagle Star378 the hirer took out an insurance policy as required in the contract of hire between the hirer and the owner of the vehicle. It was the owner who made a claim against the insurer due to the fact that the hirer was bankrupt and the trustee in bankruptcy had no interest in pursuing the matter because he would hold the proceeds of the policy on trust for the owner. The Court refused to follow the leading textbooks on insurance law and the dicta in Re King379 that in such circumstances, a trust in favour of the owner should be inferred so that the owner could claim directly against the insurer. The majority approach in the Australian case, Trident General Insurance Co v McNiece Bros Pty Ltd380 was also rejected. In Re King, Upjohn LJ stated that

the owners of the goods, which have been destroyed by some accidental fire, are entitled to claim against the insurers for the value of the goods. This is ancient mercantile law. The warehouseman is presumed to be insuring the respective interests of himself and the owners in the goods and each may claim according to his interest.381 Such an approach by the court is regrettable since it denies the owner a direct cause of action in circumstances where justice and convenience require a remedy.382

Agency

The law is uncertain on the issue of whether a third party has a direct claim against the insurer in the event that the insured is unwilling or unable to claim himself. Based on the doctrine of privity, the third party cannot sue unless the third party can show specific statutory authority or that the insured contracted as trustee or agent for him.383

377 By contrast, see Re Schebsman [1944] Ch 83. 378 16/06/1995 UKCA Unreported. 379 [1963] 1 All ER 781, 794 (Upjohn LJ). 380 (1988) 165 CLR 107. 381 [1963] 1 All ER 781. 382 N. S. Price, 'Insurers, Privity and Procedure' (1996) The Modern Law Review 738. 383 John Birds, Modern Insurance Law (Fourth ed, 1997), 64.

125

As for agency, the application of the doctrine of the undisclosed principal was held to be applicable to an insurance contract by the Privy Council in Siu Yin Kwan v Eastern Insurance Co Ltd.384 In this case, R, a Hong Kong shipping agent, purportedly effected employers’ liability insurance on behalf of the shipowners, A. Some members of a vessel owned by the latter were killed in circumstances entitling them to claim compensation from A, but A had been wound up and the representatives of the deceased sought to recover from the insurer, E. E resisted the claim on the basis that R had acted as undisclosed agent for A and the doctrine of undisclosed principal was inapplicable to insurance contracts. A, therefore was not an undisclosed principal and not a party to the insurance contract.

The Privy Council, in rejecting this claim by the insurer stated that the type of contract in the present case was an ordinary commercial contract and the shipowner was entitled to sue as undisclosed principal and therefore has to be treated as a party to the contract.

The doctrine of undisclosed principal was also applied in National Oilwell (UK) Ltd v Davy Offshore Ltd385 to enable the co-assured to have a direct claim against the insurer. Justice Colman stated that

Where at the time when the contract of insurance was made the principal assured or other contracting party had no actual authority to bind the other party to the contract of insurance, but the policy is expressed to insure not only the principal assured but also a class of others who are not identified in that policy, a party who at the time when the policy was effected could have been ascertained to qualify as a member of that class can ratify and sue on the policy as co-assurred if at that time it was intended by the principal assured or other contracting party to create privity of contract with the insurers on behalf of that particular party.386

Preliminary conclusions

In England, the doctrine of privity has a major impact in various types of contracts including insurance contracts. Particular intention was addressed to life insurance contracts and motor accident insurance. In insurance contracts, the doctrine of privity has been strictly applied particularly where there is no consideration provided by a third

384 [1994] 1 All ER 213. 385 [1993] 2 Lloyd’s Rep 213. 386 [1993] 2 Lloyd’s Rep 213, 596, 597.

126 party beneficiary even though the parties to the contract evinced an intention to benefit the third party and the third party was aware of the intended benefit.387 Even though they suffered no direct financial loss, the third party beneficiaries experienced a loss of expectation due to reliance on an entitlement to the insurance money.

To overcome the effect of the doctrine, English courts have been willing to apply the available common law exceptions, for example, trust and agency. The conceptual basis of a trust has been subject to different judicial approaches. This has resulted in different outcomes although the third party beneficiaries were in similar situations.388 The need of English courts to abrogate the doctrine of privity in insurance contracts has resulted not only in an inconsistency of approaches to declaring a trust, but has also created uncertainty in relation to the rights of third party beneficiaries in these insurance contracts.

3.3.3.4 Privity and Construction Contracts

In construction contracts, the employer, for whose benefit the work is carried out, and the contractor, who must carry out the work are the parties to construction contracts. In addition to the parties to the contract, there are usually several other persons involved. One of these other persons is the sub-contractor. A sub-contractor does not have any contractual relationship with the employer, i.e. there is no privity of contract between the sub-contractor and the employer.

It follows that a sub-contractor cannot make any claim against the employer for the price of work done or material supplied under the sub contract. The existence of a direct payment clause, permitting the employer to make direct payments to the sub-contractor, does not create a contractual relationship between the employer and the sub-contractor. For example, in A Vigers Sons & Co Ltd v Swindell389 the plaintiff (the sub-contractor) sued the defendant (the employer) for the sum of £ 112 4s 3d being the reasonable price for work and labour and materials supplied or alternatively the sum of damages for

387 See cases like Vandepitte v Preferred Accident Insurance Corporation of New York [1933] AC 70; Re Sinclair’s Life Policy [1938] Ch 799; Re Engelbach’s Estate [1924] 2 Ch 348; Green v Russell [1959] 1 QB 28, [1959] 2 QB 226 (Court of Appeal), 116-118 [ 3.3.3.2]. 388 See, eg, Williams v Baltic Insurance Association of London [1924] 2 KB 282. Cf Vandepitte v Preferred Accident Insurance Corporation of New York [1933] AC 70. 389 [1939] 3 All ER 590.

127 breach of contract. The defendant had entered into a contract on a standard Royal Institute of British Architects (RIBA) form of contract with the main contractor for the construction of a block of flats. The rule governing the standard form of contract was that there should be no privity of contract between the employer and the sub-contractor, even if the employer exercised the right to pay the sub-contractor directly and debited the main contractor. The main contractor went into bankruptcy and the project was taken over by the liquidated company. Later, the architect who was employed by the employer gave a verbal order to the plaintiff to lay the flooring and then purported to pledge the defendant’s credit to the plaintiff for the work done. The plaintiff sought to hold the defendant liable for the work done. Justice Asquith in holding the defendant not liable noted that the decision caused real hardship to the plaintiff who had completed the work in good faith and had not been paid. However, to hold the defendant liable would also have caused hardship because the defendant had already paid the main contractor.

The court rejected the claim by the plaintiff that the architect in pledging the defendant’s credit was acting as an agent of the defendant on the ground that the defendant never knew of the order made by the architect even though the defendant on previous occasions made payment to the other sub-contractor.

In an earlier case, J A Milestone & Sons Ltd (in Liquidation) v Yates Castle Brewery Ltd, 390 Justice Singleton stated that certificates issued by the architect directing the employer to pay the sub-contractor directly were invalid and did not empower the employer to pay the sub-contractor despite a clause in the contract (between the employer and main contractor) that sums should be paid to the sub-contractor by the main contractor or by the employer as the architect should direct. The main contractor went into liquidation, which was the reason for the certificate directing the sub- contractor to be paid by the employer. The architect was held not to possess the authority to issue such a certificate. The fact that there was no privity of contract between the employer and the sub-contractor further strengthened the argument that the employer had no obligation to pay the sub-contractor. The learned judge further stated

390 [1938] 2 All ER 439.

128 that a clause which enabled the building owner to pay someone other than the main contractor must be strictly construed as it might lead to confusion.391

3.3.3.5 The Abrogation of the Doctrine of Privity in Construction Contracts

Assignment

A sub-contractor who has entered into a contract with the main contractor to which the employer is not a party has no cause of action against the employer for the work done or goods supplied under the sub-contractor’s contract, unless the sub-contractor sues under a valid assignment. In the context of construction contracts, assignment refers to the assignment of the benefit of the main contract, i.e. the right to receive money when it falls due.392

There are two ways of assignment; statutory assignment and equitable assignment. Statutory assignment can be created by s 136 of the Law of Property Act 1925 which reads: 'Any… assignment by writing under the hand of the assignor… of any… thing in action, of which express notice in writing has been given to the… person from whom the assignor would have been entitled to claim such… thing in action, is effectual in law…’ The requirements under s 136 that must be fulfilled are as follows: i) Only the benefit of an agreement may be assigned.

ii) The assignment must be absolute.

iii) The rights to be assigned must be wholly ascertainable and must not relate to part of a debt.

iv) The assignment must be in writing and signed by the assignor.

v) Notice of the assignment must be received by the other party or parties for the assignment to take effect.

391 [1938] 2 All ER 439, 443 (Singleton J). 392 Stephen Furst, Adrian Williamson and John Uff, Keating on Construction Contracts (8th ed, 2006), 374.

129

If the above requirements cannot be fulfilled, an assignment can take place by way of an equitable assignment. Under equitable assignment, only the benefit of an agreement may be assigned. There is no requirement for written notice to be given or received. After an equitable assignment of the benefit of the contract, the sub-contractor, as the assignee, has a right to any payment due to the main contractor. On default by the employer, the sub-contractor may sue in the name of the main contractor (the assignor) or, if the main contractor refuses to be joined as the claimant, must add the main contractor as a defendant. A clear intention to assign a debt or other chose in action may result in an equitable assignment. For example, a letter by the main contractor to the employer directing the employer to pay direct to the sub-contractor a sum of money was held by the Court of Appeal to be a valid equitable assignment in Ashby Warner & Co Ltd v Simmons.393 In the words of Greer LJ, “Equity, however which now prevails in all courts did justice to the party who received an assignment of part of a larger sum, by holding that that assignment gave him an equitable claim on the fund if the fund came into existence”. 394 The learned judge further continued that “the effect of such an assignment appears to be that it gives to the assignee a right to make a claim…”395

Where a party enters into a construction contract for the benefit of a third party and subsequently assigns its rights against the building contractor to the third party, the latter is entitled to recover damages for defects in the performance of the contract where it is foreseeable that such defects would cause the third party loss. In Darlington Borough Council v Wiltshier Northern Ltd, 396 a finance company entered into a construction contract with the defendant (the contractor) for the erection of a building. The company also entered into a collateral agreement with the plaintiff whereby the company agreed to procure the erection of the building and to pay the contractor all sums due under the construction contract. Under the collateral agreement, the company agreed that at the end of the construction period, or whenever it was called upon to do so, it would assign to the plaintiff the benefit of any rights it had against the contractor

393 (1936) 2 All ER 697, 155 L T 48. 394 Ibid 699 (Greer LJ). 395 Ibid. 396 [1995] 3 All ER 895.

130 including any cause of action. The plaintiff in return agreed that the finance company should not be liable to the plaintiff for any loss arising out of any defects in the building. The construction was completed and it contained serious defects which would cost £2 million to remedy. The plaintiff, as assignee, appealed against the decision of the trial court which held that as assignee, the plaintiff could claim no more than nominal damages. In allowing the appeal, Steyn J held that the contract between the company and the defendant was a contract for the benefit of the plaintiff as the company agreed to finance the construction of the building. However, his Lordship concluded that the case was covered by an exception to the general rule relying on the Lord Diplock’s speech in The Albazero:397

The only way in which I find it possible to rationalize the rule in Dunlop v Lambert (1839) 6 Cl & Fin 600, 7 ER 824) so that it may fit into the pattern of the English law is to treat it as an application of the principle, accepted also in relation to policies of insurance on goods, that in commercial contract concerning goods where it is in the contemplation of the parties that the proprietary interests in the good may be transferred from one owner to another after the contract has been entered into and before the breach which causes loss or damage to the goods, an original party to the contract, if such be the intention of them both, is to be treated in law as having entered into the contract for the benefit of a all persons who have or may acquire an interest in the goods before they are lost or damaged, and is entitled to recover by way of damages for breach of contract the actual loss sustained by those for whose benefit the contract is entered into.398

Additionally, Lord Diplock stressed the need to avoid a demonstrable unfairness which no rationale legal system should tolerate. If it was the intention of the parties that the plaintiff should have the right to recover the loss suffered, the court must respect that.399

Trust

In England, the existence of a direct payment clause has never been held to raise the implication of a trust.400 Therefore, there are no reported cases on the use of trust in regard to direct payment clauses.401

397 [1976] 3 All ER 129, [1977] AC 774. 398 [1976] 3 All ER 129, [1977] AC 774, 847. 399 [1976] 3 All ER 129, [1977] AC 774, 907. 400 See J A Milestone & Sons Ltd (in Liquidation) v Yates Castle Brewery Ltd [1938] 2 All ER 439, 392 (Singleton J).

131

Agency

Other than the concept of agency and the exclusion clause which is irrelevant to payment of a sub-contractor, agency can also be applied where the employer is the principal and the sub-contractor is the third party. When there is an agency relationship created between the employer and the main contractor (agent) who made a promise to pay the sub-contractor, the sub-contractor as the third party is entitled to enforce the promise against the employer on the basis of agency.

In A Vigers Sons & Co v Swindell402 the concept of agency was recognised by Asquith J in a situation where there was an unauthorised pledge of the employer’s credit. It was held that the employer may ratify it despite the existence of a clause that prohibits direct payment by the employer, hence creating an agency relationship between the employer as principal and the architect as agent. The sub-contractor who had been promised to be paid by the architect is the third party. In Asquith J’s words “If [the employer] knew that [the architect] was pledging her credit to other sub- contractors wholesale, approved or affirmed his conduct, this might ratify the transaction with [the sub-contractor], even if she had no specific knowledge of the transaction”.403

Despite this, it is rarely the case that the main contractor would be acting as an agent to the employer as the provisions for the creation of agency as enunciated by Diplock LJ in

401 However, trust has been used by Dillon and Waite LJJ in Darlington Borough Council v Wiltshier Northern Ltd, [1995] 3 All ER 895 where their Lordships held that in light of clause 3(4) the covenant agreement which concerned the assignment of right from the company to the plaintiff if the company had before any assignment sued in its own name for damages for the alleged breaches of the construction contract, the company would have held any damages recovered on constructive trust for the plaintiff. 402 [1939] 3 All ER 590. 403 [1939] 3 All ER 590, 596. Additionally, English courts in earlier periods also resorted to an express or implied promise to pay to enable sub-contractors to claim the money promised. In Dixon v Hatfield (1825) 2 Bing 439, the employer’s agreement to pay a timber supplier for moneys due to the contractor amounted not merely to a collateral undertaking guaranteeing the contractor’s debt, but to a direct undertaking to pay the supplier directly.

132

Garnac Grain Co v HMF Faure and Fairclough Ltd and Bunge Corporation404 will not usually be satisfied.405 The principle was stated as follows: “For A to be the agent of B in entering into a contract with C…there must be a previously existing agreement between A and B that A shall contract with C on B’s behalf so as to create privity of contract between B and C.”

In most circumstances, there is no existing agreement or contract between the main contractor and the employer that the main contractor shall contract with the sub- contractor on the employer’s behalf.406

Preliminary conclusions

In England, there are many cases and examples in which sub-contractors could not enforce the benefits of promised payments expressed in standard form contracts due to the doctrine of privity. For example, the sub-contractors in A Vigers Sons & Co Ltd v Swindell407 and in J A Milestone & Sons Ltd (in Liquidation) v Yates Castle Brewery Ltd408 were aware of the promise by the employers to pay them directly and the sub- contractors provided consideration for the promise when they completed the work under the sub-contracts. By reason of the doctrine of privity, they were held not entitled to enforce the promise and in consequence the sub-contractors suffered financial loss. The impact of the doctrine of privity in these types of cases is severe.

The impact of the doctrine is further amplified in the case of construction contracts as the direct payments clause has not been interpreted as creating a trust in favour of the sub-contractors in any reported case. These sub-contractors have suffered economic loss as a result of not being paid for the work done and materials supplied for the

404 [1965] 3 All ER 273. 405 Graham N. Prentice, 'Remedies of Building Sub-Contractors Against Employers' (1983) 46 Modern Law Review 409. 406 In contrast, in Hobbs v Turner (1902)18 TLR 235, a contract provided that payments on the architect’s certificate in respect of provisional sums were to be made “in such amounts and to and in favour of such persons as the architect shall direct…” The certificate was issued directly to the employer. Collins MR held that the main builder was acting as an agent to the employer since the main builder was acting under the general scope of the contract, hence creating privity between the building owner and the sub-contractor. 407 [1939] 3 All ER 590. 408 [1938] 2 All ER 439.

133 construction works. In order to remedy the injustice produced by the doctrine of privity, in addition to assignment, in earlier periods, English courts had been willing to hold that the main contractor acted as an agent to the employer409 and when there was an express or implied promise made by the employer to pay the sub-contractor directly, the court adopted the principle of express or implied promise to compel the employer to fulfill their promise.410

In summary, the doctrine of privity has an impact on construction contracts in terms of payment to sub-contractors where the sub-contractors have to endure loss and injustice. Only occasionally have English courts been prepared to apply exceptions to provide a remedy to the sub-contractors concerned.

3.4 POSITION OF THIRD PARTIES IN MALAYSIA COMPARED WITH AUSTRALIA AND ENGLAND

In this part, a comparison is conducted to assess whether third party beneficiaries in Malaysia share the same problem as third party beneficiaries in Australia and England. This part will also examine the similarities in the type of detriment suffered by those third parties.

3.4.1 Third Parties in Other Types of Commercial Contracts

As far as the application of the doctrine of privity in types of commercial contracts (other than insurance and construction contracts) is concerned, there are concerns with the effect caused by the doctrine to third party beneficiaries in all three jurisdictions. In Malaysia, other than in insurance and construction contracts, the impact of the doctrine of privity is seen in agreements to pay the third party, sale and purchase agreements and tenancy agreements. As a result of the doctrine of privity, all third parties in the three analysed cases411 were prevented by the courts from enforcing the benefit contained in

409 See Hobbs v Turner (1902)18 TLR 235, above n 406. 410 See Dixon v Hatfield (1825) 2 Bing 439, above n 403. 411 Kepong Prospecting Ltd v Schmidt [1968] 1 MLJ 170; Chung Shan Kwang v Ise Ichi Japanese Restaurant Sdn Bhd [2005] 3 MLJ 471; Bacom Enterprises Sdn Bhd v Jong Chuk [2011] 5 MLJ 820.

134 the contract even though the benefit was intended by the parties to the contract to be bestowed on the third party. Each third party was aware of the intended benefit in the contract and acted in the belief that they would receive or be entitled to the payments as promised in the contracts. To frustrate the matter further, except for the third party in Chung Shan Kwang v Ise Ichi Japanese Restaurant Sdn Bhd, 412 each third party provided consideration for the benefits promised. In summary, the doctrine of privity has operated to disadvantage these third parties, resulting in them suffering loss as a result of being unable to enforce the benefit under the terms of the contracts.

In Australia, the doctrine of privity has been applied in several types of contracts, for example, a contract for payment of debts, a contract of guarantee, a contract for the sale of land and a contract for carriage of goods. Nevertheless, none of the third parties in the analysed cases suffered actual or financial loss due to the operation of the doctrine of privity. The only loss that they experienced was the loss of expectation and reliance that they would have received the money. For examples, in Coulls v Bagot's Executor and Trustee Co Ltd413 and Olsson v Dyson,414 the wives of the deceased were denied in their claims to receive the money intended by their deceased husbands on the ground that they were not parties to the contracts that purported to confer the benefit on them. As the wives did not provide any consideration (monetary consideration) for the benefit promised, the wives did not suffer any financial loss. In summary, the impact of the doctrine of privity in these types of contracts is the loss of expectation of financial benefits from the contract. The doctrine has also defeated the clear intention of the parties to the contract to confer a benefit on the third parties concerned who were also aware of the intended benefit.

In contrast to third party beneficiaries in Australia who only suffered loss of expectation, third party beneficiaries in England suffered financial loss either due to a failure to recover money paid or inability to recover a debt. There was financial loss suffered by third parties in a sale of goods contract as illustrated in Dunlop Pneumatic

412 [2005] 3 MLJ 471. 413 (1967) 119 CLR 460. 414 (1969) 120 CLR 365.

135

Tyre Co v Selfridge and Co Ltd.415 and in an agreement to pay as shown in Woodar Investment Development v Wimpey Construction UK Ltd.416 These cases demonstrate that the doctrine of privity has caused third parties to suffer financial loss even though the contracts clearly evinced an intention to benefit the third parties. In addition, the third parties were aware of the intended benefit and had acted on reliance on it and suffered loss. The doctrine of privity also restricts the recovery of damages to the loss suffered by the party to the contract and not the loss suffered by a third party. Consequently, third parties are left without any remedies. These impacts illustrate the injustice and unfairness caused by the doctrine of privity.

Other than in these two types of contracts, England shares similarities with Australia in relation to the right of third parties to claim the benefit of an exemption clause. Both jurisdictions have resorted to the use of agency to allow the third parties (usually stevedores) to enforce the benefit of an exemption clause.

In summary, even though the circumstances of the cases in these three jurisdictions are different, the impact of the doctrine of privity is similar: third party beneficiaries have been prevented from claiming the benefits promised in contracts and they either suffered financial loss or the loss of expectation of payment of the money promised to them because of the doctrine of privity. The differences lies with the type of damage suffered, the quantum of the loss suffered and whether the third party provided consideration for the benefit.

3.4.2 Third Parties in Insurance Contracts

From the analysis of past judicial decisions, it can be concluded that the application of the doctrine of privity has affected third parties in insurance contracts in all three selected jurisdictions; Australia, England and Malaysia.

From the cases, it can be seen that third parties in Malaysia share the same problem with third parties in England particularly in cases involving life insurance policies and group

415 [1915] AC 847. 416 [1980] 1 WLR 227.

136 insurance policies. Cases such as GR Nair v Eastern Mining & Metals Co Sdn Bhd417 and Green v Russell418 represent the firm stand of the courts in defending the doctrine of privity and thereby refusing to recognise the rights of third party beneficiaries. The courts have refused to invoke the concept of trust on the ground that there was no clear intention from employers to benefit employees. The third parties in life insurance policies are faced with uncertainty as to their rights to the policy money as a result of inconsistent approaches by English and Malaysian Courts as to when a trust exists, as shown in the cases examined.419

In life insurance and group insurance policies, third party beneficiaries could be said not to suffer any direct financial loss because the employees did not pay any premium for the policies and they did not provide any consideration to the parties to the contract, but it could be argued that they did suffer injustice as they were aware of the existence of the policy and therefore had conducted their affairs under the belief that they would receive financial assistance in the event of the death of the assured or if they suffered total and permanent disablement they would be covered by the insurance policies as in GR Nair v Eastern Mining & Metals Co Sdn Bhd420 and Green v Russell.421

The impact of the privity doctrine on life insurance and group insurance policies in Malaysia can be contrasted with the impact in Australia on indemnity insurance policies. In Australia, most of the cases are concerned with fire insurance policies as seen in Ziel Nominees Pty Ltd v VACC Insurance Co422 and Kern Corporation v Walter Reid Trading Pty Ltd.423 In Malaysia, the case of Standard Chartered Bank v KTS Sdn Bhd424 evidences that the insured holds the policy money on trust for the purchaser despite the fact that the sale and purchase agreement might not be completed at the time

417 [1974] 1 MLJ 176. 418 [1959] 2 QB 256. 419 See Vandepitte v Preferred Accident Insurance Corporation of New York (1933) AC 70; Tomlinson v Gill (1756) 27 ER 221; Llyod’s v Harper (1880) 16 Ch D 290; Re Schebsman [1944] Ch 83; Re Engelbach’s Estate [1924] 2 Ch 348; Kishabai v Jaikishan [1981] 2 MLJ 289; Bank Bumiputra Malaysia v Mohamed Salleh [2000] 2 MLJ 412; Poominathan Kuppusamy v Besprin Stationers Sdn Bhd [2003] 3 CLJ 118. 420 [1974] 1 MLJ 176. 421 [1959] 2 QB 256. 422 (1975) 50 ALJR 667 423 (1987) 163 CLR 164. 424 [2006] 4 MLJ 617.

137 the goods are destroyed by fire. In Australia, courts have refused to invoke a trust therefore holding that purchasers are not entitled to the insurance money despite having paid the purchase price. The doctrine of privity prevented the purchasers in Ziel Nominees Pty Ltd v VACC Insurance Co425 from claiming the money as they were not parties to the insurance contract.

Standard Chartered Bank v KTS Sdn Bhd426 could easily be distinguished in future cases as the circumstances of the case did not reflect the existence of a trust concept. In deciding a trust existed, the Federal Court shared the approach taken in Williams v Baltic Insurance Association of London427 as both courts looked to the object of the insurance policies. It is worth noting that Williams v Baltic Insurance Association of London428 was decided at the time when English Courts adopted a flexible approach to determining the existence of a trust. Malaysian Courts at present seem to prefer that flexible approach, but this could easily change in the future and if so, third parties (the purchasers) in Malaysia would be in the same position as the third parties in Ziel Nominees Pty Ltd v VACC Insurance Co.429 The third parties suffered a substantial financial loss as they had already paid the purchase price (hence provided the parties to the contract with consideration), but the property or goods purchased were destroyed.

The Australian case of Trident General Insurance Co Ltd v McNiece Bros Pty Ltd430 has not been considered by the Malaysian courts. The only similarity between Trident General Insurance Co Ltd v McNiece Bros Pty Ltd431 and Malaysian cases is the use of trust in the contract of insurance for the protection of third party beneficiaries.

It can be concluded from this analysis that third party beneficiaries in life insurance and group insurance policies in Malaysia share the same problem as a result of the doctrine of privity with third party beneficiaries in England. Both involve the intention of the insured to provide financial support to their families in the event of death or injury. The

425 (1975) 50 ALJR 667. 426 [2006] 4 MLJ 617. 427 [1924] 2 KB 282. 428 Ibid. 429 (1975) 50 ALJR 667. 430 (1988) 165 CLR 107. 431 Ibid.

138 doctrine of privity has been applied to prevent this intention from being fulfilled and as a consequence has deprived their families from benefitting from the insurance money. Based on the case law discussed, the impact of the doctrine of privity in insurance contracts in Malaysia and England is similar. In all cases the third parties were aware of the existence of the intended insurance moneys and relied on the rights under the policy in the belief that they would be able to claim the insurance money upon the occurrence of a prescribed event. Even though circumstances existed where some third parties were able to recover the loss by proving an exception to the doctrine such as a trust, uncertainty in relation to the recognition of the existence of a trust contributes to the extent of any injustice and unfairness to third parties.

Regarding fire insurance policies, Australia and Malaysia share a similar impact whereby the doctrine of privity has caused significant financial loss to purchasers of property or goods. The purchasers also have provided consideration to the parties to the contract. However, as far as Malaysia is concerned, the purchasers are in a better position as the court is willing to invoke the concept of trust in order to prevent loss to the purchaser.

3.4.3 Third Parties in Construction Contracts

The doctrine of privity has affected the Malaysian construction industry in the same way as in England and Australia, as demonstrated by the cases that concern a claim of direct payment by sub-contractors from employers. Most of the promises to benefit sub- contractors were contained in a clause in the standard form contract used by the employer or owner and main contractor, as well as a letter of undertaking from the employer to pay directly to the sub-contractor.432 The problem with the promises stated in the standard form contract is the existence of another clause which denied the sub-

432 See A Vigers Sons & Co Ltd v Swindell [1939] 3 All ER 590; J A Milestone & Sons Ltd v Yates Castle Brewery Ltd [1938] 2 All ER 439; Fimatic Engineering Sdn Bhd v Bumi Negeri Sdn Bhd [1995] 2 BLJ 121. Further, in Malaysia, cases like Mahkota Technologies Sdn Bhd v Bina Jati Sdn Bhd [2001] MLJU 749; Artic Building & 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 involved direct undertakings by the employers to pay directly to the sub-contractors. See also the Australian case Railways Commissioners for (Vic) v James L Williams Pty Ltd (1969) 44 ALJR 32.

139 contractor the right to sue.433 This problem is evident in the application of the doctrine of privity in the construction industry. In these cases, being denied the right to payment resulted in economic loss for the sub-contractors as the sub-contractors had completed works, but had not been paid. The impact of the doctrine of privity in construction industry is substantial in the sense that it causes the sub-contractors to suffer severe economic loss despite having complied with their obligations under the contract and the employer having obtained the benefit of that work. The loss they suffer may be categorised as loss of profit and loss suffered in reliance upon the promise, such as the cost of labour and materials used. 434 All the cases analysed showed that the sub- contractors provided consideration for the promise to be paid directly by the employers. Further, the fact that the parties to the contract evinced an intention to benefit the sub- contractors who were aware of the promise and therefore relied upon the intended benefit contributes further to the injustice.

In summary, the doctrine of privity has the same major impact on third party beneficiaries in construction contracts in all selected jurisdictions, Malaysia, Australia and England. All jurisdictions experience similar problems, i.e. sub-contractors are prevented from enforcing direct payment provisions by reason of the doctrine of privity and as a consequence they suffer economic loss.

3.5 IS REFORM IN MALAYSIA REQUIRED?

The case law analysed clearly demonstrates that application of the doctrine of privity ignores the clearly stated intention of the parties to a contract, fails to deliver a known or intended benefit to a third party despite reliance on the promise or the provision of

433 See, eg, clause 27(f) of the PAM/ISN 69 which refers to the fact that there is no privity of contract between the employer and the nominated sub-contractor. “Neither the existence nor the exercise of any of the foregoing powers nor anything else contained in these conditions shall render the employer in any way liable to any nominated sub-contractor.” 434 For example, in A Vigers Sons & Co Ltd v Swindell [1939] 3 All ER 590, the sub-contractor suffered loss of £112 4s 3d for work and labour and materials supplied. In Railways Commissioners for (Vic) v James L Williams Pty Ltd (1969) 44 ALJR 32, the sub-contractor claimed £6858 for work done; in Fimatic Engineering Sdn Bhd v Bumi Negeri Sdn Bhd [1995] 2 BLJ 121, the claim was for RM108 819 60; in Fordeco Construction Sdn Bhd v Wong Sin Ten [2008] 1 LNS 854, the claim was for RM68 727 70; in Artic Building & Civil Engineering Sdn Bhd v Ahmad Zaki Sdn Bhd [2009] 9 MLJ 328, the claim was for RM587 029 63.

140 consideration. This has led to problems for third party beneficiaries under insurance and construction contracts that can be summarised as follows: i) Uncertainty as to the rights of third party beneficiaries as the courts have adopted different approaches especially in determining the existence of trusts and the use of estoppel in abrogating the privity doctrine. ii) Complexity of litigation as a result of the need to establish exceptions to the doctrine of privity. iii) Disinclination of the courts to develop methods to evade the privity doctrine.

In addition, other than in insurance and construction contracts, third party beneficiaries in other types of commercial contracts are also affected by the doctrine of privity. As identified in Chapter 1,435 altogether there were 9 cases involving insurance contracts, 8 cases involving construction contracts and 3 cases involving other types of commercial contracts. Insurance and construction contracts represent the most common types of commercial contracts affected by the doctrine of privity. These cases represent 85% of the identified commercial cases in Malaysia. The continued application of the doctrine of privity in the business environment has the ability to reduce commercial efficiency and cause financial loss. The doctrine prevents parties to a contract from effectively promising to benefit a related third party to the transaction without a direct contractual relationship. This increases the cost of the transaction and reduces efficiencies. Further, third parties who are aware of the benefit and provide tangible benefits for the parties to the contract are prevented from enforcing the promise despite the clear intention of all parties to the transaction. The economic detriment suffered by many sub-contractors is significant with the average loss suffered by sub-contractors being in the range of RM60 000 to RM600 000. These amounts, in the context of the Malaysian ringgit, are significant as Malaysian sub-contractors are generally small enterprises or small companies. Most Malaysian sub-contractors are registered under Class A, B, C, D and F which allows a maximum work value of RM500 000 and a maximum of RM600 000 in paid up capital.436The range of financial loss indicated above cannot be absorbed by

435 See Chapter 1, 10 [1.4]. 436 Information obtained from the Contractor Services Centre (PKK), Ministry of Works at http://pkk.kkr.gov.my, at 19/07/2010.

141 these types of sub-contractors and a lack of compensation causes significant injustice to them.

To overcome these problems, it is submitted that reform of the doctrine of privity is required. It is essential that the reform improves the legal position and rights of third party beneficiaries especially in insurance and construction contracts, while also being of benefit to third parties in other types of commercial contracts. The rights of third party beneficiaries to enforce the benefit conferred upon them must be clearly stated in order to prevent uncertainty. If parties to a contract wish to confer a benefit on a third party, they should be able to do so, and their intention should be given legal effect. There should be a simple and clear mechanism whereby third party beneficiaries can enforce a benefit intended to be conferred on them.

There are two possible ways to reform the law: via judicial reform or legislative reform. It is recognised that legislative reform is desirable compared to judicial reform.437 In London Drugs Ltd v Kuehne & Nagel International Ltd, 438 the Supreme Court of Canada explained this view

[w]ithout doubt, major reforms to the rule denying third parties must come from the legislature. Furthermore, where the contract involved are the one in a network of contractual business relationship, such as insurance and building contracts, the courts will be much more reluctant to intervene, since they will not wish to interfere with agreements as to liability that may have been carefully negotiated, in particular as to where the insurance obligations are to lie.439

Legislative reform could reduce the complexity of litigation as courts would not have to explore possible exceptions. Justice to third party beneficiaries would be served by affording them statutory protection instead of dependence on the common law. This will

437 Hugh Beale, 'Privity of contract: judicial and legislative reform. (United Kingdom) (Special Issue: Essays for Professor Brain Coote)' (1995) 9(n1) Journal of Contract Law 103; John N. Adams, Deryck Beyleveld and Roger Brownsword, 'Privity of Contract: The Benefits and the Burdens of Law Reform' (1997) 60(2) The Modern Law Review 238. Note that John D. McCamus in 'Loosening the privity fetters: should common law Canada recognise contracts for the benefit of third parties?' (2001) 35(2) Canadian Business Law Journal 173 preferred reform of the privity doctrine by the judiciary due to the political realities in common law Canada which involve many provincial legislatures 438 [1992] 3 SCR 436, 437. 439 Richard Stone, The Modern Law of Contract (Seventh ed, 2008), 196.

142 provide third parties with clarity and commercial convenience. The best solution440 for ensuring the development of the law in Malaysia is to enact a statutory mechanism. This approach has the advantage of ensuring clarity and certainty in the position of third parties more quickly than a judicial solution. In Malaysia judicial decisions demonstrate a disinclination on the part of the courts to either reform the doctrine of privity or to develop clear principles for contracting parties to avoid the application of the doctrine of privity. Furthermore, judicial reform is not as efficient as statutory reform with courts required to wait until cases with the facts necessary to allow a consideration of the privity doctrine and the need for reform to come before the relevant court.441

Since the judicial analyses reveal that third party beneficiaries in Malaysia share the same problem as in Australia and England, the reforms that took place in Australia and England should be examined and observed whether such reforms have improved the position of third party beneficiaries in both jurisdictions.

The next chapter will analyse the effectiveness of the statutory reforms of the doctrine of privity in Australia and England for the purpose of assessing their suitability for adoption in Malaysia.

440 Suzanna Isa, 'The Privity of Contract: Third Party Rights under Malaysian Contract Law' (2009) 4(4) The International Journal of Interdisciplinary Social Sciences 185. 441 Teh Khem On v Yeoh & Wu Development Sdn Bhd [1996] 2 CLJ 1105, 129 (Peh Swee Chin FCJ) “In retrospect, to deal with or to overcome those 'hard' cases in order to mete out ideal justice, a Court ought not to overturn a general established principle of law but should only apply it to facts or situations amenable to it. Where this is not possible, then let the custodians of the public conscience, viz members of that august body called Parliament, deal with any urgent or topical situation by legislation with appropriate details and retrospective effect as desired, otherwise confusion will be caused to the law, increasing the vulnerability of the Court to the criticism its being engaged in out and out legislation.”

143

CHAPTER FOUR AN ANALYSIS OF LEGISLATIVE REFORM AND JUDICIAL DECISIONS IN AUSTRALIA AND ENGLAND 4.1 INTRODUCTION

As seen in Chapter 3, there are groups of third party beneficiaries who were unjustly denied their rights to enforce benefits in contracts due to the doctrine of privity. These groups are third parties in insurance and construction contracts and to a lesser extent other types of commercial contracts. To circumvent the harsh consequences of the doctrine of privity, a number of legal concepts such as agency, assignment, trust and estoppel have been relied upon. But these concepts are not without problems; therefore, the legislature in various jurisdictions intervened to prevent further injustices. In Australia, two states, Western Australia and Queensland, have taken steps to abolish the doctrine of privity in certain circumstances and later, the Commonwealth in 1984 also abolished the doctrine in insurance contracts. England in 1999 finally implemented the recommendation put forward by the English Law Reform Commission to abolish the doctrine of privity. Each of these options for reform will be analysed for suitability in the Malaysian context.

4.2 PURPOSE OF ANALYSIS

The purpose of this chapter is to critique the legislative regimes which have altered the doctrine of privity in Australian and England for their suitability in the Malaysian context. This part will examine the objects of the different Acts, analyse the elements and operation of the Acts in practice, in particular whether the reforms have improved the position of third parties who are aware of the contractual benefit, provide consideration and therefore rely upon the promise, and finally, from the analysis ascertain the third parties who do not benefit from the legislative intervention.

This analysis will be undertaken through an examination of post-reform judicial decisions in the two selected jurisdictions.

144

4.3 AUSTRALIA

In Australia, the recommendation of the English Law Revision Committee made in 1937 has been implemented in two Australian jurisdictions: Western Australia and Queensland. 442 These two states relied largely on the 1937 proposals which had succinctly suggested how to allow for the enforceability of third party beneficiary agreements:

[W]here a contract by its express terms purports to confer a benefit directly on a third party, it shall be enforceable by the third party in his own name subject to any defences that would have been valid between the contracting parties. Unless the contract otherwise provides, it may be cancelled by the mutual consent of the contracting parties at any time before the third party has adopted it expressly or by conduct.443

In noting the difficulties created by the doctrine of privity of contract, the Law Revision Committee recommended that it be abolished but subject to three provisos:

(1) no third party right can be acquired unless given by the express terms of the contract;

(2) the promisor should be entitled to raise against the third party any defence that would have been valid against the promisee; and

(3) the parties to the contract should retain the right to cancel it at any time, unless the third party has received notice of the agreement and has adopted it.

Following these recommendations, the doctrine of privity was legislatively altered in these two jurisdictions by virtue of s 11 of the Property Law Act 1969 in Western Australia and s 55 of the Property Law Act 1974 in Queensland. The reforms in Western Australia and Queensland were specifically aimed at displacing the doctrine of privity in certain circumstances, giving third parties a statutory right to enforce promises made for their benefit against the promisor. For the rest of Australia, the doctrine of privity

442 For the purpose of this discussion, this research omits the legislative reform made in the Northern Territory for the reason that, apart from minor differences in drafting style, the reform is identical to the Queensland legislation. 443 Great Britain, Law Revision Committee, Sixth Interim Report (Statute of Frauds and the Doctrine of Consideration) (1937), 31-32.

145 remains for commercial contracts generally. Further in Queensland the doctrine of privity in the context of construction contracts was also altered by the introduction of the Subcontractors Charges Act 1974, which allowed claims by sub-contractors against employers in some circumstances. Similar legislation was introduced in New South Wales444 and South Australia.445

Following the decision in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd446 Australia has also abolished the doctrine of privity in insurance contracts by virtue of s 48 of the Insurance Contracts Act 1984 (Cth).

4.3.1 General Legislation: Western Australia

In 1969, Western Australia became the first Commonwealth jurisdiction to legislatively reform the doctrine of privity. The explanatory memorandum to the Property Law Bill 1969 stated that the manifest injustice caused by the rigid application of the third party rule led to a need for reform which could be achieved by substantially adopting the wording of the English Law Revision Committee in its Sixth Interim Report:

The common law of England stands alone among modern systems of law in its rigid adherence to the view that a contract should not confer any rights on a stranger to the contract, even though the sole object may be to benefit him. Apparently, there was no further independent investigation by a law reform body in Western Australia before the Property Law Act 1969 was passed. Following the passing of the Property Law Act 1969 (hereafter referred to as the PLA 1969), the operation of the doctrine of privity in Western Australia has been altered by the provisions of s 11(2) and s 11(3) of the PLA 1969.

Section 11(2) reads as follow:

Except in the case of a conveyance or other instrument to which subsection (1)447 of this section applies, where a contract expressly in terms purports to confer a benefit directly on a person who is not named as a party to the contract, the contract is,

444 Contractors' Debts Act 1897. 445 Workmen's Liens Act 1893. 446 (1988) 165 CLR 107. 447 Subsection (1) provides that a person may take any immediate or other interest in land or other property or the benefit of any condition, right of entry, covenant or agreement over, or respecting land or other property although not named in the particular conveyance or instrument concerned.

146

subject to subsection (3) of this section enforceable by that person in his own name but-

i) all defences that would have been available to the defendant in an action or proceeding in a court of competent jurisdiction to enforce the contract had the plaintiff in the action or proceeding been named as a party to the contract shall be so available; ii) each person named as a party to the contract shall be joined as a party to the action or proceeding; and iii) such defendant in the action or proceeding shall be entitled to enforce as against such plaintiff all the obligations that in terms of the contract are imposed on the plaintiff for the benefit of the defendant.

Section 11(3) reads as follow:

Unless the contract referred to in subsection (2) of this section otherwise provides, the contract may be cancelled or modified by the mutual consent of the parties named as parties thereto at any time before the person referred to in that subsection has adopted it either expressly or by conduct.

In summary the position in Western Australia under s 11 of the PLA 1969 is as follows:

i) At present, a third party can enforce the benefit conferred under a contract when there is an express term in the contract which purports to provide a direct benefit to the third party; ii) However, a third party can only enforce a benefit provided the parties to the contract are joined in the proceedings. This means in the context of a construction contract that although a sub-contractor may be seeking to recover from the owner, the main contractor should be joined as a party to the action. This might provide a means of ensuring that the owner is not required to pay twice for the same work: once to the main contractor and second to the sub-contractor;448

448 The same analogy is to be applied in insurance contracts whereby the insured will be joined in a proceeding with the insurer.

147

iii) Section 11(2) excludes in its operation cases of conveyance or other instruments; iv) Any defence that would be available to the defendant had the third party been an original party to the contract is available in an action by the third party; v) Parties to the contract may vary or rescind the contract before “adoption” by the third party. Adoption here means “has accepted” or “has become party to the relevant contract”449 and vi) The reform allows an obligation to be imposed on the third party in so far as the obligation is a quid pro quo for the benefit conferred on the third party.

Whether the legislation has substantially improved the position of a third parties under commercial contracts will be analysed by reference to the case law decided after enactment of s 11 PLA 1969.

4.3.2 Judicial Decisions: Western Australia

This part will consider through analysis of the judicial decisions post s 11 PLA 1969 whether in practice s 11 has improved the position of third parties, in particular those parties who are aware of the intended contractual benefit, have provided consideration and also relied upon the promised benefit. From the analysis a conclusion about the third parties who do not benefit from the legislative intervention will be drawn.

The application of the s 11 of the PLA 1969

The operation of the s 11 of the PLA 1969 has been discussed in several cases.

Section 11(2) was successfully invoked in Westralian Farmers Cooperative Ltd v Southern Meat Packers Ltd,450 the first case in which the Full Court of the Western Australian Supreme Court had an opportunity to apply s 11(2). The plaintiff, a livestock agent for P.T. & M.J. King (the Kings), negotiated the sale of some cattle with the defendant. When the contract of sale was entered into between the defendant and the Kings, a term of the contract provided that the full purchase price shall be payable by

449 See Westralian Farmers Cooperative Ltd v Southern Meat Packers Ltd [1981] WAR 241. 450 [1981] WAR 241.

148 the defendant and be recoverable by the plaintiff alone. The plaintiff credited the Kings with the purchase price less its commission. The defendant paid the full price directly to the Kings. The plaintiff sued the defendant to recover the purchase price based on two grounds. One of them was that the plaintiff was entitled to the benefit of the contract pursuant to s 11(2) of the PLA 1969.

Chief Justice Burt held that the requirements of s 11(2) were clearly satisfied. The benefit was that the “full purchase price shall be payable by” the defendant and “be recoverable by” the plaintiff alone and the plaintiff was a person not named as party to the contract. The right to sue for the contract price, being granted only to the plaintiff was a benefit expressly conferred upon the plaintiff for the purpose of s 11(2) and the “adoption” of the contract by the beneficiary was satisfied by the act of the Co-operative in crediting the account of the Kings with the sale price less commission.

Clearly in this case the third party was aware of the intended benefit in the contract and relied upon payment being made by the defendant. In the absence of s 11 the court would have been required to artificially impose either an agency or trust relationship in order to allow recovery by the plaintiff.

Conferee of benefit Section 11(2) does not apply unless the person who seeks to enforce a benefit conferred by the contract is identified in the contract as the conferee of that benefit. In Jones v Bartlett,451 Jones, the son of tenants of a dwelling house was injured when he walked into a glass door causing the glass to shatter. He brought proceedings against the landlord for damages, so the question arose whether the son of the tenant can enforce an agreement against the landlord. Despite not being a party to the agreement, Jones alleged that he was entitled to the benefit of the terms in the lease which required the owner to maintain the premises and to comply with all the safety requirements by reason of s 11(2) of the PLA 1969. It was held by the High Court of Australia that Jones could not bring himself within s 11 of the PLA 1969 as there was nothing in the

451 (2000) 176 ALR 137.

149 lease which purported to confer a right, interest or benefit upon Jones. For s 11(2) to apply, Jones would need to be identified in the lease as a conferee of the benefit.

Similarly, in Westina Corporation Pty Ltd v BGC Contracting Pty Ltd,452 the appellant (Westina) argued that the plant hire contract did not expressly purport to confer a benefit directly on the second respondent, Mr Keys, who was an employee of BGC. The benefit referred to in the hire contract was the benefit of an indemnity. Mr Keys was not named in the clause and was not named as a party to the Hire Agreement. The Court of Appeal in allowing the appeal found that s 11(2) of the PLA 1969 could not be relied upon by the respondent as Mr Keys was neither named nor identified in the contract as the conferee of a benefit. Mr Keys also was not identified in the contract by reference to membership of an existing and identifiable class or within a particular description. Further it was stated that s 11(2) confers only a limited recognition of third party rights; in particular, a third party right is not acquired by implication. It is necessary that the contractual provision relied on expressly in its terms purports to confer a benefit directly on the claimant.453

Identification of the third party

Does a person upon whom the benefit is conferred have to be referred to by name or is it sufficient for that person to be a member of an identifiable class of persons? 454 Recently, in The Bell Group Ltd (in liq) v Westpac Banking Corporation [No 9],455 it was held that the beneficiary can be ascertained by reference to an existing and identifiable class, or if the beneficiary answers a particular description, expressly referred to or identified in the contract.456 For example, an identified class may be shareholders, customers of a bank and employees.

452 [2009] WASCA 213. 453 [2009] WASCA 213, 46 (Buss JA). 454 J. Longo, Privity and the Property Law Act: Westralian Farmers Co-Operative Ltd v Southern Meat Packers Ltd (1983) 15 University of Western Australia Law Review 411. 455 [2008] WASC 239. 456 See also Toal v Aquarius Platinum Ltd (2004) FCA 550 where the plaintiffs fell within the identifiable class as they were among the shareholders who were to receive shares in a new company as stated in the scheme of arrangement of the defendants’ company.

150

Incidental beneficiary

As indicated by the case law examined above, s 11(2) cannot be invoked by a third party who indirectly benefits from the contract or a contracting party dealing directly with the third party. For example, Visic v State Government Insurance Co Ltd 457 concerned an action in which the plaintiff sustained injury by accident during the currency of a policy of insurance held by the plaintiff’s employer, Western Construction Co, with the defendant. The plaintiff claimed that he was an intended beneficiary under the insurance policy, which enabled the plaintiff to recover the damages awarded under a judgment against Western directly from the defendant. The plaintiff conceded that the policy did not expressly confer a benefit on the plaintiff, but argued it intended to confer a benefit on a class of people in which the plaintiff was to be found and that was sufficient to give the plaintiff a right of action on the policy. The Court disagreed. According to Seaman J, there was nothing in the words of the insurance policy that gave any support to the suggestion that the State Government Insurance Office was promising indemnity to the employees of the insured and therefore s 11 PLA 1969 did not apply. It was promising indemnity to the plaintiff’s employer, Western Construction Co. The plaintiff was neither a party to the insurance contract nor specifically named as a beneficiary, even though as a matter of practice an injured worker may negotiate directly with the insurer. As a result, the plaintiff was not within the ambit of s 11(2) of the PLA 1969.

Therefore, although the plaintiff was able to claim damages from their employer for the injury sustained, whether the insurance company was required to pay under the insurance policy was a matter between the employer and the insurer. There is an argument that although s 11 did not allow recovery by the plaintiff against the insurance company, that the plaintiff did not suffer a detriment because the damages were recoverable in any event from the employer.

457 (1990) 3 WAR 122.

151

Joinder of proceedings

Under s 11(2)(b) of the PLA 1969, each person named as a party to the contract must be joined as a party to the action by the beneficiary. In JWH Group Pty Ltd v Kimpura Pty Ltd,458 in rejecting the plaintiffs’ argument that they were entitled to rely on s 11 of the PLA 1969, the Supreme Court of Western Australia held that s 11 cannot be relied upon unless each party named as a party to the contract is joined as a party to the action and in this case, not all of the parties to the Deed had been joined as parties to the action.459

Benefit

Section 11(2) of the PLA 1969 requires the contract by its terms to confer a benefit on a third party. Nonetheless, the word ‘benefit’ is not defined and it is open for the courts to interpret accordingly. In Direct Engineering Services Pty Ltd v A Goninan & Co Ltd,460 the plaintiff entered into a contract with Hamersley Iron Pty Ltd (HI) to upgrade the air- conditioning and mechanical ventilation system to offices at HI’s Seven Mile railway and rolling stock maintenance workshop. The plaintiff entered into a subcontract with the defendant and due to the negligence of the defendant, the premises caught on fire and were destroyed. In defence to a claim for breach of contract, the defendant sought to rely upon a clause in the head contract which put the contractor under an obligation to supply the defendant with any information or data reasonably necessary or expedient to ensure proper performance of the work. It was pleaded by the defendant that it was entitled to take the benefit of the clause which purported to confer a benefit directly on it as a sub-contractor by virtue of s 11(2) PLA 1969. However, the Supreme Court of Western Australia held that the benefit relied upon by the defendant was not the benefit to which the clause referred. Clause 17 was concerned with the provision of information

458 [2004] WASC 39. 459 See also Jones v Bartlett (2000) 205 CLR 166. However, in Direct Engineering Services Pty Ltd v A Goninan & Co Ltd [2006] WASC 105, Murray J took the view that the requirement of s 11(2)(b) was a procedural matter rather than a substantive exception to the application of the rights conferred by the subsection. It was designed to ensure that all persons interested in the contract should have the opportunity to put to the court evidence in respect of its terms and operation. In this case, the plaintiff did not raise any objection that the party was not joined in the proceedings, 103. 460 [2006] WASC 105.

152 or data which directly affects the capacity of the sub-contractor to perform the work. Alternatively, the defendant argued that the failure of the plaintiff to provide information as to the particular risk of fire associated with penetration of the duct was the information meant in the clause. Since the word ‘benefit’ was not defined in s 11(2), it was open for the court to interpret this widely.461

Exemption clauses

Whether s 11 PLA 1969 applies to an exemption clause is yet to be judicially considered. The first question is whether the exemption clause ‘confers’ a benefit on the third party such as a stevedore. At a minimum the clause would need to refer to the third party by name, but referring to a class of persons of which the third party is one, will be acceptable.462 It is arguable that allowing a third party to rely upon an exemption clause is the conferral of a benefit, being a release of liability for the loss suffered by a party to the contract.463

Lack of Consideration

The failure by a third party to provide consideration for the benefit is not a bar to a claim under s 11 PLA 1969. This is confirmed in Westralian Farmers Cooperative Ltd v Southern Meat Packers Ltd, 464 where Burt CJ and Kennedy J stated that a lack of consideration is not a defence and it was not the intention of the Parliament for the “beneficiary to escape the Scylla of the doctrine of privity only to encounter the Charybdis of consideration.”465

461 For example, in Whitfords Beach Pty Ltd v Gadsdon (1992) 6 WAR 537, Owen J held that the ‘benefit’ of an arbitration clause was not the kind of benefit envisaged by the legislation, 554. 462 See The Bell Group Ltd (in liq) v Westpac Banking Corporation [No 9] [2008] WASC 239. 463 Justice Andrew Rogers in 'Contract and Third Parties' in Paul Desmond Finn (ed), Essays on Contract (1987) has little doubt that these questions would be answered favourably, allowing application of s 11(2). 464 [1981] WAR 241. 465 [1981] WAR 241, 94.

153

Preliminary Conclusions

The enactment of s 11(2) of the PLA 1969 provides third parties with statutory rights to enforce the benefit promised in a contract. Third parties who do not supply consideration for the promise and rely upon the promise are now entitled to a remedy under s 11(2) provided they are expressly referred to as conferees of the benefit. However, s 11(2) fails to include other necessary details. Many aspects are left to judicial interpretation in order to avoid rigidity in its application and give more opportunity for third party beneficiaries to enforce the rights conferred by a contract. Of course, this also means that such rights are decided by judges who may differ in their views. As pointed out by Kennedy J in Westralian Farmers Cooperative Ltd v Southern Meat Packers Ltd,466 “there was 'no doubt that the application of s 11(2) is likely, in particular cases, to pose questions and difficulties.” 467 Section 11(2) also acts as a barrier for third parties to enforce such rights due to its application which is limited in nature. For example, third parties who are not expressly referred to in a contract and who do not exist at the time the contract was made fall outside the scope of protection. While the enactment of s 11(2) places third parties in Western Australia in a better position than before, the statutory provisions could be amended to improve and enhance the rights of third party beneficiaries.

4.3.3 Legislation: Queensland

This part will discuss the legislation in Queensland that enables a third party to a contract to enforce a promised benefit within the contract.

4.3.3.1 General legislation: Property Law Act 1974

In 1973, the Queensland Law Reform Commission recommended that the law be amended to allow a contract conferring a benefit on a third party to be enforceable by the third party in the their own name.468 The stated reason for the proposed reform was that the rule which prevented a third party from enforcing a promise made for his or her

466 [1981] WAR 241. 467 Ibid, Kennedy J, 251. 468 See Queensland Law Reform Commission in its Working Paper on A Bill to Consolidate, Amend, and Reform The Law Relating to Conveyancing, Property and Contract and to Determine the Application of Certain Imperial Statutes (Report No. 16).

154 benefit was a source of serious injustice in many cases and the rule represented a real defect in the law.469 The Commission was influenced by the fact that the legal systems of the United States, Scotland and South Africa had proved quite capable of developing and coping with a principle of jus quaesitum tertio.

The English Law Revision Committee’s recommendation from 1937 was adopted and is expressed in s 55 of the Property Law Act 1974 (hereafter referred to as the PLA 1974). The reform under s 55 is more detailed and elaborate than the Western Australian model. The major operative provisions in the PLA 1974 are s 55(1), s 55(2) and s 55(3).

Section 55(1) states that when a promisor who, for a valuable consideration moving from the promisee, promises to do something or not to do something for the benefit of the third party, shall upon acceptance by the third party, perform that promise. Unlike the reform made in Western Australia, s 55 does not require that the contract expressly purports to confer a benefit on the third party. The third party need not be named as a third party beneficiary. In s 55(6), a beneficiary is defined as a person other than the promisor or promisee, and includes a person who, at the time of acceptance is identified and in existence, although that person may not have been identified or in existence at the time when the promise was given. Hence a third party beneficiary can take advantage of this provision although the third party was not named at the time the contract was made between the parties provided that at the time of “acceptance”, the third party is identified and in existence.

Section 55(1) makes it clear that the third party can only enforce the promised benefit once the third party accepts the promise. Acceptance here means “an assent by words or conduct communicated by the beneficiary (or on behalf of the beneficiary) to the promisor within the time specified or if no time is specified, within a reasonable time”.470 Prior to this acceptance the parties to the contract reserve the right to vary or

469 See Queensland Law Reform Commission in its Working Paper on A Bill to Consolidate, Amend, and Reform The Law Relating to Conveyancing, Property and Contract and to Determine the Application of Certain Imperial Statutes (Report No. 16), 38. 470 Section 56(a). See also Re Davies [1989] 1 Qd R 48. There was also an opinion expressed by the Queensland Court of Appeal in Hyatt Australia Ltd v LTCB Australia Ltd [1996] 1 Qd R 260 that acceptance may occur in advance of the third party promise being made.

155 cancel the said promise without consent from the beneficiary471 and may still do so after acceptance took place with consent from the beneficiary.472

Section 6(c)(ii) defines “promise” as a promise which creates a duty enforceable by a beneficiary including a promise made by deed, in writing or orally. The effect of this definition is that in Queensland, unlike in Western Australia, an intention that the third party should be able to sue is required.473 Regarding obligations imposed on the third party, s 55 is similar to s 11 of the Western Australia PLA 1969.474

Finally, as for defences, the Queensland provision is more elaborate, but to the same effect as the Western Australian s 11. Section 55(4) provides that the promisor is entitled to rely on defences and any matter which will render the promise to be void, voidable or unenforceable if the promisee is the one bringing the legal action.

As to the question of whether ‘benefit’ includes exemption of liability, like the Western Australia model, s 55 does not define the word “benefit”, hence it may still be regarded as an open question as to whether the section applies to an exemption clause. Section 55 also reserves the continuation of the English common law exceptions. The rationale behind this reservation is to allow the third party to seek other options in the event that s 55 is not held to be applicable.

4.3.3.2 Construction Contracts

In construction contracts, sub-contractors who have problems securing or claiming payment for goods and services supplied from head contractors475 enjoy two forms of statutory protection. The extent of this protection under the Subcontractor’s Charges Act 1974 and the Building and Construction Industry Security of Payment Act 2004 will be outlined first, before considering the relevant case law.

Subcontractors’ Charges Act 1974

471 Section 55(2). 472 Section 55(3)(d). 473 The Western Australian model only requires the intention to benefit a third party. 474 Section 55(3)(b). 475 In Malaysia, the head contractor is known as the main contractor. The term ‘main contractor’ is used throughout this thesis except in reference to Australian cases.

156

For the past 38 years in Queensland, the right to secure payment from the land owner or employer for sub-contractors has been governed by the Subcontractors' Charges Act 1974 (hereafter referred to as the SCA 1974).

At common law, a charge operates as an encumbrance against money payable by one person to another in favour of a third person. Without contractual provision, a sub- contractor has no right to a charge in a sub-contractor’s favour over money owing to the head contractor under the main contract, due to the fact that a sub-contractor is not a party to that contract and the doctrine of privity precludes recovery.476 A statutory right has been created in Queensland to avoid this common law principle in the form of the SCA 1974. The objects of the SCA 1974 are to secure payment of money due to sub- contractors by placing the onus on the employer to retain certain money payable to the head contractor until the court in which the claim is heard directs to whom and in what manner the money is to be paid.477 The effect of the SCA 1974 is to create legal rights between the employer and sub-contractor who would otherwise have no legal nexus because of the doctrine of privity.

The SCA 1974 allows a sub-contractor to recover payment owed by a head contractor from higher parties in the contractual chain, i.e. employers. The SCA 1974 allows sub- contractors to obtain payment direct from employers, rather than head contractors. Section 5(1) provides:

“If an employer contracts with a contractor for the performance of work upon or in respect of land or a building, or other structure or permanent improvement upon land or a chattel, every subcontractor of the contractor is entitled to-

i) a charge on the money payable to the contractor or a superior contractor under the contractor’s, or superior contractor’s, contract or subcontract.” Based on the wordings of s 5(1) above, there are two conditions that must be satisfied before the SCA 1974 comes into operation. The first condition is that there must be a contract between an employer and the contractor pursuant to which the employer has contracted with the contractor for the performance of work "upon or in respect of land

476 The Law Reform Commission of Western Australia, 'Financial Protection in the Building and Construction Industry' (Report No 82, 1998), 15. 477 The Minister for Justice and Attorney-General, the Honourable WE Knox, Qld Parliamentary Debates, Hansard, 9 April 1974, 3701.

157 or a building, or other structure or permanent improvement upon land of a chattel". The second condition for the operation of section 5(1) is that there must be money payable to the contractor under the contractor's contract with the employer.478

The charge is payable to the sub-contractor for work done by the sub-contractor under the sub-contract. Section 5(2) reads as follows: “The charge of a subcontractor secures payment in accordance with the subcontract of all money that is payable or is to become payable to the subcontractor for work done by the subcontractor under the subcontract.”

If a sub-contractor intends to claim a charge on money payable under the contract, the sub-contractor must serve notice of claim of a charge to the employer or the main contractor by whom the money is payable. Section 10(1) reads as follows: “A subcontractor who intends to claim a charge on money payable under the contract to the subcontractor’s contractor or to a superior contractor must give notice to the employer or superior contractor by whom the money is payable, specifying the amount and particulars of the claim certified as prescribed by a qualified person and stating that the subcontractor requires the employer or superior contractor, as the case may be, to take the necessary steps to see that it is paid or secured to the subcontractor.”

The notice creates a statutory charge that enables sub-contractors to recover a debt or payment owed by head contractors for building works directly from employers, thus bypassing reluctant or insolvent head contractors. The effect of the charge is that it requires employers to retain certain money payable to head contractors until the court in which the claim is heard, directs to whom and in what manner the money is to be paid. Section 11(1) provides: “If a notice of claim of charge is given pursuant to section 10, the person to whom it is given must retain, until the court in which the claim is heard directs to whom and in what manner the same is to be paid a sufficient part of the money that is or is to become payable by the person under the contract to satisfy the claim.”

A notice of claim of charge may be given although the work is not completed or the time for payment of the money in respect of which the charge is claimed has not arrived.479 This has significant advantages to sub-contractors in circumstances where

478 Justice Mullins in Transfield Pty Ltd v Fondside Australia (receivers and managers appointed)(in liq) [2000] QSC 213, [14]. 479 Section 10(2).

158 sub-contractors have concerns about delays in payment of sub-contract works or where head contractors are in financial difficulties and facing possible bankruptcy which may result in sub-contractors recovering little (if any) monies for sub-contract works.480

The criticisms of the SCA 1974481

Ever since its enactment in 1974, the SCA 1974 has attracted comment and criticism from both the judiciary and the construction industry. As stated by Stephen J Pyman ‘Notwithstanding the laudable objects of the legislation in alleviating the financial risk of subcontractors, the legislation has received much criticism by the judiciary, the builders’ lobby and subcontractor associations.’482

Most of the criticism has been directed at the poor drafting of the legislation and its effect on the construction industry. a) Poor drafting The drafting of the SCA 1974 has been frequently criticised by the judiciary to the point where it was once described as one of the most difficult and unworkable pieces of legislation ever conceived.483 In Re Castley,484 Lucas SPJ observed that ‘The Subcontractors’ Charges Act is a difficult Act to follow and apply, and various uncomplimentary remarks have been made about it and about its draftsmanship during the years during which it has been in force.’

In Ex parte Pavex Constructions,485 Dunn J noted ‘I am of the opinion that there is an urgent need that the Act be amended in such a way that its meaning is made clear. The short title of the Act is “An Act to make better provision for securing the payment of money payable to sub-contractors and for other purposes;” yet there is universal, and comprehensive, uncertainty as to how it makes such provision. Any subcontractor who seeks to take advantage of its risks a liability for costs which may be heavy, especially if (as it is quite likely, because of the poor quality of the legislation) his claim must ultimately be dealt with on appeal. This is a thoroughly unsatisfactory situation.’

480 Helen Gregorczuk, 'Better Protection for Subbies: The Subcontractors' Charges Amendment Bill 1998' (1998) (4/98) Legislation Bulletin. 481 The discussions of the criticisms refer to the SCA 1974 prior to the amendments that took place in 2002. 482 Stephen J Pyman in Queensland Building Services Authority, 'Security of Payment Discussion Paper’ (Queensland Building Services Authority, 2001), 17-18. 483 Re Castley (unrep, QSC 18/9/80) 484 (unrep, QSC 18/9/80), 3. 485 [1979] Qd R 318, 334.

159

Prior to its amendment in 2002, 486 particular criticism had been directed to several provisions. The poor drafting of particular provisions had resulted in confusion in its application as evidenced in several cases originating from the Supreme Court of Queensland. The provision that attracts the most differences in interpretation is the definition of ‘work’ in s 3(1). Section 3(1) reads as follows: ‘work includes work ... done or commenced upon the land where the contract or subcontract is being performed by a person ... but does not include- (e) the mere delivery of goods sold by a vendor under a contract for the sale of goods, to at or upon land; ...’

Several cases have interpreted differently the meaning and applicability of the word ‘work’ in the above provision. The different propositions applied to the definition of ‘work’ as a result of judicial interpretation are: i) If it is merely a contract for supply of goods, even if the sub-contractor performs work in their production, that work is excluded under section 3(1)(e) from a lien.487 ii) Work performed by the sub-contractor absent from the main contract land can constitute work where the main contractor supplies goods to the sub- contractor in circumstances where the sub-contractor has an obligation to do work on those goods. A sub-contract for the performance of work upon goods supplied by the contractor is a sub-contract for ‘work’.488

There was also uncertainty as to the meaning of ‘superior contractor’ in s 5(3) which relates to the issue of leapfrogging. In Australia Pty Ltd v Milson Projects Pty Ltd,489 the meaning adopted by both the District Court and the Court of Appeal was that the expression ‘superior contractor’ in s 5(3) means any contractor who is superior, in the sense of being at a higher level in the chain of contracts, to the contractor who has

486 Subcontractors' Charges Amendment Act 2002. 487 See Dowstress (Qld) Pty Ltd v The Mission Congregation Servants of the Holy Spirit [1987] 1 Qd R 150; Re In The Matter of Bulk Materials (Coal Handling) Pty Ltd (Unreported, Supreme Court of Queensland, Demack J, 7 February 1997). See also Ex parte Peter Fardoulys Pty Ltd [1983] Qd R 345; William Andrew Pty Ltd v Santalucia [1983] Qd R 349. 488 Re DA Story Pty Ltd [1993] 2 Qd R 355. 489 [1997] 2 Qd R 355. See also Re Radair Pty Ltd [1998] 2 Qd R 539; Hewitt Nominees Pty Ltd v The Commissioner for Railways [1979] Qd R 256.

160 engaged the party who lodged the Notice of Claim of Charge. In Hewitt Nominees Pty Ltd v The Commissioner for Railways,490 the Supreme Court expressed the view that if the legislature intended to exclude the main contractor from the definition, s 5(1) would have read: ‘... every subcontractor of a person with whom he contracts to perform work shall be entitled to a charge on the money payable to the person with whom he contracts to perform work or to a superior contractor under his contract or subcontract.’491

The meaning adopted by the courts was particularly harsh for contractors up the line which meant they could have ended up paying twice to sub-contractors who successfully showed an entitlement to the sum from the employer in proceedings to enforce the charge.

Section 10 which is concerned with a notice of claim of charge has also been the subject of criticism over its drafting. The section is important because unless a valid notice is given, no charge arises. Some of the procedural difficulties were dealt with in Ex parte Austco Pty Ltd492 by Thomas J. In this case, difficulty arose from the fact that various terms including ‘notice of claim of charge’, ‘notice’, ‘claim’ and ‘notice of having made the claim’ were used in s 10 and s 11 without clear differentiation of the notices to which they refer. In addition, the section was silent as to the time limit for the giving of the notice of having made the claim.493 b) Practicality

The application of the SCA 1974 has proved on various occasions to be a frustrating experience for the majority of parties involved.494 According to Pyman, as far as employers were concerned, they were unhappy about the SCA 1974 because:

490 [1979] Qd R 256. 491 Ibid 263. 492 [1985] 2 Qd R 1. 493 For other criticisms in term of the drafting of the SCA 1974, see Queensland Government, 'Security of Payment for Subcontractors in the Building & Construction Industry' (1991), 46-51. 494 Queensland Building Services Authority, 'Security of Payment Discussion Paper’ (Queensland Building Services Authority, 2001), 18.

161

(a) It allows sub-contractors to freeze their cash flow, often with unsustainable or vexatious charges; (b) It allows sub-contractors to lodge charges and freeze their cash flow, even when money is not yet payable for the work carried out, so long as work has been performed and there is money payable under the main contract; and (c) The SCA 1974 allows leapfrogging so that an employer may have its cash flow frozen by a charge lodged by a sub-contractor that the employer has no sub-contract with at all.

Sub-contractors were also unhappy with the SCA 1974 because it did not go far enough and create a type of trust fund for payment prior to the commencement of building work.495

The Queensland Building Services Authority in its discussion paper acknowledges that based on its experience, sub-contractors have to fight ‘tooth and nail’ to receive payment through the use of the SCA 1974, because of the unequal bargaining power between building contractors and sub-contractors. Building contractors with assistance from legal experts were prone to look for technical reasons to delay or avoid paying sub-contractors who had lodged a claim. Even employers may be easily persuaded to argue a charge is invalid. A prolonged argument can be particularly effective if the sub-contractor is in financial difficulties and would not be able to last in its claim.496

Another point raised by the Queensland Building Services Authority is that while the SCA 1974 improved the position of sub-contractors by the lodging of a valid charge, the SCA 1974 is only effective if there is money owing by the employers to the main contractors. The recent collapse of a construction company evidenced a situation where the employer managed to convince the administrator of the building contractor that it did not owe any money to the latter because of the substantial cost to complete

495 Stephen J Pyman in Queensland Building Services Authority, 'Security of Payment Discussion Paper’ (Queensland Building Services Authority, 2001), 18. 496 Queensland Building Services Authority, 'Security of Payment Discussion Paper’ (Queensland Building Services Authority, 2001), 19-20.

162 and the cost to rectify defects. The SCA 1974 had no application because no monies were owed by the employer to the building contractor.497 Other than this reason, the employer may also refuse to pay the main contractor because of defective work and other breaches of contract.

In summary, the SCA 1974 had become difficult to interpret. To make the matter worse, the courts had continuously interpreted the provisions in a strict manner to such an extent that the original objects of the SCA 1974 have been lost. Following this and also because of criticisms from the construction industry, the Implementation Steering Committee was formed in 1997 to consider these matters.

The Implementation Steering Committee Report (ISC Report) 498 made various recommendations for amendments to the SCA 1974 including: i) Define the terms ‘contract’ and ‘subcontract’ to enable differentiation of these terms; ii) Address a number of Supreme Court decisions where the courts had strictly interpreted the Act; iii) Amend the definition of ‘work’ to refer to ‘project specific materials’; iv) Allow claims of charge to be made against moneys held in alternative to cash; v) Confine claims to claims for money payable to the person with whom the claimant is contracting (i.e. no leapfrogging allowed); and vi) Specify that a claim for moneys payable should include a claim upon retention moneys.499

In 2002, the SCA 1974 was amended.500 The amendments were intended to expand the application of the SCA 1974 to enable sub-contractors to claim a charge, not only on moneys payable under the contract, but also on security for the performance of a

497 Ibid 21. 498 Implementation Steering Committee, 'Securing Our Industry's Future' (1997). 499 For other recommendations, see the ISC Report, 48. However, not all recommendations were adopted in 2002 amendment. 500 Subcontractors’ Charges Amendment Act 2002. Prior to this, the SCA 1974 was also amended in 1976.

163 contractor's obligations to the employer. Security may only be utilised if other moneys payable are not sufficient and the rights of the holder of the security will have priority over any other interests, including a sub-contractor’s charge. The amendments also expanded the categories of persons entitled to claim a charge under the SCA 1974 to include manufacturers of project specific components and suppliers of labour, thereby substantially increasing the number of parties that may claim a charge.501

Section 5 was amended to overcome Supreme Court decisions that determined money would not be considered 'payable or become payable' if a contract required certification of an amount due by an intermediary or a determination of the amount due by dispute resolution.502 The amendment provided that notwithstanding contractual provisions such as certification or dispute resolution was still to be complied with, a subcontractor was entitled to claim a charge. Section 21 was amended to provide for specific instances where a person may be prejudicially affected by a claim of charge. The amendment attempted to limit the circumstances in which a sub-contractor may successfully claim a leapfrogging charge by providing that a contractor is prejudicially affected, if it has already paid, to a person who is a contractor or superior contractor in relation to the sub- contractor, 'an amount' for work the subject of the claim of charge.503

Building and Construction Industry Security of Payment Act 2004

The objective of the Building and Construction Industry Payment Act 2004 (hereafter referred to as BCIPA) is to facilitate timely payment for work carried out and goods and services supplied by subcontractors and suppliers. This is achieved through rapid adjudication.

501 Stephen Pyman, 'Subcontractors' Charges Act Amendment Bill-There Has Been Movement At The Station'' (2002) March(82) Australian Construction Law Newsletter. 502 See Re Riteway Constructions Pty Ltd v Baulderstone Hornibrook Pty Ltd [1988] 2 Qd R 218; Re Henry Walker Etlin Contracting Pty Ltd [2001] QSC 189. 503 Other amendments were also made to s 3, s 9, s 10, s 10A, s 11 and s 15.

164

The Building and Construction Industry Payment Bill was introduced into Parliament on 25 November 2003. 504 Minister Schwarten, in his second reading speech on 26 November 2003, stated that Improving payment outcomes for all parties operating in the building and construction industry is a key priority for this government. Security of payment has been an issue for many decades, particularly in relation to subcontracts.

Although Queensland had already enacted SCA 1974 and also the Queensland Building Services Authority Act 1991, the minister noted that previous reforms did not address all problems faced by sub-contractors, because: ... [t]here are instances in the industry where a claim for payment by a subcontractor or supplier is disputed by his or her superior contractor resulting in payments being held up for lengthy periods while the dispute is being resolved.

The Minister’s statement indicates that BCIPA was intended to ameliorate problems related to late or non-payment for sub-contractors under the SCA 1974.505

The BCIPA gives sub-contractors the right to claim progress payments and obtain adjudication of payment disputes for completed work under a construction contract by serving payment claims on the contractor or builder. A payment claim can be made when a progress or lump sum payment falls due or is overdue or if there is no set date in the contract, the last day of each calendar month, known as the reference date. Section 12 reads as follows: “From each reference date under a construction contract, a person is entitled to a progress payment if the person has undertaken to carry out construction work, or supply related goods and services, under the contract.” Section 17(1) reads as follows:

“A person mentioned in section 12 who is or who claims to be entitled to a progress payment (the claimant) may serve a payment claim on the person who, under the construction contract concerned, is or may be liable to make the payment (the respondent).”

504 The Bill had to be reintroduced after the Queensland state elections on 7 February 2004, and on 18 March 2004 Minister Schwarten again read his second reading speech, which was essentially the same as the one read on 26 November 2003. 505 Stephen Pyman, 'Subcontractor' Charges After the Subcontractors' Charges Amendment Act 2002 and the Building and Construction Industry Payments Act 2004' (2006) January/February (106) Australian Construction Law Newsletter.

165

The introduction of the BCIPA created a new regime for security of payment in the construction industry in Queensland. It provided a statutory right for sub-contractors to claim payment for works done from anyone who is liable to make the payment in accordance with the terms of the construction contracts. The BCIPA also represented a quicker way to resolve dispute of claim by way of adjudication.506

However, BCIPA 507 does not address problems arising from the application of the doctrine of privity in construction contracts. Even though it provides a right to sub- contractors to claim payment, this right is only concerned with progress payments from the party liable to pay. The BCIPA only ensures that sub-contractors or any person who undertakes to carry out construction work is entitled to receive and to recover progress payments in relation to the carrying out of the work, regardless of whether the contract makes provision for progress payments.

In summary, for sub-contractors; both the BCIPA and the SCA 1974 provide means of recovering money owed under construction contracts, albeit in different ways. Both contain provisions to assist sub-contractors in obtaining payment.508 However, as far as the doctrine of privity and third party beneficiaries contract are concerned, the BCIPA does not abrogate the doctrine of privity. It follows therefore that further discussion on the BCIPA is not necessary in the context of this thesis.

4.3.4 Judicial Decisions: Queensland

This part will consider through analysis of judicial decisions post the legislative reforms whether in practice these reforms have improved the position of third parties, in particular those parties who are aware of the intended contractual benefit, have provided

506 Marcus Jacobs, Security of Payment in the Australian Building and Construction Industry (Third ed, 2012). 507 Other states in Australia also have legislation akin to the BCIPA. See Building and Construction Industry Security of Payment Act 1999 (NSW); Building and Construction Industry Security of Payment Act 2002 (Vic); Construction Contracts Act 2004 (WA); Construction Contracts (Security of Payments) Act 2004 (NT); Building and Construction Industry (Security of Payment Act) 2009 (ACT). See also England’s Housing Grants Construction and Regeneration Act 1996. Similar to the BCIPA, the legislation does not abolish the doctrine of privity with regard to contracts for third party beneficiaries. 508 In the event of a payment dispute, sub-contractors must choose to utilise either by serving a payment claim under BCIPA or a Notice of Claim of Charge under the Subcontractors’ Charges Act 1974. They cannot have actions pending under both Acts simultaneously.

166 consideration and also relied upon the promised benefit. From this analysis a conclusion will be drawn about the third parties who do not benefit from the legislative intervention.

4.3.4.1 Property Law Act 1974

Section 55(1) of the PLA 1974 has been applied in a series of cases but often, s 55(1) has been discussed by way of alternative argument, not as the main focus of the case.509

Incidental beneficiary and implied promise

Section 55(1) provides that ‘a promisor who, for a valuable consideration moving from the promisee, promises to do or to refrain from doing an act or acts for the benefit of a beneficiary shall, upon acceptance by the beneficiary, be subject to a duty enforceable by the beneficiary to perform that promise’. The section is distinguishable from s 11 PLA 1969 in that there is no requirement for the contract to confer a benefit on the beneficiary. This leaves open the question of whether s 55 PLA 1974 may apply where there is an implied promise to benefit a third party to the contract. There is no requirement for the promise to be made to the third party or for the beneficiary to be a named beneficiary. The question of whether an incidental beneficiary may benefit from s 55 has been discussed in a number of cases.

In Re Burns Philp Trustees,510 the court considered whether the Commonwealth Bank could claim the benefit of a promise by the Mexican Village to relinquish its entitlement to payment of a debt in favour of other unsecured creditors. Based on the circumstances of the case, it was held that the bank was not the intended beneficiary of the promise as its debt was never mentioned during the meeting and therefore s 55 had no application. This decision indicates that a beneficiary must be a party expressly or impliedly intended by the parties to the contract to be entitled to a benefit.

509 See, eg, SJ MacKie Pty Ltd v Dalziell Medical Practice Pty Ltd [1986 No. 4247]; Rowella Pty Ltd v Hoult [1987 No 2207] where in both cases, the Full Court did not apply s 55(1). The possible application of s 55 in insurance contracts was briefly mentioned by McPherson J.A, 201 para 50 in McArthur v Mercantile Mutual Life Insurance Company Limited [2001] QCA 317 despite it not being raised by the parties to the proceeding. 510 Unreported, 17 Dec 1986.

167

Differing views were expressed in Northern Sandblasting Pty Limited v Harris, 511 where the High Court considered the issue of an incidental beneficiary in the context of a landlord of residential premises who undertook to have a defective electrical appliance repaired before the tenants entered into possession. A licensed electrician performed the repairs negligently with the result that those in possession of the premises were placed at risk of death or injury. The plaintiff (the daughter of the tenants) received severe electrical shock and suffered permanent and disabling injuries. The application of s 55(1) was argued as an alternative.

Justice Kirby (in dissent) and Gaudron J in considering the matter expressed the view that the daughter of the tenant was an incidental beneficiary of the provision in the lease between the tenant and the landlord wherein the landlord was obliged to maintain the premises in good repair. The daughter suffered injuries as a result of the landlord’s failure to repair and thus was able to enforce the obligation under the lease through s 55 of the Property Law Act 1974 despite not being named as a party to the lease or a named beneficiary of the promise.

In contrast, Brennan CJ rejected the daughter’s claim that s 55 applied to this case. His Honour held that s 55 requires the promisor to do an act to benefit the beneficiary and the beneficiary’s identity must be ascertainable from the contract. Clearly, the daughter could not fulfill these requirements as no reference was made to her in the tenancy agreement. In his Honour’s view had the promise been fulfilled (i.e. had the repair been properly carried out and without defect), the daughter would not stand a chance to reap a benefit under the contract. To allow the daughter or anyone else who also suffered injuries to benefit from the contract would mean that s 55 is applicable to the world at large and as a result, it would be impossible to determine who actually has the right to claim for the benefit intended in the contract.512

The arguments put forward by their Honours resulted in two possible approaches. Brennan CJ and Gummow J were of the view that s 55 only applied where the benefit

511 (1997) 188 CLR 313. 512 (1997) 188 CLR 313, 329. Similarly, Gummow J also rejected the application of s 55 to this case.

168 was expressly provided for in the contract; whereas Kirby J and Gaudron J held that a promise to benefit a third party can be implied under s 55. Nevertheless, greater weight must be accorded to the reasoning of Brennan CJ and Gummow J as they were the members of the majority.

A year later, the approach preferred by Kirby J and Gaudron J received support in Speedy Gantry Hire Pty Ltd v Preston Erection Pty Ltd.513 In this case, Speedy Gantry (SG) alleged that a promise was made between the inventor of a patent (Nielsen) and Richards. In return for Richards waiving fees for engineering services that he provided to Nielsen in inventing the patent, Nielsen promised to transfer the ownership of the invention to a company formed by them to SG (the beneficiary) via an assignment of the patent. The promise was alleged to be made in a discussion between Nielsen and Richards prior to the incorporation of SG. The relevant issue was whether SG could rely on s 55 PLA 1974 to claim the benefit of the promise. The problem faced by SG was that there was no evidence to support its contention that an express promise to transfer the ownership of the patent to it had been made.

Justice Emmet was of the view that s 55 could be satisfied by an implied promise. The learned judge found that there was a valid contract between Nielsen and Richards as to the formation of the company to exploit the patent, their contribution to the company and the benefits that they enjoyed from the company. Accordingly, a term to the effect that Nielsen promised to transfer the ownership of the patent to SG was implied as it was necessary to give business efficacy to the contract.514

It is submitted that the differences in the interpretation of s 55 as shown in the above cases demonstrate a defect in s 55. It is not clear whether s 55 applies to an implied promise and unless the provision is amended, judicial difference of opinion is likely to continue.

Acceptance of benefit

513 40 IPR 543. In this case, s 55 was discussed by Emmet J as an alternative to the main reasoning of his judgment. The main reasoning in this case was the application of the s 34(1) of the Patents Act 1952 (Cth) which provides that, inter alia, the actual inventor or assignee of the actual inventor may make an application for a patent. 514 40 IPR 543, 557.

169

There are a number of issues considered by the courts in relation to acceptance of benefit i.e. what is a reasonable time, anticipatory acceptance and what words or conduct will amount to acceptance.

Section 55(6) of the PLA 1974 requires the promise to be accepted by the beneficiary or the beneficiary’s agent within the time specified or within reasonable time if no time is specified. In Re Davies,515 in 1980, X leased to the appellants part of its building, title to which was held under the Real Property Acts. The lease, which remained unregistered, contained a series of options to renew. On 11 March 1985, X contracted to sell the building to B who was then trustee of a certain trust. By the contract, B covenanted with X that it would allow the appellants to exercise the options and also that if B should dispose of the building it would obtain a similar covenant from its successor in title.

On 19 September 1985, B retired from the office of trustee and was replaced by the respondent who covenanted with B "to be bound by all the terms, covenants, conditions and obligations imposed on it as trustee under the trust deed as if it were the original trustee thereunder". By direction of B given on 27 September 1985, X settled the contract by executing a transfer to the respondent, which transfer was registered on 24 February 1986. B's covenant with X came to the knowledge of the appellants' solicitors on 14 June 1985. In April 1986 the appellants knew the identity of their new landlord. They first purported to accept any promise given for their benefit in September and October 1986.

The court in dismissing the appeal held that B's covenants with X that it would allow the appellants to exercise the options to renew the lease gave no rights to the appellants under s 55 as there had been no acceptance from the appellants within a reasonable time.516 As stated by Macrossan J:

515 [1989] 1 Qd R 48. 516 See also Hyatt Australia v LTCB Australia Ltd [1996]1 Qd R 260 where it was held that the reasonable time only begins when the promise comes to the knowledge of the beneficiary.

170

“It was found the agreement was for the ‘benefit’ of the appellants but that there was no evidence of assent conveyed by them to the promisors and certainly not of an acceptance within "a reasonable time" within the meaning of s 55(6) of the Act.”517

In Hyatt Australia v LTCB Australia Ltd,518 a promise not to interfere with the operation of a hotel by the mortgagee was held to be a promise made by the LTCB (mortgagee) to Discovery Bay (mortgagor) in favour of the respondent (Hyatt) which was capable of acceptance by the respondent under s 55(1). The issue before the Queensland Court of Appeal was whether s 55(1) permitted a beneficiary to manifest in advance an intention to accept a promise which he or she knows is about to be made in his or her favour (anticipatory acceptance).

McPherson JA (with whom Fitzgerald P and Davies JA agreed) observed that it may be possible for the third party beneficiary to give anticipatory acceptance as it is always possible for the parties to frustrate such anticipatory acceptance. If it was the intention of the contracting parties to no longer benefit the third party, they can refrain from creating the contract as the third party beneficiary is only equipped with the enforcement right if the contract is created.519

The courts have also considered the words or conduct that will be sufficient to constitute acceptance. It is clear that words or conduct that are merely consistent with acceptance are not sufficient for the purpose of s 55(6) of the PLA 1974. In Robt Jones (363 Adelaide Street) Pty Ltd v First Abbot Corporation Pty Ltd,520 the plaintiffs sought damages from the defendants on a variety of bases, but essentially for losses sustained and which would be sustained into the future as a consequence of having certain glass installed in their multi-storey commercial building at 363 Adelaide Street, Brisbane (“the Building”). The plaintiffs pleaded that for the consideration described in the construction contract, White Industries implicitly promised to carry out the contract to

517 51(Macrossan J). 518 [1996] 1 Qd R 260. 519 [1996] 1 Qd R 260, 264. In this case, the purported acceptance preceded the relevant promise by some three and a half years. See also Cousins Securities Pty Ltd v CEC Group Limited; CEC Group Limited v Cousins Securities Pty Ltd [2006] QSC 307. 520 (1997) 14 BCL 282. This finding was later affirmed by the Queensland Court of Appeal in 1999.

171 obtain the guarantee to ensure that the plaintiffs would receive its benefit. By entering into the development contract as communicated to White Industries, the plaintiffs were alleged to have accepted that promise which was enforceable by the plaintiffs against White Industries pursuant to s 55 of the PLA 1974. White Industries submitted that although it was told about the plaintiffs' existence, it did not amount to an acceptance by the plaintiffs of the relevant term of the contract and it was merely the provision of information and further, it was given prior to the execution of the construction contract. Subsequent to the contract, there was no evidence of any relevant communication between White Industries and the plaintiffs. The Queensland Supreme Court accepted White Industries' submission that it was not liable to the plaintiffs pursuant to s 55 because there was no relevant provision in the main contract, there was no promise creating or appearing to be intended to create a duty enforceable by the plaintiffs, and there was no acceptance.521

Duty enforceable by the third party

Further, for s 55 to apply, the promise must create or appear to have been intended to create a duty enforceable by the third party as provided in s 55(6). In National Australia Bank Ltd v Hart,522 the respondent (Hart) in 1999 executed a guarantee and indemnity (“the guarantee”) in favour of the applicant (National Australia Bank) in respect of the overdraft facility granted by the applicant to Harts Group Financial Services Pty Ltd (“HGFS”). Later, in 2001, the applicant alleged that HGFS was in default under the overdraft facility and the applicant asserted the continued existence of the guarantee. There was a letter by the applicant to Harts Australasia Ltd (HAL) releasing the respondent’s personal guarantee and taking a fresh guarantee from Harts Australasia Ltd as offered by HAL. However this was subject to the applicant’s approval and review. Until then, the respondent’s guarantee was to remain. The review had not taken place when the respondent asked to be released from the guarantee. The applicant submitted that there was no consideration moving from the respondent to obtain the applicant’s promise to release the guarantee. The respondent sought to meet the claim of no

521 (1997) 14 BCL 282, 283 (White J). 522 [2002] QSC 051. See also Davies v Archer Park Newsagency Rockhampton (unreported, Qld SC).

172 consideration by arguing that if the agreement was between HAL and the applicant, the respondent was able to rely on s 55 of the PLA 1974 in order to enforce the alleged promise made by the applicant to HAL to release the guarantee of the respondent.

The difficulty with that submission was the requirement of s 55(1) that the promise to do an act be for the benefit of the beneficiary (which in this case would mean the promise alleged to have been made to HAL by the applicant to release the guarantee being for the benefit of the respondent) could not be met. The definition of “promise” in s 55(6) requires that it is a promise which creates or appears to be intended to create a duty enforceable by the beneficiary. As was stated by Brennan CJ in Northern Sandblasting Pty Ltd v Harris, 523 “The phrase ‘for the benefit of a beneficiary’ is descriptive of the promised act.”

The agreement alleged by the respondent was in terms that the applicant agreed with HAL that HAL would provide security for the HGFS overdraft facility. HGFS was a subsidiary of HAL. The benefit of any promise by HAL to provide a guarantee in respect of the facility granted by the applicant to HGFS could have been only for the benefit of HGFS. It followed that the respondent could not show that the promise alleged against the applicant in favour of HAL was of a type which satisfied s 55(1) of the PLA 1974.

In a very recent case from South Australia, s 55 was applied by the Supreme Court of South Australia as a result of a choice of law provision in Merrell Associates Ltd v HL (QLD) Nominees Pty Ltd.524 For the purposes of s 55, Merrell Associates, by the loan agreement promised Harts Australasia Limited that a second mortgage would take priority over Merrell Associates’ first mortgage. There was sufficient consideration passed to Merrell Associates from Harts Australasia in the form of loan agreement. The promise was the promise by Merrell Associates to arrange for Jobera to grant a second mortgage to Harts Staff Superannuation and to give priority to that second mortgage

523 (1997) 188 CLR 313, 329. 524 [2010] SASC 155.

173 over the first one. This promise was or appeared to have been intended to be legally binding and to create a duty enforceable by a beneficiary. As expressed by the Judge525

The overall outcome overtly indicated [by the series of documents which comprised the overall transaction]…, was that [Harts Staff Superannuation], as trustee of the Fund, would be recipient of the benefit of a second mortgage over the Kadina property owned by Jobera, in the sum of $900,000 which second mortgage was to be given priority over the registered First Mortgage… Hart Staff Superannuation was an entity other than the promisor, Merrell Associates, and the promisee, Harts Australasia Limited, and accordingly, a beneficiary within the meaning of that term in s 55(6) of the PLA 1974.

Promise must be legally binding

Additionally, “promise” under s 55(6) is defined as a promise which is or appears to be intended to be legally binding. The promise that is relied on by a party for the purpose of s 55 must be one that is capable of being enforced at law between the promisor and promisee. It must therefore be a promise that is capable of being given contractual effect. Subject to the other requirements for creating a legally enforceable contract, being the requirements for agreement and consideration, it is only a promise that is made with intention to create legal relations which can result in a contract. Therefore, s 55 will presumably exclude arrangements between friends and family that were not intended to have legal consequences. In Sorbello v Sorbello,526 discussions took place between a wife and husband concerning how the wife’s life insurance payout would be used to benefit their children. The husband was the nominated beneficiary under the policy. After the wife’s death, a dispute arose between the wife’s mother (guardian of the plaintiffs) and the husband as to whether the wife’s conversations with the husband evidenced an intention by the husband and wife to create legal relations. The children of the deceased (the plaintiffs) alleged that the conversations constituted a contract for the benefit of the plaintiffs within the terms of the s 55 PLA 1974. It was held by the Supreme Court of Queensland that such discussions were not enough to rebut the

525 HL (Qld) Nominees Pty Ltd v Jobera Pty Ltd [2009] SASC 165, 119. 526 [2005] QSC 219.

174 presumption that there was no intention to create legal relations between a husband and wife; hence, s 55 had no application in this case.

Preliminary Conclusions

Like the reform in Western Australia, s 55 PLA 1974 provides a statutory right to third party beneficiaries which enables them to enforce the benefit of a contract. Third party beneficiaries now have a statutory right which enables them to enforce the benefits promised in a contract, regardless of whether consideration was given for the benefit. Third party beneficiaries are in therefore in a better position in Queensland than before statutory intervention.

However, s 55 is not without its flaws. Third parties may find it hard to prove the requirements of s 55 due to its dual intention test which is difficult to satisfy as illustrated in Australia Bank Ltd v Hart, 527 Davies v Archer Park Newsagency Rockhampton528 and also in Sorbello v Sorbello.529 The requirement of acceptance in s 55(6) may also limit the application of s 55 as not in every circumstance has a third party accepted the benefit within a reasonable time. This requirement operates to disadvantage third parties. Further, there is uncertainty in terms of the scope of s 55. The question also remains whether third parties who are impliedly to receive a benefit under a contract may enforce the benefit under s 55 PLA 1974.

4.3.4.2 Subcontractors’ Charges Act 1974

This part will discuss the judicial interpretation of provisions within the SCA 1974 both prior to its amendment in 2002 and after.

Limited definition of ‘work’

A charge only applies in respect of ‘work’ done under the sub-contract. A contract to supply goods on which work of manufacture is performed by a sub-contractor is not a contract for work within the meaning of the SCA 1974. Mere delivery of goods under a

527 [2002] QSC 051. 528 (unreported, Qld SC). 529 [2005] QSC 219.

175 contract for the sale of goods is not ‘work’ within the meaning provided in s 3. This was discussed in Dowstress (Qld) Pty Ltd v The Mission Congregation Servants of the Holy Spirit. 530 In this case, a claim of charge under the SCA 1974 was lodged by the respondent (Dowstress (Qld) Pty Ltd) who was engaged by the appellant (E.J. & J.M. Maltry Pty. Ltd. (In Liquidation) ) to supply certain prestressed hollow floor beams to be used by the appellant in extensions to the owner’s building. There was provision for delivery instructions which was completed to refer to delivery to the owner’s hospital which was the site of the works the appellant had engaged with the owner to carry out. The appellant appealed for the claim of charge to be cancelled on the ground that what the respondent was contracted to do did not amount to ‘work’ as prescribed in s 3 of the SCA 1974 which entitled a claim of charge be lodged under s 5(1).

The appeal was allowed. It was held that the mere delivery of goods, under a contract for the sale of goods, to land where construction was being carried on did not fall within the definition of ‘work’ in s 3(1) of the SCA 1974.531 The fact that the respondent went beyond the terms of its contract and gave gratuitous advice concerning the installation of the goods did not enable the respondent to then claim a charge under the SCA 1974 as, by s 5(2), the charge attaches only in respect of work done under a contract. Nothing which the respondent was engaged by the appellant to do required performance of work, as distinct from delivery of goods to, at or upon the land, where the contract between the appellant and the owner was being performed. The respondent was not a sub-contractor to whom money was payable under a sub-contract.532 It follows therefore that the test in deciding what amounts to ‘work’ within the definition in s 3(1) is not necessarily what has been done upon or in respect of the land;

530 [1987] 1 Qd R 150. See also William Andrew Pty Ltd v Santalucia [1985] 1 Qd R 349 where a contract for the delivery of crushed rock was found to be only a contract for the sale of goods notwithstanding that the sub-contractor crushed the rock and built a service road in order to deliver it. 531 Section 3 defines ‘work’ to include among others, the supply of materials used or brought on premises to be used by a sub-contractor in connection with other work the subject of a contract or sub-contract. However it does not include the mere delivery of goods sold by a vendor under a contract for the sale of goods, to at or upon land. 532 Ibid 157 ( Moynihan J).

176 but it is whether what was contracted to be done is work upon or in respect of the land.533

Furthermore, in determining what constitutes ‘work’ within s 3 of the SCA 1974 and whether the sub-contractor is entitled to a notice of claim of charge, Derrington J stated What must first be determined are terms of the agreement between the applicant and the respondent in each case. Having determined the terms of the agreement, it is necessary to determine if what was contracted to do constituted ‘work’ under the Act. It is not the correct approach to look at what was actually done.534

It is clear from Derrington J’s words that there is no need in respect of a sub- contractor’s contract that there be any association with work upon land. Similarly in Re Bulk Materials (Coal Handling) Pty Limited (Administrators Appointed),535 it was held that as a charge applied only in respect of ‘work’ done under the sub-contract and a contract to supply goods on which work of manufacture was performed by a sub- contractor was not a contract for work within the meaning of the SCA 1974, the entitlement to the charge arose from a contract to perform work alone, unless the sub- contractor was performing work on the land the subject of contract.

On the other hand, where under the sub-contract, there is an obligation to do work on goods supplied by the contractor, it cannot be said that the contract is the mere delivery of goods sold by a vendor under a contract for the sale of goods. It is categorised as one for the performance of work upon goods supplied by the contractor.536 In deciding that the notice of a claim of charge was valid, Ryan J in Re DA Story Pty Ltd 537 distinguished Dowstress (Qld) Pty Ltd v The Mission Congregation Servants of the Holy Spirit.538 According to His Honour, the judgment by Derrington J was based upon the

533 Ibid. 534 Ibid, 151-152 (Derrington J). 535 (unrep, Sup Crt of Qld, No 3/1997). 536 In Re DA Story Pty Ltd [1993] 2 Qd R 355, the sub-contract contract required the subcontractor inter alia to, ‘‘fabricate, deliver, unload, hoist, erect and complete all structural steel purlins, braces and all other steel work elements required by the contract documents’’ and to, ‘‘paint all surfaces of steel work as required by the contract documents’’ and ‘‘after the erection has been completed, touch up all damaged paint work.’’ 537 [1993] 2 Qd R 355, 359. 538 [1987] 1 Qd R 150, 151-152.

177 facts that sub-contractor in question was not engaged to perform work on the beams at the site. Its obligation was to deliver them to the site. Dowstress (Qld) Pty Ltd v The Mission Congregation Servants of the Holy Spirit539 was not concerned with a case (as in this instance) where there was under the sub-contract an obligation to do work on the goods supplied by the sub-contractor. It could not be said of the employer that the subject of the head contract was the mere delivery of goods sold by a vendor under a contract for the sale of goods, to, at or upon land. The subject contract was not for the sale of goods. It was one for the performance of work upon goods supplied by the sub- contractor.

In 2002, with the Subcontractors' Charges Amendment Act 2002 the definition of ‘work’ was amended to include inter alia:

i) ‘Land’ to include land that is under water; ii) ‘Project specific materials’ to include materials specifically for inclusion in the work, but excluding materials that could without substantial change be incorporated in other work or which could reasonably be converted to other use; iii) ‘Security’ to describe the instruments used to secure performance under a contract; iv) ‘Supply of labour’ to specifically exclude from the definition of ‘work’ the supply of persons who perform only administrative functions; v) An extension to the definition of ‘work’ to include the manufacture of project specific materials and supply of labour for work the subject of a contract or subcontract.

In Griffiths Powerline Maintenance Pty Ltd v IDS Consulting Services Pty Ltd, 540 Boulton DCJ considered the amended definition of work and held that the clearing of trees for the erection of transmission towers was a necessary and integral part of the construction process. Use of the term ‘hire’ was not determinative and accordingly the

539 Ibid. 540 [2003] QDC 055.

178 sub-contract was not a mere hire of machinery, but a contract for services to be provided.

In Re Stockport (NQ) Pty Ltd, 541 Wilson J held that survey services such as the placement of survey pegs and batter boards was ‘in connection with the taking of measurements’ and was excluded by the definition of work in s 3 f(ii) which reads: ‘work or labour done or commenced by a person (ii) in connection with the testing of materials or the taking of measurements or quantities.’

Employer

For the purpose of a notice of intention to claim charge as stated in s 10(1), an ‘employer’ is the person who contracted with the head contractor for building work performed by the sub-contractor. A mortgagee making payments under its securities over land and assets through a receiver and manager was not doing so as ‘employer’. In Isakka v South Australian Asset Management Corporation,542 the employer who owned land in the Brisbane suburb of Bardon entered into a contract with a head contractor to build a multistorey block of units. The head contractor later engaged Sange Holdings, the sub-contractor to carry out the formwork for the building. The plaintiff was Benjamin Isakka, who was the former principal of Sange, which was now in liquidation. Finance for the project was provided by Beneficial Finance Corp (BFC), which had since been succeeded under statute by the South Australian Asset Management Corp, which was the defendant in this action as the assignee of Sange's claims. BFC entered into a deed of loan with the employer by which it undertook to lend to the latter an amount of $13,000,000 on which the head contractor was authorised to draw in order to pay amounts due under the building contract. The loan to the employer was secured by a mortgage debenture in the form of a fixed and a floating charge granted in favour of BFC over the present and future assets of the employer and by a registered mortgage under the Land Title Act 1994 over the land at Bardon on which the units were to be built. Disputes arose between the sub-contractor and the head contractor. Progress

541 Unreported QSC 02/05/2003. 542 [2000] QCA 549.

179 claims by the sub-contractor under the sub-contract were not met and the sub-contractor served a notice of intention to claim charge upon BFC claiming BFC had acted as an employer when it made payment to the head contractor.

The Court of Appeal held that in making those payments, BFC was doing so not as an ‘employer’ but as a mortgagee under its securities over the land and assets and as receiver and manager under the company charges given by both the employer and the head contractor. As stated by Starke J in Australian Mutual Provident Society v Geo Myers & Co Ltd (1931),543 the position of the receiver (which was the mortgagee in that case) "was rather that of a protector or supervisor of the Company's business for the benefit of the Bank", just as BFC was in this case. As a mortgagee, BFC fell outside the ambit of the expression "employer" by reason of the definition of that term in s3(1) of the SCA 1974 that specifically excludes a mortgagee.

Land in Queensland

The question of whether the SCA 1974 is applicable to a sub-contract where work is performed on land outside Queensland was resolved in Transfield Pty Ltd v Fondside Australia (receivers and managers appointed)(in liq).544 Prior to this decision, there were conflicting views on the matter expressed by Derrington J (with whom Moynihan J and Kelly ACJ agreed) in Dowstress (Qld) Pty Ltd v The Mission Congregation Servants of the Holy Spirit545 and in Re Gradeline Contracting Pty Ltd546 that the sub- contractor with the entitlement to lodge a charge must have a contract with the head contractor for the performance of work upon the land where the head contract is being performed. By contrast, Ryan J in Re DA Story Pty Ltd 547 submitted that the sub- contract work need not be performed upon the land where the head contract was being performed.

543 (1931) 47 CLR 65, 74. 544 [2000] QSC 480. 545 [1987] 1 Qd R 150, 157 546 [1998] 2 Qd R 251, 252-254. 547 [1993] 2 Qd R 355, 358-359.

180

In the present case, the contractor entered into a sub-contract with the sub-contractor in relation to the construction of part of a pipeline on land within New South Wales. The respondent claimed to have carried out work under the sub-contract and that the sum of $9 730 823 was payable by the contractor to the sub-contractor for that work and that the sum was unpaid. When the sub-contractor went into liquidation, the receivers and managers on behalf of the sub-contractor gave notice of intention to claim a charge to the employer in respect of the money that was then or would be payable by the employer to the contractor in respect of work done by the sub-contractor. The contractor however, submitted that the SCA 1974 did not apply on the ground that there was no express statement or clear implication in the SCA 1974 that it was intended to apply to work performed outside Queensland.

The Supreme Court in cancelling the notice of a claim of charge followed the construction adopted by the majority in Dowstress (Qld) Pty Ltd v The Mission Congregation Servants of the Holy Spirit.548 Justice Mullins stated: That construction gives effect to the words "upon the land where the contract or subcontract is being performed" in the definition of "work" as applicable in all cases, even though the definition is expressed in terms which are inclusory. It is consistent with the legislative history of this definition referred to below that the definition is intended to apply in all cases.549

Therefore, as a matter of construction, the SCA 1974 applies where the land on which the work under the main contract is being performed is within Queensland. The reference in a Queensland Act to ‘land’ must prima facie be taken to be a reference to land within the jurisdiction and there are no other indications in the SCA 1974 as to any other basis for giving some territorial limitation to its operation.550

Leapfrogging

The issue of whether a sub-contractor was entitled to lodge a charge under the SCA 1974 in respect of moneys payable to a contractor higher up the chain with whom that sub-contractor had no contractual relationship arose due to the word ‘superior

548 [1987] 1 Qd R 150, 157 549 Ibid 15 (Mullins J). 550 Stephen J. Pyman, Annotated Subcontractors' Charges Act (Third (Revised) ed, 2002).

181 contractor’ which was not defined, although it appears many times in the SCA 1974. The word could mean a person with whom a claimant sub-contractor has a contract or one who is further up the line than the sub-contractor with whom a claimant sub- contractor lower down the line has a contract. 551 Justice Dowsett who identified a possible problem in the operation of the SCA 1974 with regard to the matter stated A subcontractor who has given a notice of claim to another party is entitled to a charge as against the amount payable by that party. The source of the funds from which such payment is to be made is not relevant. As I have previously observed, I can see no justification for the view that the Act assumes that each contractor or subcontractor is to be paid only from such amounts as are ultimately payable by the employer at the top of the chain for the whole of the project. Intermediate contractors may well find that they have to pay more to their own subcontractors than they are to receive.552

Prior to 2002, the common view was that a sub-contractor was entitled to lodge a ‘leapfrogging’ charge, i.e. a charge on money due to a head contractor further up the line of contracts, despite the sub-contractor not having a contractual relationship with the superior contractor and the superior contractor having paid all money that was due to the contractor below.553 However, amendments to the SCA 1974 in 2002 make such a claim more difficult.554 Section 21(3) was inserted to provide for specific instances in s 21(1) where a person may be prejudicially affected by a claim of charge.555 If, because of a claim of charge, the payment or release of security to a person (the affected person) higher up the contractual chain than the sub-contractor is delayed or otherwise affected and the affected person has made payment to a person who is a contractor or superior contractor of the claiming sub-contractor, the affected person is prejudicially affected within the meaning of s 21(1). This provision effectively limits the circumstances in which a sub-contractor may successfully claim a ‘leap frog’ charge. The court can then determine whether a claim of charge should be either cancelled or its effect modified. The legislature has endeavoured to remove the problem which can result with an

551 Hewitt Nominees Pty Ltd v The Commissioner for Railways [1979] Qd R 256, 262-263 (W B Campbell J). 552 Re Radair Pty Ltd [1998] 2 Qd R 539, 549. 553 See Hewitt Nominees Pty Ltd v The Commissioner for Railways [1979] Qd R 256; Hamilton Australia Pty Ltd v Milson Projects Pty Ltd [1997] 2 Qd R 355; Re Radair Pty Ltd [1998] 2 Qd R 539. 554 Subcontractors' Charges Amendment Act 2002 (Qld). 555 Section 21(1) reads ‘A person who alleges that the person is prejudicially affected by a claim of charge under this Act may at any time make application to the court for an order (a) that the claim be cancelled; or (b) that the effect of the claim be modified.’

182 intermediate contractor in substance paying twice for the same work done by a subcontractor. This has been achieved by giving the court the power to cancel the leapfrogging charge which is otherwise valid or to modify it to avoid the intermediate contractor having to pay again for work which is the subject of the leapfrogging charge for which the intermediate contractor has already paid.556 Mullins J in Re University of Queensland and Baulderstone Hornibrook Pty Ltd v Broen Australia557 stated that in relation to the insertion of s 21(3), the legislature has introduced a departure from the approach of protecting the sub-contractor in preference to the superior contractor, when the superior contractor has already paid for the work done by the sub-contractor which is the subject of the leapfrogging charge.558

In Re University of Queensland and Baulderstone Hornibrook Pty Ltd v Broen Australia,559 the University entered into a contract with Baulderstone to construct laboratories, office and car park facilities at the molecular bioscience building. Baulderstone engaged Hamilton Australia to manufacture, supply and install fume cupboards at the site. Hamilton engaged Broen as a sub-subcontractor to manufacture and fabricate the specific tapware components for the fume cupboards at the site. That work was completed by Broen. The tapware components were then installed. The total amount claimed by Broen under the sub-subcontract was $161,412.35 of which $96,915 was paid by Hamilton, leaving a balance of $64,497.35. Broen then gave notice of a claim of charge to Baulderstone in respect of the balance and a notice of claim of charge to Hamilton. Broen also gave a notice of claim of charge which it describes as the "leapfrogging charge" to the University in respect of the same amount of $64,497.35 for the same works that were undertaken for Hamilton, seeking to charge moneys that were or would be payable by the University to Baulderstone.

The Supreme Court, in applying s 21(1) and s 21(3) of the SCA 1974, held that where a sub-contractor gave a notice of claim of charge based on a claim for work already paid for by the superior contractor to the contractor which had engaged the sub-

556 The Explanatory Notes for the Subcontractors' Charges Amendment Bill 2001. 557 [2003] QSC 158. 558 Ibid [35]. 559 [2003] QSC 158.

183 contractor, the superior contractor was prejudicially affected by the notice of claim of charge pursuant to s 21(3) of the SCA 1974. The sub-contractor's claim was therefore cancelled.

Liquidation/Bankruptcy

As a secured creditor, upon claiming a charge a sub-contractor’s right will continue even if a company enters into liquidation. However if a sub-contractor lodges a proof of debt for the whole of the debt or claim, it is likely that the sub-contractor will be taken to have elected to surrender his or her security (the charge), and will revert to the position of an unsecured creditor.

In Seventeenth Canute Pty Ltd v BradleyAir Conditioning Pty Ltd [in liq), 560 the contractor entered into a scheme of arrangement with its creditors and the sub- contractor lodged a proof of debt and asserted that it had not received any satisfaction or security for the debt. However, the sub-contractor had in fact also lodged a sub- contractor's charge for the amount of the debt. The sub-contractor received a dividend payment as an unsecured creditor of the amount owing to it. The sub-contractor then later received 30% of the amount owing to it by way of payment into court by the employer pursuant to its charge. It was argued by the scheme trustees that the sub- contractor had elected to be treated as an unsecured scheme creditor and as a result had assigned its rights in and to the debt to the scheme (i.e. it waived its rights to the charge).

The Supreme Court held that delivering the proof of debt to the scheme trustee constituted notice to the scheme trustee that it was to be treated as a scheme creditor and an election to be treated as an unsecured creditor. It was held that the charge passed with the debt. Accordingly, the sub-contractor had to repay the amount it would have received as a secured creditor (as it had proved for the debt as an unsecured creditor).

560 [1987] 1 Qd R 11. See also Re Stockport (NQ) Pty Ltd [2003] FCA 31; Surfers Paradise Investments Pty Ltd (in liq) [2003] QCS 025.

184

Charge

The SCA 1974 had been amended to expand the circumstances in which sub-contractor may secure a charge in respect of money payable for work performed under a sub- contract. In Abigroup Contractors Pty Ltd v Multiplex Constructions Pty Ltd,561 it was noted that s 5(2) provides that the charge of a sub-contractor secures payment of all money that is payable or is to become payable under the sub-contract. Importantly s 5(6), a new provision in the SCA 1974, provides that money 'that is or is to become payable' includes money which is payable under a provision of the sub-contract still to be complied with. This has the effect that a charge will be valid, even though the relevant work had not been certified, assessed or paid in full, if the sub-contract satisfied the requirements of the amended s 5. By this amendment, the ambit of s 5(6) and potentially of the charge under s 5(2) is now very wide. It includes claims for money payable or to become payable under the sub-contract for work done that, as regards its amount, quality or value, is in dispute or has still to be resolved or certified in accordance with the contractual provision in question.562

Preliminary conclusions

The SCA 1974 was designed to protect the interest of sub-contractors. It confers statutory rights on sub-contractors to create a statutory charge that enables a sub- contractor to recover a debt or payment owed by a head contractor for building works directly from an employer. To enhance further the security of payment to sub- contractors, the SCA 1974 was amended in 2002 to provide better protection and a wider scope of application. For example, the definition of ‘work’ was expanded and the categories of persons entitled to a charge expanded to include manufacturers of project specific material and suppliers of labour. Sub-contractors are better off with the new SCA 1974 as it provides justice and fairness to the sub-contractors concerned. However, concern has been expressed that the courts will continue to require strict compliance due

561 [2003] QCA 501. 562 Ibid 510 (Wilson J).

185 to the special rights accorded to sub-contractors.563 Any technical errors, for example, failure to observe the requirements and procedures in the SCA 1974 would render the charge invalid. This is arguably a flaw in the legislative purpose of providing security of payment to sub-contractors.

4.3.5 Legislation: The Australian Commonwealth

The injustice resulting from the failure of the law to give effect to the expressed intention of the insured and insurance company to benefit third parties who have in turn organised their affairs accordingly with knowledge of the insurance policy was in need of remedy. As discussed in Chapter 3, indemnity insurance policies are most affected by the doctrine of privity in Australia. As a result, the Australian Law Reform Commission 564 recommended that every person who properly fell within a policy’s description of the persons entitled to indemnity should be able to make a claim for loss covered by the policy, irrespective of whether that person was a beneficiary under a trust or a principal under a contract of agency. This proposal has been implemented by s 48 of the Insurance Contracts Act 1984 (Cth) which commenced on 1 January 1986.

4.3.5.1 Section 48 of the Insurance Contracts Act 1984 (Cth)

Generally, s 48(1) of the Insurance Contracts Act 1984 (Cth) creates a statutory right for a person who is not a party to a contract of general insurance to recover the amount of his or her loss directly from the insurer if that person was specified or referred to in the contract of insurance taken out between the insured and the insurer, thus overcoming the contractual privity problem. Overcoming privity of contract appears to be the central concern of s 48(1). The provision does not require the third party be named as long as that third party is sufficiently described or referred to. Section 48(1) targets an added insured as a person not party to an insurance contract. Thus, an added insured is a person who is not a party to an insurance contract yet specified or referred to in the

563 See Queensland Building Services Authority, 'Security of Payment Discussion Paper' (Queensland Building Services Authority), 37. 564 The Law Reform Commission, 'Insurance Contracts' (Report No. 20 1982), 75.

186 contract, whether by name or otherwise, as a person to whom the insurance cover provided by the contract extends.565

Under s 48(2), the third party has in relation to the claim, the same obligations to the insurer as the third party would have had if the third party was the insured, but this is subject to the terms of the contract. By virtue of s 48(3), the insurer has the same defences to an action by the specified person as the insurer would have in an action by the insured. There is a specific provision that deals with third party beneficiaries under life insurance policies. Under s 48(A), where a person effects a contract of life insurance on her or his own life for the benefit of a third party, whether that third party is specified or referred to by name or otherwise, that third party may recover under the contract, even though they are not a party to it, and the money payable under the contract does not form part of the life insured’s estate and is not subject to her or his debts. It appears that with the enactment of s 48 the Insurance Contracts Act 1984 (Cth), at present, a contract of general insurance may in certain circumstances benefit persons who are not parties to the contract of insurance, either pursuant to s 48 or in accordance with the principles in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd.566

4.3.6 Judicial Decisions: The Australian Commonwealth

Section 48(1) of the Insurance Contracts Act 1984 provides a third party with a right of recovery if the third party is specified or referred to in the contract as a party to whom its benefit extends. It is necessary to determine whether or not the person in question is a party to the contract when considering the application of s 48. Section 48 does not deem a third party to be a party to the insurance contract thus attracting the rights conferred on such party. It does not purport to confer contractual or equitable rights upon such a person. The section merely provides a right for an identified beneficiary to claim as against the insurance company.

565 Thomas Spencer, 'Section 48 of the IC Act 1984 - We didn't expect the undisclosed principal in contract' (2004) 15 Insurance Law Journal 225. 566 (1988) 165 CLR 107, as discussed in Chapter 3.

187

The insured

Usually, the question of whether a person is a party to the contract will be resolved under the policy definition of “insured” or in any policy schedules. In Barroora Pty Ltd v Provincial Insurance (Australia) Ltd,567 the relevant policy contained a definition of “the insured” which referred to the person or persons “so named in the Certificates”. The person seeking cover was not named in the relevant Certificate as the “insured” The Certificate named “the insured” as Barroora, and only Barroora, hence excluding Capital as “the insured” resulting in Capital being held not to be a party to the contract of insurance. The determinative factor was not what the parties subjectively intended, but what they should be taken to have agreed upon, viewing the matter objectively.568 A reference to Capital in the Certificates of Insurance is a reference to it as a person to whom the insurance cover provided by the contract extended and thus Capital was entitled to the benefit of s 48 of the Insurance Contracts Act 1984 (Cth).

Later, in C E Heath Casualty General Insurance Ltd v Grey,569 the Court of Appeal considered that the express intention of the party was important to decide whether or not the directors of a company were a party to the contract. JA Mahoney stated

Rogers CJ Comm D, in concluding that the directors were not party to the D/O policy, appears to have been influenced mainly by the width of the class of persons who, on that basis would be parties to the contract of insurance...the intention of the policy in this regard was that the insured person should be the directors and officers at the time when the policy was effected. These are persons who, I infer, paid such premium on the D/O policy as was payable.570 In circumstances where the insured is defined to merely include “all contractors and sub-contractors”, a sub-contractor (particularly one who is not in contemplation at the time of the taking out of the policy) would not be a party to the contract of insurance, but the sub-contractor would be entitled to take the benefit of s 48.

567 (1992) 7 ANZ Ins Cas 61-103 (NSW SC). 568 (1992) 7 ANZ Ins Cas 61-103 (NSW SC), 174 (Brownie J). 569 (1993) 32 NSWLR 25. 570 (1993) 32 NSWLR 25, 33-34.

188

Recently in QBE Insurance (Australia) Ltd v Lumley General Insurance Ltd,571 the Court of Appeal of Victoria considered a submission by QBE Insurance that the parties to a contract of insurance could not by virtue of naming a third party to the contract as an insured make the provisions of the insurance contract binding on that third party unless that third party authorised them to do so or ratified their doing so. It was held that there was nothing in the language or the underlying purpose of s 48 that required such a person to do anything as a pre-condition to enforcing the rights conferred by the section. Hence, the absence of any act to authorise or to ratify a party as the insured under the policy did not alter the legal effect of that party’s inclusion as an insured. The legal effect was that Commercial Interiors had a right under s 48 of the Insurance Contracts Act 1984 to recover its liability under the policy as it was not a party to the Lumley policy, thus it came within the definition of Insured under the policy.572

Reference in the contract

To illustrate the circumstances where section 48(1) will have no application, it is necessary to look at the rights of a third party beneficiary in a group insurance policy as discussed in Hannover Life Re of Australia Limited v Sayseng.573 The case concerned Mr Sayseng, an employee of Kellogg (Aust) Pty Ltd, who became a member of the Kellogg Retirement Fund. Kellogg took out an insurance policy with the appellant, Hannover, whereby Kellogg acted as a trustee for the Kellogg Retirement Fund. The policy was to provide cover for the Fund’s liabilities to its members. The policy covered only the Trustee with respect to payments made by it under the Fund and did not purport to extend insurance to Mr Sayseng or to other insured persons referred to in it. The case did not fall under s 48 of the Insurance Act 1984 for the reason that Mr Sayseng (the third party) was not “specified or referred to in the [insurance] contract as a person to

571 (2009) 256 ALR 574, [2009] VSCA 124. 572 (2009) 256 ALR 574, [2009] VSCA 124, 589, 590. Commercial Interiors was an insured under the Lumley policy by virtue of being a sub-contractor of Probuild and without having paid any part of the premium under the policy. 573 [2005] NSWCA 214.

189 whom the insurance cover extends.”574 Furthermore, the Supreme Court of New South Wales cast doubt on whether the Group Life Contract fell within the class of general insurance referred to in s 48.

Defences

In recent years, there have been conflicting opinions arising from the ambiguous language in s 48(3) of the Insurance Contracts Act 1984 (Cth) about whether a third party beneficiary can be in a better position than the insured. In Commonwealth Bank of Australia v Baltica General Insurance Co Ltd,575 the insurer (Baltica) insured certain premises in Sydney, New South Wales under an Industrial Special Risks policy on which the interest of the plaintiff bank as mortgagee was noted. The bank was not a party to the contract of insurance and was therefore not included within the term “the insured” but clearly it was a person specified or referred to in the contract as one to whom the insurance cover extended. During the currency of the policy, the premises were damaged by fire but Baltica refused to indemnify either the insured or the bank alleging inter alia that the insured had been guilty of non-disclosure when arranging the insurance. The bank brought separate proceedings to establish its right to an indemnity and to determine whether Baltica was entitled to rely on non-disclosure by the insured as a defence to a claim by the bank pursuant to s 48.576 Justice Giles in dismissing the claim by the bank held that the insurer could rely on non-disclosure by the insured as a defence to a third party’s claim under s 48(1). His Honour’s interpretation of s 48(3) was that a clear indication in the Act itself was required if the third party’s rights were to go beyond the existence and terms of the contract of insurance. Section 48(3) stated in plain words that the insurer was to have the same defences to a claim by a specified person as the insurer would have had in an action by the insured. Further, in the clear

574 See also Verinder v Australian Institute of Steel Construction Ltd (2004) 13 ANZ Ins Cas 61- 589; Cigna Insurance Asia Pacific Ltd v Packer [2000] WASCA 415. In all these cases, the courts resorted to applying the principle enunciated in Trident General Insurance Co v McNiece Bros Pty Ltd (1988) 165 CLR 107. 575 (1992) 7 ANZ Ins Cas. 576 The position under common law was not considered by the court as both parties agreed that the bank would not be in better or worse position if it were to bypass s 48 and bring proceedings at common law in reliance on the decision in Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107.

190 absence of indication to the contrary, it could not have been the intention of the parliament to place a third party in a better position than if that third party had been a party to the contract of insurance.577

By contrast, shortly after the decision of Giles J, the Supreme Court of New South Wales in Carden v GE Heath Casualty & General Insurance Ltd578 took a different approach to the interpretation of s 48(3) of the Insurance Contracts Act 1984. This case involved the liability of the insurer to indemnify the directors of Compass Holdings Ltd under a Directors and Officers Liability Insurance policy taken out by Compass, for costs incurred in defending an action brought against them by the Australian Securities Commission. The basis of the insurer’s refusal to cover these costs was the alleged non- disclosure of material facts. The directors argued that they were not parties to the contract of insurance and therefore were under no duty of disclosure, but nevertheless by virtue of s 48, they were entitled to the benefit of the insurance cover. Chief Justice Rogers found that the directors were not parties to the contract of insurance, but were specified or referred to in the policy as persons to whom the insurance cover extended within the meaning of s 48(1). His Honour pointed out that the wording of the policy described the directors in generic terms only, so as to include past and future directors and encompassed “the amorphous shifting population” which by definition might from time to time constitute the class of directors and officers entitled to the benefit of the policy. It was also conceded that the directors were under no duty of disclosure as they were not insured parties to the contract of insurance. As far as s 48(3) was concerned, the issue was whether the reference in that subsection to “the same defences” meant that the same types of defences as would be available against the insured would be available to the insurer in an action by the directors or whether it meant that the same defences that would be available to the insurer, had the action been brought by the insured itself, could now be relied upon to defend the claim by the directors.

577 John Graves, 'Rights and Obligations of Strangers to the Benefits of Contracts of Insurance' (1996) 7 Insurance Law Journal 4. 578 (1992) 7 ANZ Cas 61-147, also known as ‘The Compass Case’. See also C E Heath Casualty and General Insurance Ltd v Grey (1993) 32 NSWLR 25.

191

Chief Justice Rogers in coming to a different conclusion to that of Giles J in Commonwealth Bank of Australia v Baltica General Insurance Co Ltd,579 stated that the purpose of the Act was better served by holding that it was only some acts or omissions of the third party himself that should ground a defence to a claim by him. His Honour added:

The legislative purpose so identified will not be served, in my opinion, by restricting the benefit of the policy which the legislative clearly intended should be enforceable by a third party, where the third party beneficiary is innocent of any act of commission or omission.580

This interpretation was in line with the decisions in VL Credits Pty Ltd v Switzerland General Insurance Co 581 and Barroora Pty Ltd v Provincial Insurance (Australia) Ltd582 where in both cases, it was held that the insurer could not rely on arson by the insured as a defence to the third party’s claim under s 48.583 In VL Credits Pty Ltd v Switzerland General Insurance Co584 the plaintiff brought a claim under s 48 against the defendant for indemnity under a fire insurance policy. According to John Graves,585 this case is authority for the proposition that the insurer may plead any defences it would have against the insured against the third party, but only in respect of the third party’s conduct.

More recently, in General Motors Acceptance Corporation Australia v RACQ Insurance Ltd,586 the applicant financed the purchase by the insured of an off road vehicle which was insured under a policy of insurance with the respondent. The applicant's interest in the vehicle was noted on the policy of insurance. Either the insured or someone at the insured’s direction deliberately destroyed the vehicle or the insured made a fraudulent claim in respect of its loss, regard for which the respondent

579 (1992) 7 ANZ Ins Cas. 580 (1992) 7 ANZ Cas 61-147, 77,770. 581 [1990] VR 938. 582 (1992) 7 ANZ Ins Cas 61-103 (NSW SC). 583 The conflict of interpretation has now been resolved by the New South Wales Court of Appeal (on appeal from the judgment of Rogers CJ in The Compass Case) where the Court indorsed the opinion of Giles J as a true interpretation of s 48(3) and reversed the decision of Rogers CJ. See C E Heath Casualty Insurance & General Insurance Ltd v Grey (1993) 32 NSWLR 25. 584 [1990] VR 938. 585 John Graves, 'Rights and Obligations of Strangers to the Benefits of Contracts of Insurance' (1996) 7 Insurance Law Journal 4. 586 [2003] QSC 080 (Unreported).

192 was not obliged to indemnify her. The applicant claimed under s 48(1) and contended that s 48(3) makes applicable to a third party's claim any contractual limits provided for in the policy, but the effect of the subsection is not to enable an insurer to resist payment merely because it would have grounds for declining payment to the insured. Justice Muir held that:

The applicant's principal difficulty though in relation to s48 is that its right to recover under s 48(1) is a right to recover "in accordance with the contract". Neither the insured nor any person whose interest is noted on the contract has a right to recover under it for non accidental loss and damage or for damage caused when the vehicle is being used other than in a prescribed manner.587

It is implicit in this statement that a named insured’s unauthorised wrong would taint a third party’s claim against the insurer. 588 In short, section 48(3) of the Insurance Contracts Act 1984 has been described as “elliptic and economic in its use of word.”589 There exists uncertainty as to the role of s 48(3) of the Insurance Contracts Act 1984 in relation to third parties which requires legislative attention.590

4.3.7 Conclusion

The reforms made by s 11(2) of the PLA 1969, s 55 of the PLA 1974 and s 48 of the Insurance Contracts Act 1984 have all been judicially interpreted. As seen in the cases above, there are differences in the interpretation of these provisions, especially in relation to direct promises in contracts, the categories of third party who fall within the ambit of the provisions, what sort of benefit is included in the reform and whether non- disclosure by an insured may be used as a defence by an insurer in a proceeding by a third party. Regardless of these deficiencies, the reforms are welcome as they recognise the rights of third party beneficiaries in commercial contracts.

A third party who is expressly referred to in a contract as the conferee of a benefit will be entitled to enforce the benefit under both s 11(2) of the PLA 1969 (WA) and s 55

587 [2003] QSC 080 (Unreported), 25 (Muir J). 588 Thomas Spencer, 'Section 48 of the IC Act 1984 - We didn't expect the undisclosed principal in contract' (2004) 15 Insurance Law Journal 225. 589 Tadgell J, 949 in V L Credits Pty Ltd v Switzerland Insurance Co [1989] VR 938. 590 John Graves, 'Rights and Obligations of Strangers to the Benefits of Contracts of Insurance' (1996) 7 Insurance Law Journal 4. See also Michael Fotheringham, 'The Insurance Contract- Time for Reform of Section 48' (2000) 11 Insurance Law Journal 127.

193

PLA 1974 (Qld). Compared to Western Australia, the reform that took place in Queensland provides better protection to third party beneficiaries as it is wider in its scope of application. While s 11(2) of the PLA 1969 limits its application to existing third parties, the application of s 55 of the PLA 1974 extends to future third parties such as unborn children, future spouses, future nominees and also new sub-contractors who replace existing sub-contractors. However, the ability of a third party to enforce an implied benefit is excluded under s 11(2) PLA 1969 (WA) and the position is uncertain as far as s 55 PLA 1974 (Qld) is concerned. Yet, third party beneficiaries in these two jurisdictions are better off compared to third parties in other Australian jurisdictions. They have been provided with statutory rights to enforce benefits in contracts despite not being privy to the contracts.

Additionally in construction contracts, sub-contractors in Queensland have a statutory right to create a charge in order to secure payment of money due to them under the SCA 1974. Under the SCA 1974, sub-contractors have the right to secure payment directly from employers thus abrogating the doctrine of privity. However since its inception in 1974, the SCA 1974 has been subject to criticism from the judiciary as well as the construction industry. In an attempt to address some of the criticisms, amendments were made in 2002591 with the aim of making better provision for securing the payment of money payable to sub-contractors while safeguarding the rights of employers and other contractors. With the 2002 amendments, the scope of the SCA 1974 is wider as it allows more categories of sub-contractors to create charges by expanding the definition of ‘work’. The major setback of the SCA 1974 is that it is only effectual if there is money due to the head contractors from the employers before the sub-contractors are allowed to place charges in respect of payments.

In summary, the reforms made in Western Australia and Queensland have both proved to be useful in providing rights to and protection of third party beneficiaries as evidenced in the case law examined above. When considered with s 48 of the Insurance Contracts Act 1984 (Cth) which has abrogated the doctrine of privity in insurance

591 Also in 1976 but without major impact on the effectiveness of the SCA 1974.

194 contracts, s 11(2) of the PLA 1969 and s 55 of the PLA 1974 have enhanced the rights of third party beneficiaries. Despite these advantages, the reforms also have a number of defects that need to be addressed before all third party beneficiaries will have an effective right to enforce the benefit of contracts.

4.4 ENGLAND

4.4.1 General Legislation

As far back as 1937, substantial reform of the privity doctrine was proposed by the then UK Law Revision Committee. The Committee which was chaired by Lord Wright592 proposed that if a contract conferred a benefit on a third party, such a party should have a direct right of action to enforce the benefit. In addition, the Report stated that it was necessary to adopt jus quaesitum tertio because of the uncertainty and unreliability posed by exceptions especially the trust concept,593 in relation to which Sir William Anson concluded,

‘it is not a very satisfactory device as the circumstances in which it will be applied cannot be predicted with certainty.’594

In noting the difficulties created by the doctrine of privity of contract, the Committee recommended that it be abolished subject to three provisos:

(1) no third party right can be acquired unless given by the express terms of the contract;

(2) the promisor should be entitled to raise against the third party any defence that would have been valid against the promisee; and

(3) the parties to the contract should retain the right to cancel it at any time unless the third party has received notice of the agreement and has adopted it.

592 In the Sixth Interim Report ‘Statute of Frauds and the Doctrine of Consideration’. 593 See cases such as Vandepitte v Preferred Accident Insurance Corporation of New York [1933] AC 70; Re Schebman [1944] Ch 83, Court of Appeal. 594 J. Beatson, Anson's Law of Contract (28th ed, 2002).

195

However, due to the outbreak of World War II, these recommendations were never implemented. In 1991, the Law Commission for England and Wales in its Consultation Paper 595 reiterated its predecessor’s report that the doctrine of privity needed to be reformed or abolished.

In 1999, following a suggestion made by the Law Commission in another report,596 the Contracts (Rights of Third Parties) Act 1999 was introduced (hereafter referred to as the 1999 Act). The Law Commission’s primary reason for proposing reform of the doctrine of privity was to give effect to the intentions of the contracting parties.597 If the parties to the contract contracted to confer a benefit upon a third party then justice required that the third party should be able to enforce the contract to receive that benefit. For the law to deny the third party this right was to thwart the intention of the contracting parties and thereby undermine the “general justifying theory of contract.”598 Other reasons for the reform proposed by the Law Commission were concerned with injustice to a third party who has relied on the contract to regulate the third party’s affairs and also due to the unjust rule that the person who suffered loss cannot sue while the person who has suffered no loss can sue.599

The 1999 Act was enacted on 11th November 1999. The 1999 Act implements, with some amendments, the recommendations of the Law Commission in its 1996 Report. The 1999 Act came fully into force on 11th May 2000. It applies to all contracts,600 whether written or oral, (except for certain statutory exceptions) entered into on or after that date. In the intervening period (i.e. the period between enactment and enforcement), it will not apply unless the parties expressly provide for its application.

595 UK Law Commission, Privity of Contract: Contracts for the Benefit of Third Parties, Consultation Paper No. 121 (1991), received electronically upon request from Terry Cronin, Communication Officer, Law Commission, Steel House, 11 Tothill Street, London SW1H 9LJ. 596 UK Law Commission, Privity of Contract: Contracts for the Benefit of Third Parties, Report No 242 (1996), available at http://www.lawcom.gov.uk/docs/lc242.pdf 597 Ibid [3.1]. 598 Ibid. 599 For other reasons of reform, see [3.4] – [3.8]. 600 The Act, however, does not apply to Bills of Exchange, employment contracts and contracts of carriage.

196

The general approach of the 1999 Act reflects the underlying purpose of allowing the intention of the parties to determine the nature of the right provided to the third party. The 1999 Act allows modification of the provisions by the parties to the contract to suit their own purposes. In the words of Lord Chancellor when introducing the Bill, “it is a matter for them to decide whether or not to confer rights on third parties. It is a matter for the parties to decide whether such rights should be limited.601”

The legal landscape was profoundly changed by the 1999 Act. As noted in Chapter 2,602 the privity doctrine has two aspects. One is the benefit rule (i.e. a third party cannot enforce a contract which confers a benefit upon the third party) and the second is the burden rule (i.e. a third party should not be subject to liabilities/obligations provided for in a contract to which the third party is not privy). The 1999 Act does not modify the burden rule as it is considered unfair to subject third parties to burdens or obligations without their consent. The 1999 Act has changed the benefit rule by allowing third party beneficiaries to enforce rights if the contracting parties fail to perform the contract.

In short, the main change that the 1999 Act has brought about is that third parties can enforce their rights under the contract and this is not dependent on whether the third party has provided consideration.603 This benefit could be in the form of a positive benefit (e.g. a gift) or in the form of a provision of an exclusion or limitation of liability. The effect of the 1999 Act is that cases like Scruttons Ltd v Midlands Silicones Ltd604 and Beswick v Beswick 605 would be decided differently if such facts were to arise again.606

Elements of the 1999 Act

The Rights

601 HL Deb vol 596 col 32. 602 See 30 [2.1] 603 The new law had posed a question as to the need to reform the doctrine of consideration as the requirement of consideration as stated in Beswick was dispensed. The scenario in Malaysia is different since s 2(d) of the Contracts Act 1950 states that consideration can be provided by the promisee or any other persons. 604 [1962]AC 446. 605 (1968) AC 58. 606 See s 6(1).

197

Under the 1999 Act, a third party will only acquire a right to enforce the benefit of a contract if one of the following two intention tests in s 1 is satisfied. Section 1 reads

(1) Subject to the provisions of this Act, a person who is not a party to a contract (a “third party”) may in his own right enforce a term of the contract if

(a) the contract expressly provides that the third party may, or

(b) subject to subsection (2), the term of the contract purports to confer a benefit on the third party.

For s 1 to apply, the third party must be expressly identified by name, as a member of a class or by a particular description, but need not be in existence when the contract is entered into.607 Thus, unborn children, future spouses and companies which have not at the time been incorporated; all have the potential to benefit. A contract between the partners of a firm, for example, that each of their spouses will in certain circumstances receive benefits from partnership property will apply both to the spouses of those already married and any future spouses of those who at the time are single.608

Under s 1(1)(b), the third party may enforce a term of the contract if the term purports to confer a benefit on the third party. Nevertheless, s 1(2) states that s 1(1)(b) does not apply if on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party. Sub-sections (1)(b) and (2) therefore operate to create a rebuttable presumption that if a contract appears to confer a benefit on a third party, such a benefit is intended to be legally enforceable by that third party. By s 1(4), any third party who seeks to rely on the 1999 Act will be bound by the conditions stipulated in the contract for the enjoyment of the benefit.609

For the purpose of exercising the third party’s right to enforce a term of the contract, s 1(5) provides that there shall be available to the third party any remedy that would have

607 Section 1(3). Thus the Act would not give the third party a right of action on the facts of a case such as Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85 because the third party was not identified in the contract. 608 Richard Stone, The Modern Law of Contract (Seventh ed, 2008), 179. 609 Section 1(4) reads “This section does not confer a right on a third party to enforce a term of the contract otherwise than subject to and in accordance with any other relevant terms of the contract.”

198 been available to him or her in an action for breach of contract if he or she had been a party to the contract. Thus the rules relating to damages, injunctions, specific performance and other relief shall apply accordingly. Further, other than a benefit like payment of money, a transfer of property or the rendering of the services, by virtue of s 1(6), the benefit of an exemption or limitation clause is enforceable by a third party.610 Where the third party acquires rights under another rule of law, s 6 clearly excludes the operation of s 1. Thus, in the situation involving the carriage of good by sea which is governed by the Carriage of Goods by Sea Act 1992 and the Hague-Visby Rules, the third party does not fall within the ambit of s 1.

Acceptance of benefit

A third party must accept the benefit promised in the contract for the promise to become enforceable. Section 2(1)(a) provides that in order for a third party to enforce the benefit in the contract, the third party must communicate his or her assent to the benefit of the contract to the promisor. The assent may be by words or conduct.611

Variation of the Right

The general rule stated in s 2(1) is that once the third party has acquired the right to enforce a term of the contract, then if one of the circumstances described below arises, the contracting parties may not, without the third party’s consent, agree to rescind or vary the contract, or vary it so as to extinguish or alter the third party’s entitlement.

The circumstances in which the contracting parties may not, without the third party’s consent, agree to rescind or vary the contract, or vary it so as to extinguish or alter third party’s entitlement are as follow:

a) Where the third party has communicated his assent to the term to the promisor, 612 b) The promisor is aware that the third party has relied on the term,613 and

610 Section 1(6) reads “Where a term of a contract excludes or limits liability in relation to any matter references in this Act to the third party enforcing the term shall be construed as references to his availing himself of the exclusion or limitation.” 611 Section 2(2)(b). 612 Section 2(1)(a).

199

c) The promisor can reasonably be expected to have foreseen that the third party would rely on the term and the third party had in fact relied on it.614

The assent referred to in s 2(1)(a) may be by words or conduct615 and if it is sent to the promisor by post or other means, it is not regarded as communicated to the promisor until it is received by the promisor.616

The requirement of consent may be dispensed with by the court on the application of the contracting parties in three circumstances:

a) The consent of the third party cannot be obtained as his whereabouts cannot reasonably be ascertained, 617 or b) The third party is mentally incapable of giving his consent,618 or c) It cannot reasonably be ascertained whether or not the third party has relied on the term.619

Defences available to the promisor

In an action brought by the third party, s 3(2)(a) provides that the promisor can rely by way of defence or set-off on any matter that arises from or in connection with the contract and is relevant to the term. Further, s 3(2)(b) states that the promisor can also rely on any available defence or set-off as if the action had been brought by the promisee. Thus, under this principle, the promisor could, for example, rely on a valid exemption clause in the contract between the promisor and the promisee against a third party, or the fact that the contract was void for mistake, voidable for misrepresentation or frustration.

Protection from double liability

613 Section 2(1)(b). 614 Section 2(1)(c). 615 Section 2(2)(a). 616 Section 2(2)(b). 617 Section 2(4)(a). 618 Section 2(4)(b). 619 Section 2(5).

200

The right of the promisee to enforce the contract is specifically preserved by s 4.620 In order that the promisor does not face double liability (to the promisee and to the third party), s 5 provides that where the promisee has recovered compensation from the promisor in relation to a term falling within the ambit of s 1, the court shall reduce any award to the third party to the extent it thinks appropriate to take account of the sum recovered by the promisee. The opposite situation is not specifically dealt with in the 1999 Act but it may be presumed that a court would not allow the promisee to recover where compensation had already been paid to the third party.621

The 1999 Act is not mandatory. A third party cannot rely on the 1999 Act where the contract makes it clear that the contracting parties did not intend that the third party should be able to enforce the contract. The 1999 Act does not abolish the exceptions to privity of contract that have long been in existence. Hence, it can be said that the 1999 Act is addition to the exceptions but at least it places the English legal system on par with other members of the European Union. Another aspect of the 1999 Act is that it does not hamper judicial creativity in the area of privity especially in the area of remedies to the promisee as well as the issue of a joint promisee who does not provide consideration. It is still open to the courts to develop new exceptions at common law to the doctrine of privity of contract.622

Construction Contracts

It is important to note that, in construction contracts, England has enacted the Housing Grants Construction and Regeneration Act 1996 (came to force on 1 May 1998). The objective of the Act is, among others, to facilitate payment through a speedy process of adjudication. This objective is similar to the Queensland’s BCIPA.623 The Act does not contain provisions which allow third parties, for example, sub-contractors to sue directly employers for benefits (such as payment for works done) promised in the contracts. In other words, the Act does not have the effect of abrogating the doctrine of

620 Section 4 reads “Section 1 does not affect any right of the promisee to enforce any term of the contract.” 621 Richard Stone, The Modern Law of Contract (Seventh ed, 2008), 182. 622 Section 7(1). 623 Also with other parallel legislation in other states in Australia.

201 privity in relation to third party beneficiary contracts. It follows therefore that discussion of the Act is unnecessary in the context of this thesis. The only relevant legislation for the purpose of this thesis is the 1999 Act.

4.4.2 Judicial Decisions: England

There is not, as yet, much case law on the application of the 1999 Act, thus limiting judicial interpretation on the provisions of the Act. As a result, discussion of the application and efficacy of the 1999 Act is limited.

Express provision and term conferring benefit on the third party

Under s 1(1)(a) of the 1999 Act, a third party can enforce a term of the contract if the contract expressly provides that he or she may. If the contract contains this kind of provision, there is no further requirement that the promise must have been made for the third party’s benefit.624

By s 1(1)(b), a third party may enforce a term of the contract if the term purports to confer a benefit on the third party; but the third party’s right to do so is subject to subs 1(2) by which the third party has no such right if on a proper construction of the contract it appears that the promisor and the promisee did not intend the term to be enforceable by the third party. The term must purport to confer the benefit on the third party, so it is not enough for the third party to show that the third party would happen to benefit from its performance. The question of whether the term purports to confer a benefit on the third party is one of construction, and therefore it is likely to cause difficulties.

Rebutting the presumption created under s 1(1)(b) and s 1(2)

It appears that s 1(1)(b) and s 1(2) of the 1999 Act operate to create a rebuttable presumption that if a contract appears to confer a benefit on a third party, such benefit is intended to be legally enforceable by that third party. The operation of these two

624 For example, the third party can enforce the term even though the payment is to be made to the third party as trustee for the beneficiary. Law Commission, 'Privity of Contract: Contracts for the Benefit of Third Parties' (No. 242, 1996), [7.5].

202 provisions has received the most judicial interpretation compared to other provisions in the 1999 Act.

In a situation where the promisor denies that such legal enforceability was intended, the court must determine the proper construction of the contract. In the first reported case on the 1999 Act, Nisshin Shipping Co Ltd v Cleaves & Co Ltd,625 the court adopted an objective test of what reasonable contracting parties would have thought was meant by the terms of the contract. This case raised important questions for the shipping industry as to how a chartering broker, as a third party, could enforce the promise of a benefit for him or her in the charter-parties, where they contained an arbitration clause. In this case, Cleaves, a broker negotiated nine time charters on behalf of Nisshin, each containing a clause which provided for a payment of commission to Cleaves and an arbitration clause. When Nisshin refused to pay Cleaves the commission, Cleaves sought to refer the matter to arbitration. This was challenged by Nisshin on the ground that Cleaves was not a party to the time charters, thus he could not rely on the arbitration clause in the contract to claim for payment of commission. In delivering the judgment, the court was faced with the central question: was Cleaves within the ambit of s 1 of the 1999 Act?

Nisshin first contended that the wording of the commission clauses in four of the charter-parties was insufficient to confer a benefit on Cleaves alone

"A commission of 2 per cent for equal division is payable by the vessel and owners to Messrs Ifchor SA, Lausanne and Messrs Cleaves and Company Ltd, London, on hire earned and paid under this Charter, and also upon any continuation or extension of this charter".

Colman J ruled that the identity of the payee, and the amount to be paid, was clear. The learned judge held that "the effect of the clause was to confer a benefit to the extent of 1 per cent commission on Cleaves alone.”626

625 [2003] EWHC 2602; [2004] 1 Lloyd’s Rep 38. 626 Ibid 41.

203

Nisshin further argued that the parties did not intend the commission clause to be enforceable by Cleaves so subsection 1(1)(b) was nullified by subsection 1(2). Colman J rejected Nisshin's first argument under this heading that as some of the arbitration clauses used different standard wordings, they did not all explicitly provide for the broker enforcing a commission claim. It was held that the broker's ability under the Act to enforce his right to the commission was not affected by the absence of an express provision. Nisshin’s second argument was that the contracts did not positively indicate that the parties actually intended Cleaves to have an enforceable right or any mutual agreement for Cleaves to have the right to claim against Nisshin as if it were a party to the contract.

Again, Colman J rejected this argument on the grounds that subsection 1(2) did not provide that subsection 1(1)(b) was not to apply unless the parties expressed a positive intention that the benefit should be enforceable by a third party. On the contrary, it did not apply only if it appeared that the parties expressly did not intend third party enforcement. If, as in this case, the contract was neutral in that it did not express any intention regarding Cleaves entitlement to enforce the term,627 the presumption was not rebutted.

The objective test in Nisshin Shipping Co Ltd v Cleaves & Co Ltd628 was confirmed by the Court of Appeal in Laemthong International Lines Company Ltd v Artis (The Laemthong Glory) (No 2) 629 where the receivers of goods failed to prove that the clauses of the letter of indemnity (LOI) were not intended to provide an enforceable benefit and the shipowner was entitled to rely on them. The Court of Appeal noted that one clause in the LOI referred to indemnifying the charterer’s agents and took the view that the shipowner could come within this clause. A further clause referred to providing indemnity in the event of the ship being arrested and that benefit was one which could only benefit the shipowner. The clauses of the LOI therefore did purport to confer a benefit on the shipowner. Once this was established, the burden of proof was on the

627 Ibid 42. 628 [2003] EWHC 2602; [2004] 1 Lloyd’s Rep 38. 629 [2005] 1 Lloyd’s Rep 688.

204 promisor (the receiver) to show that there was no intention to give an enforceable right to the third party.

The test established in these two cases means that care must be taken in drafting contracts. If the parties do not want a third party to be able to enforce any benefits under the contract, they must clearly express such an intention in specific terms. Otherwise, the court will assume that no such intention exists. The burden of proof has shifted to the promisor to prove otherwise.630

Furthermore, it was stated that the use of a rebuttable presumption of intention provided the essential balance between sufficient certainty for contracting parties and the flexibility required for the reform to deal fairly with a wide range of different situations. The presumption can be rebutted if, as a matter of ordinary contractual interpretation, there is an indication that the parties did not intend such a right to be given.

The application of s 1(1)(b) is further discussed in Prudential Assurance Co Ltd v Ayers, 631 a case concerning a tenant who took an assignment of an underlease and entered into a deed with the immediate landlord. The claimant (Prudential) who held the lease of the premises entered into a sub-lease with the two defendants, who were partners in a law firm. The lease was later assigned to a firm of American lawyers (the firm). Unlike the previous lease, the assignees were not two residential partners, but an entire firm. In the licence to assign, the defendants guaranteed to Prudential that if the firm, before making any lawful assignment of the lease, defaulted in payment of the rent payable under lease, the defendants would pay the rent. Subsequently, the landlord and the firm entered into a supplemental deed (the Deed) 632 and the firm subsequently entered into bankruptcy. The defendants were sued by Prudential in their capacity as guarantors of the firm.

630 Richard Stone, The Modern Law of Contract (Seventh ed, 2008), 179. 631 [2007] All ER 43. 632 Clause 2.1 of the Deed provided, inter alia that the liability of the tenant under the Lease shall be limited to the Partnership and such liability shall not extend to the personal assets of individual partners (present, past or future) therein.

205

The issue to be determined by the court was whether the defendants, who were not party to the Deed, could take advantage of the limitation of recovery against them. This in turn depended upon whether the provision in clause 2.1 of the Deed, which sought to restrict recoverability against “any previous tenant”, was a term which purported “to confer a benefit on” the previous tenants within the meaning of s 1(1)(b) of the 1999 Act. Lindsay J held that s 1(1)(b) of the Act was satisfied if it had the effect of conferring a benefit on the third party in question. There was no requirement within s 1(1)(b) that conferring a benefit on the third party should be the predominant purpose behind the term or that it denied the applicability of s 1(1)(b) if a benefit was conferred on someone other than the third party. It was found that the Act had no such additional requirement.

The trial court decision was reversed by Court of Appeal633 where it was decided that the supplemental deed did not purport to confer any benefit on the defendants; rather, it purported to limit their rights against the individual partners of the assignee firm. A different construction of cl 2.1 of the Deed was adopted by Moore-Bick LJ who viewed that there was a drafting error in cl 2.1 and took the opportunity to reword the clause to suit what his Lordship considered had been the objective intention of the parties to the contract i.e. to prevent Prudential from having recourse to the personal assets of the partners in the event of a default under the lease.634 The deed was concerned with claims directly against the partners, not with claims by Prudential against the defendants. Consequently the Deed was not construed to benefit the defendants as it did not contain any express provision that Prudential and the firm intended to allow the defendants to limit their liability by enforcing cl 2.1. His Lordship further stated that if cl 2.1 was really intended to benefit the defendants, the contracting parties would have expressly stated so or made the defendants parties to the Deed.635

633 [2008] EWCA Civ 52. 634 The reworded version of Clause 2.1 “Consequently, any recovery by the Landlord or any previous tenant under the Lease against the Tenant for any such default shall be limited to assets of the Partnership and shall not extend to the personal assets of any individual partners therein other than the capital and current accounts of such partners in the partnership.” 635 [2008] EWCA Civ 52, 34 (Moore-Bick LJ).

206

As suggested by Moore-Bick LJ, in this kind of situation where there are multiple parties and complex arrangements involved, it is not plausible for third parties to rely on the uncertain effect of the 1999 Act unless such a right is clearly expressed in the contract.636

Identification of the third party

Under s 1(3) of the 1999 Act, it is a requirement of the third party’s right to enforce the promise that the third party must have been expressly identified in the contract either by name, as a member of a class or as answering a particular description. It follows therefore that by this requirement, a third party cannot claim that the contract refers to the third party by implication or by a process of construction (e.g. where the words of the term are adequate to identify the third party but the term does not purport or the parties to the contract do not intend to confer a benefit on the third party)

In the case of Avraamides v Colwill,637 the respondents sued the appellants for failure to refurbish their two bathrooms. The contract for refurbishment of the bathrooms however, was with a company named Bathroom Trading Company (Putney) Ltd (referred to as BTC Ltd). Later, there was a transfer agreement between the shareholders of BTC Ltd and the appellants which inter alia stated that the appellants as partners of BTC also assumed the liabilities of BTC Ltd on 1st April 2003. These liabilities included any liability of BTC Ltd to the claimants which existed as at 1 April. Further, paragraph 3 stated that the purchasers undertook to complete outstanding customer orders taking into account any deposits paid by customers as at 31 March 2003 and to pay in the normal course of time any liabilities properly incurred by the company as at 31 March 2003. The respondents claimed that these terms conferred a benefit on them as they were the third parties in the transfer agreement and the word ‘liabilities properly incurred’ included the failure of the BTC Ltd to refurbish their two bathrooms.

636 Ibid 36. 637 [2006] EWCA Civ 1533. See also the argument advanced by the counsel in The Laemthong Glory (No 2) [2005] 1 Lloyd’s Rep 688 regarding the word ‘you’ which according to the counsel could also include ‘your servants and agents.’ This was rejected by the Court of Appeal.

207

In order to rely on the 1999 Act, the third party must not only be intended to benefit from the terms of the contract, but must be identified expressly or as a member of a class described in the agreement. The Court of Appeal held that, in this case, the liabilities to be settled under the agreement were all types of liabilities, not only relating to customers but also including, for example, suppliers or telephone bills. There was no express reference to existing customers. Instead there was only a general reference to liabilities. Paragraph 3 did not identify any third party or class of third parties. Lord Justice Waller stated that s 1(3), by use of the word ‘express’ simply did not allow a process of construction or implication. It would be inappropriate to infer that the word ‘customer’ as a class identified in s 1(3) was concerned with the benefit conferred on third parties and the identification of third parties. The benefit from the obligation to pay liabilities properly incurred would benefit third parties from a range of unidentified classes.638 It was held that on this basis the third party intended to benefit from the agreement was not sufficiently identified for the 1999 Act to operate.

Limits upon the contracting parties ability to rescind or vary their contract

Once the third party has acquired the right to enforce a term of the contract between the promisor and the promisee, s 2(1) of the 1999 Act comes into operation. As a general rule, s 2(1) provides that the parties cannot by agreement take steps to rescind or vary the contract in such a way as to extinguish or alter the third party’s entitlement, without the third party’s consent. The most obvious consequence of this provision is that a purported rescission or variation without the third party’s consent is simply ineffective so that the third party can in spite of it enforce the term in question against the promisor.

The 1999 Act laid down circumstances where the parties to the contract may not without the third party’s consent, rescind, vary or alter the contract where the third party has communicated his or her assent to the promisor,639 or where the promisor is aware

638 Ibid 19. 639 S 2(1)(a).

208 of the third party having relied on the term640 or where the promisor could reasonably have foreseen such reliance and it has actually taken place.641

A variation of the contract was held to be valid when an argument that acceptance of the benefit must be made within a reasonable time was rejected by the Court of Appeal in Precis (521) v William Mercer Ltd642 a case involving professional negligence. Mercer, a firm of actuaries, prepared an actuarial valuation report for one of the pension funds of Stoves Group for the purpose of a takeover by Glen Dimplex (via its subsidiary, Precis). Stoves and Glen Dimplex entered into a confidentiality agreement (CFA) which among other matters, purported to exclude liability for the negligence of Stoves’ agents in relation to any information supplied to Glen Dimplex. Based on the report by Mercer, the board of Glen Dimplex approved the offer price. The report showed a deficit of £1.35m even though the correct figure should have been £4.5m. By a deed of variation dated 25 April 2003, Glen Dimplex and Stoves varied, or purported to vary, the terms of the CFA by excluding Mercer from any benefit under the deed, and by agreeing that CPA did not bind Precis. As it stood, the CFA intended to impose liability on Glen Dimplex for any breach of the terms of the CFA by Precis. Mercer argued that it had already communicated its assent for the purposes of s 2(1)(a) of the 1999 Act. In response to this, it was submitted by Precis that the communication by Mercer was too late as it had to accept before it acted in the manner for which the CFA excluded liability. Further, Precis also argued that the exclusion clause operated in the same way as an offer and that offer must be accepted within reasonable time. Lord Justice Arden held that such an interpretation was inconsistent with the wording of s 2(1)(a) of the 1999 Act.643

Conclusion

Despite years of discussion and consideration by the judiciary about the doctrine of privity and its harsh effect on third party beneficiaries, the 1999 Act has not been applied very often in the courts. Before the enactment of the 1999 Act, there was no

640 S 2(1)(b). 641 S 2(1)(c). 642 [2005] EWCA Civ 114. 643 Ibid 39.

209 general principle under which third parties could enforce contracts that confer benefits on them. With the introduction of the 1999 Act, a third party who is expressly identified in the contract may now enforce the benefit which is expressly or impliedly promised in the contract directly against parties to the contract. This principle has the impact of abrogating the doctrine of privity in these cases. The most important provision, s 1 demonstrates a wide scope of application (if compared to Western Australia s 11(2) of the PLA 1969 and Queensland’s s 55 of the PLA 1974). The provisions allow extensive types of third parties to enforce the benefits, for examples, third parties expressly identified in the contracts either by name, class or description and future third parties, such as unborn children, future spouses and future nominees). Additionally, the benefit also includes implied benefit. Third parties are better off with the 1999 Act. However, there are certain groups of third parties who cannot take the advantage of the 1999 Act as the 1999 Act makes it very clear that any third parties whose identification arose by way of implication or by a process of construction are excluded from its application.644

4.5 ANALYSIS AND CONCLUSION

4.5.1 Efficacy of the Reforms

Have the reforms had the desired effect? It has now been some years since the legislative reforms took place and it is necessary to analyse their effectiveness. Have the reforms led to improvements in the rights of third party beneficiaries?

4.5.1.1 Australia

It has been noted that s 55 of the PLA 1974 (Qld) requires a dual intention requirement: the agreement must be intended for the third party’s benefit and it also must be intended that the third party be entitled to enforce the benefit. These requirements must be fulfilled before the third party can benefit from the reform. Absence of either element means that the doctrine of privity will apply and the third party will fall outside the ambit of the reform.

644 See the 1999 Act s 1(3).

210

With this dual intention test, it is evident from the judicial decisions discussed earlier that not all third party beneficiaries benefit from s 55 of the PLA 1974. Cases such as National Australia Bank Ltd v Hart,645 Davies v Archer Newsagency Rockhampton646 and Sorbello v Sorbello 647 are proof that failure to prove the requirement of enforceability of the promise resulted in denial by the courts of the rights of third party beneficiaries. It is odd that the Queensland legislature has enacted more complex intention requirements when it cannot be assumed that contracting parties, though intending to benefit third parties, would necessarily consider the matter of enforcement. The chance of inconsistent and arbitrary decisions is inevitable.648

Furthermore, the approach of the English Law Revision Committee in 1937 that enforceability is restricted to a contract which by its express terms purports to confer a benefit was too narrow because it would exclude a promise which by implication intended the benefit to be conferred. To require “express terms” would probably mean that documents drawn by laymen would fail to qualify.649 To avoid this scenario, Kirby J and Gaudron J 650 along with Emmet J in Speedy Gantry Hire Pty Ltd v Preston Erection Pty Ltd651 opined that s 55 of the PLA 1974 could be satisfied by an implied promise to enable claims by third party beneficiaries. At present, there are two approaches to the interpretation of s 55 resulting in acceptance of both an express or implied promise. This has the potential to lead to inconsistency and uncertainty in the application of s 55.

The requirement of acceptance in s 55(6)(a) may also lead to injustice for third parties. In the Western Australian case, Westralian Farmers Cooperative Ltd v Southern Meat Packers Ltd, 652 the act of adoption relied upon by Burt CJ was presumably not communicated to anyone and would have been insufficient under the Queensland

645 [2002] QSC 051. 646 (unreported, Qld SC) 647 [2005] QSC 219. 648 R.H. Newman, 'The Doctrine of Privity of Contract: The Common Law and the Contracts (Privity) Act 1982' (1980-83) 4 Auckland University Law Review 339. 649 Justice Andrew Rogers, 'Contract and Third Parties' in Paul Desmond Finn (ed), Essays on Contract (1987). 650 See Northern Sandblasting Pty Limited v Harris (1997) 188 CLR 313. 651 (1998) 40 IPR 543. 652 [1981] WAR 241.

211 legislation. The requirement, although fair and sensible on the face of it, may well cause otherwise meritorious beneficiaries to fail in their claim.653 Additionally, if there is a term in the contract stipulating the specified time for acceptance by the third party, it may be disadvantageous to a third party beneficiary who does not know about the existence of the promise. There is no duty on the part of the contracting parties to inform the third party of the existence of the promise as well as the period allowed for communication of acceptance to the promisor.

Further, compared with the Western Australian reform, another deficiency of the Queensland reform is that it does not include a provision requiring all parties to the contract to be made parties to an action by the beneficiary. This provision is essential to avoid double payment to a third party. As pointed out by Corbin

The remedy for the prevention of injustice to the promisor is not to deny a remedy to the third party. It is to make use of the modern code procedure following equity: a promisor can cause the joinder in one action of all the parties concerned; in that action an unjust double recovery can be avoided, at the same time giving to each claimant his just due.654

Despite the criticisms above, the Queensland reform nevertheless covers a wide range of third party beneficiaries by virtue of s 55(6)(b). The reference to the existence of the beneficiary will cover not only the case of an unborn child beneficiary but also the case of an unincorporated company which often poses difficulties because of the rule which precludes an agency relationship on behalf of a non-existent principal. The definition is designed to enable a contract for the benefit of a company yet to be formed to be enforceable if accepted by the company after incorporation.

Both s 55 PLA 1974 (Qld) and s 11(2) PLA 1969 (WA) require the contract to confer the benefit expressly in its terms on a third party. Bearing in mind that the Western Australian reform was based on the 1937 Report of the English Law Revision Commission, it means that the court must resort to the use of trust if it wishes to allow the third party to claim the benefit of the contract if the benefit was not expressly

653 Justice Andrew Rogers, 'Contract and Third Parties' in Paul Desmond Finn (ed), Essays on Contract (1987), 98. 654 Arthur L. Corbin, Corbin on Contracts: A Comprehensive Treatise on the Working Rules of Contract Law, (1952), vol 4, 288.

212 conferred. Yet, as discussed in Chapter 3, the law with respect to trust is quite uncertain. That uncertainty continues despite the reform.

Another issue raised by the courts is which categories of third parties fall within the ambit of s 11(2) PLA 1969. Does a person have to be referred to by name or is it sufficient for that person to be a member of an identifiable class of person? The provision itself only refers to persons who are not named as a party to the contract. Guidance can be sought from the decision in The Bell Group Ltd (in liq) v Westpac Banking Corporation [No 9] 655 where the court stated that a beneficiary can be ascertained by reference to an existing and identifiable class or a particular description expressly referred to or identified in the contract. In Queensland, s 55 PLA 1974 does not require the third party to be named, identified or in existence at the time when the promise was given. Therefore, the scope of s 55 is wider and includes any type of person and this includes any member of an identifiable class of person.

Finally, it is worth noting that both Queensland and Western Australia deal with the question of defences. What is not clear is whether some conduct by the third party can also render the third party’s right void, voidable or unenforceable. The Western Australian provision, s 11(2)(a), speaks only of defences available to a party in an action by the other party to the contract. By contrast, s 56(7) PLA 1974 (Qld) provides that any right or remedy that is available apart from the section may be used. Therefore, if the third party, for example, induced the promisor to make the promise in the third party’s favour through a misrepresentation, it can be presumed that the promisor could use this as a defence against the third party.656 As yet the operation of s 11(2)(a) PLA 1969 is yet to be authoritatively considered by a court.

Unlike Queensland’s s 55, the drafters of s 11(2) PLA 1969 (WA) have left many details to judicial interpretation, which avoids rigidity in application and gives more chance for third party beneficiaries to enforce the rights conferred by the contract. However, it also means that such rights are decided by the judiciary and judges may differ in opinion as seen in the cases discussed above. Such reform is welcome as a

655 [2008] WASC 239. 656 NC Seddon and MP Ellinghaus, Cheshire & Fifoot's Law of Contract (Ninth ed, 2008), 285.

213 means to abrogate the doctrine of privity, but it is submitted that reform requires explicit provisions to avoid uncertainty in application and strengthen the position of third party beneficiaries.

Section 55 and s 11 are not specifically aimed at addressing the implications of the doctrine of privity for third parties to contracts of insurance or construction contracts due to the existence of specific legislation.

Insurance contracts

Although restricted to the field of insurance, s 48 of the Insurance Contracts Act 1984 proves to be an effective reform as it has not posed any problems in interpretation except for s 48(3) which requires legislative intervention to clarify uncertainty.

Construction Contracts

In the area of construction contracts, the SCA 1974 has been subject to criticisms from judiciary and the construction industry. The judiciary was concerned with a lack of clarity and imprecise drafting. For the industry, particularly employers and contractors, the SCA 1974 was a failure. The concerns and criticisms were addressed in 2002 when the SCA 1974 was amended with the aim of creating better provision for securing the payment of money payable to sub-contractors, while safeguarding the rights of employers and other contractors. Most importantly, the definition of ‘work’ has been expanded allowing a greater number of sub-contractors to claim a charge under the SCA 1974. Unclear provisions and wording were made clearer thereby eliminating ambiguity and uncertainty surrounding the operation of the SCA 1974. The amendment was welcomed by the judiciary.

However, despite the amendments, concern still exists within the industry about the effectiveness of the SCA 1974 because of the fact that the courts have always strictly interpreted the SCA 1974 due to the special position it confers on sub-contractors. The Queensland Building Services Authority believes that in the future the courts will continue to apply themselves in a similar manner and any number of amendments will

214 not create a cheaper or smoother path for sub-contractors seeking to recover monies owed to them by a building contractor under this avenue.657

The SCA 1974 is also ineffective in the event of the bankruptcy of a main contractor who has already been paid by the owner. To make the matter worse, sub-contractors can only benefit from the SCA 1974 if there is money owing by the employers to the main contractors. There may be situations where an employer refuses to pay the main contractor for the failure of the latter to complete the building works. In this case there may be no money owing over which a charge may be created in favour of the subcontractor.

Conclusions

In summary, the legislative reforms that took place in Western Australia and Queensland recognise that third party enforcement of rights should be allowed. They have to some extent achieved the intention of the legislatures to allow third parties to enforce benefits in contracts. The position of third party beneficiaries is significantly improved by the reforms. Despite the positive steps taken by the respective legislatures, it is obvious that the reforms are limited in application and not without their own difficulties (except perhaps for s 48 of the Insurance Contracts Act 1984). However, as seen in judicial decisions handed down in Queensland and Western Australia, third party beneficiaries in these jurisdictions are in a far better position than third parties in other jurisdictions in Australia, except of course third party beneficiaries in contracts of general insurance.

Even though the SCA 1974 does not impact the doctrine of privity by allowing direct payment as promised by the employers to sub-contractors, it may assist the sub- contractors concerned to secure and obtain payment for the work done. In this respect, it can be said that the SCA 1974 itself provides justice and fairness to sub-contractors by securing payment. However, in enhancing the right of sub-contractors by allowing them to claim payment owed by main contractors directly from employers, the effectiveness

657 Queensland Building Services Authority, 'Security of Payment Discussion Paper' (Queensland Building Services Authority), 37.

215 of the SCA 1974 when applied in the construction industry cannot be guaranteed. There are circumstances where sub-contractors are unable to successfully claim a charge and are therefore left to a claim against the main contractor under the subcontract with no recourse against the employer due to the doctrine of privity.

4.5.1.2 England

In England, so far, the 1999 Act has not been subject to extensive judicial interpretation. However, it has generated academic discussion regarding application of its provisions. Academic commentary currently fills the gaps in the 1999 Act, but these interpretations are of course not binding. Robert Stevens argues that despite the fact that the 1999 Act received almost universal praise, it nevertheless creates uncertainty in the law governing the rights of third parties.658

Identification by name, class or description

One potential problem in the application of s 1(3) of the 1999 Act659 is the identification of third party beneficiaries. The difficulty might arise in a case where third parties are identified by class or description. Parties may not want to identify the parties outright in the contract, but may agree in the contract to a mechanism for their identification. The most common example is where A agrees with B to confer a benefit on B or B’s nominee. Andrew Phang states that despite the enactment of the 1999 Act, there remains controversy as to whether the words “or nominee” allow a person thus described (that is, a bare nominee) to obtain enforceable rights under the 1999 Act.660 The issue was discussed by T M Yeo who endorsed the liberal view adopted by Tipping

658 Robert Stevens, 'The Contracts (Rights of Third Parties) Act 1999' (2004) 120 (APR) Law Quarterly Review 292. 659 Section 1(3) reads “The third party must be expressly identified in the contract by name, as a member of a class or as answering a particular description but need not be in existence when the contract is entered into.” 660 Andrew Phang, 'On Justification and Method in Law Reform - The Contracts (Rights of Third Parties) Act 1999' (2002) 18 Journal of Contract Law 32.

216

J in a New Zealand case, Rattrays Wholesale Ltd v Meredyth-Young & A’Court Ltd,661 that a bare nominee was able to obtain enforceable rights.662 Justice Tipping was of the view that the purpose of the designation of the third party was to enable the promisor to know with certainty who was entitled to claim the benefit of the promise in the contract. The only requirement was that the person should be capable of identification from the terms of the contract. The nominee was a person designated by description under s 4 of the Contracts (Privity) Act 1982. There was no conceptual doubt as to whether the person was a nominee. The fact that the nominee could be anyone was not objectionable.

T M Yeo opines that a liberal interpretation is preferable on the ground that if the parties’ intentions are sufficiently clear such that the third party is ascertainable at the time of enforcement of the contract, that intention should not be denied simply because the third party may be chosen from a large class of potential beneficiaries.

The criteria of “answering a particular description” also has been questioned by Catherine MacMillan who states that if a description covers an employer, does it also cover his employees, agents and sub-contractors? If A and B contract that B will deliver A’s goods for storage in C’s warehouse and that B and C have a limited liability to A for damage to or loss of the goods, all things being equal, C should be within the 1999

661 [1997] 2 NZLR 363. In New Zealand, the difficulties of interpretation and application of s 4 of the Contracts (Privity) Act 1982 arose in a series of cases where the courts were divided into two approaches: a narrower approach (see Field v Fitton [1988] 1 NZLR 482 and Karangahape Road International Village Ltd v Holloway [1989] 1 NZLR 83 where the courts were of the view that a nominee was not sufficient to identify the third party. The nominee could be anyone at all and in the context of s 4, “designated” means specified or identified so that if the nominee is not named, the word nominee in the contract should be qualified by the addition of a descriptive phrase or the addition of the particular class within which the nominee falls) and a liberal approach (see Coldicutt v Web & Keeys, unreported, HC, Whangarei, 17 May 1985, A50/84 and Rattrays Wholesale Ltd v Meredyth-Young & A’ Court Ltd [1997] 2 NZLR 363.) It is to be noted that s 4 is similar in substance to s 1(3) of the 1999 Act. The Law Commission for England and Wales in its report supported the liberal interpretation. See 'Privity of Contract: Contracts for the Benefit of Third Parties' (No. 242, 1996), para 8.3, 8.4. 662 T. M. Yeo, 'When do Third Party Rights Arise under the Contracts (Rights of Third Parties) Act 1999 (UK)?' (2001) 13 Singapore Academy of Law Journal 34.

217

Act. Are C’s employees within the description of C? This type of question is not always easy to answer and is one on which courts may be divided.663

Implied intention: purporting to confer a benefit on the third party

This test is likely to be problematic in practice. It is necessary to show that the specific term sued upon purports to confer a benefit on a third party.664 Like Queensland’s PLA 1974, the 1999 Act does not define the meaning of “purport to confer a benefit.” Consequently, its meaning is a question of contractual intention. This requires the court to distinguish cases where third parties are intended by the parties to the contracts to benefit from the specific term from cases where the third parties’ identities are incidental to the term or where the third party benefits incidentally from the performance of the term. In some cases, the determination of whether a term purports to benefit the third parties will be straightforward but this is not so in every case. A term that prima facie confers a benefit on third parties may turn out, on a proper construction, not to be for that purpose. Academic writers665 agree that there will be difficulties in differentiating a contract which results in a benefit to third parties 666 (yet is not a contract to directly benefit third parties) with a contract that confers a benefit on third parties. The former is excluded from the scope of the 1999 Act.

Additionally, the construction industry has expressed concern regarding the phrase “purports to confer benefit” on third parties. The industry predicts that this subsection has “potentially disastrous implications” as the 1999 Act may lead to contracting parties

663 Catharine MacMillan, 'A Birthday Present for Lord Denning: The Contracts (Rights of Third Parties) Act 1999' (2000) 63(5) The Modern Law Review 721. 664 Section 1(1)(b) of the 1999 Act. 665 For examples, see Catharine MacMillan, 'A Birthday Present for Lord Denning: The Contracts (Rights of Third Parties) Act 1999' (2000) 63(5) The Modern Law Review 721; John N. Adams, Deryck Beyleveld and Roger Brownsword, 'Privity of Contract: The Benefits and the Burdens of Law Reform' (1997) 60(2) The Modern Law Review 238; T. M. Yeo, 'When do Third Party Rights Arise under the Contracts (Rights of Third Parties) Act 1999 (UK)?' (2001) 13 Singapore Academy of Law Journal 34. 666 See White v Jones [1995] 2 AC 207 where the contract between the solicitor and his client was to draft a will and the will would benefit the client’s beneficiary. The 1999 Act could not be relied upon by the client’s beneficiary as the contract fell within the category which results in a benefit to a third party. Other examples would be architects’ warranties in respect of buildings later disposed of and accountants preparing accounts for a company knowing that they are likely to be shown to potential buyers or relied on by beneficiaries of a trust of the company’s shares. See Andrew Tettenborn in Robert Merkin, 'Privity of Contract the Impact of the Contracts (Rights of Third Parties) Act 1999' (First ed, 2000), 174.

218 being bound to third parties when this was not their true intention. The robust response to this matter is that the parties would have to rely on better drafted contracts. This is unlikely to appeal to members of the industry who wish to limit the costs of legal advice.667

Rebuttable Presumption

By virtue of s 1(2), the presumption of enforceability under s 1(1)(b) will be rebutted if it can be shown that on the proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party. The onus of proving this lies upon the contracting parties and this usually would be the promisor. The reasoning is straightforward. The contracting parties may well be happy for a third party to benefit if the obligation is performed, but it does not follow that they equally mean for the third party to have a right to complain or sue for damages if it is not.668

The question of the strength of presumption has raised queries amongst academic writers. The strength of the presumption is most difficult to judge in the context of chains of contracts.669 Andrew Burrows, one of the commissioners who prepared the Report,670 has described the presumption as a “strong one” although it was not stated in the Report. It would not normally be rebutted unless there was an express term negating the third party’s right or an express term which was an inconsistent with the right or there was a chain of contracts which gave the third party a consensual right against another party.671 A situation where the parties intend to seek remedies only from parties to the contract and from other parties within a chain of contracts was interpreted by the

667 In the words of the Chief Executive of the Construction Industry Council (CIC), “it cannot be right that everyone in construction should need a lawyer at their side when they enter a contract...” Refer to Jane Jenkins and James Duckworth in Robert Merkin, 'Privity of Contract the Impact of the Contracts (Rights of Third Parties) Act 1999' (First ed, 2000), 210. 668 Andrew Tettenborn in Robert Merkin, 'Privity of Contract the Impact of the Contracts (Rights of Third Parties) Act 1999' (First ed, 2000), 175. 669 Robert Stevens, 'The Contracts (Rights of Third Parties) Act 1999' (2004) 120 (APR) Law Quarterly Review 292. 670 'Privity of Contract: Contracts for the Benefit of Third Parties' (No. 242, 1996). 671 Andrew Burrows, ‘Reforming Privity of Contract: Law Commission Report No 242’ (1996) LMCLQ 467. See also Catharine MacMillan, 'A Birthday Present for Lord Denning: The Contracts (Rights of Third Parties) Act 1999' (2000) 63(5) The Modern Law Review 721 and Robert Stevens, 'The Contracts (Rights of Third Parties) Act 1999' (2004) 120 (APR) Law Quarterly Review 292.

219

Report as a rebuttal of the presumption, bringing the situation outside the scope of the 1999 Act.672 Andrew Tettenborn,673 however, disagrees arguing that there is a certain circularity to this assumption. The assumption must be formed because privity of contract has generally prevented third parties from seeking a benefit. Indeed, the actual situation is such that one would have thought that this was a very fertile area for third parties to seek a benefit. An obvious example would be in the construction contract where A (employer) contracts with B (main contractor) to perform construction work who then sub-contracts to C (sub-contractor). If C fails to perform the sub-contract, A will have a claim against B who may then claim damages from C. The problem will arise as it is the usual practice in the construction industry that the employer (A) will not have rights of enforcement under the sub-contract despite the contract between A and B purporting to confer a benefit upon C.

Terms to benefit

Another potential problem is the contract with many terms which could benefit third parties. Because s 1 of the 1999 Act applies to “a term of the contract,” each term will need to either expressly confer a benefit on third parties or each term will need to purport to confer a benefit on third parties. Each term must also meet the requirement of the 1999 Act and all the anticipated problems that might arise with regard to those requirements. For example, each term is subject to rebuttal of the presumption.674

The 1999 Act also provides that the right of enforcement by third parties must be “subject to and in accordance with any other relevant terms of the contract.”675 It is thus possible to attach conditions to the exercise of the right. The promisor could accept only limited liability or exclude some forms of liability towards third parties. This is entirely consistent with the purpose of the 1999 Act because the intentions of the parties will be

672 Privity of Contract: Contracts for the Benefit of Third Parties' (No. 242, 1996), [7.47], [7.18], [7.38]. 673 Andrew Tettenborn, ‘Third Party Contracts-Pragmatism from the Law Commission’ (1996) Journal of Business Law 602. 674 Catharine MacMillan, 'A Birthday Present for Lord Denning: The Contracts (Rights of Third Parties) Act 1999' (2000) 63(5) The Modern Law Review 721. This potential problem arises because of the change in the wording from the draft Bill which dealt with a contract which provided a benefit to the 1999 Act which concerns a term of the contract. 675 Section 1(4).

220 affected. However, it will not be helpful for unsuspecting third parties who may assume that a greater right has been conferred.676

According to Robert Stevens, s 1(4) may create more confusion than clarity as the scope of the third party’s rights must always be determined by construction of the contract.677 Whether the third party’s right is subject to conditions is also a matter of construction of the agreement. A third party’s right of enforcement may be narrower or wider than the promisee’s. The matter of construction may not be straightforward. Where the right of enforcement arises due to the operation of the presumption, the task of construction is an exceptionally difficult one as the parties will not have addressed the issue. Perhaps where the third party’s right of enforcement arises due to the presumption, the right of enforcement should be presumed to be subject to all of the conditions to which the promisee’s right of enforcement is subject.

Defences

It is the intention of the 1999 Act that third parties should not enjoy a better right than the promisee because the rights derived from the promisee. Thus, in an action by third parties, the promisor could raise a defence which questioned the existence, validity or enforceability of the contract as if the third party was the promisee. Section s 3(2)(a) narrows the ambit of possible defences by further stipulating that it must also be relevant to the term upon which the third party relies as the 1999 Act itself refers to the enforceability of a “term” of the contract, rather than the contract as a whole. This restriction is to ensure that the third party is not burdened by defences which do not strictly relate to the term that confers the benefit upon the third party. On the other hand, the third party might be uncertain as to its rights due to s 3(3) which allows the contracting parties to change the default position of the 1999 Act. The contracting parties may expressly stipulate that the promisor may also have available any defence or

676 Catharine MacMillan, 'A Birthday Present for Lord Denning: The Contracts (Rights of Third Parties) Act 1999' (2000) 63(5) The Modern Law Review 721. See also Michael Bridge, ‘The Contracts (Rights of Third Parties) Act 1999’ (2001) 5 Edinburgh Law Review 85. 677 Robert Stevens, 'The Contracts (Rights of Third Parties) Act 1999' (2004) 120 (APR) Law Quarterly Review 292.

221 set-off, not necessarily only those which are relevant to the term in question.678 This provision operates to the disadvantage of third parties who may be unaware of the possibly wide range of defences available to the promisor.

Variation of Rights

In the opinion of Michael Bridge, perhaps the most striking feature of the 1999 Act is the way in which it prevents the contracting parties from varying or rescinding the contract to the disadvantage of the third party.679 The 1999 Act reaches a compromise in protecting the reasonable expectations of the third party and at the same time giving effect to the intentions of the contracting parties. In short, the 1999 Act reaffirms the central reason for reform of the doctrine of privity and upholds the intentions of the contracting parties.680

Section 2(3), however, provides that it is open to the contracting parties to provide that the prior consent of the third party is waived if the contracting parties expressly reserved their right to vary or rescind the contract. This has the consequence that a legally adept promisor may take advantage of the existence of the provision and draft contracts which allow variation or rescission without the consent of the third parties. It may put the third parties in an even worse situation than under the doctrine of privity in that it could operate to defeat a legitimate expectation of benefit.681

The Impact of the 1999 Act on Insurance Contracts

A liability insurance policy where an insurer is to indemnify specified third parties against legal liability will be enforceable under the 1999 Act. Similarly most medical expenses, personal accident or private health insurance taken out by an employer for the benefit of its employees will be enforceable by the employees. But the 1999 Act leaves open the possibility that even though a third party is expressed to be covered by the

678 Catharine MacMillan, 'A Birthday Present for Lord Denning: The Contracts (Rights of Third Parties) Act 1999' (2000) 63(5) The Modern Law Review 721, 728. 679 Michael Bridge, ‘The Contracts (Rights of Third Parties) Act 1999’ (2001) 5 Edinburgh Law Review 85. 680 See the 1999 Act s 2(1). 681 Catharine MacMillan, 'A Birthday Present for Lord Denning: The Contracts (Rights of Third Parties) Act 1999' (2000) 63(5) The Modern Law Review 721, 727.

222 policy, the contracting parties may intend that only the promisee and not a third party should have the right of enforcement.682

It is submitted, however, that the 1999 Act fails to address the real source of difficulty in insurance contracts. 683 The unresolved matter concerns a dispute between the intended third party beneficiaries and the creditors or estate of the insured as to who is entitled to the proceeds once they are paid. If the payee is the third party, the third party will be entitled to them. If the payee is the promisee, the third party will not be entitled to the proceeds unless it is intended that the proceeds be held on trust. The third party’s right of enforcement under the 1999 Act is of no assistance as this will not affect the identity of the payee which is a matter of construction. The 1999 Act will consequently be of little assistance to third party beneficiaries under insurance contracts when in competition with the creditors or estate of the insured.684

Other problems in insurance contracts in conjunction with the doctrine of privity such as the requirement that third parties possess an insurable interest and waiver of subrogation are best left to targeted reform of insurance law where specific problems could be addressed.685 In short, the 1999 Act fails to tackle the existing problems in England’s insurance law. Nevertheless, the reform has improved the position of third party beneficiaries in cases such as life insurance contracts, medical insurance contracts and liability insurance contracts.

The Impact of the 1999 Act on Construction Contracts – Direct payment issue

Construction contracts are highly standardised. In England, the vast majority of construction work is done under a number of standard forms produced by the

682 'Privity of Contract: Contracts for the Benefit of Third Parties' (No. 242, 1996), [12.24]. 683 Robert Stevens, 'The Contracts (Rights of Third Parties) Act 1999' (2004) 120 (APR) Law Quarterly Review 292. 684 Ibid. Under s 11 of the Married Women’s Property Act 1982, the third party is the beneficiary of a statutory trust, while under the Third Parties (Rights Against Insurers) Act 1930, the rights under the insurance contract are transferred to the third party giving the third party an interest in the proceeds. The 1999 Act adopts neither of these techniques. 685 Robert Stevens, 'The Contracts (Rights of Third Parties) Act 1999' (2004) 120 (APR) Law Quarterly Review 292.

223

Association of Consulting Engineers and the Joint Contracts Tribunal (JCT). In their standard form contracts, both have excluded the operation of the 1999 Act and this being so, it is unlikely that the 1999 Act will have a significant impact in the construction industry, at least for the time being.686

Will the 1999 Act change the position in relation to direct payment provisions as drafted in those standard forms? A clause providing for the employer to make payments directly to a sub-contractor in the case of failure by the main contractor to satisfy sums certified in favour of the nominated sub-contractor would arguably constitute a term which purports to confer benefit on a third party within s 1(1)(b) of the 1999 Act. Despite this, it has been said that the 1999 Act does little to change the fundamental problem as the employer would utilise the existence of s 1(2), allowing the employer to argue that the contracting parties did not intend the direct payment provision to be enforceable by the sub-contractor.687 It has been suggested that if it is indeed intended to grant the sub- contractor a secure route for payment, the parties should consider alternative means rather than relying on the 1999 Act in conjunction with direct payment provisions.688

4.5.2 Third Party Beneficiaries who are not covered by the reform

This part will summarise the categories of third party beneficiaries who are not covered by the reforms in Western Australia, Queensland and England based on the discussion above.689

686 Robert Stevens, 'The Contracts (Rights of Third Parties) Act 1999' (2004) 120 (APR) Law Quarterly Review 292. Why did the industry exclude the 1999 Act? The Construction Industry Council (CIC) argued that construction contracts should be excluded from the operation of the 1999 Act on the basis that the unique nature of the construction process required legislative reform tailored to its own specific needs. See Jane Jenkins and James Duckworth in Robert Merkin, Privity of Contract the Impact of the Contracts (Rights of Third Parties) Act 1999 (First ed, 2000). According to Andrew Burrows at the meeting in Oxford of the Society of Construction Law, 25 May 2000, the possible application of the 1999 Act on the construction industry are i) to replace collateral warranties given by the architect or engineer or contractor to e.g. subsequent purchaser or lending institution, ii) B (head contractor) excludes or limits liability in negligence to A (employer) of B and B’s agents, servants, employees and sub- contractors, and iii) A (employer) agrees to indemnify B (head contractor) and sub-contractors against liability to others in carrying out construction work for A. 687 Jane Jenkins and James Duckworth in Robert Merkin, Privity of Contract the Impact of the Contracts (Rights of Third Parties) Act 1999 (First ed, 2000), 207. 688 Ibid. 689 Refer to [4.3]-[ 4.4].

224

Section 11 Property Law Act 1969 (Western Australia)

On the basis of the judicial interpretation of s 11, it can be concluded that there are certain types of third party beneficiaries who would not be able to claim a benefit conferred by relying on s 11:

i) Third party beneficiaries who acquire rights by implication. This arises in a situation where the benefit was not expressly conferred. It is necessary for the contractual provisions to expressly purport to confer a benefit directly on the third party or a class of beneficiary. Examples of third parties who fall within this category are consumers who are not identified specifically in the contract of sale as a class to receive benefits or a sub-contractor under a construction contract between the employer and main contractor. ii) Third party beneficiaries who are non-existent or unascertained at the time the contract was made. For example, unborn children, future spouses, unincorporated companies and bare nominees. iii) Incidental beneficiaries who benefit from the performance of the contract, but the conferral of a benefit was not intended by the contracting parties. iv) Third parties who are not identified as a conferee of benefit such as injured visitors or injured family members of a tenant whose lease provided that the landlord must maintain the premise. Only the tenant has the right to enforce benefit in the lease.

There are also reservations about whether third parties such as stevedores, agents and brokers can claim the benefit of an exemption clause under the section. Section 11(2) does not apply unless the person who seeks to enforce a benefit conferred by the contract is identified in the contract as the conferee of that benefit, which is not the case for stevedores, agents and brokers. A further question is whether exemption from liability is a ‘benefit’ within the meaning of s 11(2)? This question still remains and

225 answers will have to await further consideration by the courts. Until it is resolved, there is doubt that s 11(2) applies.690

Section 55 Property Law Act 1974 (Queensland)

i) Incidental beneficiaries who benefit from the performance of the contract, but the conferral of a benefit was not intended by the contracting parties. However Kirby J and Gaudron J in Northern Sandblasting Pty Ltd v Harris691 were of the view that an incidental beneficiary could rely on s 55 by way of implied benefit. This view was later adopted by Emmet J in an intellectual property case, Speedy Gantry Hire Pty Ltd v Preston Erection Pty Ltd.692 ii) Third parties who fail to accept the benefit conferred within the time specified or within a reasonable time. iii) Third parties who receive a promise which is not capable of being enforced at law for the reason of lack of intention to create legal relations. iv) When there is no consideration provided by the promisee for the benefit promised. v) Third parties seeking to claim the benefit of an exemption clause.693

Subcontractors’ Charges Act 1974 (Queensland)

i) A sub-contractor who performs ‘work’ which is not within the definition provided in s 3 is excluded from the application of the SCA 1974. For example, where a sub-contractor:

690 Justice Andrew Rogers in 'Contract and Third Parties' in Paul Desmond Finn (ed), Essays on Contract (1987), 96. 691 (1997) 188 CLR 313. 692 40 IPR 543. 693 It is noted that the Queensland Law Reform Commission in its Working Paper on A Bill to Consolidate, Amend, and Reform The Law Relating to Conveyancing, Property and Contract and to Determine the Application of Certain Imperial Statutes, 39 believed that the subject of exemption clauses required special and independent consideration in the context of the law of contract as a whole and it was not a question which should fall to be dealt with according to the collateral and legally irrelevant question of whether the person seeking to rely upon the exemption was not a party to the contract.

226

a) merely delivers goods sold by a vendor under a contract for the sale of goods; or b) performs work in connection with testing of materials or the taking of measurements or quantities. ii) A sub-contractor who claims a charge for damages arising from a breach of contract or in tort, or an amount payable on the basis of an extra-contractual remedy (restitution) or money payable for damages or other relief under another Act. iii) A sub-contractor who fails to claim a charge in accordance with the rules and formalities prescribed in s 10 SCA 1974. iv) A sub-contractor who lodges a proof of debt in the event of liquidation of the head contractor will be taken to have elected to surrender his or her security (the charge), and therefore is excluded from the SCA 1974.

Section 48 Insurance Contracts Act 1984 (Commonwealth)

i) Only applies to contracts of general insurance. Thus, specific insurance contracts such as marine insurance, health insurance, third party motor insurance, workers’ compensation insurance and reinsurance are excluded from its scope.694 ii) Third parties in group insurance contracts, for the reason that the third party is not specified or referred to in the insurance contract as a person to whom the insurance cover extends. This is due the wording of s 48(1) which requires the third party to be specified or referred to. iii) There is uncertainty in the situation in which there is non-disclosure by the insured. There is conflict over whether the insurer may use it as a defence against the third party’s claim. If so, s 48 will not apply to that third party beneficiary

694 Insurance Contracts Act 1984 s 9.

227

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

Section 6 of the 1999 Act lists the types of contracts which are excluded from its application due to the reason that there is specific legislation governing them. They are:

i) Contracts on a bill of exchange, promissory note or other negotiable instrument; ii) Contracts covered by s 14 of the Companies Act 1985;695 iii) Terms found in employment contracts or worker’s contracts in a legal action brought against the employee or worker; iv) Contracts of carriage of goods by sea; and v) Contracts of carriage of goods by rail or road or carriage of cargo by air which is subject to an appropriate international transport convention.

Additionally, judicial interpretation of the 1999 Act suggests that other types of third parties who do not benefit from the legislative reform will include:

i) Incidental beneficiaries; ii) Third parties who are not conferees of the benefit; iii) Third parties whose identity arose by implication; iv) Third parties who the contracting parties expressly indicate are not to possess enforceable rights; and v) Where the presumption of benefit has been rebutted by the contracting parties.

For ease of reference the above analysis is summarised in the table below.

695 Section 14 refers to the contractual nature of the memorandum and articles between the company and its shareholders. The section reads: Subject to the provisions of this Act, the memorandum and articles, when registered, bind the company and its members to the same extent as if they respectively had been signed and sealed by each member, and contained covenants on the part of each member to observe all the provisions of the memorandum and of the articles.”

228

Table 4.1: Third Party Beneficiaries who are not covered by legislative reform in Australia and England

Legislation Third Party Beneficiaries who are not covered by the legislation

Section 11 Property Law Act i) Third party beneficiaries who acquire rights by 1969 (Western Australia) implication. Examples of third parties who fall within this category are consumers who are not identified specifically in the contract of sale as a class to receive benefits or sub-contractors not parties to the main contract. ii) Third party beneficiaries who are non-existent or unascertained at the time the contract was made. For example, unborn children, future spouses, unincorporated companies and bare nominees. iii) Incidental beneficiaries who benefit from the performance of the contract but the conferring of the benefit was not intended by the contracting parties. iv) Third parties who are not identified as a conferee of benefit such as injured visitors or injured family members of a tenant whose lease provided that the landlord must maintain the premise. Only the tenant has the right to enforce a benefit in the lease. v) Third parties who claim the benefit of an exemption clause such as stevedores, agents and brokers.

Section 55 Property Law Act i) Incidental beneficiaries. 1974 (Queensland) ii) Third parties who fail to accept the benefit conferred within the time specified or within a reasonable time. iii) Third parties who receive a promise which is not capable of being enforced at law for the reason of lack of intention to create legal relations. iv) When there is no consideration provided by the promisee for the benefit promised. v) Third parties seeking to claim the benefit in an exemption clause.

Subcontractors’ Charges Act i) Sub-contractor who performs work outside the 1974 definition in s 3 of the SCA 1974. ii) Sub-contractor who claims a charge on the money payable for damages for breach of contract or in tort, or an amount payable on the basis of an extra- contractual remedy or money payable for damages or other relief under other Act. iii) Sub-contractor who fails to claim a charge in accordance with the rules and formalities prescribed in s 10.

229

iv) Sub-contractor who lodges a proof of debt in the event of liquidation of the head contractor.

Section 48 Insurance Contracts i) Only applies to contract of general insurance. Thus, Act 1984 (Commonwealth) specific insurance contracts such as marine insurance, health insurance, third party motor insurance, workers’ compensation insurance and reinsurance are excluded from its scope.696 ii) Third parties in group insurance contracts, for the reason that the third party is not specified or referred to in the insurance contract as a person to whom the insurance cover extends. iii) There is uncertainty in the situation in which there is non-disclosure by the insured. There is a conflict over whether the insurer may use it as a defence against the third party’s claim. If so, s 48 will not apply.

Contracts (Rights of Third i) Incidental beneficiaries; Parties) Act 1999 (England) ii) Third parties who are not conferees of the benefit; iii) Third parties whose identity arose by implication; iv) Third parties who the contracting parties expressly indicate are not to possess enforceable rights; and v) Where the presumption of benefit has been rebutted by the contracting parties. vi) Contracts on a bill of exchange, promissory note or other negotiable instrument. vii) Contracts covered by s 14 of the Companies Act 1985. viii) Terms found in employment contracts or worker’s contracts in a legal action brought against the employee or worker. ix) Contracts of carriage of goods by sea, and x) Contracts of carriage of goods by rail or road or carriage of cargo by air which is subject to an appropriate international transport convention.

4.6 CONCLUSIONS RELEVANT TO REFORM IN MALAYSIA

The rule that third party beneficiaries are unable to enforce benefits conferred in a contract has been altered by legislative reform in Western Australia, Queensland and England, following European countries, including Scotland where third party rights are

696 Insurance Contracts Act 1984 s 9.

230 widely recognised. Australia (the Commonwealth) has undertaken additional reform to enhance the rights of third parties in insurance contracts. Even though the statutory reforms in the comparative jurisdictions selected are drafted differently, all have the same objective of enabling third parties to enforce the benefits conferred by a contract, therefore respecting the intention of the contracting parties.

Relevant to a consideration of potential reform of the doctrine of privity in Malaysia is the finding from the analysis that there are three potential legislative frameworks that have been implemented in order to abrogate the privity rule:

1. General legislation which abrogates the privity rule for all contracts in certain circumstances; 2. General legislation together with specific legislation abrogating the rule for particular contracts such as insurance and construction; and 3. No general legislation only specific legislation for particular contracts.

Further relevant findings concern the similarities and differences in the legislative approaches.

The major differences between these three reforms697 are as follow:

i) While the reforms in Queensland and England enable third party beneficiaries who are non-existent or unascertained at the time the contract was made to enforce the benefit conferred, the Western Australian reform does not allow this. ii) The Queensland reform emphasises the need for consideration from the promisee for the third parties to acquire rights while the Western Australian and English reforms place no importance on the requirement for consideration. iii) Time of acceptance is of the essence for third parties in Queensland, but not in Western Australia and England. iv) In England, third parties are entitled to enforce an exemption of liability clause whereas in Queensland and Western Australia, an exemption from

697 PLA 1969 (WA) s 11; PLA 1974 (QLD) s 55; England’s 1999 Act.

231

liability clause was construed as not being within the “benefit” intended by those Acts. v) Australian third party beneficiaries of insurance contracts have additional rights by virtue of s 48 of the Insurance Contracts Act 1984.

The major similarities are as follows:

i) All reforms exclude incidental beneficiaries from the right to enforce the benefit conferred in the contract. ii) All reforms exclude third parties who are not conferees of the benefit. iii) All reforms disqualify any third parties whose identity arises by implication or construction.

In addition, it is submitted that all legislation analysed above contained express provisions that recognised right of third parties to enforce the benefit conferred. However, all legislation stipulate that in order for the doctrine of privity to be dispensed with, certain conditions must be fulfilled. The rationale for imposing such conditions could be said as to prevent an indeterminate range of liability as argued by Collins.698 By imposing conditions that need to be fulfilled, it will prevent unintended third parties (i.e. incidental third party beneficiaries) from enforcing the benefit conferred in the contracts.

The similarities between the types of parties most affected by the doctrine of privity in Australia, England and Malaysia provide a starting point for the consideration of the application of one of the identified frameworks within the Malaysian context. Before considering the most appropriate reform option for Malaysia the effectiveness of current legislative reforms to the privity doctrine in Malaysia will be examined.

698 See Chapter Two, 49.

232

CHAPTER FIVE LEGISLATIVE REFORM IN MALAYSIA 5.1 INTRODUCTION

Despite the availability of common law exceptions, the inherent difficulties and inconsistency in their application has continued the uncertain position of third party beneficiaries. Malaysia is no exception. As seen in Chapter 3, the device of trust is the preferred method of circumventing the doctrine of privity in Malaysia, yet trust law itself remains unclear in its application. For this reason, the only viable option is legislative intervention which provides certainty to the rights of third party beneficiaries.

The Malaysian legislature has over time intervened to protect third parties in certain types of contract. This chapter will explain the extent of the legislative reform of the privity doctrine in Malaysia and analyse it effectiveness.

5.2 PURPOSE OF ANALYSIS

The purpose of this chapter is to examine the types of contracts and third parties currently benefitting from legislative intervention in Malaysia. Realising the injustice caused by the doctrine of privity, coupled with its strict application by the judiciary, the legislature has taken some steps to lessen the effect of the doctrine of privity in Malaysia. The important outcome from this chapter will be a summary of the recognition of rights already given to third parties under particular contracts as well as details of those third parties who are yet to be protected. This chapter will conclude by addressing why further reform is necessary to provide rights to third party beneficiaries in Malaysia.

In summary, this chapter will discuss the following:

a) What reforms have been made in Malaysia;

b) What or who the existing reforms do not cover; and

c) Why further reform is necessary.

233

5.3 LEGISLATIVE INTERVENTION TO PROTECT THIRD PARTY BENEFICIARIES

The Malaysian legislature has enacted several pieces of legislation with provisions that allow third party beneficiaries to enforce contracts. The right vested in third party beneficiaries is seen in the area of insurance, consumer protection, negotiable instruments and agency.

5.3.1 Insurance Contracts: Insurance Act 1996

In Malaysia, the legislature did not completely abrogate the doctrine of privity in its general application to an insurance policy. Instead, the legislature intervened to confer rights only on selected third parties in certain types of insurance policies. The Insurance Act 1996 (hereafter referred to as the IA 1996) is the most relevant legislation relating to insurance law in Malaysia.699 Although the IA 1996 does not contain any provision of general application conferring rights on third parties in an insurance policy, there are specific provisions conferring rights on selected third parties.

Nominees and Life Policy

It is a common practice in the insurance industry that the owner of the policy nominates a beneficiary at the time of taking out a policy. Many people would assume that the person named would be legally entitled to the proceeds of the policy on the death of the life assured. However, this is not true in every case.

Prior to the IA 1996, statutory provisions on insurance matters were found in the Insurance Act 1963. The repealed Insurance Act 1963 did not prescribe any procedure for a valid and effective nomination in a life or personal accident policy. Thus, any nomination effected by the policy owner was non-statutory and the nomination was subject to the common law principle. The question arises as to the entitlement of the nominee, that is, whether the nominee receives the insurance money as a beneficiary or only as an executor? At common law, where the nominee is named by the policy owner as the beneficiary of the insurance moneys and also named in the will, the nominee is

699 It repealed the Insurance Act 1963 when it came into effect on 1st January 1997.

234 entitled to the insurance moneys as the beneficiary. However, if the nomination does not satisfy the requirements of a valid will and the nominee is not named in the will as the beneficiary to the insurance moneys, the common law authorities are conflicting.700 The weight of authority indicates that nominees who are not next of kin are prevented from receiving the insurance moneys. The intention of the policy owner to benefit that person will be defeated at common law.

The position is more certain after the enactment of the IA 1996. A third party who is nominated by a policy owner has the right to receive the policy money upon the policy owner’s death. For the nomination to be valid, s 163(1) of the IA 1996 requires the policy owner to provide the insurer with the proposed nominee’s name, date of birth, latest address and birth certificate number or identity card number. The section reads as follows:

A policy owner who has attained the age of eighteen years may nominate a natural person to receive policy moneys payable upon his death under the policy by notifying the licensed insurer in writing the name, date of birth, identity card number or birth certificate number and address of the nominee— (a) when the policy is issued; or (b) after the policy has been issued, together with the policy for the licensed insurer’s endorsement of the nomination on the policy.

Section 163(1) is only applicable to life and personal accident policies affected by the policy owner. Other types of insurance policies are excluded. Section 162 states as follows: In this Part, a reference to a policy is a reference to a life policy, including a life policy under section 23 of the Civil Law Act 1956 [Act 67], and a personal accident policy, effected by a policy owner upon his own life providing for payment of policy moneys on his death.

The nominee cannot be an unborn child or a body corporate. The nominee must be a natural person who is in existence and known to the policy owner at the time of the nomination. Further, a policy owner cannot nominate a third party by description or by reference to class of persons.

700 Refer to Chapter 3, [3.3.3.2] for series of cases where the English Courts decided on the matters. See also a Malaysian case, Manonmani v Great Eastern Life Assurance Co Ltd [1991] 1 MLJ 364, 79 [3.3.1.3].

235

The requirement that the nominee should be clearly identified is consistent with one of the intentions of the IA 1996 that is, to expedite payment of policy money upon the death of the person insured. Payment can be made without delay if the identity of the third party is known to the insurer. If the nomination does not comply with the procedure in s 163, the nomination is invalid and the nominee will not enjoy the benefits conferred by the insurance policy.

It is important to note that, unlike the uncertainty at common law as to whether the nominee receives the insurance moneys as a beneficiary or as an executor, s 167(1) of the IA 1996 makes the position certain. The nomination does not confer any rights on the nominee of a life insurance policy or a personal accident policy. The nominee only receives the insurance money as an executor and has to apply the money accordingly. Section 167(1) clearly provides the following:

A nominee, other than a nominee under subsection 166(1), shall receive the policy moneys payable on the death of the policy owner as an executor and not solely as a beneficiary and any payment to the nominee shall form part of the estate of the deceased policy owner and be subject to his debts and the licensed insurer shall be discharged from liability in respect of the policy moneys paid.

Regarding the enforcement of this provision, should the owner of the insurance policy wish to benefit the nominee, other than their spouse or children, as a beneficiary, this intention will be defeated. It is immaterial whether the policy or the nomination was affected before the IA 1999 came into force. Thus, if the facts of Manonmani v Great Eastern Life Assurance Co Ltd701 were decided today, the mother would not be entitled to the insurance moneys. The mother would only receive the money as an executor and not as a beneficiary.702 This would be contrary to the son’s intention to provide financial security to his mother in the event of his death. Should the owner of the policy wish to benefit the nominee, the owner should assign the policy or its proceeds to the nominee or alternatively create a trust and make the nominee the beneficiary of the trust.

701 [1991] 1 MLJ 364. 702 This is due to s 166 which only allows the spouse or the children of the policy owner to be named as beneficiaries.

236

Prior to the IA 1996, the creation of a trust was subject to the interpretation of the courts. In some cases, the court found the existence of a trust, but not in other cases. Cases such as GR Nair v Eastern Mining & Metals Co Sdn Bhd, 703 Kishabai v Jaikishan,704 Bank Bumiputra Malaysia Bhd v Mohamed Salleh705 and Poominathan Kuppusamy v Besprin Stationers Sdn Bhd706 illustrate the inconsistency of Malaysian courts in determining the existence of trust. In life and personal accident policies, the matter was put to rest by s 166 of the IA 1996.

The IA 1996 recognises the creation of a statutory trust and rights of the spouse and the children as third party beneficiaries in life insurance contracts. Section 166(1) provides as follows:

A nomination by a policy owner, other than a Muslim policy owner, shall create a trust in favour of the nominee of the policy moneys payable upon the death of the policy owner, if— (a) the nominee is his spouse or child; or (b) where there is no spouse or child living at the time of nomination, the nominee is his parent.

Section 2 of the IA 1996 defines a child as including an illegitimate child, a step-child and a child adopted under any written law of Malaysia or any place outside Malaysia or under a custom recognised by a class of persons in or outside Malaysia. In Shunmuga Vaderu S Athimulam v The Malaysian Co-Operative Insurance Society Ltd, 707 the deceased nominated his wife to receive the insurance moneys payable upon his death. Subsequently, the deceased made another nomination. It was held that the second nomination was void since the deceased had created a trust under s 166 when he nominated his wife to receive the insurance moneys.

In order to qualify as a spouse of the insured, there must be a valid marriage between the spouse and the insured and the spouse and the marriage must exist at the time of death of the insured.

703 [1974] 1 MLJ 176. 704 [1981] 2 MLJ 289. 705 [2000] 2 MLJ 412. 706 [2003] 3 CLJ 118. 707 [1999] 1 CLJ 231. (A case which was decided after the IA 1996 came into effect.)

237

In Re Tan Hui Guan, Deceased (Phang Siew Fa v Aw Kim Siok),708 the deceased policy owner nominated his mother as the beneficiary of a life policy upon the owner’s death. The deceased at the time of the nomination was engaged to be married to the plaintiff. It was argued by the plaintiff that she was the ‘spouse to be’ as the deceased was engaged to her at the time of nomination. Furthermore, the plaintiff argued that since the IA 1996 did not define the word “spouse”, the word should include “the spouse to be” and therefore, no trust was created under s 166 in favour of the deceased’s mother. The High Court held that “spouse” can only mean a legal wife and the fact that the plaintiff was engaged to the deceased did not make her a spouse within the scope of s 166 of the IA 1996.

Other categories of people are not included as beneficiaries under any trust created despite the intention of the parties to the contract. These categories include parents, step-parents, adopted parents, cohabitees, spouses married under customary law, future spouses and future or unborn children,709 other relatives and friends. These categories of persons are not afforded protection under the insurance contract as the intention of the IA 1996 is to provide protection only to the immediate family of the insured. The IA 1996 is not intended to protect the rights of all third party beneficiaries named in the insurance contract. As a result, even if the insured intends to name a person other than their spouse, children or parents (for an unmarried policy owner) as a third party beneficiary, s 166 will defeat their intention. The IA 1996 still would not be of any help to the nephew who was named as the beneficiary to the insurance policy in Kishabai v Jaikishan710 as a nephew would not fall within the scope of s 166.

For a trust under s 166 to be automatically created the following three requirements must be fulfilled:

a) The settlor of the trust must be the policy owner. The policy owner, as defined in s 2, means the legal owner of the policy and this include his assignee and when the policy owner dies, his personal representative. The word “policy”, as defined

708 [2006] 3 MLJ 663. 709 This is due to the requirements specified under IA 1996 s 163(1). 710 [1981] 2 MLJ 289. Refer to Chapter 3, 75[3.3.1.3].

238

by s 162, refers to a life policy and a personal accident policy affected by a person on his own life providing for payment of policy moneys on his death. Therefore, s 166 only applies to insurance policies affected on the insured’s life such as life policies, endowment policies and personal accident policies. Other types of insurance policies are excluded. b) Section 166 excludes its application to a Muslim policy owner. Thus, if a Muslim policy owner nominates a spouse, child or parent, the nomination does not create a trust in the nominee’s favour. The nominee of a Muslim policy owner receives the money as an executor. c) Only a person who has attained the age of 18 years may create a trust under s 166.

In summary, a nominated third party in a life or personal accident policy in Malaysia receives the money payable on the death of the policy owner as an executor and not as a beneficiary. The exception is where the policy owner is non-Muslim and the nominee is the policy owner’s spouse or child, or his parent if the policy owner does not have a spouse or child at the time of nomination. A statutory trust is created in favour of these nominees by virtue of s 166 of the IA 1996. However, the application of s 166 is narrow in the sense that the beneficiaries of a trust under it are limited to the policy owner’s spouse, children or parent.

As discussed in s 163(1), the nominee must be named and particulars must be submitted to the insurer. It follows that the policy owner cannot create a trust in favour of his future wife or future children under s 166. This is another type of beneficiary excluded from the application of s 166. A nominee in a life and accident policy, other than the spouse, children or the parent (if the owner does not have spouse or children) cannot receive the insurance moneys as beneficiary, even if that is the intention of the policy owner. Section 167 cannot be circumvented by the policy owner by expressly providing that the nominee is to receive the moneys as a beneficiary. Therefore, the IA 1996 has the effect of defeating the intention of the policy owner which is to allow the nominee to receive the policy moneys for his or her own benefit. The status of the spouse and the children (or the parent) has improved under s 166 but more could be done to improve

239 the position of the nominee in Malaysia. Most importantly, the scope of the definition of the word “nominee” must be extended to include other persons as desired by the policy owner.

Rights of Third Parties in Group Insurance Policies

A group insurance policy is a contract between an insurer and the group policy owner whereby the insurer agrees to insure a certain group of persons, for example, employees. A group policy owner may affect the insurance contract for the benefit of itself or for the benefit of the respective insured persons. In the latter case, the doctrine of privity hinders the insured persons from claiming under the policy.

Prior to the IA 1996, a person insured under a group insurance policy was generally a third party to the insurance contract who had no right to sue the insurer unless one of the exceptions to the doctrine of privity applied.711 It was immaterial that the insurance contract was affected for that person’s benefit. If for example, an employer affected an insurance policy with an insurer to cover the injuries or sickness sustained by one of the employer’s employees who was named as the insured in the policy, the employee as the insured third party did not have a right to enforce the policy.

After the enactment of the IA 1996, a third party insured under a group insurance policy has a right to the insurance money in certain circumstances. Section 186(3) reads as follows:

A licenced insurer shall be liable to the person insured under a group policy if the group policy owner has no insurable interest in the life of the person insured and if the person insured has paid the premium to the group policy owner regardless that the licensed insurer has not received the premium from the group policy owner. Furthermore, section 186(4) states the following:

The licensed insurer of a group policy, where the group policy owner has no insurable interest in the lives of the persons insured, shall pay the moneys due under the policy to the person insured or any person entitled through him.

Despite the legislative intention to give rights to insured third parties under a group insurance policy, sections 186(3) and 186(4) would not assist the third parties in the

711 See GR Nair v Eastern Mining & Metals Co Sdn Bhd [1974] 1 MLJ 176 in Chapter 3, 72 [3.3.1.2].

240 case where the employer took out an insurance policy to cover the death or illness of employees in the course of employment.

The sections would not apply as the third parties (the employees) did not pay their own premium and the group policy owner had an insurable interest in the life of the third parties. Both sections only confer rights on an insured person where the group policy owner does not have an insurable interest in the insured person. Section 186(3) also provides that the insurer shall be liable to the insured person if the insured person has paid the premium to the group policy owner. Neither section would alleviate the loss suffered by the employees in the case of GR Nair v Eastern Mining & Metals Co Sdn Bhd712 if the facts were to arise again today. The IA 1996 does nothing to abrogate the doctrine of privity in group insurance policies.713 Therefore, the IA 1996 fails to provide protection to these types of third party.

5.3.2 Insurance Contracts: Civil Law Act 1956

Before the IA 1996 714 came into effect, s 23 of the Civil Law Act 1956 (hereafter referred to as CLA 1956) was the sole statutory trust device which could be used by the owner of a life insurance policy. The purpose of s 23 and s 166 of the IA 1996 is the same, namely, to simplify the creation of a trust over an own-life policy in favour of the policy owner’s family members.

Section 23(1) which is based on s 11 of the Married Women’s Property Act (UK) Act 1882, and continues after the enactment of the IA 1996 provides as follows:

A policy of assurance effected by any man on his own life and expressed to be for the benefit of his wife or of his children or of his wife and children or any of them, or by any woman on her own life and expressed to be for the benefit of her husband or of her children or of her husband and children or any of them, shall create a trust in favour of the objects therein named, and the moneys payable under any such policy shall not as long as any object of the trust remains unperformed form part of the estate of the insured or be subject to his or her debts.

712 [1974] 1 MLJ 176. 713 See also Bank Bumiputra Malaysia Bhd v Mohamed Salleh [2000] 2 MLJ 412 where the court resorted to the device of trust to enable the employees to claim the insurance moneys. 714 See s 166.

241

The above provision indicates that a nominee under s 23 is an absolute beneficiary. In Re Man bin Mihat deceased,715 Suffian J, by virtue of s 23(1) of the CLA 1956, decided that the nominee is an absolute beneficiary. The decision was followed by Abdul Hamid J in Re Bahadun bin Haji Hassan deceased,716 where the wife of the deceased was nominated in the policy. The court held that by virtue of s 23(1) of the CLA 1956, the sum payable under the policy should be paid to the widow, as she was considered as the absolute beneficiary of the policy.717

Although a trust is created, the beneficiary under s 23(1) does not have direct recourse to the insurer for the policy moneys. Since the legal title to the policy is vested in the trustee, only the trustee has the right to sue the insurer. Section 23(6) states that “the receipt of a trustee…shall be a discharge to the insurer for the sum secured by the policy.”

To qualify as a trust under s 23(1), several conditions must be fulfilled:

i) Only the owner of an own-life policy or endowment and personal accident policy can create a trust in favour of the owner’s spouse and children. ii) The beneficiaries are limited to the policy owner’s spouse (husband or wife) and children. Other family members such as parents, nephews, nieces and others are excluded. A policy owner also is permitted to create a trust under s 23 in favour of his wife whom he marries according to the necessary customary rites. The wife enjoys the protection conferred by s 23 of the CLA 1956.718 iii) The term “children” is not defined in the CLA 1956. This may mean that a trust under s 23 can only be created in favour of the policy owner’s lawful

715 [1965] 2 MLJ 1. 716 [1974] 1 MLJ 14. 717 It is worth noting that Suffian J’s decision in Re Man bin Mihat deceased was made on the basis of the English decision in Re Loakimidi’s Policy Trust [1925] Ch 403 which concluded that the policy money belonged to the widow (nominee) beneficially and did not form part of her husband’s estate. 718 Chan Wai Meng, Third Party Rights in Insurance Law in Malaysia, (2008), 118.

242

children, who are the legitimate and legally adopted children. 719 An illegitimate child or a child adopted outside the Malaysian Adoption Act 1952 may be excluded from the benefits of s 23.

Section 23 was recently applied in Anthony Kulanthai Marie Joseph v Malaysian Assurance Alliance Bhd,720 where the policy owner affected a policy on his life for the benefit of his wife. The Court of Appeal declared that the claim of the wife was, in fact and in law, a claim by her as a beneficiary (‘cestui que trust’) of a policy effected under s 23(1) of the CLA 1956 which created a trust of the said policy of assurance immediately upon the policy being affected. As trustee, the insurer was under an obligation to pay the insurance moneys (trust property) to the beneficiary (wife) upon the death of the insured. On the trustee’s (insurer’s) failure to do so, any action instituted by the beneficiary (wife) would not be a claim in contract but a claim by the beneficiary (wife) under the trust to recover from the trustee (insurer) trust property in the possession of the trustee.

The benefit of s 23 may also extend to a customary wife or husband as a result of the court’s liberal interpretation of the term “wife” in cases involving s 7 of the CLA 1956.721 In Chong Sin Sen v Janaki a/p Chellamuthu,722 the High Court held that since the word ‘wife’ was not defined in the CLA 1956, the word should be read as applicable to those things to which they would in their natural sense apply. There was nothing in the CLA 1956 which provided that the term ‘wife’ should be confined to a woman who is a party to a marriage solemnised and/or registered under any prevailing Act.723 The

719 The legal status of an adopted child is the same as that of the natural children of the adoptive parents. (Adoption Act 1952 s 9(2) and s 9(3)). 720 [2008] 4 MLJ 903. 721 Section 7 confers rights on a deceased’s wife, husband, parent and child to claim compensation for loss or damage caused by them by the deceased provider’s death. Section 7(1) reads “Whenever the death of a person is caused by wrongful act, neglect or default, and the act, neglect or default is such as would, if death had not ensued, have entitled the party injured to maintain an action and recover damages in respect thereof, the party who would have been liable if death had not ensued shall be liable to an action for damages, notwithstanding the death of the injured, and although the death has been caused under such circumstances as amount in law to an offence under the Penal Code [Act 574].” Section 7(2) reads “Every such action shall be for the benefit of the wife, husband, parent, and child, if any, of the person whose death has been so caused and shall be brought by and in the name of the executor of the person deceased.” 722 [1997] 5 MLJ 411. 723 Ibid 417 (Mohd Ghazali J).

243 wife who carried out a customary marriage with the deceased was held to be entitled to claim under s 7 of the CLA 1956. This interpretation was approved by the Court of Appeal in Joremi Kimin v Tan Sai Hong,724 where it was held that the wife who was in a customary marriage with the deceased was within the scope of s 7.

To date, there are no reported cases involving a customary spouse under s 23, but the interpretation of the term “wife” in s 7 is equally applicable to the term “wife” in s 23 as it was the intention of the legislature to ensure that the spouse of the deceased is financially supported in the event of the death of one spouse. Accordingly, it could be said that the wife (or the husband) enjoys the benefit of a statutory trust created under s 23 of the CLA 1956.

Inconsistency between s 23 of the CLA 1956 and s 166 of the IA 1996

Section 23 co-exists with s 166 of the IA 1996, but this situation has the tendency to create uncertainty regarding the concept of a statutory trust in Malaysia. One of the uncertainties relates to the rights of a customary spouse. As s 166 of the IA 1996 excludes a customary spouse as a third party beneficiary, this is inconsistent with s 23. Section 23 is supported by s 7(2) of the CLA 1956 which defines “wife” to include a woman who is a party to a marriage solemnised and/or registered under any prevailing Act relating to marriage and divorce.725 Hence, customary wives in Malaysia will find themselves in a different position as to their rights as beneficiaries under a life or personal accident policy. They are considered immediate family under the CLA 1956 but not under the IA 1996. This inconsistency must be remedied.

Another inconsistency regards the definition of “child”. Section 2 of the IA 1996 expressly includes in the definition of child a person’s illegitimate child, step-child or child adopted under any written law in Malaysia or any place outside Malaysia or under a custom recognised by a class of persons in or outside Malaysia. On the other hand, a statutory trust could not be created for an illegitimate child under s 23 of the CLA 1956.

724 [2001] 1 CLJ 526. 725 See also s 2 of the Married Women Act 1997 which interprets the phrase “married woman” to include “any woman married in accordance with the rites and ceremonies required by her religion, manners and customs”. It should be noted that this Act applies to West Malaysia only.

244

While the benefits of s 23 do not extend to the policy owner’s parents, s 166 does recognise the parents as beneficiaries, but only if the policy owner does not have a living spouse or child at the time of nomination. Despite this, it is uncertain whether step-parents or adoptive parents could take advantage of s 166 as the IA 1996 does not define the word “parent”. Hence, the word “parent” may be understood to include natural parents only.

In summary, s 166 of the IA 1996 and s 23 of the CLA 1956 have the same intention and purpose being to confer protection to the immediate family through a statutory trust. However, they have different coverage and scope. It is regrettable that there is inconsistency as to the type of third parties that can benefit from these statutory trusts.

5.3.3 Insurance Contracts: Road Transport Act 1987

It is a well established principle that an insurance contract is a contract between the policy owner and the insurer. In road accident cases, if the owner of the car affected an insurance policy, any third party who suffers injury as a result of the accident cannot sue the insurer directly for compensation. The insurance moneys belong to the policy owner. In the event of insolvency, the injured third party may not be entitled to the insurance moneys as the money would be used to satisfy the owner’s debt. The circumstances changed with the introduction of the Road Transport Act 1987 (hereafter referred to as the RTA 1987) whereby the legislature inserted provisions pertaining to third party rights into Part IV of the RTA 1987.726 The most important change can be seen in s 96(1) which allows an injured third party to sue the insurer directly if injuries are sustained.

Section 90(1) of the RTA 1987 makes it compulsory for a user of a motor vehicle to be insured against third party risks. Section 90(1) reads as follows:

Subject to this part, it shall not be lawful for any person to use or to cause or permit any other person to use, a motor vehicle unless there is in force in relation to the user of the motor vehicle by that person or that person, as the case may be, such policy of insurance

726 Part IV of the RTA 1984: Provisions against the third party risks arising out of the use of motor vehicles.

245

or such security in respect of third party risks as complies with the requirements of this Part. In most circumstances, the third party in a claim under a motor insurance policy is a person who sustains injury in a motor accident arising from the use of a vehicle on a road (the injured third party).727

Where an injured third party has obtained a judgment against an insured, the injured third party is vested with certain rights. Section 96(1) of the RTA 1987 confers on an injured third party the right to sue the insurer for the judgment sum awarded against the tortfeasor whose liabilities are insured. Section 96(1) reads as follows:

If, after a certificate of insurance has been delivered under sub-s (4) of s 91 to the person by whom a policy has been effected, judgment in respect of any such liability as is required to be covered by a policy under para (b) of sub-s (1) of s 91 (being a liability covered by the terms of the policy) is given against any person insured by the policy, then notwithstanding that the insurer may be entitled to avoid or cancel, or may have avoided or cancelled the policy, the insurer shall, subject to this section, pay to the persons entitled to the benefit of the judgment any sum payable there under in respect of the liability, including any amount payable in respect of costs and any sum payable in respect of interest on that sum by virtue of any written law relating to interest on judgments.

It follows therefore that the pre-requisites to claim under s 96(1) are as follows: a) A certificate of insurance has been delivered by the insurer to the other contracting party; b) A judgment against any person insured by the policy has been obtained; c) The suing party is a person entitled to the benefit of the judgment in respect of the liability; and d) The entitled person is also entitled to costs and interest if covered by the judgment by virtue of any written law.

However, s 96 does not confer a right on all injured third parties to recover their judgment sums from the insurer. The effect of s 96(1) has been watered down by s 91(1)(b) which reads as follows:

727 Other categories of third parties are: a person whose liabilities are insured under a motor policy even though he is not the policy owner (the authorised driver) and a hospital that gives treatment to the injured third party.

246

A policy of insurance must be a policy which insures such person, or class of persons as may be specified in the policy in respect of any liability which may be incurred by him or them in respect of death of or bodily injury to any person caused by or arising out of the use of the motor vehicle or land implement drawn thereby on a road.

In short, the injured third party can only claim for damages arising from death or bodily injury. Property damage is thus excluded.728 Nevertheless, in The People’s Insurance Co (M) Sdn Bhd v Syarikat Kenderaan Melayu Kelantan Bhd,729 the issue was raised as to whether by virtue of s 96(1) of the RTA 1987 and the case of QBE Insurance Ltd v Dr K Thuraisingham,730 the claim of a third party against an insured party was limited to injuries or death as provided by s 96(1)(b) and whether a property loss claim was outside the ambit of s 96(1) of the RTA 1987. In this case, Sykt Kenderaan Melayu Kelantan (the respondent) sued the People’s Insurance (the appellant) for loss of property in an accident wherein the respondent’s vehicle was damaged. The contract of insurance was comprehensive in nature.

Justice Suriyadi in dismissing the appeal held that QBE Insurance Ltd v Dr K Thuraisingham was inapplicable to a matter falling under s 96(1) of the RTA 1987. A third party can claim damages for property damage suffered in a road accident. The learned judge based his reasoning on the inequities where the insurance companies are generally in a superior position as compared to the individual who may be suffering financial or physical afflictions. The injured third party as well as the family must not be ‘put in misery.’731 The learned judge further argued that if the legislature was to restrict payment to death or bodily injury only, why then are costs and interest included, which

728 Nik Ramlah Mahmood, Insurance Law in Malaysia, (1992), 235. Refer also to QBE Insurance Ltd v Dr.K.Thuraisingam [1982] 2 MLJ 62; Pacific & Orient Insurance Co Sdn Bhd v Lee Yin Siong [1983] CLJ 690 where despite there being clauses in the insurance policies providing that the insured were entitled to recover on property damage, The High Court held that liability for property damage was not within the scope of s 75(1)(b) of the Road Traffic Ordinance 1958. (The section and the Ordinance were the predecessor of the RTA 1987 s 91(1)(b)). 729 [2001] 1 MLJ 279. 730 [1982] 2 MLJ 62. 731 Ibid 285 (Suriyadi J).

247 are more akin to specific damages.732 It is to be noted that there is no other reported case which allows a claim for property damage under s 96(1) of the RTA 1987.733

A claim under s 96 is not available to all kinds of injured third parties. The proviso in s 91(1) states as follows: Provided that such policy shall not be required to cover: (aa) liability in respect of the death arising out of and in the course of his employment of a person in the employment of a person insured by the policy or of bodily injury sustained by such a person arising out of and in the course of his employment; or (bb) except in the case of a motor vehicle in which passengers are carried for hire or reward or by reason of or in pursuance of a contract of employment, liability in respect of the death of or bodily injury to persons being carried in or upon or entering or getting onto or alighting from the motor vehicle at the time of the occurrence of the event out of which the claims arise;

Therefore, employees who are injured in a road accident in the course of their employment have no right to claim any compensation from the insurer under the motor insurance policy purchased by their employers. Under s 91(1)(bb), passengers injured as a result of road accidents are also excluded from the rights conferred in s 96, unless the injured third party is a passenger in a contract of hire or reward or the person suffers the injury or death by reason of or in pursuance of a contract of employment. The position of the insured’s passenger is uncertain as the passenger cannot take advantage of the statutory rights given to a third party by s 96(1) of the RTA 1987, unless one of the exceptions prescribed in proviso (bb) to s 91(1)(b) applies to the passenger. The uncertainty of the meaning of the phrases “by reason of or in pursuance of a contract of employment” and “for hire or reward” is shown below.

The phrase “by reason of or in pursuance of a contract of employment” has been subject to numerous judicial interpretations. In Tan Keng Hong v New India Assurance Co

732 Ibid 287 (Suriyadi J). 733 In Tan Tok Nam v Pan Global Insurance Sdn Bhd [2002] 3 MLJ 742, a case decided under the Road Traffic Ordinance 1958, the judge followed QBE Insurance Ltd v Dr K Thuraisingam [1982] 2 MLJ 62 and the claim for property damage was not allowed.

248

Ltd,734 the Privy Council held that whether a passenger is carried “by reason of or in pursuance of a contract of employment” depends solely upon its terms. The contract must have either an express or implied term requiring or entitling the passenger to travel in the said vehicle. The passenger must be in the vehicle for sufficient practical or business reasons. Thus the passenger cannot be in the vehicle for personal reasons or convenience. It is immaterial if the vehicle is driven by the injured third party’s employer or any other person.735

However, in Union Insurance (M) Sdn Bhd v Chan You Young,736 the Court of Appeal held that a person who is driven by another to work does so “by reason of or in pursuance of a contract of employment.” It was held that the injured third party was covered by the clause even though he was not required or entitled to travel in the vehicle under the terms of his contract of employment. The injured third party was being driven by her son to work when the accident happened. The decision appears to be inconsistent with the decision of the Privy Council in Tan Keng Hong v New India Assurance Co Ltd,737 which held that the proviso to s 91(1)(bb) was only applicable if the employer had arranged for the passenger to be carried in the motor vehicle involved in the accident or the journey was connected to their contract of employment.

734 [1978] 1 MLJ 97. The Privy Council adopted the definition determined in Izzard v Universal Insurance Co Ltd [1937] AC 773 where Lord Wright held that “the words of the statute are general and unlimited. To insert the words ‘with the insured person’ (after ‘by reason of or in pursuance of a contract of employment’) would be to insert words of specific limitation beyond what can be inferred from the general tenor of the Act or policy. If these words had been intended they could and should have been expressed, as was done in the previous (proviso (aa)). They are not expressed and in my opinion ought not to be and cannot properly be implied”, 783. 735 See the Supreme Courts’s decision (now Federal Court) in United Oriental Assurance Sdn Bhd v Lim Eng Yew [1991] 3 MLJ 429 where the injured third party was the policy owner’s employee. The vehicle was driven by an authorised driver. The insurer was obliged to pay the employee the awarded judgment sum. See also the Court of Appeal’s decision in Union Insurance (M) Sdn Bhd v Chan You Young [1999] 1 MLJ 593 where the injured third party was driven by her son to work, and in The People’s Insurance Company (M) Bhd v Ting Tiew Kiong [2007] 5 MLJ 624 where the injured third party was instructed by his manager to travel as a passenger in the tortfeasor’s car. 736 [1999] 1 MLJ 593. 737 [1978] 1 MLJ 97. See also United Oriental Assurance Sdn Bhd v Lim Eng Yew [1991] 3 MLJ 429.

249

In Mary Colete John v South East Asia Insurance Bhd,738 the word “employment” was defined to include contracts of service, but not contracts for services. In this case, the plaintiff was travelling as a passenger in a car belonging to the plaintiff’s “employer”, Angel Pereira. The plaintiff, a beautician was engaged by Angel to dress, make-up and beautify the bride for her wedding. While on the way to the bride’s home, the car skidded and overturned and the plaintiff was seriously injured, suffering neck-down paralysis. The High Court held that the insurer was under no obligation to pay the plaintiff as the motor insurance policy excluded passenger liability by virtue of s 75(1)(ii) of the Road Traffic Ordinance 1958.739 It was submitted that the appellant was not travelling in the said vehicle by reason of or in pursuance of a contract of employment between the appellant and the insured.

The High Court found that there was no employer-employee relationship between the plaintiff and the insured. That being so, the insured was not liable to satisfy the judgment under s 96 of the RTA 1987. The plaintiff was plainly an independent contractor and she was not carried in the car by reason of or in pursuance of a contract of employment. The contract between the appellant and the insured was a contract for services and not a contract of service.

As for the phrase “for hire or reward”, the Federal Court in New Zealand Insurance Company Ltd v Sinnadorai740 expressed the opinion that the phrase “for hire or reward” applies to public service vehicles only. Concern arises as to the position of the passenger in a car-pool arrangement as it is a common thing in Malaysia to car-pool to work. Yet there is no decided case on this issue in Malaysia. The position remains unknown.741

738 [2004] 7 CLJ 314, [2010] 2 AMR 385(Court of Appeal). 739 The Road Traffic Ordinance 1958 has since been repealed and replaced by the Road Transport Act 1987 which came into force on 1 January 1988. That was the reason why the plaintiff sought to enforce the judgment under s 96 of the RTA 1987 which was previously s 80 of the Ordinance. Section 75(1)(ii) of the repealed Ordinance is in pari materia with s. 91(1)(bb) of the present Act. 740 [1969] 1 MLJ 183, 185. 741 Chan Wai Meng, Third Party Rights in Insurance Law in Malaysia, (2008), 171.

250

In summary, regarding the enforcement of the RTA 1987, an injured third party can recover from the insurer the judgment sum awarded to the injured third party in respect of a risk which is covered by s 91(1) of the RTA 1987. Despite this, the entitlement is not for every type of third party and not for every type of risk. For example, property damage is excluded. Passengers’ liability is also subject to limitation whereby it is not compulsory to cover the insured’s liability towards passengers, unless they are carried for hire or reward, or by reason of or in pursuance of a contract of employment. Again, the interpretation of the words “by reason of or in pursuance of a contract of employment” varies, resulting in uncertainty as to the rights of these injured third party passengers. The same rule applies to injured third party employees.

5.3.4 Construction Contracts: Construction Industry Payment and Adjudication Act 2012

In 2008, the Master Builder Association Malaysia (MBAM) submitted a proposal to the Malaysian Government that that there should be a similar Act to the ones in Australia, England, New Zealand and Singapore dealing with security of payment for sub- contractors. 742 All states of Australia as well as England have enacted specific legislation to address issues of security of payment in the construction industry and eliminate, to the extent possible, poor payment practices (smooth the contractor’s cash flow) through a speedy adjudication process.743 This specific Act is vital to protecting the interests of the primary players in the construction industry, including sub- contractors particularly as contractual bargaining power is often not equal. The importance of this legislation is that it creates a statutory right to make and receive progress payments.

742 Master Builders Association Malaysia, 'Proposed Act to protect contractors', The Star Online (Malaysia), 9 December 2008. 743 See New South Wales’s Building and Construction Industry Security of Payment Act 1999; Victoria’s Building and Construction Industry Security of Payment Act 2002; Queensland’s Building and Construction Industry Security of Payment Act 2004; Western Australia’s Construction Contracts Act 2004; Northern Territory’s Construction Contracts (Security of Payments) Act 2004; England’s Housing Grants, Construction and Regeneration Act 1996. See also New Zealand’s Construction Payment Act 2002; Singapore’s Building and Construction Industry Security of Payment Act 2004.

251

On 18 June 2012, the Construction Industry Payment and Adjudication Act 2012 (hereinafter referred to as CIPAA) was passed, but with no date set for its commencement. Consideration of judicial application of the CIPAA in order to evaluate its effectiveness therefore could not be made. The analysis will be limited to an interpretation of its provisions.

Elements of the CIPAA

The main objectives of the CIPAA are as follows:

i) To facilitate regular and timely payments between parties to a construction contract; ii) To provide a speedy dispute resolution mechanism; and iii) To provide security and remedies for the recovery of payment.

Under the CIPAA, sub-contractors will have a statutory right to claim for payment as promised in the contract. The statutory right, as provided for in s 5(1), is as follows:

5. Payment claim (1) An unpaid party may serve a payment claim on a non-paying party for payment pursuant to a construction contract.

Section 4 provides: A non-paying party means a party against whom a payment claim is made pursuant to a construction contract;

Construction contract means a construction work contract or construction consultancy contract;

Construction work contract means a contract to carry out construction work; and

Construction consultancy contract means a contract to carry out consultancy services in relation to construction work and includes planning and feasibility study, architectural work, engineering, surveying, exterior and interior decoration, landscaping and project management services.

In the construction industry a main contractor will be engaged by the owner of land to construct a building. The main contractor will then enter into contracts with sub- contractors to carry out the construction works. The sub-contractor will be entitled to

252 payment under the contract with the main contractor. Upon default of payment by the main contractor, under s 5(1) the sub-contractor may serve a payment claim on the main contractor for payment through a process known as adjudication.

To facilitate regular and timely payments between parties to a construction contract, s 36 provides for a right to a progress payment. Section 36 reads as follows: 36. Default provisions in the absence of terms of payment (1) Unless otherwise agreed by the parties, a party who has agreed to carry out construction work or provide construction consultancy services under a construction contract has the right to progress payment at a value calculated by reference to the contract price for the construction work or construction consultancy services; any other rate specified in the construction contract; any variation agreed to by the parties to the construction contract by which the contract price or any other rate specified in the construction contract is to be adjusted; and the estimated reasonable cost of rectifying any defect or correcting any non- conformance or the diminution in the value of the construction work or construction consultancy services performed, whichever is more reasonable.

Under s 36, the following persons may make progress claims for payment: i) Main contractors against employers/principals; ii) Sub-contractors against main contractors; iii) Sub-contractors against other sub-contractors; iv) Suppliers of materials or building components against purchasers; and v) Architects, engineers and others providing building advice against employers.

Another important feature of the CIPAA concerns direct payment from employers. This is seen in s 30(1) which provides as follows: 30. Direct payment from principal (1) If a party against whom an adjudication decision was made fails to make payment of the adjudicated amount, the party who obtained the adjudication decision in his favour may make a written request for payment of the adjudicated amount direct from the principal of the party against whom the adjudication decision is made.

Section 4 defines ‘principal’ as a party who has contracted with and is liable to make payment to another party where that other party has in turn contracted with and is liable to make payment to a further person in a chain of construction contracts.

253

The result of s 30(1) is that upon failure by a main contractor to pay the adjudicated amount of payment to a sub-contractor, the sub-contractor has the right to claim payment directly from the employer provided that there is money payable to the main contractor. In this context, s 30(1) has abrogated the doctrine of privity to the extent that the sub-contractors may claim payment directly from the employer, therefore bypassing the main contractor.

However, the application of s 30(1) is limited to situations in which the main contractor fails to pay the contract price to the sub-contractor. As revealed in Chapter Three, the main effect of the doctrine of privity in the construction industry was that courts could not enforce payments promised by an employer (and not by the main contractors) to the sub-contractor. Section 30(1) would not be able to provide a remedy to sub-contractors in circumstances where there is a promise by the employer to pay a sub-contractor directly. These sub-contractors remain outside of the ambit of the CIPAA.The doctrine of privity will still prevail in those cases.

In summary, the recently enacted CIPAA, although aimed at solving the issue of payment in construction contracts, does not purport to abrogate the doctrine of privity in cases that involve claims of direct payment by the sub-contractors from the employers under the main contract. The CIPAA is more about providing a statutory right to claim progress payments and settling disputes in a speedy process of adjudication. It does not abrogate the application of the doctrine of privity in a situation where a sub-contractor is denied direct payment as promised by an employer under the main contract.

5.3.5 Contracts Act 1950

Where an agent makes a contract with another person without disclosing he or she is contracting as agent, the agent is said to be making a contract on behalf of his or her undisclosed principal. An undisclosed principal whose identity and existence is unknown to another person is the third party in the contract made between the agent and that other person. As a third party, the principal is prevented from suing on the contract due to the doctrine of privity. Section 184(a) of the Contracts Act 1950 (hereafter

254 referred to as the CA 1950) allows the undisclosed principal to sue for the performance of the contract that was made on his or her behalf: If an agent makes a contract with a person who neither knows, nor has reason to suspect, that he is an agent, his principal may require the performance of the contract; but the other contracting party has, as against the principal, the same rights as he would have had as against the agent if the agent had been principal.

However, if the undisclosed principal’s character, credit or substance is important to the other party, then the undisclosed principal cannot enforce the contract744 as provided in s 184(b):

If the principal discloses himself before the contract is completed, the other contracting party may refuse to fulfil the contract, if he can show that, if he had known who was the principal in the contract, or if he had known that the agent was not a principal, he would not have entered into the contract.

In general, under the law of contract, to be able to sue under a contract made for the third party’s benefit, there must be an agency relationship between the third party and the party to the contract (the agent). The agency relationship could exist by way of express appointment, implied appointment, by estoppel or by the concept of emergency.745 If no agency relationship is created, the third party beneficiary does not possess any rights to sue the parties under the contract for the benefit conferred. It is to be noted that the law of agency as stated in the CA 1950 is a codification of the common law of agency.

5.3.6 Negotiable instruments: Bills of Exchange Act 1949

Section 3(1) of the Bills of Exchange Act 1949 (hereinafter referred to as BEA 1949) defines a bill of exchange as follows:

an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to, or to the order of, a specified person, or to bearer.

744 See also Said v Butt [1920] 3 KB 497 where the court refused to allow the performance of the contract because the principal’s personality was important to the other party who did not wish to contract with the undisclosed principal. 745 Wu Min Aun & Beatrix Vohrah, The Commercial Law of Malaysia (1979), 104-130.

255

There are three parties involved in the transaction of a bill of exchange: a) The drawer (the person who draws up the bill or gives instructions on the bill), b) The drawee (the person responsible for making payment to the payee according to the instructions of the drawer), and c) The payee (the person who is entitled to payment under the bill).

The payee or any other person746 is the third party in the contract entered into between the drawer and the drawee. The contract could be said to be made for the benefit of the third party (the payee) when the drawer instructs the drawee to make payment to the payee. As a general rule, the doctrine of privity operates to prevent the payee from enforcing the contract. Nonetheless, s 38(1) abrogates the doctrine of privity by allowing the payee or any other person who is the holder in due course to sue on the bill in his or her own name. In other words, these third parties are given rights to sue the drawee for default in payment. For example, a cheque is a negotiable instrument and it constitutes a contract between the customer and the issuing bank, whereby the customer directs the bank to pay the amount stated to a third party. The BEA 1949 allows a third party who receives this negotiable instrument to sue on it as though this third party is the original party who negotiated the instrument.

In Yew Chow Fah v Multihorizon Sdn Bhd,747 the High Court, on appeal, had to decide whether a holder of a cash cheque who was not an immediate party to the cheque could enforce payment against the drawer of the cheque which had been countermanded. In this case, the respondent drew a crossed post-dated cheque made payable to cash or bearer and delivered the cheque to Cipta Hikmat Development Sdn Bhd. Subsequently, the respondent countermanded the payment. The cheque then fell into the hands of Yee Teck Fah who negotiated the cheque with the appellant and obtained cash from her in return for the cheque. The appellant presented the cheque for payment and it was dishonoured, having been countermanded by the respondent. The appellant brought an

746 Negotiable instruments are transferable from the payee to another person. 747 [1999] 6 MLJ 175. See also Development & Commercial Bank Sdn Bhd v Brimal Sdn Bhd (Syarikat Oriental Elastic Industries, Third Party) [1991] 3 MLJ 187; Overseas Chinese Corporation Ltd v Woo Hing Brothers (M) Sdn Bhd [1992] 2 CLJ 1050.

256 action against the respondent on the dishonoured cheque. The Magistrate rejected the claim on the ground that there was no privity of contract between the parties, and no consideration was received from the plaintiff. The appellant appealed. In allowing the appeal, the High Court held that the appellant became the holder of the cheque before it was overdue and without notice of the countermand. By virtue of s 38 of the Bills of Exchange Act 1949, the appellant, being a holder in due course, even though she was the fourth party, held the cheque free from any defect of title of prior parties as well as from mere personal defences available to the prior parties among themselves, provided that the holder obtained it in good faith without any notice of its defects. Accordingly, therefore, the appellant was entitled to sue the respondent in her own name.

A holder in due course as stated in s 29(1) is a holder who has taken a bill, complete and regular on the face of it, under the following conditions: a) that he became the holder of it before it was overdue, and without notice that it had been previously dishonoured, if such was the fact; b) that he took the bill in good faith and for value, and that at the time the bill was negotiated to him, he had no notice of any defect in the title of the person who negotiated it.

In Ng Kim Lek v Wee Hock Chye,748 it was held that a holder in due course was not acting in good faith only if he had actual notice of the defects in title or if he turns a blind eye to the obvious. Mere negligence, even gross negligence, in itself is insufficient if the holder does not suspect that something is amiss.

Additionally, anyone who takes a bill from a holder in due course irrespective of whether he or she has given value will have the same rights as a holder in due course. Section 29(3) states as follows: A holder (whether for value or not) who derives his title to a bill through a holder in due course, and who is not himself a party to any fraud or illegality affecting it, has all the rights of that holder in due course as regards the acceptor and all parties to the bill prior to that holder.

748 [1971] 1 MLJ 148, 149 (Syed Agil Barakbah J).

257

5.3.7 Consumer contracts: Consumer Protection Act 1999

The doctrine of privity had been the subject of criticism in common law countries especially in England, which later introduced general legislation giving rights of enforcement to third party beneficiaries in certain circumstances. Malaysia also introduced an important piece of legislation, which is the Consumer Protection Act 1999 (hereafter referred to as the CPA 1999). The promulgation of the CPA 1999 was a major achievement for the consumer protection movement in Malaysia which had been advocating this kind of comprehensive consumer protection legislation for nearly 25 years.749

Although Malaysia already had thirty different pieces of legislation with elements of protection for consumers, none provided comprehensive and specific protection. Some of the Acts were archaic and insufficient to protect the rights of consumers. Economic growth in Malaysia resulted in unfair practices from traders, unnecessary price increases and goods manufactured at poor standards, among other complaints. There was also an imbalance of bargaining power between traders and consumers. After two decades advocating for comprehensive and specific legislation to improve consumer protection, the government finally recognised the importance of such legislation.

The CPA 1999 was based on the UK’s Consumer Protection Act 1987, New Zealand’s Consumer Guarantees Act 1993 and Australia’s Trade Practices Act 1974. The CPA 1999 was aimed at providing for the protection of consumers, the establishment of the National Consumer Advisory Council and the Tribunal for Consumer Claims, and for matters connected therewith. The CPA 1999 established the Consumer Claims Tribunal and the National Consumer Advisory Council which were established in November 1999 and April 2000 respectively. The aim of the Consumer Claims Tribunal was to preside over and expedite the settlement of claims. The National Consumer Advisory Council was to advise the Government on consumer issues as well as promote consumer

749 The movement was led by a consumer group, Federation of Malaysian Consumers Associations (FOMCA) which launched a campaign to acquire 2 million signatures in order to attract the Government’s attention. The consumer movement in Malaysia advocates the rights of the consumer to safety, right to information, right to choice and right to be heard, based on the first consumer rights declaration made by John F. Kennedy in 1961.

258 protection and awareness. The CPA 1999 also intended to protect consumers from unethical business practices and to criminalise fraudulent and misguided conduct.750

The need for the CPA 1999 was not due to the criticisms of the doctrine of privity. Malaysia was not influenced by the reforms of the doctrine of privity made in England, Australia and other common law countries. Despite this, the CPA 1999 relaxed the doctrine of privity in the area of consumer law, unintentionally. Prior to the enactment of the CPA 1999, the consumer had no right to sue the manufacturer if goods purchased were defective due to an act or omission of the manufacturer. Similarly, if a person received goods as a gift from another person, the former had no recourse to return the goods, demand a repair or ask for damages. These persons were considered third parties to the contracts of sales made between the seller and the manufacturer or between the seller and the buyer.

Following the CPA 1999, consumers are in a better position. Among the salient features of the CPA 1999 is that it abolished the ancient rule of privity in sale of goods contract. Section 50 in Part VII of the CPA 1999 provides for a consumer’s right of direct redress against a manufacturer by allowing a consumer to claim against the manufacturer for the breach of certain implied guarantees in Part V751 ( s 31–s 37 and s 38). Section 50 reads as follows:

This Part gives a consumer a right of redress against a manufacturer of goods where (a) the goods fail to comply with the implied guarantee as to acceptable quality under section 32; (b) the goods fail to comply with the implied guarantee as to correspondence with description under section 34 due to the failure of the goods to correspond with a material description applied to the goods by or on behalf of the manufacturer or with the express or implied consent of the manufacturer; (c) the goods fail to comply with the implied guarantee as to repairs and spare parts under section 37; (d) the goods fail, during the currency of the guarantee, to comply with any express guarantee given by the manufacturer that is binding on the manufacturer in accordance with section 38.

750 Parliamentary debate (Malaysian Hansard), DR-27071999, Datuk Seri Megat Junid bin Megat Ayob, Minister of Trade, 8. 751 As to title, acceptable quality, fitness for purpose, compliance with description, compliance with sample, to price, repairs and spare parts and manufacturer’s express guarantee

259

The most crucial effect of this provision is it has abolished vertical privity752 so that injured consumers (buyers and non-buyers) are allowed to “leapfrog”, i.e. sue the manufacturer for the defective goods without the problem of privity. Hence, this new law provides new rights to consumers. In addition, the implied guarantees provided under Part V are deemed to abolish horizontal privity.753 The law now provides both buyer consumers and non-buyer consumers with the benefit of implied guarantees.

Furthermore, Part VI of the Act provides rights and remedies for consumers against suppliers in respect of the implied guarantees.754 Section 39 provides as follows: This Part gives a consumer a right of redress against a supplier of goods where the goods fail to comply with any of the implied guarantees under sections 31 to 37.

When there is a breach of an implied guarantee, the consumer may obtain from the supplier, directly, the following remedies prescribed in s 41(1):

(a) where the failure is one that can be remedied, the consumer may require the supplier to remedy the failure within a reasonable time in accordance with section 42; and (b) where the failure is one that cannot be remedied or is of a substantial character within the meaning of section 44, the consumer may— (i) subject to section 43, reject the goods in accordance with section 45; or (ii) obtain from the supplier damages in compensation for any reduction in the value of the goods below the price paid or payable by the consumer for the goods.

Further, s 41(2) states as follows:

In addition to the remedies under subsection (1), the consumer may obtain from the supplier damages for any loss or damage suffered by the consumer, other than loss or damage through a reduction in the value of the goods, which is proved to be a result or consequence of the failure.

Section 41(3) continues as follows:

Where the supplier refuses or neglects to remedy the failure as required under paragraph (1)(a), or refuses or neglects to do so within a reasonable time, the consumer may—

752 In trade practices, vertical privity and horizontal privity are distinguished. Vertical privity is the privity which each of these persons has with his predecessor and successor in the chain. Horizontal privity is the ensuing privity of contract between the retailer and the first domestic consumer who buys from him, and then between that consumer and any sub-consumer, if such there be. See Macleod, J. K, Consumer sales law. (2007). 753 Ibid. 754 Refer above n 751.

260

(a) have the failure remedied elsewhere and obtain from the supplier all reasonable costs incurred in having the failure remedied; or (b) subject to section 43, reject the goods in accordance with section 45.

Despite the good intentions of the legislature to accord protection to third party consumers, the CPA 1999 is not without limitations. While it appears to confer protection on consumers, the protection is restricted due to the uncertainty created by s 2(4) which states that the CPA 1999 is only “supplemental in nature and without prejudice to any other law regulating contractual relations”. This provision arouses the question whether the abrogation of the doctrine of privity in the application of implied guarantees in supplying of goods under the CPA 1999 is in itself impliedly contrary to Contracts Act 1950 and Sale of Goods Act 1957.

Therefore, in light of this s 2(4), statutes such as the Contracts Act 1950 and the Sale of Goods Act 1957 continue to operate in conjunction with the CPA. Uncertainty can arise where all Acts are capable of application. The CPA 1999 has abrogated the doctrine of privity as it applies to consumer transactions, but the Contracts Act 1950 and Sale of Goods Act 1957755 still require privity to exist before a third party can enforce rights conferred by those Acts.

In addition to the uncertainty surrounding its operation, the CPA 1999 is only applicable to a limited range of goods. If the goods used or bought by the claimant are not covered by the Act, or if the claimant is a “buyer” and not a “consumer”, the claimant will fall under the Sale of Goods Act 1957. Consequently, a claimant who purchases goods not covered by the Act, and is not a “buyer” will be left without recourse other than attempting to establish that a common law exception to the doctrine of privity applies.

Furthermore, the definition of “consumer” in the CPA 1999 is very limited. To fall within the definition, an individual must acquires or uses goods or services for domestic

755 Under the Sale of Goods Act 1957, the buyer has remedies only against the seller and not against the manufacturer. The non-buyer has no recourse under the Act as the non-buyer is not a party to the contract of sale.

261 or household purposes only.756 For example, a consumer purchasing a fax machine or a photocopier may not be covered by the CPA 1999 as fax machines or photocopiers are not ordinarily used for domestic or household purposes.

Prior to the enactment of the CPA 1999, if the third party was a non-buyer consumer, the third party had no rights whatsoever to sue either the seller or the manufacturer for defective products. Similarly, the buyer consumer did not have any rights to sue the manufacturer or the retailer for defective products. The only right possessed by the buyer consumer was to sue the seller. The doctrine of privity prevailed in these conditions. Under the CPA 1999, the position of these consumers changes. It is irrelevant whether the third party is a buyer or a non buyer consumer. To be able to reap the benefit of the CPA 1999, the third party only needs to satisfy the requirement of being a consumer. Otherwise, the doctrine of privity will still apply.

5.4 EFFECTIVENESS OF MALAYSIAN REFORMS

Legislative intervention has resulted in certain types of third parties being exempted from the application of the doctrine of privity in Malaysia. Each of the statutes and provisions discussed above has created statutory exceptions to the doctrine of privity, working alongside the common law exceptions. Nonetheless, it is submitted that the rights are inadequate with disparate approaches, aims and scope and limited application. They are confined to certain types of third parties in certain types of contracts only. Not all types of third parties benefit from these statutes.

In relation to insurance contracts the legislature has enacted the IA 1996. Although the IA 1996 does not contain any provisions of general application conferring rights on third parties in insurance contracts, there are specific provisions conferring rights on selected third parties in certain types of insurance policies. The selected third parties

756 Section 3 defines consumer as a person who a) acquires or uses goods or services of a kind ordinarily acquired for personal, domestic or household purposes, use or consumption; and b) does not acquire or use the goods or services, or hold himself out as acquiring or using the goods or services, primarily for the purpose of – i) re-supplying them in trade; ii) consuming them in the course of a manufacturing process; or iii) in the case of goods, repairing or treating, in trade, other goods or fixtures on land.

262 with the rights to enforce the contracts can be summarised to include legal, illegitimate, step-children and adopted children, legal spouses or natural parents. The rights however are confined to life and accident policies. As for other types of insurance policies, there are no third party beneficiaries who have been granted the right to enforce the benefit of insurance policies. It follows that other types of third party beneficiaries such as unborn children, future spouses, and customary spouses or adopted or step-parents do not obtain any benefit from the IA 1996. Section 23 of the CLA 1956 could be of assistance to a customary spouse as the provision allows for the creation of a statutory trust for customary spouses. Again, the creation of a statutory trust is only for life and accident policies.

In relation to motor insurance policies, s 96 of the RTA 1987 requires the user of a motor vehicle on a road to be insured against certain third party risks. To be able to take advantage of s 96, the injured third party must first obtain judgment sums from the insurer. This necessitates a long wait for the third party before they can be compensated for the pain and suffering resulting from the road accident. Without a judgment, the injured third party is without protection. In addition, s 96 covers third parties in road accident cases only. Furthermore, if the injured third party is an employee (either a driver or passenger), that employee could not take the benefit of s 96.

The most recent legislative intervention in the area of construction contracts is the CIPAA. The importance of the CIPAA is that it introduces a statutory right to claim progress payment with the aim of facilitating regular and timely payments between parties to a construction contract, and a speedy dispute resolution mechanism through adjudication. In addition, it allows direct payment from employers upon default of payment by main contractors. Nonetheless, the CIPAA is not sufficient. Other circumstances may exist where sub-contractors are denied payment for works completed as identified through judicial analysis in Chapter 3.757 Primarily it is the

757 See Chapter 3, [3.3.1.4]; [3.3.1.5].

263 situation where an employer promises to pay a sub-contractor directly,758 but, because of the application of the doctrine of privity, the sub-contractors will fail in a claim to enforce the promise.

In the area of consumer protection, the Malaysian legislature responded to increased emphasis on consumer protection by introducing a long awaited piece of legislation, the CPA 1999, with the aim of improving and protecting the rights of consumers. Consumers at present are given the rights to sue directly the seller, the manufacturer or the retailer of defective products. Again, the rights are not without limitation. To be able to reap the benefit of the CPA 1999, third parties must fall within the definitions in the Act. Additionally, the CPA 1999 co-exists and must be read together with the Contracts Act 1950 and the Sales of Goods Act 1957 which preserve the doctrine of privity. A buyer-consumer in a contract of sale will be subject to the Contracts Act 1950 and Sales of Goods Act 1957, therefore, for the buyer-consumer, the right to sue the manufacturer or the retailer is uncertain as it is not known which Acts prevails in such circumstance.

In the general law of contract, the doctrine of privity is abrogated by the concept of agency as provided for in s 184 of the Contracts Act 1950. For s 184 to apply, an agency relationship must come into existence. If there is no agency relationship created between the principal and the agent, the doctrine of privity still operates.

Furthermore, third parties in negotiable instruments can rely on s 38(1) of the BEA 1949 which confers rights on the payee or other holder in due course to sue the parties to the contract for the promised payment. This provision abrogates the effect of the doctrine of privity, but the benefit is restricted to third parties in negotiable instruments only and not in other types of contracts.

758 See Mahkota Technologies Sdn Bhd v Bina Jati Sdn Bhd [2001] MLJU 749; 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; Fordeco Construction Sdn Bhd v Wong Sin Ten [2008] 1 LNS 854; Artic Building and Civil Engineering Sdn Bhd v Ahmad Zaki Sdn Bhd [2009] 9 MLJ 328.

264

The following table summarises the position for third party beneficiaries in Malaysia. The second column lists the third parties benefitted by the reforms and the third column lists the third parties, identified in Chapter 5, who are not benefitted by the reforms.

Table 5.1: The position of third party beneficiaries under the present legislation in Malaysia

Act Third party beneficiaries covered Third Party Beneficiaries not by the Act covered by the Act Section 166 of the IA a) Spouse (legal spouse), a) Parents of the policy owner (if 1996 b) illegitimate child, there exists a spouse or children c) Step-child, of the policy owner at the time of d) Adopted child (adopted under nomination), any written law in Malaysia or b) Customary spouse, outside Malaysia, and also under c) Step-parents, a custom recognised by a class of d) Adopted parents, persons), and e) Cohabitees, e) Parent of the policy owner if f) Future spouse, there is no spouse or children g) Unborn/future children, existing at the time of h) Other family members, nomination. i) Relatives, j) Friends, *Section 166 is only applicable in a k) Third parties in other types of life and personal accident policy. insurance contracts.

Section 186(3) and s a) Person who has paid the a) Employee/worker who has not 186(4) of the IA 1996 premium to the group policy paid the premium to the group owner (i.e. the policy owner has policy owner. no insurable interest in the life of the person insured)

Section 23 of the CLA a) Legal spouse, a) Illegitimate children, 1956 b) Customary spouse b) Children adopted outside the c) Legitimate children, and Malaysian Adoption Act 1952, d) Legally adopted children (adopted under Malaysian c) Step-children, Adoption Act 1952) d) Parents (including adoptive and *Section 23 only applies to a life and step-parents), personal accident policy. e) Other family members such as siblings, nieces and nephews, f) Other relatives, g) Friends, and h) Third parties in other types of insurance contracts.

265

Section 96 of the RTA a) Injured third party who dies a) Third party who suffers property 1987 or suffers bodily injury, and damage, b) Passenger in a contract of b) Injured employee, and hire or reward or in c) Injured passenger travelling for pursuance of a contract of personal reasons or convenience. employment.

Section 38(1) of the Holder in due course of a negotiable Note: The 1949 Act is applicable to BEA 1949 instrument. negotiable instruments only.

Part V, VI, and VII of Third party who is within the a) Person who buy or use goods the CPA 1999 definition of a ‘consumer i.e. person for business purposes. who buy or use goods for domestic or household purposes.

S 30(1) of the CIPAA Sub-contractor, who entered into a Sub-contractor who has been 2012 contract with main contractor and promised by employer, either upon default of payment by main expressly or impliedly that payment contractor, has a right to claim for sub-contract works will be paid payment directly from employer. directly by employer.

5.5 JUSTIFICATION FOR FURTHER REFORM IN MALAYSIA As the table demonstrates there are still a significant number of third party beneficiaries in Malaysia unable to enforce contracts that contain provisions for their benefit. The reforms implemented are not as extensive as in Australia or England and purport to deal only with narrow classes of contracts and third parties. It is submitted that the existing legislative reforms in Malaysia are inadequate. There are many other types of third parties particularly under insurance contracts that do not benefit from the reforms; for example, third parties in property insurance policies, marine policies and group insurance policies. Despite the existence of the IA 1996, the rights of third parties are not secured due to the shortcomings of the IA 1996. A major setback is s 166 which is limited in application as it only confers rights on the insured’s spouse, child or parents where there is no spouse or child living at the time of nomination. Other categories of third parties such as parents, step-parents, siblings, relatives, future spouses and unborn children are unable to claim the benefit of s 166. Third party beneficiaries in life and accident insurance policies should not be confined to children, spouses or parents only. Other persons, such as siblings, relatives and friends should be allowed to receive the benefit of the insurance money if it is intended by the policy owner. In addition to this,

266 the IA 1996 does not assist third parties under group insurance contracts as the IA 1996 requires third parties to pay their own premium and to have an insurable interest. These requirements are unlikely to be fulfilled for a group insurance policy, as normally it is the employer who pays the premium and who has the insurable interest.

Furthermore, third parties who are not entitled to the benefit of the legislation have to rely on any available common law exceptions in order to be compensated for the loss or injury suffered. For example, under s 91(1)(bb) RTA 1987, passengers who travel for ordinary or leisure purposes and suffer injury as a result of road accidents are excluded from suing the insurer for the injuries sustained. To be compensated for the pain and suffering resulting from the accident, these passengers have to prove negligence. It is often difficult for them to prove the elements of common law negligence. This method certainly does not guarantee success to injured passengers. The cost of the litigation process should also be a matter of concern. And most importantly, in construction contracts, third parties such as sub-contractors who have been promised to be paid directly by employers and suffer loss as a result of the doctrine of privity are left without any legislative protection.

The case law analysed in Chapter 3 clearly demonstrates that an application of the doctrine of privity ignores the clearly stated intention of parties to a contract, fails to deliver a known or intended benefit to a third party despite reliance on a promise or the provision of consideration.759 In insurance contracts, the doctrine of privity defeated the intention of the policy owners of life insurance policies to benefit their families (other than spouses and children) as these persons were not parties to the insurance contracts. The same principle applies to employees in group insurance policies affected by their employers. In nearly all cases the third parties were aware of the existence of the intended insurance moneys and relied on the rights under the policy in the belief that they would be able to claim the insurance money upon the occurrence of a prescribed event. There is also significant uncertainty in relation to the circumstances in which a trust may be imposed. Unless there is reform of the doctrine of privity in insurance

759 See Chapter 3, [3.3.1].

267 contracts, it leaves the courts with no option but to continue to rely upon the trust concept which has proven to yield varying outcomes.

In the construction industry, the impact of the doctrine of privity has caused serious problems in relation to promises made to pay sub-contractors by employers due to the fact that there is no privity between these two parties. Despite the existence of promises to pay the sub-contractors directly, the courts have strictly followed the common law doctrine of privity. Without doubt, the doctrine of privity has caused economic loss to many sub-contractors. The cases analysed in Chapter 3 demonstrate an average loss suffered by sub-contractors in the range of RM60 000 to RM600 000. These amounts, in the context of the Malaysian ringgit, are significant as Malaysian sub-contractors are generally from small enterprises or small companies. Most Malaysian sub-contractors are registered under Class A, B, C, D and F which allow a maximum work value of RM500 000 and a maximum of RM600 000 in paid up capital.760 Being denied the right of payment results in financial and economic losses to the sub-contractors due to the fact that the sub-contractors have completed works but have not been paid. The losses they suffer may be categorised as loss of profit and the loss in completing the work such as the cost of labour and materials used. The amount of loss indicated above cannot be absorbed by these types of sub-contractors and the lack of compensation will cause injustice for them. Unfortunately, the recent enactment of the CIPAA will not be able to resolve all injustices suffered by these sub-contractors.

Not only has the doctrine of privity caused problems in insurance and construction contracts, it also created injustice for third parties in other types of commercial contracts such as in agreements to pay the third party, sale and purchase agreements and tenancy agreements as shown by the case law analysis in Chapter 3. In these instances,761 third party beneficiaries suffer financial loss as a result of being denied the right to enforce promises that confer benefits upon them. The doctrine of privity has operated to disadvantage these third parties, who as a result of being unable to enforce the benefit

760 Information obtained from the Contractor Services Centre (PKK), Ministry of Works at http://pkk.kkr.gov.my, on 19/07/2010. 761 See Chapter 3, 67-70 [3.3.1.1]; Kepong Prospecting Ltd v Schmidt [1968] 1 MLJ 170; Chung Shan Kwang v Ise Ichi Japanese Restaurant Sdn Bhd [2005] 3 MLJ 471; Bacom Enterprises Sdn Bhd v Jong Chuk [2011] 5 MLJ 820.

268 under the terms of the contracts suffer loss. None of the existing Malaysian legislation provides a remedy to the above problems.

It is apparent that the present statutory regime in Malaysia does not resolve the detriment suffered by third parties particularly in insurance and construction contracts. This finding is evidenced by the case law and legislative analysis in Chapters 3 and 5. The position of a third party in Malaysia can be contrasted unfavourably with the position in Australia and England where legislative reforms, particularly in Western Australia and Queensland, vest in third parties the right to enforce an intended contractual benefit. The position is similar in England under the 1999 Act.

Based on the arguments put forward above, it is submitted that reform should be embraced by the Malaysian legislature to prevent further injustice to third parties and fairly allocate rights to parties to a contract and third parties. The list of third parties with rights to enforce the benefits conferred upon them in contracts must be expanded as the current statutory regime caters only for specific third parties in specific types of contracts. Discrimination between third party beneficiaries’ rights should not be allowed. It is essential that any reform improves the legal position of third party beneficiaries. To this end it is argued that reform should not only benefit third parties in insurance and construction contracts but also provide benefits for third parties in other types of commercial contracts.

The reform should be clearly stated to prevent uncertainty and should aim to end the complexity of litigation by avoiding the need for courts to explore possible exceptions. Statutory reform will provide third parties with clarity, commercial convenience and fairness. Malaysia should learn from the statutory reforms that have taken place in Australia and England. Even though the reforms in these jurisdictions are drafted differently, they all have the same objective of enabling third parties to enforce the benefits conferred in a contract, therefore respecting the intention of the contracting parties and providing justice to third party beneficiaries. At this stage, it can be argued that the most appropriate approach to be adopted in Malaysia is the enactment of general legislation and specific legislation targeting particular contracts on the basis of similar third parties affected in each of the jurisdictions examined. The introduction of

269 general legislation can potentially have greater scope to benefit third parties but there is also a need for specific legislation to deal with particular issues relevant to insurance or construction contracts that are different to commercial contracts generally.

The next chapter will propose criteria for effective reform of the privity doctrine in Malaysia based primarily upon principles of distributive and corrective justice and incorporating recognised law reform principles from the Malaysian Law Reform Commission. These criteria will be used to analyse the potential suitability of legislative reforms in Australia and England for adoption in Malaysia. The chapter will conclude with recommendations for effective reform of the doctrine of privity and third party rights in Malaysia.

270

CHAPTER SIX A FRAMEWORK FOR REFORM IN MALAYSIA 6.1 INTRODUCTION

Chapter 5 analysed how and to what extent the Malaysian legislature has already intervened to provide third party beneficiaries with rights under contracts to which they are not parties. Chapter 5 establishes that the existing reforms apply only to discrete contracts and limited types of third party beneficiaries leaving room for further reform to ensure appropriate fairness and avoid injustice.762 The analysis of judicial decisions in Malaysia in Chapter 3 established that third party beneficiaries in insurance and constructions contracts are most affected by the doctrine of privity in Malaysia. A similar analysis of Australian and English decisions in Chapter 3 established that the same groups of third parties are affected by the doctrine of privity in those countries. Despite this similarity, the extent of the reforms in Australia and England are greater in scope than the limited approach to date in Malaysia.

An examination of the legislative reforms in Australia and England in Chapter 4 revealed three potential frameworks for limiting the application of the doctrine of privity to third party beneficiaries:

Chapter 5 concluded with the preliminary recommendation that an appropriate approach in Malaysia is the introduction of a combination of general legislation and specific legislation on the basis that similar third parties are affected in each of the jurisdictions examined. The introduction of general legislation can potentially have greater application to benefit third parties, but there is also a need for specific legislation to deal

762 Refer to table 5.1 in Chapter 5, 265.

271 with particular issues relevant to insurance or construction contracts that are different to commercial contracts generally.

In this chapter the legislative reforms in Australia and England will be analysed to determine their suitability for adoption in Malaysia by reference to proposed criteria for effective law reform. The first part of this chapter will identify relevant criteria for effective law reform in Malaysia based upon principles of distributive and corrective justice. The second part of the chapter will use the criteria to assess the suitability of the options for reform based upon the analysis of the reforms in Australia and England and the final part of the chapter will make recommendations for an effective reform of the doctrine of privity and third party rights in Malaysia.

6.2 CRITERIA FOR LAW REFORM

6.2.1 Relevant considerations for inclusion in criteria

The recently established Malaysian Law Reform Committee (MLRC)763 has declared that before any law will be reviewed or reformed, the paramount criteria to be taken into account are the following:-

a) Public Interest

MLRC will take into consideration to what extent the law is no longer suitable. Reform must be for the benefit of the public at large. Thus, the question that needs to be asked is if the laws were reformed, what are the benefits that the public may enjoy?

b) Suitability

Under this criterion, the MLRC will consider whether the laws are suitable to be reviewed at the particular time. The factors that may affect the suitability include government policy and financial implications.

c) Adequate resources

763 The MLRC was established on 4 December 2009 and it is under the auspices of Malaysian Prime Minister’s Office. Being recently established, the significance of the MLRC is yet to be seen. To date, no major reforms have been proposed by the MLRC.

272

This refers to whether the Government has sufficient financial funding to conduct a particular reform.764

Any effective criteria for reform of the doctrine of privity should also incorporate principles relevant to overcoming the problems identified with the current law. Several other commentators have suggested criteria to underpin a change to the law so that a third party is allowed to enforce a contract. Adams and Brownsword suggest:765

i) The law should be clear, coherent and predictable in its application. ii) The law should avoid commercial inconvenience. iii) The law should avoid injustice and anomaly.

Suzanna suggests that the same principles adopted in England’s reform must be the underlying principles for a Malaysian statutory solution. These principles are as follows:766

i) The intention of the parties to the contract, and ii) The reasonable expectation of third parties in relation to the potential benefits.

Clearly the criteria should be based upon the results of research in relation to the flaws or injustices created by an application of the doctrine of privity. As established by the analysis of the case law in Chapter 3, an application of the doctrine of privity ignores the clearly stated intention of parties to a contract, fails to deliver a known or intended benefit to a third party despite reliance on a promise or the provision of consideration. This has created several problems for third party beneficiaries under commercial contracts including insurance and construction contracts in Malaysia:

764 The explanations on the MLRC criteria were based on the clarification given by Lee Kim Keat, Federal Council, Law Reform Unit, Malaysian Prime Minister Department. Communication was made via email dated 23 June 2011. No blueprints or documents are available for public viewing. 765 John Adams and Roger Brownsword, Key Issues in Contract, (1995), 143 766 Suzanna Isa, 'The Privity of Contract: Third Party Rights under Malaysian Contract Law' (2009) 4(4) The International Journal of Interdisciplinary Social Sciences 185, 191.

273

i) Uncertainty as to the rights of third party beneficiaries. Evidence shows that the courts have adopted different approaches especially in determining the existence of trusts and the use of estoppel in abrogating the privity doctrine. ii) Complexity of litigation as a result of the need to establish exceptions to the doctrine of privity. iii) Disinclination of the courts to develop methods to evade the privity doctrine.

A set of integrated criteria suitable for application in Malaysia will be proposed on the basis of the principles of distributive and corrective justice.

6.2.2 Proposed criteria on basis of distributive and corrective justice

Distributive justice deals with the distribution of rights and entitlements according to a conception of equality or fairness.767 Inequality and unfairness that cause injustice are to be addressed by distributing rights and entitlements according to their respective merits.768 It is also the function of law to restore the balance of justice. Justice needs to be restored when one party realises an unlawful gain and the other suffers a corresponding loss.769 Whenever a person is treated unjustly, the principle of corrective justice should be applied to remedy defects in the law and to restore the rights of the parties in the transaction.770

An important aspect of any reform of the law is therefore a re-allocation of rights to restore justice and fairness. Allocation of rights by giving each person his or her due is a reflection of just and fair law, rendering to each man his rights and due.771 It is therefore proposed that the principles of distributive and corrective justice should underpin the proposed reform.772

In summary, to ensure justice in accordance with these principles and for effective law reform, the proposed legislation must protect third party beneficiaries’ rights and

767 Aristotle, The Nicomachean Ethics (1976). 768 Antonio Estrada, The Philosophy of Law (1970), 96. 769 Ernest J. Weinrib, 'Corrective Justice in a Nutshell' (2002) 52(4) The University of Toronto Law Journal 349. 770 Ibid. See also H.L.A. Hart, The Concept of Law (Second ed, 1994), 163. 771 Antonio Estrada, The Philosophy of Law (1970), 96. 772 J.H. Farrar & A.M. Dugdale, Introduction to Legal Method (1990), 63.

274 provide remedies to those who suffer injustice as a result of the doctrine of privity. Relevant considerations are the principles suggested by Adams and Brownsword,773 the principles for law reform stated by the MLRC774 and the deficiencies in the doctrine as identified by the analysis of the case law in Malaysia. On the basis of these considerations the following three criteria are proposed:

i) The law must provide certainty and clarity as to the rights of parties; ii) The law must have the capacity to benefit and protect the public interest; and iii) The law must allocate rights on the basis of justice and fairness.

The proposed criteria and their application within the Malaysian context are explained below.

The law must provide certainty and clarity as to the rights of parties.

The law should be clear, coherent and predictable in its application. The differences as to entitlements found in judicial decisions and interpretation of legislation has the effect of discriminating between different types of third party beneficiaries. Similar cases produced different results. Given the analysis of Malaysian case law there is a need for reform to introduce certainty and clarity into the law.

As discussed in Chapter 3 and Chapter 5, the present state of Malaysian law in relation to the doctrine of privity and rights of third parties is unsatisfactory. First, the rights of third party beneficiaries are uncertain. The uncertainty arises from the application of common law exceptions and from the different interpretations given to legislation by the judiciary.

In insurance and construction contracts, the most popular common law exception adopted by the Malaysian judiciary for the purpose of avoiding the doctrine of privity is trust. However, the methods and approaches used by the courts in determining the existence of a trust differ and are often inconsistent. This leaves third parties with

773 Refer to 272 [6.2.1]. 774 Ibid 273.

275 uncertainty as to their rights in future cases as it is not easy to predict the outcome of a particular case. This issue is aggravated by the fact that the law of trust is itself in a state of disorder. Further the divergent interpretations of the IA 1996, the CLA 1956 and the RTA 1987 have impeded the efficient operation of the Acts and prevented them from effectively providing affected third parties with rights to enforce the benefits of insurance contracts. For example, the phrase “by a reason of or in pursuance of a contract of employment” in s 91(1)(b) RTA 1987 has been the subject of numerous judicial interpretations. There is conflict regarding whether a claim of property damage under s 91(1)(b) is allowed or whether only a claim in respect of death or bodily injury is allowed.775 Moreover, the inconsistency between the types of third parties who are entitled to benefit from insurance moneys under the IA 1996 and the CLA 1956 aggravate this matter. Uncertainty also arises regarding the application of the CPA 1999 as the CPA 1999 is only supplemental in nature. Other legislation such as the Contracts Act 1999 and the Sales of Goods Act 1957 still apply. These Acts make it compulsory for third parties to establish privity. This makes the future rights of individuals uncertain which is undesirable.

The law must have the capacity to benefit and protect the public interest

The first criterion set out by the MLRC is public interest. Under this criterion, there are two things that need to be ascertained before the doctrine of privity is reformed in Malaysia. First, whether the doctrine of privity is no longer suitable to current developments and secondly the reform must benefit the public at large.

The insurance sector has been an important factor in the economic development of Malaysia. Over the years, the industry has enjoyed remarkable growth in terms of business volume and the momentum is expected to continue with life insurance business

775 The People’s Insurance Co (M) Sdn Bhd v Syarikat Kenderaan Melayu Kelantan Bhd [2001] 1 MLJ 279.

276 projecting a growth rate of 12% in 2011.776 Similarly, in the construction industry, it was reported that the industry registered solid growth in 2009 compared to previous years.777 These two industries have become the backbone of the Malaysian economy and it is important to make certain that the growth is not halted or restricted by laws which are no longer suitable in the context of these industries. The analysis conducted in Chapter 3 reveals that the doctrine of privity has caused sub-contractors to be refused promised payments. Contractors and sub-contractors in the construction industry run on cash and this had been stressed by Lord Denning who stated many years ago that cashflow is the lifeblood of the construction industry.778 The statement is still relevant today. In the construction industry, payment is an issue of paramount concern. This is because, unlike many other industries, the duration of construction projects are relatively long. The size of each construction project is large, each progress payment is often relatively large and payment terms are usually on credit rather than payment on delivery. The payment terms are therefore crucial to contractors and especially to sub- contractors. The strict application of the doctrine of privity is no longer suitable within this commercial environment as it contributes significantly to economic loss and the possibility of bankruptcy of sub-contractors, thereby impacting on the Malaysian economy.

The second requirement is for the reform to benefit the public at large. As discussed earlier779 the doctrine of privity has put third party beneficiaries in an uncertain position as a result of the use of common law exceptions and diverse interpretation of existing legislation. Due to the complexity of litigation, the parties have to bear increasing costs. This is inimical to the public interest.

Adams and Brownsword state that the doctrine of privity has caused commercial inconvenience particularly in commercial contracts including construction contracts and

776 Outlook for the Insurance and Takaful Industry 2011, Malaysia Insurance Online, http://www.malaysiainsurance.info/grapevine/outlook-for-the-insurance-and-takaful-industry- 2011, retrieved 27 June 2011. See also Shazali Abu Mansor and Alias Radam, 'Productivity and Efficiency Performance of the Malaysian Life Insurance Industry' (2000) 34 Jurnal Ekonomi Malaysia, 93-105. 777 Construction Industry Development Malaysia, 'Construction Sector Scenario 2009' (2009), 52. 778 Dawney Ltd v FG Minter Ltd & Others (1971) 1 BLR 16. 779 See Chapter 3 and Chapter 5.

277 contracts for the carriage of goods.780 They refer to these types of contracts as network contracts which involve principal, secondary and tertiary contracts. 781 In most circumstances, network contracts may be accompanied by collateral contracts. A collateral contract may in effect allow a third party to enforce the main contract which is between the parties to the contract. For instance, in a construction contract context, a collateral contract can exist between the sub-contractor and the employer providing that payment to the sub-contractor will be made directly by the employer or providing the employer rights of recourse for defects in the sub-contractor’s performance. It also has been used extensively as a way of extending to subsequent owners or tenants the benefits of a builder’s, architect’s or engineer’s contractual obligations.782 Nevertheless, the practice of using collateral contracts to provide benefits and rights to third parties is inconvenient in terms of drafting and costly.

In Malaysia, the use of collateral contracts to evade the doctrine of privity was recognised in Oriental Bank Bhd v Uniphoenix Corp Bhd783 where Abdul Malik Ishak J stated that “the collateral contract provides a means of avoiding the rule as to the privity of contract” even though no collateral contract was held to exist in that case. 784 Although there are no other reported cases regarding construction contracts which rely on collateral contracts to evade the doctrine of privity, the device is accepted in Malaysia. Reform of the doctrine of privity should eliminate the need to rely on collateral contracts and by eliminating, or at least by reducing, the dependency on collateral contracts, the interest of the public is protected as the cost in drafting the related contract is kept to a minimum.

The need to minimise the use of collateral contracts or collateral warranties is in line with the criterion of suitability outlined by the MLRC. The MLRC will prioritise reform

780 John Adams and Roger Brownsword, Key Issues in Contract, (1995), 143. 781 Ibid 149. 782 England Law Commission, 'Privity of Contract: Contracts for the Benefit of Third Parties' (No. 242, 1996), 45. 783 [2005] 7 MLJ 315. 784 Ibid 332.

278 of the laws legislated before Merdeka.785 The MLRC will also consider other laws that hinder the development of business in the country, as a matter of urgency. 786 The doctrine of privity originated from English common law and dates back to the late 19th century.787 The doctrine of privity has taken root comfortably in Malaysian contract law and its operation can be seen in various judicial decisions.788 However, the doctrine of privity is no longer suitable in an era of economic growth where contracts are more complicated and there are many parties involved. As more parties became involved, the use of collateral contracts became common in the construction industry for the purpose of regulating rights and liabilities amongst the various parties. While it supplements the terms and conditions in the main contract, the disadvantage of using collateral contracts are its cost and inconvenience especially in terms of drafting the contract. This commercial inconvenience can be avoided by reforming the doctrine of privity and therefore the rights and liabilities of the parties to collateral contracts can be regulated directly without the need for separate contracts. The interest of the public would be protected by the reform.

Further for the law to have the capacity to benefit and protect the public interest, the uncertainty and discrimination surrounding the rights of third party beneficiaries need to be resolved. Variations in the availability of exceptions to the doctrine of privity and the narrow impact of existing legislation have the effect of indiscriminately distinguishing between types of third party beneficiaries. The public interest requires that unjustifiable anomalies should be minimised and a level of consistency in the application of the law restored.

The law must allocate rights on the basis of justice and fairness

The final criterion proposed is that the law should allocate rights so as to provide justice and promote fairness. In the context of this thesis, “justice” is about ensuring people

785 Merdeka is a term in Malay which refers to Independence Day. Malaysia gained independence from Britain on 31st August 1957. Any laws legislated before 31st August 1957 are known as pre- Merdeka laws. 786 MLRC official website, http://www.myreform.my, retrieved 28 June 2011. 787 See Tweddle v Atkinson (1861), 121 ER 762, Dunlop Pneumatic Tyre Co Ltd v Selfridge & Co Ltd [1915] AC 847 (HL). 788 The first Malaysian case that adopted the doctrine of privity was Kepong Prospecting Ltd v Schmidt (1968) 1 MLJ 170.

279 receive what they are entitled to and what they deserve.789 Fairness on the other hand is about just treatment to competing claims brought by disputing parties, hence justice as fairness as proposed by Rawls in “Theory of Justice”.790 As law is a tool of justice, the law itself must be just and fair. It is well established that the doctrine of privity has caused injustice and unfairness to third party beneficiaries who are unable to enforce their rights and entitlements in contracts. The analysis in this thesis demonstrates that the common law doctrine of privity is inconsistent with legal theory that aims to give a person what is due to him or her, which includes fulfillment of a promise or repayment of a debt.791 The notion of giving each person his or her due reflects the need for the law to be just and fair, rendering to each man his rights and due. This notion of justice and fairness forms the basic principle of distributive justice which has been discussed earlier.

The current law, particularly in the case of construction and insurance contracts, allocates rights to the parties to the main contract but ignores the intention of the parties to benefit a third party despite reliance on the promise by the third party or the provision of consideration. On the basis of the doctrine of privity, a sub-contractor, despite having undertaken work that benefits the parties to the main contract, will be denied the right to enforce a promise for their benefit in the main contract. The sub-contractor is left to enforce rights to payment under the sub-contract often unsuccessfully. The allocation of rights in this case is clearly inequitable and ultimately results in injustice and unfairness to the sub-contractor. Similarly, under insurance contracts, it is unfair to deny the intention of the policy owner to provide financial security to third parties, especially when the third parties are the policy owner’s parents, siblings or other family members.

These kinds of injustice and unfairness require legal intervention using the principles of distributive and corrective justice. By using the principles of distributive and corrective justice, injustice can be addressed by allocating rights and restoring entitlements according to their respective merits. The failure of the current law to give appropriate recognition to the intention of the parties to the contract is a failure to allocate rights on

789 Hari Chand, Modern Jurisprudence (1994), 257. 790 John Rawls, A Theory of Justice (Revised ed, 1999), 3. 791 J.H. Farrar & A.M. Dugdale, Introduction to Legal Method (1990), 259.

280 the basis of justice and fairness. Indiscriminate application of the exceptions to the privity rule has also resulted in a failure to properly allocate rights between the contracting parties and third parties. Finally, attempts in Malaysia to reform the doctrine of privity only in relation to certain types of contracts and third parties has also arguably failed to properly allocate rights to third parties with similar merits resulting in a failure to fairly allocate rights.

Any reform of the law must therefore eradicate injustice suffered by third party beneficiaries by an appropriate and consistent allocation of rights to third parties. The basis upon which that allocation should occur in order to achieve fairness and justice will be considered further below, but should take into account the factors identified in this thesis (Chapter 3) and in particular:

(a) Did the parties to the contract evince an intention to benefit the third party? (b) Was the third party aware of the intended benefit? (c) Did the third party rely upon the intended benefit and suffer loss? (d) Did the third party provide consideration for the benefit whether to the parties to the contract or not?

Therefore, to resolve the above matters, the proposed law reform must provide certainty and clarity as to the rights of third party beneficiaries, the law must have the capacity to benefit and protect the public interest and the law must provide justice and fairness to third party beneficiaries.

6.3 ASSESSMENT OF REFORM OPTIONS AGAINST THE CRITERIA

It has been established by this thesis that the doctrine of privity in Malaysia needs to be reformed as it produces uncertainty, injustice, commercial inconvenience and complexity of litigation in relation to third party rights especially for third parties in insurance and construction contracts. An examination of the legislative reforms in Australia and England in Chapter 4 revealed three potential frameworks for limiting the application of the doctrine of privity to third party beneficiaries:

281

1. General legislation which abrogates the privity rule for all contracts in certain circumstances. This is the approach reflected in the English 1999 Act; 2. General legislation together with specific legislation abrogating the rule for particular contracts such as insurance and construction. This approach is reflected in the Australian law; and 3. No general legislation only specific legislation for particular contracts. This is the current Malaysian approach.

Chapter 5 concluded with the preliminary recommendation that an appropriate approach in Malaysia is the introduction of a combination of general legislation and specific legislation on the basis similar third parties are affected in each of the jurisdictions examined. The introduction of general legislation can potentially have greater application to benefit third parties, but there is also a need for specific legislation to deal with particular issues relevant to insurance or construction contracts that are different to commercial contracts generally.

The predominant view in the literature and by academic commentators is that the introduction of general legislation similar to the 1999 Act in England is required. Balan, 792 Sakina Shaik Ahmad Yusoff, 793 Suzanna Mohamed Isa 794 and Tan Pei Meng 795 all advocate the reform of the doctrine of privity by the adoption of the principle of jus quaesitum tertio and implementation of the English reforms. While all authors acknowledge the need for reform of the doctrine of privity in Malaysia, the research to date has not analysed the case law to determine the impact of the doctrine on third parties in particular contracts or the impact of current legislation on third parties.

792 Clarence Balan, The History of the Beneficiary Action and the Need for Reform of the Parties- Only Rule in Malaysia (PhD Thesis, St. Clements, 2001). See also Clarence Edwin, 'Will Our Common Law See the Demise of Privity of Contract?' (2000) 4 Malayan Law Journal i. 793 Sakina Shaik Ahmad Yusoff, 'Kontrak Jualan Barang : Doktrin Priviti Sebagai Halangan Tuntutan Pengguna' (2000) 3 Malayan Law Journal cclvii. Suzanna Mohamed Isa, Jus Quaesitum Tertio: Regim Pemakaian di Malaysia (PhD Thesis, National University of Malaysia, 2009). 795 Tan Pei Meng, The Doctrine of Privity in Malaysia: The Need for Reform and the Way Forward (PhD Thesis, Malaya University, 2009).

282

It is submitted, based upon the analysis of the Malaysian case law and legislation in Chapters 3 and 5, that the best overall framework for the Malaysian context is the enactment of general legislation together with specific legislation dealing with specific issues for insurance and construction contracts that are not covered by general legislation for the following reasons:

(i) The analysis of Malaysian case law reveals that similar to the position in Australia and England third parties in commercial contracts generally, including insurance and construction contracts, suffer detriment as a result of the doctrine. The position of third parties in commercial contracts can be addressed by the adoption of general legislation which to an extent may also improve the position of parties in insurance and construction contracts. (ii) The issues for parties to construction contracts arise from an application of the doctrine of privity and from a lack of security for payment by main contractors. These issues can be more conveniently dealt with in specific legislation. (iii) Specific legislation addressing some aspects of the privity doctrine in relation to insurance and construction contracts already exists in Malaysia. Proposing amendments to existing legislation will be a simpler process than proposing new legislation and has the benefit of dealing with specific problems more directly.

Having reached the conclusion that reform of the law in Malaysia requires both the enactment of general legislation and specific legislation the different legislative provisions in each of the comparative jurisdictions will be assessed against the criteria to ascertain their suitability for adoption in Malaysia.

6.3.1 General legislation

Legislative reform applying to contracts generally has been enacted in Australia and England. The suitability of each of the legislative provisions for adoption in Malaysia

283 will be assessed against the criteria developed and necessary amendments to improve the suitability highlighted.

6.3.1.1 Western Australia

The doctrine of privity in Western Australia is altered by s 11 PLA 1969 which provides for a third party to be able to enforce the benefit conferred by a contract on that party. The operation of s 11 is summarised in Chapter 4.796 For the purposes of the analysis, s 11 applies where:

(i) A party is either named in a contract or identified by description or a class; (ii) The contract confers a benefit upon the person (iii) Provided that the third party can only enforce a benefit if all parties to the contract are joined to the proceedings.

A number of deficiencies in s 11 were identified after analysis of the case law: a. Many elements were left to the courts for interpretation. Adopting similar legislation would invite uncertainty in its application as the courts may vary in interpreting the applicability of the provision. b. The section does not clearly articulate the ways in which a third party may be identified in the contract leaving it to courts to interpret the phrase “persons who are not named as party to the contract”. c. The question of defences is not dealt with in the section. This leaves open the question of whether a third party right can be defeated by conduct of a party to the contract. It is unclear whether some wrongful conduct by the third party could also render the third party’s right void, voidable or unenforceable. d. The section does not apply to future third party beneficiaries such as unborn children, future spouses and bare nominees as envisaged in The Bell Group Ltd (in liq) v Westpac Banking Corporation [No 9]797 where it was held that the beneficiary can be ascertained by reference to an existing and identifiable class or if the

796 146 [4.3.1]. 797 [2008] WASC 239.

284

beneficiary answers a particular description expressly referred to or identified in the contract. e. There is uncertainty as to whether s 11 applies to third party beneficiaries in cases concerning exemption clauses.

Taking into account the identified deficiencies the suitability of s 11 for adoption in Malaysia will be assessed against the criteria.

Criterion 1: Certainty and Clarity

The law should be clear, coherent and predictable in its application. As discussed, the wording of s 11(2) is potentially too general and simple leaving it open to varying interpretations by the courts and resulting in uncertainty and inconsistencies in application. Although the simplicity may avoid rigidity in application, giving more chance for third party beneficiaries to enforce the rights conferred in a contract, this also means that such rights are decided by the judiciary leading to differing interpretations. The position of a third party who is not specifically named in the contract is not clear. While some case law suggests that a third party described by reference to characteristics or a particular class will be able to utilise s 11, other case law, particularly in relation to incidental beneficiaries798 suggests that the rights are unclear. To ensure certainty and clarity of third party rights, the proposed Malaysian reform must specifically identify whether third parties must be named or can be described by characteristics or class in order to take advantage of the provisions.

Moreover, s 11(2) of the PLA 1969 requires the contract to confer a direct benefit by virtue of its terms directly on a third party. The result of this provision is that a narrower class of third parties is able to take advantage of the provision with the result that courts are forced to resort to the use of a trust if it wishes to allow a third party to claim a benefit under a contract where the intention is clear but an express term does not exist. The uncertainty in the application of trust to the rights of third party beneficiaries would therefore continue despite the reform.

798 Visic v State Government Insurance Co Ltd (1990) 3 WAR 122.

285

Criterion 2: To benefit and protect the public interest

This criterion requires that unjustifiable anomalies should be minimised and a level of consistency in the application of the law restored. As discussed in the case and legislative analysis there are a number of circumstances where the right of a third party under s 11 will depend on the clarity of the terms of the contract either in specification of the party or the benefit conferred.

As s 11(2) is unable to provide consistency in application to parties of equal merit it is submitted that the reform does not sufficiently benefit and protect the public interest. Certainty in the law is one of the most important elements in national as well as international laws which hold that the law must provide the public with the ability to regulate their affairs and conduct them with certainty. Therefore, potential third party beneficiaries must know precisely the circumstances in which they can legally enforce the benefits conferred upon them by the parties to contracts to ensure they can conduct their affairs efficiently. Section 11(2) of the PLA 1969 fails to guarantee certainty.

Criterion 3: Justice and Fairness

The law should allocate rights so as to avoid injustice and promote fairness. Parties with the same merits should be treated equally by the law. Any reform of the law should eradicate injustice suffered by third party beneficiaries by an appropriate and consistent allocation of rights to third parties. It is submitted that in the context of the doctrine of privity that an allocation should take into account the factors identified in this thesis (Chapter Three) and in particular:

(a) Does the law give effect to the clear intention of the parties to benefit a third party or class of persons? (b) Was the third party aware of the intended benefit and relied upon it? (c) If consideration was provided for the benefit should the third party be in a better position?

Arguably section 11 to an extent fails to give effect to the intention of the contracting parties by not recognising the rights of an incidental beneficiary to claim the benefit

286 intended to be given in a contract. In Visic v State Government Insurance Co Ltd799 a group insurance policy was interpreted as providing indemnity only to the employer and not to the employees. Although the employees were indirectly benefited by the policy, there was not direct right to claim against the insurance company. This approach arguably does not provide a fair and just allocation of rights to the employees. On the basis of the criteria above the employees who were obviously intended to ultimately have the benefit of the insurance money, relied upon the policy and failed to effect their own insurance and provide services to the employer should be entitled to enforce that right in the same way as a party who happened to be named or described in the policy. Malaysian courts have to date tended to employ the concept of trust in order to established rights for employees. Therefore, if Malaysia was to adopt s 11 of the PLA 1969, the employees in group insurance policies would still be unprotected unless a trust could be found.

Similarly an allocation of rights should not distinguish between classes of person with similar merits. Section 11, it is submitted unjustifiably distinguishes in the case of insurance contracts between third party beneficiaries who are in existence and those who are non-existent but ascertainable by reference to a class at the time the contract was made, for example, unborn children, future spouses and nominees. A further example is provided in the context of the construction industry where it is common practice for a sub-contractor to be replaced by another sub-contractor if the former fails to deliver the work according to the terms of contract. The latter will obviously not be able to benefit from the application of s 11(2) PLA 1969 in circumstances where the employer promised to pay directly the original sub-contractor as the latter is not in existence or contemplated by the contract at the time the promise was made. The substituted sub-contractor would be unable to recover any financial loss suffered from the employer. Section 11(2) also discriminates against a substituted sub-contractor who is arguably in no different position to the original contractor.

On the basis of this analysis it is submitted that s 11(2) should not be adopted in Malaysia as it does not provide sufficient certainty to third parties in relation to their

799 (1990) 3 WAR 122. Refer to Chapter 4, 151.

287 rights or allocate rights fairly to avoid discrimination between parties with similar merits. The detriments suffered by third party beneficiaries would not be remedied.

6.3.1.2 Queensland

The reform in Queensland’s Property Law Act 1974 by contrast is more specific than the Western Australian reform. Section 55 applies where a promisor for valuable consideration moving from the promisee, promises to do something or not to do something for the benefit of a third party, then upon acceptance of that promise by the third party, is enforceable against the promisor. There is no requirement for the contract by its terms to expressly confer a benefit and a broad definition of ‘beneficiary’ is provided in s 55(6). It is submitted that while s 55 provides more certainty for third party beneficiaries it has a number of limitations as follows: a. The dual intention requirement that the agreement must be intended for the third party’s benefit and it also must be intended that the third party be entitled to enforce that benefit is complex. Not all types of third party beneficiaries can satisfy this dual test.800 b. Third party beneficiaries who are unable to fulfill the requirement of acceptance of the promise would not be able to benefit from the reform. c. Consideration from the promisee of the contract is necessary; otherwise, the third party beneficiaries cannot enforce the benefit under s 55. d. Third party beneficiaries who are not capable of proving the intention to create legal relations also could not benefit from s 55. Thus, certain family or social arrangements to benefit the third parties are excluded from the operation of s 55. e. There is also uncertainty as to whether s 55 applies to third party beneficiaries in exemption clause cases.

Criterion 1: Certainty and Clarity

800 See cases such as National Australia Bank Ltd v Hart [2002] QSC 051; Davies v Archer Newsagency Rockhampton (unreported, Qld SC); Sorbello v Sorbello [2005] QSC 219.

288

The law should be clear, coherent and predictable in its application. The reform in s 55 is more specific in its application. For example, it is clear from the definition of ‘beneficiary’ in s 55(6) which third parties are benefited by the section. Arguably another aspect of clarity in the legislation is that only third parties who know of the benefit and have accepted it can take advantage of the section. The specificity in the legislation has ensured that less divergence of opinion has arisen in the courts in relation to the application of the section. Section 55 therefore satisfies the criteria of certainty and clarity.

Criterion 2: Benefit and Protect Public Interest

Criterion 3: Justice and Fairness

Section 55 purports to apply to a wide range of third party beneficiaries and includes beneficiaries not named in the contract as long as at the time of acceptance, the third party beneficiaries are identified and in existence. That person may not have been identified or in existence at the time when the promise was given. Therefore unlike s 11 PLA 1969, in the case of insurance contracts, unborn children and future spouses could take advantage of section 55 to enforce an insurance contract. To this extent, s 55 eliminates or at least reduces the discrimination inherent in the current regime in Malaysia.

Aspects of s 55 however that do not contribute to a just and fair allocation are: (i) the requirement for a dual intention test; and (ii) the requirement for acceptance of the benefit within a reasonable time.

As discussed in Chapter 4, s 55 PLA requires that the agreement must be intended for the third party’s benefit and it also must be intended that the third party be entitled to

289 enforce that benefit. This hurdle may prove difficult for all third party beneficiaries to satisfy, not through any fault of the third party but as a result of the poor drafting of a contract by the parties.

Further, the requirement of acceptance in s 55(6)(a) means that third party beneficiaries who are unaware of the existence of the benefit or whose type of communication of acceptance is considered insufficient by the courts will not obtain the benefit of s 55. One response may be that this is fair because a third party should not be entitled to enforce a benefit of which they are unaware. The opposite view is that the imposition of a requirement for acceptance imposes a further unjustified barrier for the application of the section to third parties that does not appear in other jurisdictions. If the requirement for acceptance is maintained a mechanism whereby the contracting parties are obliged to inform third parties of the existence of the promise may improve the position.

In the context of sub-contractors, there are a number of difficulties with the application of s 55 PLA 1974. First, similar to the point above, a sub-contractor is unlikely to be aware of a promise to benefit the sub-contractor in the main contract. A sub-contractor may never accept the benefit, because they are unaware of its existence. Secondly, an employer when making the promise to pay the sub-contractors must have an intention for the sub-contractors to be able to sue the employer when there is a default in payment.801 This again is unlikely to be fulfilled as there is a clause in the standard form contract that is widely used in Malaysia which clearly states that employers shall not be liable in any way to sub-contractors.802 Even if no standard form of contract is involved, it is also doubtful that an employer would intend that a sub-contractor would be able to sue to recover payment. Sub-contractors are therefore likely to fall outside the ambit of s 55 PLA 1974. Section 55 would therefore by itself fail to provide a fair reallocation of rights and restore justice to third party beneficiaries in construction contracts if applied to the Malaysian context.

801 Section 55(6)(c)(ii). 802 Clause 27(f) states: Neither the existence nor the exercise of the foregoing powers nor anything else contained in these Conditions shall render the Employer in any way liable to any nominated sub-contractor.

290

In summary, the Queensland legislation may be suitable for adoption in Malaysia with a number of amendments to ensure a fair and just allocation of rights to third parties.

6.3.1.3 England

England’s 1999 Act has also improved the position of third party beneficiaries. With the enactment of the 1999 Act, the rights of third party beneficiaries in insurance contracts (for example, in life insurance contracts, medical insurance contracts and liability insurance contracts) have been strengthened and the need to rely on common law exceptions is reduced. On the other hand, in the construction industry, the 1999 Act does not solve the issues surrounding security of payment to sub-contractors by main contractors or employers

Like the reforms that took place in Queensland and Western Australia, the 1999 Act also is not without its flaws as pointed out by several authors. These authors have discussed difficulties that might be produced by the application of the 1999 Act due to the lack of judicial decisions interpreting its provisions.803 In summary, the problems identified in the operation of the 1999 Act were as follows:

i) Difficulties in differentiating a contract which results in a benefit to a third party (yet is not a contract directly benefitting the third party) from a contract that confers a benefit on the third party.804 The former is excluded from the scope of the 1999 Act. ii) The phrase “term of the contract” as set out in s 1 of the 1999 Act means that in a contract which contains many terms that confer benefit on a third party, each of the terms must satisfy the conditions prescribed in the 1999 Act.

803 For example, Robert Stevens; Andrew Phang; T. M. Yeo; Catharine MacMillan; John N. Adams; Deryck Beyleveld; Roger Brownsword; Andrew Tettenborn. 804 The difficulty was predicted due to the wording in s 1(1)(b) of the 1999 Act which is “term purports to confer a benefit on the third party.” It is a matter of construction to determine whether the term purports to confer a benefit on the third party.

291

iii) The right of enforceability granted to third party beneficiaries is subject to any other relevant terms of the contract whereby parties to the contract may attach conditions or limit their liabilities to third parties.805

Criterion 1: Certainty and Clarity

The 1999 Act is comprehensive. The rights are clearly defined. Unlike the Western Australian and Queensland models which do not define “benefit” in their legislative reforms, the 1999 Act clearly explains that the benefit can be in the form of a positive benefit (for example, a gift) or in the form of the provision of an exclusion or limitation of liability. By this, the uncertainty surrounding the question of whether third parties such as stevedores and agents may benefit from exclusion clauses within a contract is addressed by the 1999 Act. Chapter 4 demonstrated that the 1999 Act improved the position of third party beneficiaries in cases such as life insurance contracts, medical insurance contracts and liability insurance contracts.806 The first limb of the intention test set out in s 1 of the 1999 Act807 is clear, straightforward and not difficult to fulfil. Anyone who is expressly identified by name, as a member of a class or by a particular description in the insurance policy as a beneficiary can enforce the benefit under the 1999 Act. The second limb of the intention test808 eliminates the need to use the concept of trust to circumvent the doctrine of privity as the courts only need to decide whether the term intended to confer a benefit on the third party in question.

Criterion 2: Benefit and Protect the Public Interest

As the 1999 Act provides for clear, coherent and more predictable third party rights, the public at large would be able to conduct their affairs efficiently and with commercial certainty. Under the 1999 Act, it can be clearly seen who is to benefit from the contract and in what circumstances the right to enforce the benefit is revoked or varied. The scope of the 1999 Act is wide enough to cover most types of third party beneficiaries. The types of third party beneficiaries who do not fall within the ambit of the 1999 Act

805 1999 Act s 1(4). 806 See Chapter 4, 222 [4.5.1.2]. 807 The first limb is “the contract expressly provides that the third party may.” 808 The second limb is “the term of the contract purports to confer benefit.”

292 are clearly stated in s 6. The wide scope of the 1999 Act will benefit more third party beneficiaries and the public also could be assured that the people they intended to benefit can enforce the benefit conferred.

Further, the wide scope of the 1999 Act eliminates the discrimination which currently exists in Malaysia. Any type of third parties, for example, unborn children, future spouses, customary spouses, adopted parents, consumers, stevedores and agents could benefit from this model of reform.

Criterion 3: Justice and Fairness

The provision of a just law is crucial for sub-contractors in the construction industry. This criterion does not carry much weight for third party beneficiaries in the insurance industry under life insurance policies as they do not usually suffer financial loss as a result of the doctrine of privity. It could be said that the 1999 Act is a fair model to third party beneficiaries in the insurance industry as the 1999 Act allows them to enforce the benefit in insurance policies despite the fact that they may not suffer any financial loss if they were to be denied the benefit.

However, sub-contractors who have suffered financial loss would be denied justice under the 1999 Act. Robert Stevens809 and Jane Jenkins and James Duckworth810 argue that the 1999 Act has less impact in the construction industry as the industry has excluded the 1999 Act in their standard form contract.811 This has the effect of denying sub-contractors the right to enforce the payment as promised by the employers (if any). Andrew Burrows 812 who is on one of the committees of the England Law Reform Commission explains that the benefits of the 1999 Act to the construction industry are as follows: i) to replace collateral warranties given by an architect or engineer or contractor to, for example, a subsequent purchaser or lending institution, ii) B (head

809 Robert Stevens, 'The Contracts (Rights of Third Parties) Act 1999' (2004) 120 (APR) Law Quarterly Review 292. 810 Jane Jenkins and James Duckworth in Robert Merkin, 'Privity of Contract the Impact of the Contracts (Rights of Third Parties) Act 1999' (First ed, 2000), 207. 811 Association of Consulting Engineers and the Joint Contracts Tribunal (JCT). 812 At the meeting in Oxford of the Society of Construction Law, 25 May 2000.

293 contractor) excludes or limits liability in negligence to A (employer) of B and B’s agents, servants, employees and sub-contractors, and iii) A (employer) agrees to indemnify B (head contractor) and sub-contractors against liability to others in the carrying out of construction work for A. The list does not include payment to sub- contractors.

The 1999 Act does little to assist sub-contractors as far as payment is concerned. The 1999 Act allows employers to assert that the contracting parties did not intend the direct payment provisions to be enforceable by sub-contractors.813 Another important aspect of the 1999 Act is that it fails to resolve the issue which arose in British Eagle International Airlines Ltd v Compagnie Nationale Air France, 814an insolvency case concerning priority of creditors in a company winding up. In this case, a number of airlines agreed to set up a clearing house system, the object of which was to provide a procedure for the monthly settlement of debts and credits arising when members performed services for one another in the carriage of passengers and cargo. Under the regulations, the airlines could not claim payment directly from one another and could only claim from the clearing house the balance due to them. The plaintiff, British Eagle went into liquidation and the liquidator claimed against the defendant, Air France, sums which it claimed were payable by it to British Eagle. Air France, relying on the clearing house agreement refused the claim. The House of Lord held that the liquidator was entitled to recover payments and that the effect of the scheme was to provide for the distribution of assets in a manner other than that provided for in the Companies Act 1948, which is in breach of the pari passu principle,815 and that an agreement which had such an effect was contrary to public policy and thus void.

The House of Lord’s decision raised doubt as to the legality of direct payment provisions set out in main contracts in the event of insolvency of the main contractor.

813 The 1999 Act s 1(2). 814 [1975] 1 WLR 758. See also Re Right Time Construction Co Ltd (in liquidation) (1990) 52 BLR 302. 815 This refers to the rule whereby all unsecured creditors rank equally. The principle prohibits preferential treatment of any unsecured creditor over another. In the context of construction law, sub-contractors are unsecured creditors and therefore should not be treated above other unsecured creditors.

294

Prior to this decision, there were cases that had upheld direct payment provisions in construction contracts on insolvency of the main contractors. In Re Wilkinson, ex parte Fowler816 and later in Re Tout and Finch Ltd,817 clauses permitting an engineer and an employer respectively to make payments directly to sub-contractors were held to amount to irrevocable authority given by the contractors to dispose of the funds in favour of the sub-contractors.818

In summary, the principle of pari passu in insolvency law upheld in the case of British Eagle International Airlines Ltd v Compagnie Nationale Air France,819 runs contrary to direct payment provisions in construction contracts. While direct payment provisions promise payment directly to sub-contractors, who are unsecured creditors, thus bypassing all other unsecured creditors, the pari passu principle makes direct payment provisions void for being contrary to the public policy. 820 Thus, in circumstances whereby sub-contractors were held to be entitled to enforce direct payment provisions against the employers, there remains the difficulty raised by the British Eagle International Airlines Ltd v Compagnie Nationale Air France,821 and this issue will

816 [1905] 2 KB 713. 817 [1954] 1 WLR 178. 818 However, these two cases involved the moneys in the retention fund and the courts observed that the doctrine of privity should not prevent the courts from granting sub-contractors relief by way of declaratory orders. Discussions of the pari passu principle were not made in these two cases. 819 [1975] 1 WLR 758. 820 The same position applies in Malaysia by virtue of s 264 of the Companies Act 1965 which reads: “Subject to the provisions of this Act as to preferential payments the property of a company shall, on its winding up, be applied pari passu in satisfaction of its liabilities, and subject to that application shall unless the articles otherwise provide be distributed among the members according to their rights and interests in the company. This section must be read together with s 53(1) of the Bankruptcy Act 1967 which declares: Every conveyance or transfer of property or charge thereon made, every payment made, every, obligation incurred and every judicial proceeding taken or suffered by any person unable to pay his debts, as they become due, from his own money in favour of any creditor or any person in trust for any creditor shall be deemed to have given such creditor a preference over other creditors if the person making, taking, paying or suffering the same is adjudged bankrupt on a bankruptcy petition presented within six months after the date of making, taking, paying or suffering the same and every such act shall be deemed fraudulent and void as against the Official Assignee.” See also a Singaporean case (reported in the Malayan Law Journal), Joo Yee Construction Pte Ltd (In Liquidation) v Diethelm Industries Pte Ltd [1990] 2 MLJ 66 where direct payment has been made by the employer to the nominated sub-contractor when the main contractor went into liquidation. The main contractor’s liquidator approached the court for direction whether the employer could pay the sub-contractor directly. It was held that the direct payment made by the employer was void and contrary to the principle of pari passu. 821 [1975] 1 WLR 758.

295 arise where payments are made following the main contractor’s insolvency.822 The 1999 Act fails to answer this and the question still remains whether the sums payable are the property of the main contractors or whether the sub-contractors’ entitlement is conditional only upon the main contractor complying with the provisions of the contract in making payments to the sub-contractors.823

Hence, it can be said that the benefit of the 1999 Act does not extend to sub-contractors in relation to recovery of monies owing. General legislation aimed at reforming and enhancing the rights of third parties is unlikely to provide a suitable remedy for sub- contractors who have been denied payment from their employers. As shown in the case of British Eagle International Airlines Ltd v Compagnie Nationale Air France,824 the issue of direct payment to sub-contractors is not straightforward. In circumstances where the main contractor become insolvent, there are matters under insolvency law which need to be resolved, for example, the issue of direct payment provisions and the pari passu principle. The unique nature of the construction industry requires specific and targeted legislative reform tailored to its own specific needs.

In conclusion, the 1999 Act is suitable for adoption in Malaysia with an ability to provide a fair and just allocation of rights to third parties in insurance contracts and other commercial contracts, except for sub-contractors in construction contracts.

822 Recently, the English court started to pay attention to a Scottish case, Brican Fabrications Ltd v Merchant City Developments [2003] BLR 512 where it was found that an arrangement by a developer to pay a sub-contractor directly was enforceable. The Court held that there was an agreement between the sub-contractor and the developer that had a suspensory clause, meaning that the agreement would not become active until the contractor assented to the existence of the arrangement. The contractor did assent and the sub-contractor entered into a sub-contract with the contractor. All went well with the developer paying the sub-contractor directly until after the sub-contract works were complete. It was at this point that the contractor went into liquidation and developer refused to pay the outstanding balance owing to the sub-contractor. The Court held that the sub-contract could not vary the terms of the pre-existing contract for direct payment and the obligation to pay the sub-contractor was not contingent on the payment mechanism in the sub-contract being available for use. The liquidation of the contractor made no difference to the obligation to pay the sub-contractor. 823 Jane Jenkins and James Duckworth in Robert Merkin, 'Privity of Contract the Impact of the Contracts (Rights of Third Parties) Act 1999' (First ed, 2000), 207. 824 [1975] 1 WLR 758.

296

An examination of the requirement and suitability of specific legislation will be discussed below.

6.3.2 Specific Legislation

In Australia specific legislation has been enacted to abrogate the privity doctrine for insurance contracts and construction contracts.

6.3.2.1 Insurance Contracts Act 1984 (Cth) Other than the general legislation adopted by Western Australia and Queensland, as far as the doctrine of privity is concerned, in Australia, the position of third party beneficiaries in insurance contracts is fortified by s 48 of the Insurance Contracts Act 1984 which has the effect of granting a statutory right to third party beneficiaries in a contract of general insurance to recover the amount of loss directly from the insurer if that person was specified or referred to in the contract of insurance taken out between the insured and the insurer.

In contrast to s 11 PLA 1969 and s 55 PLA 1974, the operation of s 48 of the Insurance Contracts Act 1984 poses the least difficulty. Section 48 has not resulted in problems of interpretation except:

a) s 48(3) which requires legislative intervention to clarify the uncertainty surrounding the issue of defences available to the insurer in circumstances where there has been non-disclosure of material facts by the insured. The courts have been divided as to the correct interpretation.

Other than this dilemma, third party beneficiaries in insurance contracts have benefitted significantly from this reform.

Criterion 1: Certainty and Clarity

The law should be clear, coherent and predictable in its application. The reform in s 48 is more specific in its application. For example, it is clear from s 48(1) which third parties are benefited by the section i.e. persons specified or referred to in the contract of

297 insurance taken out between the insured and the insurer. Section 48 therefore satisfies the criteria of certainty and clarity.

Criterion 2: Benefit and Protect Public Interest

The second aim of the law should be to benefit the public interest. This can be achieved by removing unjustifiable anomalies in the law and ensuring consistency in application of the law. An analysis of the case law concerning s 48 of the Insurance Contracts Act 1984 did not reveal any significant anomalies in interpretation or application. Section 48 is limited in application to insurance contracts and is not capable of applying to different contexts in which the doctrine of privity applies. Therefore it is not capable of providing a benefit and protecting the interest of the public at large. Other categories of third parties, especially sub-contractors are not within the ambit of protection offered in s 48.

Criterion 3: Justice and Fairness

It is obvious that s 48 of the Insurance Contracts Act 1984 only provides rights to third parties in insurance contracts. To adopt this model in Malaysia would mean that other types of third parties as identified in Chapter 3 and 5 would not be able to reap the benefits of the reform. In this respect, s 48 alone is not capable of providing justice to third party beneficiaries, i.e. sub-contractors in construction contracts as well as other third parties in other types of commercial contracts.

In summary, if this specific reform in insurance contracts is to be embraced in Malaysia, no doubt it will improve the position of third party beneficiaries such as parents, nephews, siblings, family members and friends who are not covered under s 166 of the IA 1996. But as discussed in Chapter 5, there are other types of third parties such as passengers in road accidents or consumers who do not fall under the IA 1996, who have been deprived of the right to recover the loss they suffered by the doctrine of privity. To this extent, s 48 alone is not capable of providing non-discriminatory reform in Malaysia. To undertake specific reform in the insurance industry only would not satisfy the other criteria of protecting the public interest and providing justice and fairness to other types of third party beneficiaries.

298

Thus, it is suggested that to introduce a similar provision in the IA 1996 is not recommended. Sweeping reform of the doctrine of privity must take place in Malaysia to provide certainty, benefit the public interest and ensure fairness for all types of third party beneficiaries. By introducing a general legislation based on England’s 1999 Act, not only will third parties in insurance contracts, but also other types of third parties for example, passengers in road accident cases and consumers be able to enforce the benefit in the contracts. Anyone who is expressly identified by name, as a member of a class or by a particular description in the contracts as a beneficiary of a term intended to confer a benefit on the third party in question can enforce the benefit under the 1999 Act.

6.3.2.2 Subcontractors Charges Act 1974 (Qld)

Prior to the amendment in 2002, Queensland’s SCA 1974 caused a number of difficulties which have been highlighted by a series of Supreme Court decisions.825 The courts faced difficulties in interpreting several provisions due to unclear wording adopted in those provisions. In 2002, the SCA 1974 was amended to clarify the ambiguity surrounding the wording of the relevant provisions. In spite of the amendment, the SCA 1974 is considered to be ineffectual. It is submitted that the SCA 1974 has a number of limitations: a) The SCA 1974 could not be used in the event of the bankruptcy of a main contractor who has already been paid by the owner. b) Sub-contractors can only benefit from the SCA 1974 if there is money owing by the employers to the main contractors. c) Actual application of the SCA 1974 has proved that there had been delay in proceedings which made it expensive to pursue a remedy under the SCA 1974. This

825 For examples, see Dowstress (Qld) Pty Ltd v The Mission Congregation Servants of the Holy Spirit [1987] 1 Qd R 150; William Andrew Pty Ltd v Santalucia [1985] 1 Qd R 349; Re DA Story Pty Ltd [1993] 2 Qd R 355; Transfield Pty Ltd v Fondside Australia (receivers and managers appointed)(in liq) [2000] QSC 480; Hewitt Nominees Pty Ltd v The Commissioner for Railways [1979] Qd R 256; Hamilton Australia Pty Ltd v Milson Projects Pty Ltd [1997] 2 Qd R 355; Re Radair Pty Ltd [1998] 2 Qd R 539 in Chapter 4, [4.3.4.2].

299

has forced a significant number of sub-contractors not to proceed with actions initiated.826 d) The procedural requirements prescribed in the SCA 1974 is a setback to sub- contractors due to building contractors who are determined to identify technical issues, no matter how small, in an attempt to delay or avoid payments to sub- contractors. This could mean that a significant number of sub-contractors will continue to find any attempt to rely on the provisions of the SCA 1974 to be a very frustrating and costly experience.827

In short, it can be concluded that though the objective of the SCA 1974 is to allow sub- contractors to obtain payment directly from employers (rather than main contractors) by placing charges on the money payable to the main contractors, the actual application of the legislation renders the SCA 1974 undesirable.

Criterion 1: Certainty and Clarity

As a result of the amendment in 2002, the SCA 1974 is able to provide certainty and clarity in relation to the right of sub-contractors to recover payment from employers by placing a charge over money payable to the main contractors. The wording of the relevant provisions, for example, the term ‘work’ in s 3 was clarified and the scope of ‘work’ has been extended to the effect that more categories of sub-contractors can take advantage of the provisions in SCA 1974. The amended SCA 1974 also is more detailed thus promoting certainty as courts are left with fewer tasks of interpretation.

Criterion 2: Benefit and Protect Public Interest

While s 5 of the SCA 1974 provides a benefit and protects sub-contractors’ interests by allowing them to place charges over money payable to main contractors, the legislation as a whole attracts concern and fear over its effectiveness in balancing the sub- contractors’ rights and other parties’ rights. The fact that the SCA 1974 allows sub- contractors to lodge charges and freeze builders’ cash flow creates anxiety among the

826 Queensland Building Services Authority, 'Security of Payment Discussion Paper' (Queensland Building Services Authority, 2001), 18. 827 Ibid 22.

300 builders as this could cause them to experience a degree of financial difficulty in performing their contractual obligations. As for sub-contractors, the procedural and technical aspects of the SCA 1974, which must be fulfilled in placing charges mean that any defects in the charges, no matter how small the defect is, would render the charges void ab initio.

Moreover, the main limitation on the applicability of the SCA 1974 is that the Act applies only if there is money payable to a main contractor over which a charge can be claimed. This condition is not desirable for sub-contractors generally as in most circumstances, the main contractor becomes insolvent and this would create a reason for employers not to pay the main contractors. In that case, a sub-contractor will not have the right to claim a charge as there is no money payable to the main contractor.

Criterion 3: Justice and Fairness

It is obvious that the SCA 1974 only provides rights to sub-contractors in construction contracts. To adopt this as the only solution in Malaysia would mean that other types of third parties as identified in Chapter 3 and 5 would not be able to obtain the benefits of the reform. The SCA 1974 alone is not capable of providing justice to third party beneficiaries in insurance contracts as well as other third parties in other types of commercial contracts.

In conclusion, it is recommended that Malaysia should enact general legislation with the objective of providing certainty in relation to the rights of third party beneficiaries in all types of contracts. General legislation would offer efficiency in litigation as well as commercial convenience because the courts and the parties to the contract would not have to find ways to sidestep the doctrine of privity. This would save cost and time for both the courts and the parties to contracts. Thus, the proposed legislation will benefit and protect the public interest and give more types of third party beneficiaries the right to enforce benefits intended for them in the contracts. However, the same cannot be said for sub-contractors in the construction industry as general legislation based on the 1999 Act will not provide justice for them. Sub-contractors, particularly in circumstances

301 where the main contractors become insolvent would still have difficulty in claiming the payment promised.

6.4 PROPOSED LEGISLATIVE FRAMEWORK FOR MALAYSIA BASED ON THE CRITERIA

The analysis of the different legislative models against the criteria demonstrates that the most suitable model for Malaysia is the implementation of general legislation together with targeted legislation for construction contracts. England’s model of reform on the basis of the criteria applied above is the most suitable legislative approach for the Malaysian context and will be used as the starting point for general legislation.

6.4.1 General Legislation

As a starting point s 1 of the 1999 Act provides:

(1) Subject to the provisions of this Act, a person who is not a party to a contract (a “third party”) may in his own right enforce a term of the contract if (a) the contract expressly provides that the third party may, or (b) subject to subsection (2), the term of the contract purports to confer a benefit on the third party.

Section 1 in its present form does not provide the appropriate certainty and allocation of rights as between contracting parties and third parties. Each of the issues identified above will be considered and changes to s 1 proposed.

It is submitted that to ensure the proposed Malaysian legislation is able to satisfy the 3 criteria discussed above the proposed legislation should deal with the following issues, identified in Chapter 3 from the case law:

a) How should the third party be described in the section? Should it be a named party or can it be a party described or a member of a class? Should an incidental beneficiary be entitled to the benefit of the section? b) Does the contract have to confer a benefit expressly or is it sufficient for there to be a clear intention to benefit or an implied benefit in the contract?

302

c) Should a third party have to accept the benefit, once the benefit becomes known to the third party? If acceptance is required should there be an obligation on the contracting parties to notify the third party? d) What defences should a contracting party be able to rely upon? e) When should the right of the parties to make changes to the contract terms without the consent of the third party cease?

a. Identification of the third party beneficiary

Section 1(3) of the 1999 Act provides that the third party may be expressly identified by name, as a member of a class or by particular description, but need not be in existence when the contract is entered into. The effect of this provision is that the third party cannot claim the contract refers to the third party by implication, or by a process of construction. Only the intended beneficiary described in one of these ways can benefit from the provision. As such, an incidental beneficiary who indirectly obtains a benefit is excluded from the provision. It is submitted that this creates certainty for both the third party and the contracting parties and satisfies the public benefit by appropriately expanding the types of third parties who can enforce a contract while retaining an element of a nexus to the contract.

Justice Tipping in the New Zealand case, Rattrays Wholesale Ltd v Meredyth-Young & A’Court Ltd828 was of the view that the purpose of designating the third party was to enable the promisor to know with certainty who could claim the benefit of the promise in the contract. The only requirement was that the person should be identifiable from the contract. Further, if the parties do not want a third party to be able to enforce any benefits under the contract, they must clearly express this intention in specific terms.829

To qualify as an intended beneficiary, the third party must therefore show that the contract reflects the express or implied intention of the parties to the contract to benefit the third party. Although intended beneficiaries need not be specifically or individually identified in the contract, they must still fall within a class clearly intended by the

828 [1997] 2 NZLR 363. 829 Ibid.

303 parties in the contract. For this purpose a definition of ‘beneficiary’ or ‘third party’ should be included in the reform clearly providing for a third party to be either named, or identified by a class or described by the contract. Section 1(3) of the 1999 Act provides an appropriate definition:

The third party must be expressly identified in the contract by name, as a member of a class or as answering a particular description but need not be in existence when the contract is entered into.

The benefit of this definition is that it will provide certainty and clarify the position of unborn children, future spouses, customary spouses, adopted or step-parents, other family members, employees who have not paid the insurance premium, passengers and injured employees in road accident cases, buyers in a contract of sale, and others. As long as they are described in one of the ways specified in the proposed provision, they will benefit from the provision.

b. Express or implied benefit and intention

Does the contract have to confer a benefit expressly or is it sufficient for there to be a clear intention to benefit or an implied benefit in the contract? The intention test as set out in s 1 of the 1999 Act clearly states that a third party will only acquire a right to enforce the benefit of a contract if the contract expressly provides that the third party may do so or a term of the contract purports to confer a benefit on the third party. Therefore s 1 enables the third party to enforce both express and implied benefits. Providing for both express and implied benefits fulfils the criteria of certainty and appropriate allocation of rights, while minimising diverse judicial interpretation which is in the public interest.

However s 1 of the 1999 Act cannot be adopted as a whole as the 1999 Act uses the phrase “term of contract” instead of “agreement” or “promise” as used in Queensland and Western Australia respectively. This provision should be adopted in Malaysia with slight modification, whereby the word “term” is to be amended as it requires the third party to prove that each of the terms purport to benefit the third party (if there is more than one term that purports to benefit the third party) rather than adopting a whole of contract interpretation. The section is to be modified by invoking the wording in s 11(2)

304 of the PLA 1969 or s 55 of the PLA 1974 as part of the section. This modification will strengthen the third party’s position when enforcing their right, especially when there are multiples terms that confer benefits on them. This modified section fulfils two criteria of the law reform i.e. certainty and clarity and the third criteria i.e. justice and fairness as the third party does not have to prove each of the terms of the promise provided by the contracting parties.

c. Acceptance of the benefit by third party

Section 2(1)(a) of the 1999 Act provides that in order for a third party to enforce the benefit in the contract, the third party must communicate assent to the benefit of the contract to the promisor. The assent may be by words or conduct.830

Similarly, section 11(3) of the PLA 1969 (WA) provides:

‘Unless the contract referred to in subsection (2) otherwise provides, the contract may be cancelled or modified by the mutual consent of the persons named as parties thereto at any time before the person referred to in that subsection has adopted it either expressly or by conduct.’

As for Queensland, s 55 (1) of the PLA 1974 provides:

‘A promisor who, for a valuable consideration moving from the promisee, promises to do or to refrain from doing an act or acts for the benefit of a beneficiary shall, upon acceptance by the beneficiary, be subject to a duty enforceable by the beneficiary to perform that promise.’

Both the 1999 Act and PLA 1974 (Qld) requires assent/acceptance to be communicated by words or conduct to the promisor.831 The PLA 1969 (WA) is silent on the method of communication.

To avoid complexity of the law and to prevent injustice to third parties, it is recommended that the requirement for acceptance of benefit by a third party should be dispensed with in the proposed reform law. This recommendation is consistent with

830 Section 2(2)(b). 831 See s 55(6) of the PLA 1974 (Qld).

305

Justice Andrew Roger’s view on this matter, whereby the honourable judge states that the requirement for a third party to assent, accept or adopt the benefit and communicate to the promisor is not fundamental and is unnecessary.832 Such a requirement may also lead to injustice for third parties. His Honour argues that, the requirement, although fair and sensible on the face of it, may cause a third party who is not aware of the existence of the benefit to fail in their claim.833

Eisenberg also shares Justice Roger’s view on the issue of acceptance of benefits by a third party. 834 Eisenberg argues that the requirement for a third party to accept is uncontroversial when the contracting parties have essentially made an offer to the beneficiary, so that the beneficiary's assent concludes an independent contract under the rules of offer and acceptance. Unless such an offer has been made, however, an assent by the beneficiary is a virtually meaningless act.835 Other support comes from Williston who also agrees that a beneficiary's assent is normally of no real significance as any beneficiary who knew he or she was a beneficiary would assent to being a beneficiary, because the status of a beneficiary has only an upside.836

Based on the above arguments, it is submitted that reform in Malaysia does not need a requirement for the third party to accept the benefit of the contract as a condition to enforcement of the benefit. Therefore, under the proposed reform a third party will be entitled to enforce the benefit upon creation of the benefit by the contracting parties with or without accepting and communicating their acceptance or assent. But while the need for acceptance is dispensed with, it is proposed that communication of acceptance of the benefit shall have a binding effect against the contracting parties. Upon acceptance by a third party, any variation to the benefit by the contracting parties requires consent from the third party. In contrast, a third party who chooses not to

832 Justice Andrew Rogers, 'Contract and Third Parties' in Paul Desmond Finn (ed), Essays on Contract (1987), 98. 833 Ibid. 834 Melvin Aron Eisenberg, 'Third-Party Beneficiaries' (1992) 92(6) Columbia Law Review 1358. 835 Ibid 1420. 836 Samuel Williston, 'Contracts for the Benefit of a Third Person' (1902) 15(10) Harvard Law Review 767, 740.

306 communicate acceptance will forfeit the right to object against any variation to the benefit.

Furthermore, it is also recommended that the contracting parties who promised the benefit should have a statutory obligation to notify the third party about the existence of the benefit. This is to ensure the benefit conferred in the contract comes to the knowledge of the third party.

d. Defences to a claim

On the question of whether the wrongful conduct of a third party will render the third party’s right void, voidable or unenforceable, s 55(4) of Queensland’s PLA 1974 could be adopted as the provision deals with the defences available to the promisor. Section 55(4) provides that the promisor is entitled to rely on defences and any matter which will render the promise to be void, voidable or unenforceable if the promisee is the one bringing the legal action. The wording of this provision provides that any right or remedy that is available apart from the section may be used. Therefore, the promisor could use any defences available against the promisee, in an action against the third party wrongdoer. By way of contrast, s 3(3) of the 1999 Act allows the contracting parties to change the default position in relation to defences and set off.837 This means that the contracting parties may expressly stipulate that the promisor may also have available any defence or set-off and not necessarily those which are relevant to the term in question. The provision thus operates to the disadvantage of third party who might be unaware of the potentially wide range of defences available to the promisor. If s 3(3) of the 1999 Act was adopted in Malaysia, it will violate the third criteria of justice and fairness as this provision allows the contracting parties to change their contracting position unilaterally at their own will. This will adversely affect the third party beneficiary as it can jeopardise their right to claim the benefit in the contract against the contracting parties. Section 55(4) of the Queensland Act should be adopted.

e. Variation to the terms of the contract

837 The 1999 Act s 3(3). The default position is that although the promisor is entitled to use any defences available against the promisee, the defence must be relevant to the term upon which the third party relies as the 1999 Act itself refers to the enforceability of a “term” of the contract, rather than the contract as a whole.

307

For the purposes of freedom of contract and upholding the intention of the contracting parties, they should be allowed to rescind or vary the benefit conferred on the third party. The 1999 Act strikes a balance between the rights of the third party to enforce the benefit and the rights of the parties to the contract to change their mind. The 1999 Act gives details of the circumstances in which the crystallisation of the contract takes place so that rescission or variation of the benefit will no longer be possible. The circumstances in which the contracting parties may not, without the third party’s consent, agree to rescind or vary the contract, or vary it so as to extinguish or alter the third party’s entitlement as stated in s 2(1) are as follow:

a) Where the third party has communicated his assent to the term to the promisor,838 b) The promisor is aware that the third party has relied on the term,839 and c) The promisor can reasonably be expected to have foreseen that the third party would rely on the term and the third party has in fact relied on it.840

Although it is proposed earlier that assent or acceptance by a third party is not required for the enforcement of the benefit, s 2(1) of the 1999 Act should be adopted as a whole in the proposed law reform in Malaysia. The first limb, i.e. where the third party has communicated his or her assent to the term to the promisor is necessary in the event the third party does accept the benefit and the limb will serve as a cut off date where the right of the parties to vary the contract should cease.

Next, it is also proposed that to be consistent with s 1 of the proposed reform law, the word ‘term’ should be amended to ‘promise/agreement.’841 The proposed amendment is necessary as it balances the rights of the third party beneficiary against the rights of parties to the contract. The balancing act fulfils the third criteria of law reform i.e. justice and fairness as it prevents the parties to the contract from withdrawing/altering their promise to the detriment of the third party.

838 Section 2(1)(a). 839 Section 2(1)(b). 840 Section 2(1)(c). 841 The amendment is to ensure uniformity with the proposed s 1.

308

Section 2(4) and s 2(5) of the 1999 Act that allow the contracting parties to make changes to the contract through variation to the terms of contract should be adopted in Malaysia. Both sections contain a provision that the requirement of consent from the third party prior to a variation being made by the contracting parties may be dispensed with by the court on the application of the latter in three circumstances:

i) The consent of the third party cannot be obtained as his whereabouts cannot reasonably be ascertained, 842 or ii) The third party is mentally incapable of giving his consent,843 or iii) It cannot reasonably be ascertained whether or not the third party has relied on the term.844

The above provision should be adopted as it balances the rights of the third party beneficiary against the rights of parties to the contract. The balancing act fulfils the third criteria of law reform i.e. justice and fairness as it prevents the parties to the contract from withdrawing/altering their promise to the detriment of the third party.

6.4.1.1 Draft Proposed Provision After consideration of the identified factors, the following general legislative provision is proposed:

1) Third party rights (1) Subject to the provisions of this Act, a person who is not a party to a contract (a ‘third party’) may in his own right enforce a promise/agreement if:

a) The contract expressly provides that he may, or b) Subject to subsection (2), the promise/agreement purports to confer a benefit on him.

2) Identification of third party Section 1(3) of the 1999 Act as it currently reads should be adopted:

842 Section 2(4)(a). 843 Section 2(4)(b). 844 Section 2(5).

309

The third party must be expressly identified in the contract by name, as a member of a class or as answering a particular description but need not be in existence when the contract is entered into.

3) Defence The wording of s 55(4) of the PLA (Qld) should be adopted: “ any matter which would in proceedings not brought in reliance on this section render a promise void, voidable or unenforceable, whether wholly or in part, or which in proceedings (not brought in reliance on this section) to enforce a promissory duty arising from a promise is available by way of defence shall, in like manner and to the like extent, render void, voidable or unenforceable or be available by way of defence in proceedings for the enforcement of a duty to which this section gives effect.”

4) Acceptance of benefit

The requirement of acceptance should not be a condition to the enforcement of the benefit. A third party should be able to enforce the benefit upon creation of the benefit by the contracting parties with or without accepting and communicating their acceptance or assent. However, should the third party choose to accept the benefit and communicate acceptance, the contracting parties are no longer allowed to vary the benefit without the third party’s consent. The contracting parties who promised the benefit should have a statutory obligation to notify the third party about the existence of the benefit.

5) Variation of right without third party’s consent

(1) Subject to the provisions of this section, where a third party has a right under section 1 to enforce a promise/agreement,, the parties to the contract may not, by agreement, rescind the contract, or vary it in such a way as to extinguish or alter his entitlement under that right, without his consent a) Where the third party has communicated his assent to the promise/agreement to the promisor, b) The promisor is aware that the third party has relied on the promise/agreement, and

310

c) The promisor can reasonably be expected to have foreseen that the third party would rely on the promise/agreement and the third party had in fact relied on it.

Section 2(4) and s 2(5) of the 1999 Act which contains a provision that the requirement of consent from the third party prior to a variation being made by the contracting parties may be dispensed with by the court on the application of the latter should be adopted without changes.

Ultimately the aim of the reform is to improve the position of third party beneficiaries. One method of ascertaining whether the provision will be successful in achieving the aim and satisfying the criteria of certainty, public interest and fair and just allocation of rights, it to critique the application of the proposed reform by reference to previous case law where third parties were unsuccessful in claiming the benefit of a contract.

In relation to insurance contracts, the plaintiffs in GR Nair v Eastern Mining & Metals Co Sdn Bhd 845 would fall within the ambit of the proposed provision i.e. the promise/agreement purports to confer a benefit on them. It can be inferred that the promise/agreement intended to confer a benefit on the plaintiffs based on the fact that on previous occasions, seven other disabled employees had been paid sums due to them from the same policies. Similarly, in Kishabai v Jaikishan,846 the court would not face the same difficulty in deciding the nephew was the beneficiary under the insurance policies as the policy clearly stated that the policy was for the benefit of insured’s nephew. The nephew would fall under the proposed s 1(a) where the contract expressly provides that he may in his own right enforce a promise or agreement.

The intention of the proposed legislation is to benefit third party beneficiaries in a range of contracts as mentioned in Chapter 1.847 Not only third party beneficiaries in insurance contracts would be protected, but also third parties in other types of contracts who do not fall within the categories of the existing statutory protections such as third parties in sale and purchase agreements and tenancy agreements as illustrated in the cases of

845 [1974] 1 MLJ 176. See Chapter 3, 72 [3.3.1.2]. 846 [1981] 2 MLJ 289, ibid 75 [3.3.1.3]. 847 See Chapter 1, [ 1.4].

311

Kepong Prospecting Ltd v Schmidt,848 Bacom Enterprises Sdn Bhd v Jong Chuk 849 and Chung Shan Kwang v Ise Ichi Japanese Restaurant Sdn Bhd850 would also be able to claim the benefits conferred in the contracts under the proposed legislation.

If the case of Kepong Prospecting Ltd v Schmidt, 851 were to be decided under the proposed general legislation, Schmidt would fall within the ambit of s 1 as he was expressly identified in the 1955 agreement as the person who should receive 1% of all ore that might be won from any land comprised in the 1954 agreement in consideration of the services by the consulting engineer for and on behalf of the company prior to its formation, after incorporation and for future services. Similarly in Bacom Enterprises Sdn Bhd v Jong Chuk 852 under the proposed general legislation, the plaintiff (Jong Chuk), as a third party to the sale and purchase agreement, would be entitled to a declaration that the defendant (Bacom Enterprises) must honour and abide by the provision in the development agreement as written and promised by the defendant in the sale and purchase agreement. The plaintiff was expressly identified as a person who was intended to benefit.

Similarly in Chung Shan Kwang v Ise Ichi Japanese Restaurant Sdn Bhd,853 the dispute arose as a result of an improper assignment agreement made between the appellant (the third party) and the former owner of the said premise. If a proper assignment had been made to include the tenancy agreement as well, the appellant would not have had difficulties in enforcing the benefit of any of the terms in the tenancy agreement. Nevertheless, if the matter were to occur after the proposed reform of the doctrine of privity, the appellant, as the new owner of the premises, would have the right to enforce the benefits contained in the tenancy agreement that is they would be entitled to the rental payment by the tenant to the owner. As the new owner of the said premises, the appellant could claim that the terms in the tenancy agreement purported to confer a benefit on him.

848 [1968] 1 MLJ 170 849 [2011] 5 MLJ 820. 850 [2005] 3 MLJ 471 851 [1968] 1 MLJ 170 852 [2011] 5 MLJ 820. 853 [2005] 3 MLJ 471.

312

Accordingly, based on the arguments above, introducing general legislation based on England’s 1999 Act would not only resolve the problems faced by third party beneficiaries in insurance contracts but also third party beneficiaries in other types of commercial contracts. While the legislation would be specifically aimed at resolving the problems caused by the doctrine of privity in insurance contracts, it could also address the injustice created by the doctrine of privity in contracts more generally. The proposed s 1 has a wider scope of application allowing many types of third parties to potentially benefit from this provision.

Furthermore, s 1 of the proposed general legislation has addressed concerns about the concept of autonomy, mutuality of rights and indeterminate range of liability which were raised earlier by Collins.854 Contrary to Waddams855 arguments, reforming the doctrine of privity does not create any difficulty whatsoever to the third party. Instead, the proposed model empowers the third party to enforce their right to obtain the benefits conferred to them under the contract. Neither will the proposed model create any difficulty to the contracting parties to rescind or modify the contract entered by them. The intention of the proposed model is merely to ensure that the third party is able to enforce their right to obtain the benefit conferred on them under the contract. The proposed model does not revoke the right of the contracting parties to rescind or modify the contract entered between them. However, their rights to rescind or modify the contract have to be exercised subject to the rights of the third party which have been stipulated and agreed upon by the contracting parties themselves.

With the enactment of general legislation conferring rights on third party beneficiaries, the legal landscape in Malaysia will change dramatically. Third parties will no longer be prevented from enforcing the benefit conferred on them due to the doctrine of privity. With this general legislation, the doctrine of privity in Malaysian commercial law will be substantially abrogated.

854 Refer to Chapter Two, 48. 855 Refer to Chapter Two, 51.

313

6.4.2 Specific legislation

It has previously been submitted that the general legislation should be supplemented by specific legislation in relation to construction contracts. Reform through general legislation is unlikely to improve the situation for sub-contractors in relation to security of payment for works completed in construction projects. The 1999 Act only benefits the construction industry in relation to the use of collateral warranties as it is known that collateral warranties in a chain of contracts are very expensive. Due to the doctrine of privity and the non-availability of an action by the third party against the promisor, multilateral contracts may need to be made between the promisor and the promisee and between the promisor and the third party. The second contract between the promisor and the third party will incur additional costs for the same outcome.856 With the right to enforce the promise or benefit directly as provided for in the proposed general legislation, there is no longer a need for the parties to the contract to provide undertakings separately. It would be more efficient if the same obligations arose from a single provision in the contract.857

However, in situations where there have been promises in the main contracts (between the employers and the main contractors) that the employers would make payment direct to sub-contractors, the 1999 Act fails to provide justice for sub-contractors. Jane Jenkins and James Duckworth 858 have recognised that sub-contractors should consider alternative means rather than seeking to rely on the 1999 Act in conjunction with direct payment provisions. This is because the legislative solution needs to refer specifically to requirements for employers to honour promises to pay sub-contractors. For this reason, specific legislation addressing the issue of direct payment to sub-contractors is required.

The specific legislation must have the effect of abrogating the doctrine of privity to the extent that sub-contractors are allowed to enforce the promises made by employers in the principal contracts to pay the sub-contractors directly, despite not being parties to

856 Robert Flanningan, ‘Privity- The End of an Era (Error)’ (1987), 103 Law Quarterly Review 564, 589. 857 Hugh Beale, 'Privity of contract: judicial and legislative reform. (United Kingdom)(Special Issue: Essays for Professor Brain Coote)' (1995) 9(n1) Journal of Contract Law 103. 858 Jane Jenkins and James Duckworth in Robert Merkin, 'Privity of Contract the Impact of the Contracts (Rights of Third Parties) Act 1999' (First ed, 2000), 207.

314 the contracts. The recent enactment of the CIPAA in June 2012 (not yet in force) means that Malaysia now has specific legislation dealing with security of payment, but the CIPAA does not address the problem of direct payment arising from the application of the doctrine of privity. It does not have the effect of abrogating the doctrine of privity in relation to direct payment and it does not concern third party beneficiary contracts in the construction industry. Yet, to propose further specific legislation dealing with the matter in hand is not recommended as it is likely to be costly, time consuming and lead to the creation of piecemeal legislation. Rather, a specific provision should be added to the recently enacted CIPAA to abrogate the doctrine of privity in favour of sub-contractors. With the proposed amendment, the CIPAA will become specific legislation targeting the problem of direct payment by employers and accordingly abrogating the doctrine of privity in relation to third party benefits in construction contracts.

Based on the above argument, to resolve the issue of direct payment and demonstrated injustice to sub-contractors as a result of the doctrine of privity as discussed in Chapter 3, 859 this thesis proposes that the CIPAA should be amended to include a specific provision facilitating direct payment by employers in any circumstances notwithstanding default in payment by main contractors.

6.4.2.1 Proposed amendments to CIPAA

The importance of the CIPAA, which is quite similar to the Acts in Australian states, England, New Zealand and Singapore is that it creates a statutory right to make and receive progress payments. The broad application and the powers the CIPAA gives to claimants means it is of great importance to sub-contractors of all trades. The CIPAA supplements parties’ contractual rights and obligations. However, the CIPAA does not abrogate the doctrine of privity in relation to third party benefits in the main contract. There is no provision that allows a sub-contractor to enforce direct payment as promised by an employer.

859 See 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; Tropical Profile Sdn Bhd v Kerajaan Malaysia Jabatan Kerja Raya Malaysia [2007] 8 MLJ 419 in Chapter 3, [3.3.1.4] and [3.3.1.5].

315

To ensure that the proposed amendment to the CIPAA is able to satisfy the 3 criteria for law reform discussed above the proposed amendment should deal with the following issues, identified from the case law:

a) In what circumstances sub-contractors are allowed to enforce direct payment promised by employers? b) Should the right be limited to circumstances where the main contractor is insolvent only?

As a starting point s 30 of CIPAA provides:

30. Direct payment from principal

(1) If a party against whom an adjudication decision was made fails to make payment of the adjudicated amount, the party who obtained the adjudication decision in his favour may make a written request for payment of the adjudicated amount direct from the principal of the party against whom the adjudication decision is made.

Section 30 in its present form does not provide the appropriate allocation of rights on the basis of justice and fairness to sub-contractors. The issue identified above will be considered and changes to s 1 proposed.

As seen in Chapter 3, 860 the Malaysian courts have refused to recognise the direct payment provision contained either in the standard form contract or promises (express or implied) made by employers to sub-contractors because of the doctrine of privity. Under s 30, direct payment from the principal is allowed, but only as a means to recover payment after default by the main contractor. ‘Principal’ in s 4 is a party who has contracted with and is liable to make payment to another party where that other party has in turn contracted with and is liable to make payment to a further person in a chain of construction contracts.

The effect of this provision is that courts could no longer use the doctrine of privity to deny payment to sub-contractors. However, the application of s 30(1) is limited to a situation where the main contractor fails to pay the contract price to sub-contractors. As

860 See Chapter 3, 86 [3.3.1.4].

316 revealed in Chapter 3, the main effect of the doctrine of privity in the construction industry was that courts could not enforce payments promised by an employer (and not by the main contractor) to the sub-contractor. Section 30(1) would not be able to provide a remedy to sub-contractors in circumstances where there are promises by an employer to pay a sub-contractor directly. The doctrine of privity still prevails and any injustice suffered by the sub-contractors is not remedied.

6.4.2.2 Draft Proposed Provision

After consideration of the identified factors, the following amendment to s 30 of CIPAA is proposed:

30. Direct payment from principal

(a) If a party fails to pay in whole or at all the adjudicated amount pursuant to an adjudication decision or where there has been promise by the principal himself to pay, the principal of that party may make payment to the unpaid party of the outstanding amount provided that the unpaid party shall have made a written request to the principal for payment.

(b) This provision should apply despite anything to the contrary in a contract containing the promise.

The effect of the proposed amendment is that direct payment from the employer is to be allowed in any circumstances without the need for default in payment by the main contractor. The amendment would remedy the current problem faced by sub-contractors as discussed in Chapter 3 in which courts refuse to acknowledge the promises made by employers to pay sub-contractors directly due to the doctrine of privity. For example, in Mahkota Technologies Sdn Bhd v Bina Jati Sdn Bhd861 where despite the promise that the sub-contractor would be paid directly by the employer, the Court did not allow enforcement of the promise due to the doctrine of privity. The promise existed by virtue of a letter of award which stated that 'Payment on certificates duly certified by the consultants shall be made directly by our client, Sum-Projects (Brothers) Sdn Bhd.’ The fact that the employer made the first payment directly to the sub-contractor meant that the employer should be estopped from denying liability to the sub-contractor. It was held that the doctrine of privity prevented the sub-contractor from enforcing the right to

861 [2001] MLJU 749. See Chapter 3, 88 [3.3.1.4]

317 payment from the employer. Should the proposed s 30(1) of the CIPAA be in force, the sub-contractors would be able to sue the employer directly without the need to establish privity of contract.

Similarly in Artic Building and Civil Engineering Sdn Bhd v Ahmad Zaki Sdn Bhd 862 where there was uncertainty as to whether the court would acknowledge the letter of undertaking to pay the sub-contractor directly from the employer’s account, the proposed s 30(1) would eliminate the uncertainty of whether the sub-contractor has the right to sue directly the employer for the promised payment. The proposed s 30(1) will empower the sub-contractor to claim the payment directly from the employer. Justice is served in these two instances as the sub-contractors are able to claim what they are entitled to and what they deserve. By allowing the sub-contractors to sue the employer directly in any circumstances and not only limited to the insolvency of the main contractor, the proposed amendment to s 30(1) will benefit and protect the public interest especially sub-contractors. Further, the proposed provision also provides clarity and certainty as to the rights of parties where the courts will no longer have to rely on the common law exceptions which have proven to produce different outcomes.863

To conclude, it is timely for Malaysia to resolve the issue of direct payment to sub- contractors because from the judicial analysis conducted in Chapter 3, the issue of direct payment to sub-contractors is crucial due to the reluctance of courts to recognise promises made by employers to pay sub-contractors directly. Under the proposed reform of s 30(1) of the CIPAA, direct payment provisions which are subject to the doctrine of privity could be enforced by sub-contractors.

6.5 SUMMARY OF RECOMMENDATIONS

This chapter has identified criteria which would effectively contribute to the legislative reform of the doctrine of privity in Malaysia, thus providing for and enhancing the

862 [2009] 9 MLJ 328. See n 239. 863 Furthermore, this provision will answer the uncertainty posed by the decision in British Eagle International Airlines Ltd v Compagnie Nationale Air France [1975] 1 WLR 758 regarding the validity of a direct payment provision in the event of insolvency of the main contractors. See Chapter 6, 294 [6.3.1.3].

318 rights of third party beneficiaries in general and especially in the insurance and construction industries. Further, analysis of the effectiveness of legislative reforms in Australia and England has been conducted. On this basis, several recommendations were made and it is submitted that these recommendations could be implemented by the Malaysian legislature to reform the doctrine of privity and remedy the injustice suffered by third party beneficiaries, particularly those in insurance and construction contracts.

The proposed reform is consistent with the will theory as it empowers the court to dispense the operation of the doctrine of privity and to give effect to the intention of the contracting parties to benefit third parties Similarly, by allowing third parties to enforce their rights to obtain the benefit conferred on them under the contract, the spirit and letter of the will theory are fulfilled.

In summary, the following recommendations are made:

a) Malaysia should reform the doctrine of privity to recognise the right of third party beneficiaries to enforce benefits conferred by the parties to a contract. b) The existing types of third party beneficiaries who are already equipped with the right to enforce benefits should be expanded to include all types of third parties. There should not be discrimination between different types of third party beneficiaries. c) General legislation based on England’s 1999 Act should be enacted in Malaysia with some modifications to ensure the efficacy of the proposed reform. This general legislation will give rights to various categories of third party beneficiaries to sue for the benefits promised by the contracting parties. It will also eliminate uncertainty and unpredictability as to the rights of third parties as the proposed legislation specifically identifies who is entitled to enforce the benefits in the contracts. Further, general legislation would also enhance efficacy and efficiency in the litigation as it eliminates the need for courts to apply common law exceptions which can be timely and costly. The existence of general legislation could also curb the courts’ reluctance to abrogate the doctrine of privity.

319

d) With the recent enactment of the CIPAA in June 2012, Malaysia already has a specific and targeted piece of legislation for the construction industry. As the CIPAA is presently silent in relation to the issue of a direct payment provision from employers, it is proposed that the CIPAA be amended to include a provision recognising direct payment made by employers. With the proposed amendment, the CIPAA will be specific legislation that has the effect of abrogating the doctrine of privity in third party beneficiary contracts.

The current problems faced by third party beneficiaries in Malaysia and the proposed solution are summarised below:

Table 6.1: Problems caused by the doctrine of privity and proposed reform in Malaysia

Problem Proposed reform

Discrimination of rights as to who is To enact general legislation based on England’s able to enforce benefits conferred in 1999 Act model with slight modifications:1.Third contracts. At present, in insurance party rights contracts, not all persons can be named as third party beneficiaries in insurance The phrase “term of contract” used in s 1 should be policies, particularly in life and personal amended to “agreement” or “promise” as used in s accident policies. In third party motor 55 of the PLA 1974 and s 11(2) of the PLA 1969, insurance policies, certain third parties respectively. The new provision would read as do not have the right to claim for follows: injuries suffered in road accidents. “Subject to the provisions of this Act, a person who is not a party to a contract (a ‘third party’) may in his own right enforce a promise/agreement if:

a) The contract expressly provides that he may, or b) Subject to subsection (2), the promise/agreement purports to confer a benefit on him.”

2. Identification of third party

Section 1(3) of the 1999 Act as it currently reads should be adopted: “The third party must be expressly identified in the contract by name, as a member of a class or as answering a particular description but need not be in existence when the contract is entered into.”

320

3. Defence The wording of s 55(4) of the PLA (Qld) should be adopted: “any matter which would in proceedings not brought in reliance on this section render a promise void, voidable or unenforceable, whether wholly or in part, or which in proceedings (not brought in reliance on this section) to enforce a promissory duty arising from a promise is available by way of defence shall, in like manner and to the like extent, render void, voidable or unenforceable or be available by way of defence in proceedings for the enforcement of a duty to which this section gives effect.”

4. Acceptance to benefit It is proposed that the requirement of acceptance should not become a condition to the enforcement of the benefit. A third party may enforce the benefit with or without accepting and communicating their acceptance or assent. However, should the third party choose to communicate acceptance of the benefit, the contracting parties are no longer allowed to vary the benefit without the third party’s consent. On the contrary, if the third party chooses not to accept the benefit and communicate acceptance, the right to object against any variation to the benefit prior to their consent will be forfeited.

In addition, it is also proposed that the contracting parties who promised the benefit should have a statutory obligation to notify the third party about the existence of the benefit.

5. Variation of right without third party’s consent

Section 2(1) of the 1999 should be adopted with slight modification as to the word ‘term of contract’ in order to ensure consistency with the proposed s 1 of the law reform. The proposed provision would read as follows: “ Subject to the provisions of this section, where a third party has a right under section 1 to enforce a promise/agreement of the contract, the parties to the contract may not, by agreement, rescind the contract, or vary it in such a way as to extinguish or alter his entitlement under that right, without his

321

consent a) Where the third party has communicated his assent to the promise/agreement to the promisor, b) The promisor is aware that the third party has relied on the promise/agreement , and c) The promisor can reasonably be expected to have foreseen that the third party would rely on the promise/agreement and the third party had in fact relied on it.

However, the requirement of consent from the third party may be dispensed with by the court on the application of the contracting parties. Section 2(4) and s 2(5) of the 1999 Act as they currently read should be adopted: a) The consent of the third party cannot be obtained as his whereabouts cannot reasonably be ascertained,864 or b) The third party is mentally incapable of giving his consent,865 or c) It cannot reasonably be ascertained whether or not the third party has relied on the term.866

In the construction industry, sub- The direct payment provision in s 30(1) of the contractors were refused payment CIPAA should not be limited to circumstances despite promises by their employers to where there has been default in payment by the make direct payment to sub-contractors. main contractors. Section 30(1) should be repealed and a new provision inserted to replace s 30(1) to allow direct payment from the employer in any circumstances.

In other types of contracts, the current To enact general legislation based on England’s legislation does not cover every type of 1999 Act model. This 1999 Act model provides a third party. For example, in sale of statutory right to any kind of third party beneficiary goods contracts buyers who buy to enforce the benefit in these contracts. defective goods for business purposes do not have the rights to sue any party except the seller. The doctrine of privity has also prevented third parties claiming benefits in sale and purchase agreements and tenancy agreements. The third parties in these types of contracts are not covered under the present regime.

864 Section 2(4)(a) of the 1999 Act. 865 Section 2(4)(b) of the 1999 Act. 866 Section 2(5) of the 1999 Act.

322

CHAPTER SEVEN RECOMMENDATIONS AND CONCLUSIONS

7.1 INTRODUCTION

This thesis commenced with an explanation of the common law doctrine of privity and its historical origin. The doctrine of privity encompasses two limbs; the first limb which prevents third parties from obtaining rights or benefits under a contract to which they are not a party; and the second limb, which provides that the parties to a contract cannot impose liabilities or obligations on third parties. Unlike the second limb, the first limb attracts continued criticism from the judiciary, law commission bodies and academics alike. The criticism is focused on the failure of the doctrine to respect the intention of the contracting parties to confer benefits on third parties, the reasonable expectations of the third parties as to receipt of the benefit and that the doctrine of privity causes injustice to third parties. Following the criticisms, several common law countries, including England and two states of Australia, Queensland and Western Australia, opted to legislatively reform the first limb of the doctrine of privity by allowing third parties in certain circumstances to enforce a contract made for their benefit.

The key objective of this research was to analyse the impact of the doctrine of privity in Malaysia on third party beneficiaries of commercial contracts for the purpose of identifying the third parties most disadvantaged by the doctrine of privity with a view to making appropriate recommendations for reform. This thesis explored the impact of the doctrine of privity on commercial contracts, including insurance and constructions contracts and whether third parties to these commercial contracts were adequately protected under the present regime. Although the impact on third parties in commercial contracts generally is not as significant as the impact in insurance and construction contracts, a need for reform for commercial contracts generally was identified. The thesis then examined the potential for reform in Malaysia with the aim of specifically addressing the injustice and problems created by the doctrine of privity in insurance and construction contracts, whilst at the same time aiming to provide rights and protection to other third parties in commercial contracts generally.

323

The three objectives of this thesis were:

1) to propose viable legislative reform which alters the doctrine of privity applying to commercial transactions in Malaysia; 2) to conduct a comparative analysis of categories of third party beneficiaries most affected by the application of the doctrine of privity in Malaysia and the pre- legislative reform in Australia and England; and 3) to compare legislative regimes which have altered the privity rule in selected jurisdictions and consider their impact on commercial transactions, dealing specifically with insurance and construction contracts.

This Chapter will summarise the research and key findings resulting from the analysis carried out. From these findings, this chapter will also offer recommendations to remedy any wrong suffered by third party beneficiaries as a consequence of the doctrine of privity.

7.2 THE KEY ISSUES/RESEARCH FINDINGS

In order to achieve the above three objectives of the thesis, the research questions as stated below needed to be answered.

The research questions addressed as stated in Chapter 1 were:

1. What was the original rationale for the doctrine of privity of contract? 2. What factors underpinned the legislative amendment of the doctrine of privity in Australia and England? 3. Was there any evidence of disadvantage or detriment to third parties evident in the case law in Australia and England that led to reform of the doctrine of privity of contract? 4. Have the same changes in commercial relations or the common law occurred in Malaysia as in these other jurisdictions and are the same disadvantages evident in Malaysian case law? 5. What rationale can be offered for abolition or amendment of the doctrine of privity in Malaysia, having regard to the commercial and legal context?

324

6. If the doctrine of privity in Malaysia is to be reformed, what principles should underpin this reform?

The key research findings in relation to these questions and how they answered the research questions are explained below:

7.2.1 Chapter Two

Chapter 2 addressed research question 1: “What was the original rationale for the doctrine of privity of contract?”

Chapter 2 provided a brief explanation of the historical origin of the doctrine of privity commencing with the interest theory and concluding with the consideration theory which halted further development of the interest and benefit theory. In the earlier period, the doctrine of privity was largely associated with the consideration theory which resulted in claims by third party beneficiaries often failing on the ground that no consideration was provided by them. Being a stranger to a contract meant the person was also a stranger to the consideration under the contract.867 Only those who provided consideration were considered to have the right to sue and further a third party could not take advantage of a contract to which he or she was not a party.

The arguments for and against reform of the doctrine of privity were also discussed in this chapter. The discussion demonstrated that the arguments put forwarded by those who were against reform of the doctrine of privity failed to provide adequate justification for the benefits of practicality and convenience. Defence of the doctrine was justified on the basis that a contract was a private affair between the parties and consequently it was not fair to allow third parties to have any rights under it. The arguments were further supported by the bargain theory which aims to uphold the bargain entered into between the parties to the contract.

Nevertheless, the conclusion was reached that reliance on the theoretical and doctrinal aspects of the doctrine of privity was insufficient to defend the doctrine. Past judicial decisions evidence the injustices and hardships caused by the doctrine of privity to third

867 Bourne v Mason (1669) 1 Vent 6, 2 Keb 457, 527.

325 party beneficiaries. Cases like Beswick v Beswick,868 Tweddle v Atkinson,869 Vandepitte v Preferred Accident Insurance Corporation of New York 870 and Re Sinclair’s Life Policy871 were among the cases where third party beneficiaries had been denied the benefits conferred by a contract. Together with the comments and criticisms presented by judges, law commission bodies and commentators, the arguments in favour of reform outweigh, in the writer’s view, the arguments against. The fact that reform has taken place in a significant number of common law jurisdictions, for example Australia, New Zealand, England and Singapore, further supports the calls for reform.

The impact of the doctrine of privity on third party beneficiaries was analysed in the next chapter; Chapter 3.

7.2.2 Chapter Three

Chapter 3 addressed several research questions. They were:

i) Research question 3: Was there any evidence of disadvantage or detriment to third parties evident in the case law in Australia and England that led to reform of the doctrine of privity of contract?, ii) Research question 4: Have the same changes in commercial relations or the common law occurred in Malaysia as in these other jurisdictions and are the same disadvantages evident in Malaysian case law? and iii) Research question 5: What rationale can be offered for abolition or amendment of the doctrine of privity in Malaysia, having regard to the commercial and legal context?

The purpose of this chapter was to examine the impact of the doctrine of privity on third party beneficiaries in Malaysia, Australia and England, in order to ascertain the classes of third parties most affected by the doctrine of privity.

Chapter 3 commenced with an analysis of the judicial decisions in Malaysia in insurance contracts, construction contracts and other types of commercial contracts. A

868 [1966] Ch 538. 869 (1861) 1B &S 393. 870 [1933] AC 70. 871 [1938] Ch 799.

326 search through Malaysian law journals872 identified that in commercial contracts, the doctrine of privity has impacted third party beneficiaries in agreements to pay for work done, sale and purchase agreements and tenancy agreements. In insurance contracts, the doctrine of privity has significantly impacted third party beneficiaries of life and indemnity insurance policies. The case law revealed that although the doctrine of privity was strictly applied in most of the cases, the courts have acknowledged the harshness of the doctrine and have attempted to apply a trust in order to abrogate the doctrine of privity. This has produced uncertainty for third parties. In the context of construction contracts, the case law indicated that the doctrine of privity was largely associated with default in payments suffered by sub-contractors; the third party beneficiaries to the contract. Any promises made by the employers particularly under standard form contracts to pay directly to the sub-contractors were halted by the doctrine of privity.

Later, comparisons were made with the Australian and English cases prior to legislative reform in order to find similarities and differences in the problems caused by the doctrine of privity. In Australia, the cases analysed involved only two states; Western Australia and Queensland as they are the only two states in Australia that have legislatively reformed the doctrine of privity. As in Malaysia, the analysis involved the cases that concerned third party beneficiaries in commercial contracts, insurance and construction contracts to determine the extent of the impact of the doctrine of privity on these types of third parties and whether similar problems of enforcement occurred. It was found that in insurance contracts, the doctrine of privity had raised difficulties in the area of property insurance as well as liability insurance but not in life insurance as experienced in Malaysia. The third party beneficiaries had been denied the insurance moneys even though the policy was intended to benefit the third parties upon occurrence of the prescribed events.

In construction contracts, the analysis of case law indicated that default in payment to sub-contractors was a major issue caused by the doctrine of privity. The doctrine had also caused injustice to sub-contractors in situations where promises by employers to directly pay the sub-contractors, in the event of insolvency of the main contractors, were

872 The Malayan Law Journal (MLJ) and Current Law Journal (CLJ).

327 not upheld. The doctrine of privity prevented the sub-contractors from enforcing the promises as they were not a party to the main contracts. For other types of commercial contracts, the doctrine of privity applied to contracts for payment of debts, contracts of guarantee, contracts for sale of land and contracts for carriage of goods.

A similar methodology was used to analyse the English cases. Prior to 1999, third party beneficiaries of insurance policies were in the same position as third parties in Malaysia. A search conducted via LexisNexis demonstrated that most of the cases involved life insurance and group insurance policies. In construction contracts, payments to sub- contractors were also denied on the basis of the doctrine of privity. In both types of contracts, the analysis demonstrated that the English courts had circumvented the doctrine of privity by applying various devices, the most popular being a trust. As for other types of commercial contracts, the application of the doctrine was evidenced in contracts for the sale of goods and agreements to pay.

In answer to research question 3, the case analysis demonstrated the detriments and disadvantages suffered by third party beneficiaries in Australia and England which led to reform of the doctrine of privity in those countries. Based on the analysis, it was concluded, in all types of contracts examined, third party beneficiaries were prevented from claiming the benefit conferred in the contracts despite the fact they were aware of the existence of the intended insurance moneys, relied on the rights and suffered loss or provided consideration to the contracting parties. The fact the parties to the contract evinced an intention to benefit the third party contributed further to the impact of the doctrine.

In answer to research question 4, the comparative analysis of the judicial decisions also demonstrated the similarities and differences in the different jurisdictions in relation to the impact of the doctrine of privity in insurance and construction contracts as well as other types of commercial contracts. There were similarities in the issues for third parties under construction contracts in Australia, England and Malaysia where direct payment by parties to the head contract was rejected. In insurance contracts, even though different types of insurance contracts were involved, the issues were similar, i.e. third party beneficiaries had been denied the benefit of insurance moneys despite an

328 intention express or implied to benefit those persons. Similarly, the doctrine had also caused third parties to be denied the benefits in other commercial contracts.

In summary, as highlighted in Chapter 3, the comparative analysis revealed:

a) The application of the doctrine of privity prevented third parties under insurance and construction contracts and also in other types of commercial contracts from enforcing promises within the contracts for their benefit in all selected jurisdiction; Australia, England and Malaysia; b) In insurance contracts, the third parties in Malaysia suffered the same inability to recover under life insurance and group insurance policies as third parties in England; c) Malaysia did not share the same problem with Australia in the area of life insurance and group insurance policies. In Malaysia, third parties in life insurance and group insurance policies were most disadvantaged by the doctrine of privity whereas in Australia, it was the effect of the doctrine of privity in liability insurance that led to the reform of the doctrine of privity. However, both shared similar problems under fire insurance policies; d) In construction contracts, the doctrine of privity has affected the Malaysian building industry in the same way as in England and Australia. There were cases involving claims of direct payment by sub-contractors from employers due to the default of payment by the head contractors; e) As far as the application of the doctrine of privity in other types of commercial contracts is concerned, there were concerns in relation to the impact of the doctrine on third party beneficiaries in all three jurisdictions. As a result of the doctrine of privity, all third parties in the three analysed jurisdictions were prevented by the courts from enforcing the benefit contained in the contract; and f) The uncertainty of rights and injustice suffered by third party beneficiaries in Western Australia, Queensland and England has been addressed by legislative reform of the doctrine of privity.

In conclusion, Chapter 3 identified a number of rationales as justification for the abolition or amendment of the doctrine in Malaysia, being uncertainty of rights,

329 complexity of litigation due to the need to establish common law exceptions to the doctrine of privity and the disinclination of the courts to develop methods to circumvent the doctrine of privity. Reform of the doctrine of privity is needed to improve the position of third party beneficiaries.

7.2.3 Chapter Four

Chapter 4 addressed research question 2: What factors underpinned the legislative amendment of the doctrine of privity in Australia and England?

Chapter 4 undertook a comparative analysis of the legislative regimes in Australia and England which have altered the doctrine of privity with the objective of assessing their suitability for adoption in the Malaysian context. This chapter examined the objects of the different Acts, analysed the elements and operation of the Acts in practice, in particular whether the reforms have improved the position of third parties and ascertained the third parties who did not benefit from the legislative intervention. Following the recommendation of the English Law Revision Committee in 1937, Western Australia and Queensland873 reformed the doctrine of privity to ensure third parties were able to enforce contracts that conferred benefit on them. The reform was necessary to reverse injustice caused by the rigid application of third party privity rules874 The injustice to third parties is demonstrated by the judicial decisions analysed in the previous chapter, Chapter 3, where the cases indicated that third party beneficiaries did suffer from injustice as well as uncertainty of rights as a result of the doctrine of privity.

In England, various reasons were given by the English Law Commission as justifications for the reform of the doctrine, including the need to respect the intention of the parties, the injustice to third parties who are unable to enforce benefits conferred

873 Also in the Northern Territory. 874 See Explanatory memorandum to the Western Australia Property Law Bill 1969 and Queensland Law Reform Commission in Working Paper on a Bill to Consolidate, Amend and Reform the Law Relating to Conveyancing, Property and Contract and to determine the Application of Certain Imperial Statutes (Report No.16).

330 on them and the problems and inconveniences caused to commercial transactions.875 The justifications are supported by the cases examined in Chapter 3.

The legislation analysed and compared in Chapter 4 were:

• Section 11 of the Property Law Act 1969 (WA); • Section 55 of the Property Law Act 1974 (Qld); • Subcontractors’ Charges Act 1974 (Qld); • Section 48 of the Insurance Contracts Act 1984 (Cth); and • Contracts (Rights of Third Parties) Act 1999 (UK).

The efficacies of the reforms were evaluated through an analysis of the post reform judicial decisions. The extent of the application of the Acts, their judicial interpretation and the problems arising from the application to third parties were analysed. From the examination of these Acts and from the analysis of the post reform cases, the third parties who did not obtain the benefit of the reforms were identified. The effectiveness of the reforms was evaluated and improvements to be gained from reform were identified. In summary, Chapter 4 established:

• The Western Australia model lacked the necessary specificity to be transferable to the Malaysian context. The meaning of the provisions was left to be decided by judicial interpretation which led to differences in opinion, and created uncertainty. The model also did not extend to non-existent third party beneficiaries such as unborn children; • The Queensland model provided greater certainty but contained barriers to application such as the dual intention test, the need for acceptance of the promise by the third party and the requirement for consideration from the promisee. These same issues create difficulties for the application of this provision to sub-contractors; • The Subcontractors’ Charges Act 1974 is not desirable for adoption in Malaysia due to the difficulties in meeting strict technical requirements for

875 See Law Commission, 'Privity of Contract: Contracts for the Benefit of Third Parties' (No. 242, 1996).

331

the creation of a charge over the money payable by the employer; in assisting sub-contractors in obtaining payment due to undesirable effects in its actual application; • Section 48 of the Insurance Contracts Act 1984 (Cth) proved to be effective in securing the rights of third party beneficiaries under insurance contracts; • The English 1999 Act is able to assist third party beneficiaries under insurance contracts and also other types of third parties, but, it was not suitable for sub-contractors seeking direct payment from employers; and • The chapter concluded with the identification of three potential legislative frameworks that may be implemented in order to abrogate the privity rule i.e general legislation which abrogates the privity rule for all contracts in certain circumstances, general legislation together with specific legislation abrogating the rule for particular contracts such as insurance and construction; and no general legislation only specific legislation for particular contracts.

7.2.4 Chapter Five

Chapter 5 analysed the existing legislative reform in Malaysia with the objective of proposing the final rationales for abolition or amendment of the doctrine of privity in Malaysia, having regard to the commercial and legal context. The existing legislative intervention has resulted in certain types of third parties being exempted from the doctrine of privity. It was the objective of this chapter to examine the types of contracts and third parties currently benefitting from legislative intervention in Malaysia. From this examination, conclusions about the impact of the present regime on third parties’ rights in Malaysia were drawn. The chapter concluded by addressing why further reform is necessary.

The legislation analysed was:

• Insurance Act 1996 (IA 1996); • Civil Law Act 1956 (CLA 1956); • Road Transport Act 1987 (RTA 1987);

332

• Construction Industry Payment and Adjudication Act 2012 (CIPAA 2012); • Contracts Act 1950 (CA 1950); • Bills of Exchange Act 1949 (BEA 1949); and • Consumer Protection Act 1999 (CPA 1999).

The Acts were analysed in light of judicial decisions relevant to third party beneficiaries. The purpose of the analysis was to understand the scope of the legislation and to identify which third parties obtained the benefit of the existing legislation.

From the analysis, it was concluded that not all types of third parties benefit from current legislative intervention. In short, the analysis disclosed:

• The IA 1996 did not apply to parties such as parents of the insured, customary spouse, step parents, future spouse, unborn children, siblings and employees who did not pay the premium to the group policy owner ; • Section 23 of the CLA 1956 failed to enhance the rights of illegitimate children, step children, parents, families member and other relatives; • Under road accident policies, the RTA 1987 did not apply to third parties who suffered property damage, an injured employee and an injured passenger travelling for personal reasons or convenience; • CIPAA 2012 did not apply to sub-contractors who were promised direct payment from employers and it did not abrogate the doctrine of privity in construction contracts; • The BEA 1949 was applicable to negotiable instruments only; • The benefit of the CPA 1999 did not extend to a consumer who bought or used defective products for business purposes and not all types of goods were covered by the CPA 1999; • There was diversity of interpretation of the legislation analysed in relation to the entitlement to the rights accorded under the different Acts, which led to confusion and uncertainty about the rights of the third parties in question; • Further reform is need. More types of third party beneficiaries need to be able to enforce the benefit in the contracts; and

333

• A preliminary recommendation that the most appropriate approach to be adopted in Malaysia is the enactment of both general and specific legislation targeting particular contracts.

From an examination of the legislation, it was concluded that the intervention and protection offered by the present regime was not adequate and not all types of third parties were able to benefit from the legislation. The statutory rights were limited to certain types of third parties only and the application of the legislation was far from satisfactory. There were discrepancies in interpretation of the legislation and inconsistency as to the types of third parties that could benefit from the legislation as evidenced between s 23 of the CLA 1956 and s 166 of the IA 1996 and also in the RTA 1987. Such irregularities could cause unpredictability and uncertainty of rights faced by the third party beneficiaries.876 The recently enacted CIPAA was also inadequate for protecting the rights of sub-contractors in construction contracts. It was unfortunate that being the only specific legislation in facilitating and securing payment in the construction industry, the CIPAA did not contain a provision allowing direct payment from employers since this was the real problem faced by sub-contractors in Malaysia as revealed in Chapter 3.

Therefore, Chapter 5 concluded that the abolition or amendment of the doctrine of privity in Malaysia should be implemented, as the present legal regime fails to adequately protect the rights of third party beneficiaries.

7.2.5 Chapter Six

Chapter 6 addresses research question 6: If the doctrine of privity in Malaysia is to be reformed, what principles should underpin this reform?

Chapter 6 built upon the recommendations in Chapter 5 that further reform of the doctrine of privity in Malaysia was necessary and also upon the preliminary recommendation that the most appropriate approach to be adopted in Malaysia is the enactment of general legislation and specific legislation targeting particular contracts. It

876 Refer to Chapter 5, 244 under the heading Inconsistency between s 23 of the CLA 1956 and s 166 of the IA 1996.

334 was the aim of Chapter 6 to identify and develop effective law reform criteria based on the current problems faced by third party beneficiaries in Malaysia and to use those criteria to recommend the most suitable and viable model for Malaysia.

The identified problems faced by third party beneficiaries in Malaysia were uncertainty of rights, complexity of litigation due to the need to establish common law exceptions to the doctrine of privity and the disinclination of the courts to develop methods to circumvent the doctrine of privity. The state of uncertainty and the diversity of interpretation could act as disadvantages to the public and future third parties as they would not be able to predict the availability of their rights. This is against the public interest. Furthermore, the financial loss suffered by sub-contractors in construction contracts should be compensated so as to ensure justice is served.

By reference to both case and legislative analysis, principles of law reform established by the Malaysian Law Reform Commission and the principles of distributive and corrective justice, Chapter 6 proposed three criteria for assessing the suitability of proposed reforms in Malaysia.

The proposed criteria were:

• The law must provide for certainty and clarity of the rights of third parties; • The law must have the capacity to benefit and protect the public interest; and • The law must allocate rights on the basis of justice and fairness.

These three criteria were used to evaluate the legislative models analysed in Chapter 4; s 11 of the PLA 1969 (WA), s 55 of the PLA 1974 (Qld), SCA 1974 (Qld), s 48 of the Insurance Contracts Act 1984 (Cth) and the 1999 Act (UK). The analysis concluded:

• Compared to other models, England’s 1999 Act was the most suitable to be adopted in Malaysia with slight modifications as it was capable of satisfying the suggested criteria. • The 1999 Act, with recommended changes, fulfilled the three criteria so as to protect and enhance the rights of third party beneficiaries in insurance contracts and also in other types of contracts, but not in construction contracts. The 1999

335

Act failed to fulfil the third criterion which was that the law must provide justice and fairness to third party beneficiaries, in the context of construction contracts. The reason was the provision in the 1999 Act877 allowed the employers to argue that the parties to the contract did not intend the promise to be enforceable by sub-contractors. Furthermore, the 1999 Act fails to provide an answer to the issue raised in the case of British Eagle International Airlines Ltd v Compagnie Nationale Air France878 on the legality of the direct payment provisions in the standard form contracts, in the event of insolvency of the main contractors. The direct payment provisions are against the pari passu principle879 in insolvency law. • Malaysia must have specific legislation that targets the problem in relation to the claim of direct payment made by the sub-contractors against employers.

7.3 RECOMMENDATIONS FOR REFORM This research has established the problems caused by the doctrine of privity in Malaysia. The problems are:

i) Discrimination of rights where not all types of third party beneficiaries are able to enforce the benefit of promises in contracts. This was because of the uncertainty in the operation of the common law exceptions and diverse interpretation of existing legislation; ii) In insurance contracts, if the named third party beneficiaries were not covered under the existing legislation and common law, being third parties not privy to the contract of insurance, they would not be able to benefit from the insurance money due to the doctrine of privity despite the intention of the parties to the contract; and

877 Refer to s 1(2) which reads: “Subsection (1)(b) does not apply if on a proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party.” 878 [1975] 1 WLR 758. See also Re Right Time Construction Co Ltd (in liquidation) (1990) 52 BLR 302. 879 Refers to a rule whereby all unsecured creditors rank equally. The principle prohibits preferential treatment of any unsecured creditor over another. In the context of construction law, the sub- contractors are the unsecured creditors and therefore should not be treated above other unsecured creditors.

336

iii) Injustice and unfairness especially in relation to sub-contractors who had no recourse for loss suffered as a result of default of payment either by the main contractors or by employers.

In light of the problems faced by third party beneficiaries in Malaysia, Chapter 6 made the following recommendations:

• The existing types of third party beneficiaries who were already equipped with the right to enforce benefits should be expanded to include all types of third parties. There should not be discrimination between different types of third party beneficiaries. • General legislation based on England’s 1999 Act should be enacted in Malaysia with some modifications to ensure the efficacy of the proposed reform. This general legislation will give rights to various categories of third party beneficiaries to sue for the benefits promised by the contracting parties. It will also eliminate uncertainty and unpredictability as to the rights of third parties as the proposed legislation specifically identifies who is entitled to enforce the benefits in the contracts. Further, general legislation would also enhance efficacy and efficiency in the litigation as it eliminates need for courts to apply common law exceptions which can be timely and costly. The existence of general legislation could also curb the courts’ reluctance to abrogate the doctrine of privity. • With the recent enactment of the CIPAA in June 2012, Malaysia already has a specific and targeted legislation in the construction industry. As the CIPAA is silent in relation to the issue of direct payment provision from employers, it is proposed that the CIPAA be amended to include a provision recognising direct payment made by employers. With the proposed amendment, the CIPAA will be specific legislation that has the effect of abrogating the doctrine of privity in third party beneficiary contracts.

337

7.3.1 General legislation

General legislation based on England’s 1999 Act, as proposed by this thesis will confer upon third party beneficiaries the right to claim the benefits contained within a contract or to sue the parties to the contracts for the benefits promised. The most important provision in the 1999 Act, s 1 reads:

(1) Subject to the provisions of this Act, a person who is not a party to a contract (a ‘third party’) may in his own right enforce a term of the contract if: (a) The contract expressly provides that he may, or (b) Subject to subsection (2), the term purports to confer a benefit on him.

The word ‘term’ in s 1 could cause problems for third parties, particularly in circumstances where there is more than one term that purports to benefit a third party. The third party will need to prove each of the terms provides an express benefit to satisfy s 1.880 Therefore, it is proposed that s 1 be modified.

After the proposed modification, s 1 will read as follows:

(1) Subject to the provisions of this Act, a person who is not a party to a contract (a ‘third party’) may in his own right enforce a promise/agreement if: a) The contract expressly provides that the third party may, or b) Subject to subsection (2), the promise/agreement purports to confer a benefit on the third party.

The above provision would entitle third parties to enforce the benefits promised in the contract. By this provision, any third parties, including those under insurance contracts will have a statutory right to enforce the promise or benefits rather than trying to find ways to circumvent the doctrine of privity which has proven to be unreliable and inconsistent in result. The parties to the contract under the proposed legislation will be under a legal obligation to fulfil their promises to third parties as promised in contracts. Unlike any other statutory rights that already exist in Malaysia, as discussed in Chapter 5, this provision will apply to all types of third parties beneficiaries. Discrimination between third parties with similar merits under the same type of contract will be reduced or eliminated.

880 See Chapter 6, 302[6.4.1].

338

In relation to insurance contracts under the proposed Act, the insured will be able to specify any person including the insured’s future spouse or unborn children to be named as the beneficiaries of the insurance moneys. This is because the process of identification will not require the third party to be in existence at the time of nomination. The third party may be expressly identified by name, as a member of a class or by a particular description. The effect of this recommendation will be to further expand the type of third party beneficiaries who are able to enforce the benefits promised under a contract. Chapter 6 recommended that the 1999 Act, s 1(3) as it currently reads should be adopted:

The third party must be expressly identified in the contract by name, as a member of a class or as answering a particular description but need not be in existence when the contract is entered into.

To prevent injustice to a third party who is unaware of the existence of the benefit, the requirement of acceptance should not be a condition to the enforcement of the benefit. A third party can enforce the benefit upon creation of the benefit by the contracting parties with or without accepting and communicating their acceptance or assent. Therefore, neither the provision in the 1999 Act, the PLA 1974 (Qld) nor the PLA 1969 (WA) should be adopted. It is also proposed that should the third party assent to or accept the benefit and this is duly communicated, such communicated acceptance will bind the contracting parties and any variation to the benefit by the latter without the third party’s consent should not have any effect. On the other hand, if the third party chooses not to assent or accept the benefit or not to communicate acceptance the right to object against any variation to the benefit without their consent will be forfeited.

In addition, it is also proposed that the contracting parties who promised the benefit should have a statutory obligation to notify the third party about the existence of the benefit.

To ease some concerns raised by those who are against reform of the doctrine of privity, the proposed general legislation also provides clarity in relation to the rights of parties to the contract. The 1999 Act provides for the circumstances where contracting parties may vary the rights under the contract with and without consent of the third party.

339

Further flexibility is given to the courts to dispense with the requirement of obtaining a third party’s consent especially when the whereabouts of the third party is unknown. Section 2(1) provides: Subject to the provisions of this section, where a third party has a right under section 1 to enforce a term of the contract, the parties to the contract may not, by agreement, rescind the contract, or vary it in such a way as to extinguish or alter his entitlement under that right, without his consent if- (a) the third party has communicated his assent to the term to the promisor, (b) the promisor is aware that the third party has relied on the term, or (c) the promisor can reasonably be expected to have foreseen that the third party would rely on the term and the third party has in fact relied on it.

Earlier, it was proposed that assent or acceptance by a third party is not required for the enforcement of the benefit. Nonetheless, it is proposed that s 2(1) of the 1999 Act should be adopted as a whole in the proposed law reform in Malaysia. The first limb, i.e. where the third party has communicated his or her assent to the term to the promisor is necessary in the event the third party does accept the benefit and the limb will serve as a cut off date where the right of the parties to vary the contract should cease. Therefore, based on the wording of s 2(1) of the 1999 Act, with slight modification, the right of contracting parties to vary the benefit will read as:

Subject to the provisions of this section, where a third party has a right under section 1 to enforce a promise/agreement, the parties to the contract may not, by agreement, rescind the contract, or vary it in such a way as to extinguish or alter his entitlement under that right, without his consent if— (a) the third party has communicated his assent to the promise/agreement to the promisor, (b) the promisor is aware that the third party has relied on the promise/agreement, or (c) the promisor can reasonably be expected to have foreseen that the third party would rely on the promise/agreement and the third party has in fact relied on it.

In addition, section 2(4) and s 2(5) of the 1999 Act, which contains a provision allowing the contracting parties to dispense with the consent of the third party prior to variation, should be adopted without changes.

340

On the question of whether the wrongful conduct of a third party will render the third party’s right void, voidable or unenforceable, the current provision of s 55(4) of the PLA 1974 (Qld) should be adopted as the provision deals with the defences available to the promisor. Section 55(4) provides that the promisor is entitled to rely on defences and any matter which will render the promise to be void, voidable or unenforceable.

Another important feature of the general legislation is that it can apply to commercial contracts generally as well as offering relief for third parties under insurance contracts. Third parties in cases like Kepong Prospecting Ltd v Schmidt,881 Bacom Enterprises Sdn Bhd v Jong Chuk 882 and Chung Shan Kwang v Ise Ichi Japanese Restaurant Sdn Bhd883 as reviewed in Chapter 1884 and also in Chapter 6885 will have a statutory right to claim the benefits conferred by the particular contracts. The effect of the legislative reform will be to remove the application of the doctrine of privity and the need to rely on the uncertainty of asserting a common law exception to support their claims. Under the general legislation, third parties in these cases would fall within the ambit of the proposed s 1 as they are usually expressly identified in the contracts as persons who should received a benefit886 or they could argue that the terms of the contract purport to confer benefit on them.887 Either way, the recommendation that Malaysia must enact general legislation will particularly benefit third parties under insurance contracts and as well as third parties in other types of commercial contracts.

7.3.2 Specific and targeted legislation

In addition to general legislation, separate and specific legislation is necessary to resolve the injustice suffered by sub-contractors in the construction industry. In Chapter 6, it was argued that construction contracts, due to the unique and particular nature of

881 [1968] 1 MLJ 170. 882 [2011] 5 MLJ 820. 883 [2005] 3 MLJ 471. 884 Refer to 12-14. 885 Refer to 312 [6.4.1.1]. 886 See Kepong Prospecting Ltd v Schmidt [1968] 1 MLJ 170; Bacom Enterprises Sdn Bhd v Jong Chuk [2011] 5 MLJ 820. 887 Chung Shan Kwang v Ise Ichi Japanese Restaurant Sdn Bhd [2005] 3 MLJ 471.

341 the construction process, required legislative reform tailored for specific needs.888 It was argued that the 1999 Act would not be able to secure payments to sub-contractors due to s 1(2), which allows an employer to argue that the contracting parties did not intend direct payment provisions to be enforceable by a sub-contractor.

Malaysia has now enacted the CIPAA following the steps taken by states in Australia as well as England to secure payment to sub-contractors from the main contractor. Despite the legislature’s good intention to provide statutory protection for claims for payment for works done, the CIPAA is inadequate in dealing with the injustices suffered by sub- contractors as a result of the doctrine of privity. The CIPAA only deals with the right of a subcontractor to progress payments, speedy adjudication and the right to claim payment from employers in the event of default by a main contractor. The CIPAA does not provide a right for sub-contractors to enforce payments promised by employers to pay directly the sub-contractors. Direct payment is allowed only when a main contractors has defaulted in payment.

To provide for the right of sub-contractors to claim direct payment from employers, modification of s 30(1) was suggested in Chapter 6 so as to allow direct payment from employers, in accordance with a promise to do so, in any circumstances rather than only where there has been default in payment by the main contractor. Proposed s 30(1) is:

(a) If a party fails to pay in whole or at all the adjudicated amount pursuant to an adjudication decision or where there has been a promise by the principal himself to pay, the principal of that party must pay the outstanding amount to the unpaid party provided that the unpaid party shall have made a written request to the principal for payment. (b) This provision should apply despite anything to the contrary in a contract containing the promise.

The suggested amendment will promote fairness and justice for sub-contractors as it allows payment to be made directly from the employer to the sub-contractor for work done under a sub-contract. In addition, the enforcement of the above provision will

888 See Jane Jenkins and James Duckworth in Robert Merkin, 'Privity of Contract the Impact of the Contracts (Rights of Third Parties) Act 1999' (First ed, 2000), 207.

342 validate the direct payment provision in the standard form contract commonly used in the construction industry. The employer and the courts may no longer use the doctrine of privity as a ground for refusing payment to a sub-contractor as seen in Fimatic Engineering Sdn Bhd v Bumi Negeri Sdn Bhd889 and Mahkota Technologies Sdn Bhd v Bina Jati Sdn Bhd. 890

In conclusion, it is argued that the enactment of general legislation based on England’s 1999 Act and the modification of the CIPAA will remedy and improve the position and rights of third party beneficiaries in Malaysia, especially under insurance and construction contracts. The suggested reforms have the ability to provide certainty for third parties in Malaysia and at the same time, benefit the public as well as ensuring justice to these third parties.

The recommendations and how they address the deficiencies of the current law is summarized in the table below.

Table 7.1: How the proposed reform will resolve the problems presently faced by third party beneficiaries in Malaysia

Present Current law Proposed Solution situations/problems

Discrimination of a) Under s 166 of the To enact general legislation based rights where not all Insurance Act 1996 (IA on England’s 1999 Act model. types of third party 1996), only a legal spouse, beneficiaries are able children and parents (if no Discrimination of rights could be to enforce the benefits spouse or children exist at resolved via the adoption of s 1 of in the contracts. the time of nomination) the 1999 Act but with modification. have the right to enforce Section 1 after the proposed payment of insurance modification will read: moneys as designated to them by the parties to the (1) Subject to the provisions of this contracts. Act, a person who is not a party to a contract (a ‘third b) In a group policy party’) may in his own right insurance, under s 186(3) enforce a promise/agreement and s 186(4) of the IA if: 1996, employees or a) The contract expressly

889 [1995] 2 BLJ 121. See Chapter 3, 86. 890 [2001] 1 MLJU 749. See Chapter 3, 88.

343

workers who did not pay provides that the third the premium money to the party may, or group policy owner could b) Subject to subsection (2), not claim the insurance the promise/agreement moneys despite suffering purports to confer a benefit injury/death in the course on the third party. of employment. The proposed s 1 expands the c) Section 166 of the IA categories of third party 1996, s 23 of the Civil Law beneficiaries able to enforce the Act 1956 only covers the benefits promised in contracts. Any spouse and children of the third party has the right under s 1 insured. Parents and others as long as the general requirements are totally excluded even under the provision are satisfied. though that is the intention With the proposed solution, third of the insured. party beneficiaries no longer have to rely on existing statutory d) Section 96 of the Road protections and the common law Transport Act 1987 (RTA exceptions to claim for the benefits 1987) only covers an conferred in the contracts. injured third party who dies and suffers bodily injury Other proposed provisions are as and passenger in a contract follows: of hire or reward or in the course of employment. For identification of a third party, s Other than these categories 1(3) of the 1999 Act as it currently of third party, they are not reads should be adopted: covered by the RTA 1987. “The third party must be expressly e) In the Consumer identified in the contract by name, Protection Act 1999 (CPA as a member of a class or as 1999), the rights as stated answering a particular description under s 50, s 39 and s 41 but need not be in existence when do not apply to person who the contract is entered into.” buy or use goods for business purposes and also For defence available to promisor, to a buyer who is not the wording of s 55(4) of the PLA within the definition of (Qld) should be adopted: consumer. In these “any matter which would in circumstances, the doctrine proceedings not brought in of privity still operates. reliance on this section render a The CPA 1999 also is promise void, voidable or supplemental in nature unenforceable, whether wholly or which means that the Sale in part, or which in proceedings of Goods Act 1957 which (not brought in reliance on this promotes the doctrine of section) to enforce a promissory privity continues to apply. duty arising from a promise is

available by way of defence shall, f) Lastly, the right to sue the in like manner and to the like parties to the contract are extent, render void, voidable or

344 given to third parties in unenforceable or be available by negotiable instruments way of defence in proceedings for only by virtue of s 38(1) of the enforcement of a duty to which the Bills of Exchange Act this section gives effect.” 1949 (BEA 1949) It is proposed that the requirement of acceptance should not be a condition to the enforcement of the benefit. A third party may enforce the benefit with or without accepting and communicating their acceptance or assent. But should the third party choose to communicate acceptance of the benefit, the contracting parties are no longer allowed to vary the benefit without the third party’s consent. A third party who chooses not to both accept the benefit and communicate acceptance will forfeit the right to object to any variation to the benefit without their consent.

In addition, it is also proposed that the contracting parties who promise the benefit should have a statutory obligation to notify the third party about the existence of the benefit.

In relation to the variation of a right by contracting parties without the third party’s consent, section 2(1) of the 1999 should be adopted with slight modification as to the word ‘term of contract’ in order to ensure consistency with the proposed s 1 of the law reform. The proposed provision would read as follows:

“ Subject to the provisions of this section, where a third party has a right under section 1 to enforce a promise/agreement of the contract, the parties to the contract may not, by agreement, rescind the contract, or vary it in such a way as to extinguish or alter his entitlement under that right, without his consent

345

a) Where the third party has communicated his assent to the promise/agreement to the promisor, b) The promisor is aware that the third party has relied on the promise/agreement, and c) The promisor can reasonably be expected to have foreseen that the third party would rely on the promise/agreement and the third party had in fact relied on it.

Section 2(4) and s 2(5) of the 1999 Act as they currently read should be adopted: a) The consent of the third party cannot be obtained as his whereabouts cannot reasonably be ascertained, or b) The third party is mentally incapable of giving his consent, or c) It cannot reasonably be ascertained whether or not the third party has relied on the term.

These provisions deal with circumstances where the requirement of consent from the third party may be dispensed with by the court on the application of the contracting parties.

Injustice especially to It is currently the law in This thesis proposes the repeal of s sub-contractors who Malaysia that there is no 30(1) of the CIPAA in order to do not have recourse statutory right given to sub- allow sub-contractors to enforce to a claim for the loss contractors to claim payments the promise of direct payment by suffered as a result of from employers as promised in employers. The repealed s 30(1) default in payment the contracts. will be replaced with a new either by the main provision as follows: contractors or by the The existence of the direct employers. payment provision in the a) If a party fails to pay in whole standard form contract is or at all the adjudicated regarded as void and

346

unenforceable. amount pursuant to an adjudication decision or where there has been a promise by the principal himself to pay, the principal of that party must pay the outstanding amount to the unpaid party provided that the unpaid party shall have made a written request to the principal for payment. b) This provision should apply despite anything to the contrary in a contract containing the promise.

With this recommendation, it is hoped that problems and losses suffered by sub-contractors due to the doctrine of privity are resolved. The sub-contractors now have statutory rights to sue the employers for direct payment.

Uncertainty of rights a) Inconsistency in the Similarly, the proposed s 1 of the concept of a statutory trust general legislation as stated above created under s 166 of the is able to resolve the state of IA 1996 and s 23 CLA uncertainty as third parties no 1956. Both provisions aim longer have to rely on these at offering protection to existing statutory protections which the immediate families but have been proven to create different coverage, scope uncertainty and ambiguity as to the and interpretation give rise rights of third parties. to confusion and ambiguity in the current state of law. b) Based on judicial decisions, there is inconsistency of interpretation on the applicability of s 96 and s 91 of the RTA 1987. An example of this inconsistency, amongst others is whether an injured passenger ‘by reason of or in pursuance of a contract of employment’ is entitled to claim since the phrase

347

was interpreted inconsistently by the courts.

Further the table below illustrates how third party beneficiaries who are unable to take advantage of existing Malaysian legislation, as discussed in Chapter 5,891 will be able to benefit from the proposed general legislation.

Table 7.2: How the proposed reform benefits third parties not provided for by the present legislation in Malaysia

The Act Third Party who is not How they are covered and covered by the existing protected under the proposed legislation general legislation

Section 166 of the IA a) Parents of the policy owner Under the proposed s 1, not only will 1996 (if there exists a spouse or the spouse and the children of the children of the policy insured have the right to claim the owner at the time of insurance moneys, but anyone nomination), intended by the insured to be the b) Customary spouse, beneficiary of the insurance policy c) Step-parents, (for examples, see the list in the d) Adopted parents, second column) may in her or his e) Cohabitees, own right enforce the promise and f) Future spouse, claim the money, provided that the g) Unborn/future children, insurance policy expressly promises h) Other family members, to benefit them. i) Relatives, j) Friends, The list of people that can be named k) Third parties in other types as third party beneficiaries is of insurance contracts expanded and no longer restricted to the spouse or children of the insured. These people will fall under the proposed s 1.

Section 186(3) and s a) Employee/worker who has Under the proposed s 1, even though 186(4) of the IA 1996 not paid the premium to the employee/worker does not pay the group policy owner. the premium under the insurance policy, the employee/worker will be covered under the proposed reform as long as the conditions are fulfilled, i.e. the insurance policy expressly provides the rights to them or the policy purports to confer the benefit of the insurance money on

891 Refer to Chapter 5, Table 5.1, 262.

348

them. Under the proposed general legislation, the payment of the premium is no longer a pre-requisite for the enforcement of rights under a group insurance policy.

Section 23 of the a) Illegitimate children, The inconsistency between the rights CLA 1956 b) Children adopted outside in s 23 of CLA 1956 and s 166 of IA the Malaysian Adoption 1996 will be eradicated under the Act 1952, proposed general legislation. Akin to c) Step-children, s 166 of IA 1996, the list of people d) Parents (including adopted that can be named as third party and step-parents), beneficiaries under s 23 of CLA e) Other family members 1956 will be of little assistance. such as siblings, nieces, Under the proposed s 1, the people in and nephews, the list (see second column) will f) Other relatives and friends. benefit from the provision provided they are named in the insurance policies as the third party beneficiaries or the insurance policies purport to confer a benefit on them.

Section 96 of the a) Third parties who suffers A compulsory motor insurance RTA 1987 property damage, policy would fall under the proposed b) Injured employees, and general legislation given that it c) Injured passengers contains a statutory term that the travelling for personal insurer is to pay direct to the injured reasons or convenience. party his or her awarded judgment sum. 892 The complexity and uncertainty in the application of the RTA 1987 resulting in categories of injured third parties (for examples, refer to the second column) being left out from claiming the benefit of the insurance policy would be eliminated. With the enactment of the proposed general legislation and in particular, the proposed modified s 1, regardless of the types of injured third party and the types of damage, these third parties will fall under the proposed s 1 and will be able to claim from the insurer for the injuries they suffer; so long as the conditions are fulfilled.

892 The Malaysian RTA 1987 s 96(1).

349

Section 50, s 39 and s a) Person who buys or uses Under the proposed s 1 of the 41 of the CPA 1999 goods for business general legislation, the provisions purposes, i.e. a non- make it irrelevant that the third consumer. parties are not consumers. In the event of defective products, any third parties or non consumer buyer would benefit from the reform and have the right to sue directly the seller, manufacturer or retailer for the benefits contained in the express or implied terms.

S 30(1) of the a) Sub-contractors who have Under the proposed new s 30(1), the CIPAA been promised to be paid provision will provide rights to sub- directly by employers for contractors to enforce direct payment the works done in sub- provisions contains either in a contracts. standard form of contract or direct payment promised expressly or impliedly by employers.

7.4 IMPLEMENTING THE RECOMMENDATIONS

As said by Datuk V.K.Liew, the Deputy Minister in the Prime Minister’s Department,

“In the end laws must serve the society and the community’s needs, not obstruct and hinder....893”.

It is submitted that the doctrine of privity must be reformed to ensure the law is consistent with society’s views and current needs.

Any proposal to reform and introduce a new law may be submitted to the Law Revision and Law Reform Division of the Attorney General’s Chambers. Prior to this, the subject matter of the reform must be approved in principle by the Cabinet. When the outlines have been worked out, the proposal is sent to the Parliamentary Draftsperson in the Attorney-General’s Chambers to be put into legal language and form: the proposal

893 Daily Express, online newspaper, Tuesday, June 14, 2011, http://www.dailyexpress.com.my/news.cfm?NewsID=78288, retrieved 20 Oct 2011.

350 becomes a ‘Bill’. The Bill must be tabled and approved by the Cabinet and be ready to be introduced and debated in Parliament.894

To give effect to the proposed recommendations and to avoid complexity, uncertainty and to ensure standardisation throughout all existing statutes containing the doctrine of privity, it is further recommended that an overriding clause be included in the proposed general legislation as follows:

The Act shall operate notwithstanding provisions included in other legislation that permits only parties to the contract to have the right to sue. Any provisions in conflict with this Act shall be unenforceable to the extent of the inconsistency.

In addition, this thesis recommends that the legislature specifically address the relevant provisions in the existing legislation to ensure conformity and consistency with the proposed general legislation. It is recommended that:

• Section 166(1) of the IA 1996 and s 23(1) of the CLA 1956 need to be amended to allow any person to be named as a third party beneficiary, therefore removing the limitation on spouses, children or the parents (if the insured does not have a spouse or child at the time of nomination). • Section 163(1) of the IA 1996 needs to be amended so as to enable a future wife or future children to be named as third party beneficiaries. • Section 186(3) of the IA 1996 and s 186(4) of the IA 1996 need to be reviewed so that the requirement to pay a premium is dispensed with and any matters regarding insurable interest in the life of the person insured must also be re- evaluated. This will ensure conformity with the proposed s 1 of the general legislation. • Section 91(1)(b) of the RTA 1987 must be revised in order to permit every types of injury or loss, including property damage suffered by a third party, to be claimable.

894 For more details on the law making process in Malaysia, refer Wan Arfah Hamzah and Ramy Bulan, Introduction to Malaysian Legal System (2002).

351

• The proviso to s 91(1) needs to be modified to allow every type of injured third party to enforce a motor insurance policy against the insurer directly. With this modification, employees who are injured in a road accident in the course of their employment and passengers who travel for personal reasons will have the right to claim compensation from the insurer. • The introduction of a general legislation also means that two other legislations that exist concurrently i.e. Contracts Act 1950 and Sale of Goods Act 1957 have to be reviewed to ensure conformity and consistency with general legislation. It is hereby proposed that a new provision is to be included in Contracts Act 1950 and Sale of Goods Act 1957 that state that if the parties to the contract intent to confer benefit to third parties, such intention must be given effect accordingly. This would enable the third parties, for example, a non-consumer buyer to enforce the benefits promised in a contract against the seller/manufacturer/retailer. • In CPA 1999, the main source of the problem in granting the right to sue to the non-consumer buyer/user is in the definition of the consumer. However, to amend the definition would be contrary to the whole purpose and intention of the CPA 1999 which aims to specifically protect the consumer in Malaysia. The CPA 1999 should not be affected by the amendment as the proposed reform could be given effect through amendment of the Sale of Goods Act 1957. • To secure the successful implementation of the proposed new s 30(1) of the CIPAA, any clauses in standard form construction contracts that are utilised in Malaysia, which prohibit the liability of employers to sub-contractors in terms of direct payment provision should be made void and unenforceable. For example, the use of clause 27(f) of the PAM 2006895 which reads ‘neither the existence nor the exercise of any of the foregoing powers nor anything else contained in these conditions shall render the employer in any way liable to

895 PAM 2006 is the successor of the PAM 1998 and PAM 1969. The PAM standard form of contract (prepared by Malaysian Institute of Architects) is used extensively in Malaysia and it was estimated that 90 per cent of the construction contracts in the private sector are based on the PAM form. See Sundra Rajoo, 'The PAM 2006 Standard Form of Construction contract - A Change in Risk Allocation' (2010) 4 MLJA cxlvii. Other types of standard form of contract are those prepared by Institution of Engineers Malaysia (‘IEM’), Construction, Industry Development Board (‘CIDB’) and Public Works Department (JKR).

352

any nominated sub-contractor’ must be made void and unenforceable as it promotes the doctrine of privity and prevents employers being required to make payments to sub-contractors.

7.5 BENEFITS OF THE RESEARCH

Although there has been some previous research in Malaysia addressing the application of the doctrine of privity, the previous research did not attempt to analyse the case law in order to identify the types of third party beneficiaries most affected by the doctrine of privity. Previous postgraduate theses conducted by Clarence Balan, 896 Suzanna Mohamed Isa897 and Tan Pei Meng898 explored the history, origin and doctrinal aspect of the doctrine of privity. Examination of the application of the doctrine of privity was also carried out in those theses, but the studies focused only on the application and effects of the doctrine of privity on the law of contract generally. The theses did not attempt to examine the impact of the doctrine more specifically. In other words, from those theses, it could not be known which types of third parties were most affected by the doctrine of privity and therefore where reform should be targeted.

There have also been several articles that discussed the doctrine of privity and the problems that might occur due to its application. For example, Chan Wai Meng 899 discusses the difficulty that may be caused by the doctrine of privity for a client of a professional firm with limited liability, who has no recourse under the professional indemnity insurance policy affected by the firm. In the area of consumer protection, Sakina Shaik Ahmad Yusoff900 urged that reform of the doctrine of privity in consumer law should take place and that the jus quaesitum tertio must be adopted instead,

896 Clarence Balan, The History of the Beneficiary Action and the Need for Reform of the Parties- Only Rule in Malaysia (PhD Thesis, St. Clements, 2001). See also Clarence Edwin, 'Will Our Common Law See the Demise of Privity of Contract?' (2000) 4 Malayan Law Journal i. 897 Suzanna Mohamed Isa, Jus Quaesitum Tertio: Regim Pemakaian di Malaysia (PhD Thesis, National University of Malaysia, 2009). 898 Tan Pei Meng, The doctrine of Privity in Malaysia: The Need for Reform and the Way Forward (PhD Thesis, Malaya University, 2009). 899 Chan Wai Meng, et al, Limited Liability Partnership: Protection of the Third Parties (2008) http://eprints.um.edu.my/210/ at 2 October 2009. 900 Sakina Shaik Ahmad Yusoff, 'Kontrak Jualan Barang : Doktrin Priviti Sebagai Halangan Tuntutan Pengguna' (2000) 3 Malayan Law Journal cclvii. See also Sakina Shaik Ahmad Yusoff and Suzanna Mohamed Isa, 'Doktrin Privity ke Jus Quaesitum Tertio: Rasional Peralihannya' (2007) 11 Jurnal Undang Undang & Masyarakat 41.

353 following European countries, the United States of America and Scotland. In relation to insurance contracts, Chan Wai Meng901 suggests reform of the doctrine of privity and acknowledges that the enactment of England’s Contracts (Rights of Third Parties) Act 1999 has improved and strengthened the rights of third parties in insurance law. In construction contracts, a discussion of the problems caused by the doctrine of privity was made by Ng Sock Hooi902 and one of the identified problems was payment defaults by main contractors and also by employers. However, no method of reform was suggested by the author.

Therefore, three previous postgraduate theses suggested there were problems caused by the doctrine of privity but none of them analysed or identified the contracts most at risk or suggested reform particularly aimed at these at risk contracts. All of the researchers recommended adoption of a general legislation with England’s 1999 Act. No research was conducted to identify the types of third party beneficiaries most affected by the doctrine of privity.

By comparison to the existing literature, the benefits of this research are: • First, this research identifies third parties under insurance and construction contracts as the third party beneficiaries most affected by the doctrine of privity. • After identifying the types of third parties most affected by the application of the doctrine of privity, this research recommends appropriate and effective reform that ensures third parties most at risk may take advantage of legislative reform. This research concludes that in order to ensure reform of the doctrine is effective the implementation of one generic legislative provision was not adequate to provide a solution for all at risk third parties. • The reform suggested, that is, a combination of general legislation and specific targeted legislation is capable of resolving the problems faced by most third party beneficiaries in commercial contracts, insurance contracts and construction contracts. Specific legislation in the form of amendments to the CIPAA will

901 Chan Wai Meng, Third Party Rights in Insurance Law in Malaysia (Sweet & Maxwell Asia, Malaysia, 2008). 902 Ng Hock Sooi, Legal Position of the Issues Associated with Main Contractor's Insolvency (Master Thesis, Universiti Teknologi Malaysia, 2006).

354 assist in creating a new statutory right for sub-contractors to claim for direct payment from employers as promised. The recommendations as suggested in this research will provide certainty of rights and an appropriate allocation of rights between contracting parties and third parties.

355

Bibliography

Articles/books/reports/conference papers/thesis

A. Mohaimin Ayus, Law of Contract in Malaysia (Sweet & Maxwell Asia, 2009).

Adams, J.N and Brownsword, R, 'Privity and the Concept of a Network Contract' (1990) 10 Legal Studies 12.

Adams, J.N. and Brownsword, R, Key Issues in Contract (Butterworths, London, 1995).

Adams, J.N., Beyleveld, D and Brownsword, R, 'Privity of Contract: The Benefits and the Burdens of Law Reform' (1997) 60(2) The Modern Law Review 238.

Ali Mohammad Matta, 'Claimability of Economic Loss: Malaysia Takes a Stand Amid Inconsistencies' (2003) 4 Malayan Law Journal clxxviii.

Andrews, N, 'Strangers to Justice no Longer: the Reversal of the Privity Rule under the Contracts (Rights of Third Parties) Act 1999. (United Kingdom)' (2001) 60(2) Cambridge Law Journal 353.

Aristotle, The Nicomachean Ethics (Penguin Books, London, 1976).

Ashton, G, 'Equal Access to Justice' (1997) 19(1) Liverpool Law Review 29.

Atiyah, P.S., An Introduction to the Law of Contract (Fifth ed, Clarendon Press, Oxford, 1995).

Australian Law Reform Commission, 'Insurance Contracts' (Report No. 20 1982).

Beale, H, 'Privity of Contract: Judicial and Legislative Reform. (United Kingdom)(Special Issue: Essays for Professor Brain Coote)' (1995) 9(n1) Journal of Contract Law 103.

Beatson, J, Anson's Law of Contract (28th ed, Oxford University Press, 2002).

Beneficiary to Sue on Contract-Collateral Contracts-Letters of Credit-Exemption Clauses' (1968) 6 Alberta Law Review 124.

Birds, J, Modern Insurance Law (Fourth ed, Sweet & Maxwell, 1997).

Birks, P, 'No Shield for a Stranger' (1975) 1 Poly Law Review 39.

356

Boodman, M, 'Third-Party Beneficiaries in Quebec Civil Law' (2001) 35(2) Canadian Business Law Journal 216.

Bremen, J and Moy, M, 'Subcontractor's Charges - A Cause or Not A Cause?' (2001) 80 (October/November) Australian Construction Law Newsletter 37.

Bresch, M.H, 'Contracts for the Benefit of Third Parties' (1963) 12(1) The International and Comparative Law Quarterly 318.

Bridge, M, 'The Contacts (Rights of Third Parties) Act 1999' (2001) 5 Edinburgh Law Review 85.

Brock, J, 'A Principled Exception to Privity of Contract-Fraser River Pile & (and) Dredge Ltd. v. Can-Dive Services Ltd' (2000) 58 University of Toronto Faculty of Law Review 53.

Burch, J.V, 'Third-Party Beneficiaries to the Construction Contract Documents' (1988) 8 Construction Lawyer (ABA) 1.

Burrows, A, ‘Reforming Privity of Contract: Law Commission Report No 242.’ (1996) Lloyd's Maritime and Commercial Law Quarterly, 467.

Burrows, A, The Australian Law of Restitution: Has the High Court Lost Its Way?, Draft Paper(2008). Burrows, Finn and Todd, Law of Contract in New Zealand (Third ed, LexisNexis NZ Limited, Wellington, 2007).

Butler, D, et al, Contract Law Case Book (Oxford University Press, Victoria, 2009).

Butler, D.A, 'Privity of Contract in Queensland: Recent Developments' 10(5) The Queensland Lawyer 147.

Carter, J.W and Tolhurst, G.J, Restitution Law in Australia (Second ed, Lexis Nexis Butterworth, 2008).

Chan Wai Meng and Usharani Balasingam, 'Delay in the Completion of a New Residential Property: Rights of the Purchaser' (2007) 1 Malayan Law Journal xix.

Chan Wai Meng, Third Party Rights in Insurance Law in Malaysia (Sweet & Maxwell Asia, Malaysia, 2008).

Cheong May Fong, Restitutionary Developments under Part VI, Malaysian Contracts Act 1950, Australian Journal of Asian Law, Vol 7, Issue 1, 2005.

Cheong May Fong, Contract Law in Malaysia (Sweet & Maxwell Asia, 2010).

357

Chetwin, M, Graw, S and Tiong, R, An Introduction to the Law of Contract in New Zealand (Fourth ed, Brookers Ltd, Wellington, 2006).

Clarence Balan, The History of the Beneficiary Action and the Need for Reform of the Parties-Only Rule in Malaysia St. Clements, 2001).

Clarence Edwin, 'Will our Common Law see the Demise of Privity of Contract?' (2000) 4 Malayan Law Journal i.

Collins, H, The Law of Contract (Fourth ed, LexisNexis UK, 2003).

Corbin, A.L, ‘Contracts for the Benefit of Third Persons' (1930) 46 Law Quarterly Review 12.

Corbin, A.L, 'Contracts for the Benefit of Third Persons' (1918) 27(8) The Yale Law Journal 1008.

Corbin, A.L, 'Recent Developments in the Law of Contracts' (1937) 50(3) Harvard Law Review 449.

Costabel, A.M, 'The Himalaya Clause Crosses Privity's Far Frontier-Norfolk Southern Railway Co. v. James N. Kirby, Pty Ltd' (2005) 36 Journal of Maritime Law and Commerce 217.

Cremean, D.J, Brooking on Building Contracts (Fourth ed, LexisNexis, Australia, 2004).

Davenport, P, Construction Claims (The Federation Press, New South Wales, 1995).

David Fung, 'Restitution and Section 71 of the Contracts Act 1950' (1994) 2 Malayan Law Journal lxxix.

Davies, W.E.D, 'Jus Quaesitum Tertio in the Common Law-Right of Third-Party Beneficiary to Sue on Contract-Collateral Contracts-Letters of Credit-Exemption Clauses' (1968) 6 Alberta Law Review 124.

Derrington, S and White, M, 'Australian Maritime Law Update: 1996' (1997) 28 Journal of Maritime Law and Commerce 449.

Dowrick, F.E, 'A Jus Quaesitum Tertio by Way of Contract in English Law' (1956) The Modern Law Review 374.

Dowrick, F.E, 'Progress towards a Jus Quaesitum Tertio by Way of Contract' (1958) 21(1) The Modern Law Review 98.

358

Duncan, W.D, 'Jus Quaesitum Tertio and the Matrix of Circumstances' 9(6) The Queensland Lawyer 167.

Eisenberg, Melvin Aron, 'Third-Party Beneficiaries' (1992) 92(6) Columbia Law Review 1358.

Estrada, A, The Philosophy of Law (University Book Supply, Manila, 1970).

Flannigan, R, 'Privity - The End of an Era (Error)' (1987) 103(Oct) Law Quarterly Review 564.

Fotheringham, M, 'The Insurance Contract-Time for Reform of Section 48' (2000) 11 Insurance Law Journal 127.

Fridman, G.H.L, The Law of Contract in Canada (Third ed, Thomson Canada Limited, Canada, 1994).

Furmston, M.P, 'Return to Dunlop v. Selfridge?' (1960) 23(4) The Modern Law Review 373.

Gava, J, 'Is Privity Worth Defending?' in Peter Kincaid (ed), Privity: Private justice or public regulation (Ashgate Publishing Company, 2001).

Girvin, S.D, 'Review: [untitled]' (1995) 13(1) Law and History Review 164.

Graves, J, 'Rights and Obligations of Strangers to the Benefits of Contracts of Insurance' (1996) 7 Insurance Law Journal 4.

Greene, F.D, Petrocine, A.R and FitzPatrick, R.C, 'Holding Accountants Accountable: The Liability of Accountants to Third Parties' (2003) 15(1) Employee Responsibilities and Rights Journal 23.

Gregorczuk, H, 'Better Protection for Subbies: The Subcontractors' Charges Amendment Bill 1998' (1998) (4/98) Legislation Bulletin.

Gutteridge, H.C, Comparative Law: An Introduction to the Comparative Method of Legal Study & Research (2nd ed, 1949).

Halson, R, 'Variation, Privity and Law Reform' in Roger Halson (ed), Exploring the Boundaries of Contract (Dartmouth Publishing, 1996) 83.

Harbans Singh K.S., 'Construction Contracts: An Overview' The Ingenieur 7.

Hardy, S, 'Third Party Beneficiaries to Insurance Contracts' (1997) 8 Insurance Law Journal 145.

359

Hari Chand, Modern Jurisprudence (International Law Book Services, Kuala Lumpur, 1994).

Hatzis, A.N, 'Rights and Obligations of Third Parties' (2000) 3 Encyclopedia of law and economics 200.

Henley, C, 'Insurance' in Robert Merkin (ed), Privity of Contract. The Impact of the Contracts (Rights of Third Parties) Act 1999 (LLP Professional Building, London, 2000).

Hillman, R.A, 'The Crisis in Modern Contract Theory' (1988) 67 Texas Law Review 103.

Hogg, M, 'Perspectives on Contract Theory from a Mixed Legal System' (2009) Oxford Journal of Legal Studies 643.

Hutchinson, T, Researching and Writing in Law (2nd ed, Thompson Law Book, NSW, 2006).

H.L.A. Hart, The Concept of Law (Second ed, Oxford University Press, New York, 1994).

Implementation Steering Committee, 'Securing Our Industry's Future: Report of the Implementation Steering Committee on Security of Payment in the Building and Construction Industry' (1997).

I. L. N, 'Assignment: Application of Third Party Beneficiary Doctrine' (1921) 10(1) California Law Review 62.

Ireland Law Reform Commission, 'Privity of Contract and Third Party Rights' (LRC 88 - 2008, 2008).

Jeevan Lal Kapur, Pollock & Mulla on Indian Contracts and Specific Relief Act (9 ed, N. M. Thripathi Private Ltd, India, 1972).

Jeremy M. Joseph, 'Carriage of Goods by Sea: Hague-Visby for Malaysia?' (1998) 1 Malayan Law Journal i.

Jacobs, M, Security of Payment in the Australian Building and Construction Industry (Third ed, Thomson Reuters 2012).

John Rawls, A Theory of Justice (Revised ed, Harvard University Press, 1999).

Jones, N.G, 'Uses, Trusts, and a Path to Privity.(United Kingdom)' (1997) 56(n1) Cambridge Law Journal 175.

360

J.H. Farrar & A.M. Dugdale, Introduction to Legal Method (Sweet & Maxwell, London, 1990).

Karsten, P, 'The "Discovery" of Law by English and American Jurists of the Seventeenth, Eighteenth, and Nineteenth Centuries: Third-Party Beneficiary Contracts as a Test Case' (1991) 9(2) Law and History Review 327.

Kincaid, P, 'An Outline of the Law of Contract in Australia' (1990) 3(n2) Journal of Contract Law 156.

Kincaid, P, 'Privity and private justice in contract. (Australia)' (1997) 12(n1) Journal of Contract Law 47.

Kincaid, P, 'Privity and the Essence of Contract. (Australia) (Contract: Death or Transfiguration?)' (1989) 12(n1) University of New South Wales Law Journal 59.

Kincaid, P, 'Privity reform in England' (2000) 116 Law Quarterly Review 43.

Kincaid, P, 'The Trident Insurance case: Death of Contract?' (1989) 2(2) Journal of Contract Law 160.

Kincaid, P, 'The UK Law Commission's Privity Proposals and Contract Theory' (1994) 8(n1) Journal of Contract Law 51.

Kincaid, P, 'Third Parties: Rationalising a Right to Sue. (Great Britain)' (1989) 48(n2) Cambridge Law Journal 243.

Koh, K.L, 'Privity of Contract and the Contracts (Malay States) Ordinance, 1950' (1968) 10 Malaya Law Review 125.

Kotz, H, 'Doctrine of Privity of Contract in the Context of Contracts Protecting the Interests of Third Parties, The' (1990) 10 Tel Aviv U. Stud. L. 195.

Kwai-Lian Liew and W. Holligan A.A. Tarr, Australian Insurance Law (Second ed, The Law Book Company Limited, 1991).

Lance, S.J, 'Subcontractors' Charges Legislation' (1987) March Building and Construction Law 6.

Lance, S.J, 'The Subcontractors' Charges Act 1974: Yet More Judicial Clarification' (55) Australian Construction Law Newsletter 52.

Lance, S.J, 'Re Subcontractors' Rights: The Subcontractors' Charges Act 1974 (QId)' (1988) Building and Construction Law 240.

Lawson, F.H, 'Legal Orthodoxy' (1968) 6 Houston Law Review 1.

361

Liang, C, 'Benefits and Burdens of Third Parties under Exception Clauses in Bills of Lading' (1999) 24 Tulane Maritime Law Journal 225.

Longo, J, 'Privity and the Property Law Act: Westralian Farmers Co-Operative Ltd v Southern Meat Packers Ltd' (1983) 15 University of Western Australia Law Review 411.

M.E.C Munaaim, 'Security of Payment Regimes in the United Kingdom, New South Wales (Australia), New Zealand and Singapore: A Comparative Analysis' (Paper presented at the W113-Special Track 18th CIB World Building Congress, Salford, United Kingdom, May 2010).

MacMillan, C, 'A Birthday Present for Lord Denning: The Contracts (Rights of Third Parties) Act 1999' (2000) 63(5) The Modern Law Review 721.

MacQueen, H.L, 'Third Party Rights in Contract: English Reform and Scottish Concerns' (1996) 1 Edinburgh Law Review 488.

Mason, A, 'Privity - A Rule in Search of Decent Burial?' in Peter Kincaid (ed), Privity: private justice or public regulation (Ashgate Publishing Company, 2001).

Master Builders Association Malaysia, 'Proposed Act to Protect Contractors', The Star Online (Malaysia), 9 December 2008.

McCamus, J.D, 'Loosening the Privity Fetters: Should Common Law Canada Recognize Contracts for the Benefit of Third Parties?' (2001) 35(2) Canadian Business Law Journal 173.

Merkin, R, 'Privity of Contract The Impact of the Contracts (Rights of Third Parties) Act 1999' in Robert Merkin (ed), (First ed, LLP Asia Limited, London, 2000).

Merkin, R, 'The Enforcement of Promises Made for the Benefit of a Third Party' in Robert Merkin (ed), Privity of Contract The Impact of the Contracts (Rights of Third Parties) Act 1999 (2000).

Merkin, R, 'Undisclosed Principals in Insurance Law.(United Kingdom)' (2006) 17(1) King's College Law Journal 111.

Millner, M.A, 'Ius Quaesitum Tertio: Comparison and Synthesis' (1967) 16(2) The International and Comparative Law Quarterly 446.

Mitchell, C, 'Privity Reform and the Nature of Contractual Obligations' (1999) 19 Legal Studies 229.

Mohammad Naqib Ishan Jan, Law and Commerce the Malaysian Perspective (IIUM, 2011).

362

Monserud, G.L, 'Blending the Law of Sales with the Common Law of Third Party Beneficiaries' (2000) 39 Duquesne Law Review 111. Montrose, J.L, 'Jus Quaesitum Tertio' (1957) 20(6) The Modern Law Review 658.

Murdoch, J and Hughes, H, Construction Contracts. Law and Management (E & FN Spon, London, 1992).

Newman, R.H, 'The Doctrine of Privity of Contract: The Common Law and the Contracts (Privity) Act 1982' (1982) 4 Auckland University Law Review 339.

Neyers, J.W, 'Explaining the Principled Exception to Privity of Contract' (2007) 52 McGill LJ 757.

Ng Hock Sooi, Legal Position of the Issues Associated with Main Contractor's Insolvency Universiti Teknologi Malaysia, 2006).

Noushad Ali Naseem Ameer Ali, 'A "Construction Industry Payment and Adjudication Act": Reducing Payment-Default and Increasing Dispute Resolution Efficiency in Construction.' (2006) (3rd Quarter) Master Builders.

Patterson, E.W, 'An Apology for Consideration' (1958) 58(7) Columbia Law Review 929.

Pearson, G.D, 'Joshua Williams Memorial Essay 1981-Privity of Contract: Proposed Reform in New Zealand', (1981-1984) 5 Otago L. Rev 316.

Peel, E, The Law of Contract (Twelfth ed, Sweet & Maxwell Limited, London, 2007).

Pejovic, C, 'Civil law and Common Law: Two Different Paths Leading to the Same Goal' (2001) 32 Victoria University of Wellington Law Review 817.

Peter de Cruz, Comparative Law in a Changing World (3rd ed, Routledge-Cavendish, 2007).

Phang, A, 'On Justification and Method in Law Reform - The Contracts (Rights of Third Parties) Act 1999' (2002) 18 Journal of Contract Law 32.

Pollock & Mulla, Pollock & Mulla on Indian Contract & Specific Relief Acts (12 ed, LexisNexis Butterworths, India, 2001).

Prentice, G.N, 'Remedies of Building Sub-Contractors against Employers' (1983) 46 Modern Law Review 409.

Price, N.S, 'Insurers, Privity and Procedure' (1996) 59(5) The Modern Law Review 738.

363

Prosser, W.L, 'The Assault upon the Citadel (Strict Liability to the Consumer)' (1960) 69(Number 7) The Yale Law Journal 1099.

Pyman, S, 'Subcontractors' Charges Act Amendment Bill-There Has Been Movement at the Station'' (2002) March(82) Australian Construction Law Newsletter.

Pyman, S.J, Annotated Subcontractors' Charges Act (Third (Revised) ed, Lawbook Publishing, 2002).

Pyman, S, 'Subcontractor' Charges After the Subcontractors' Charges Amendment Act 2002 and the Building and Construction Industry Payments Act 2004' (2006) January/February(106) Australian Construction Law Newsletter.

Pyman, S and Lewis, T, 'The Effect of the Building and Construction Industry Payments Act on the Subcontractors’ Charges Act' (2006) 22 Business Construction Law 197.

Queensland Building Services Authority, 'Security of Payment Discussion Paper' (Queensland Building Services Authority, 2001).

Queensland Government, 'Security of Payment for Subcontractors in the Building & Construction Industry' (1991).

Queensland Law Reform Commission in Working Paper on a Bill to Consolidate, Amend and Reform the Law Relating to Conveyancing, Property and Contract and to determine the Application of Certain Imperial Statutes (Report No.16).

R. Mahamud, 'Perlantikan Kontraktor Kecil dan Isu-isu Berkaitan Dengan Pembayaran Kemajuan' (1994) 5(1) Buletin Ukur 1.

Reid, K and Zimmermann, R, 'The Development of Legal Doctrine in a Mixed System' (2000) Reid, Kenneth/Zimmermann, Reinhard (Hg.): A history of Private Law in Scotland, Oxford.

Reitz, J.C, 'How to Do Comparative Law' (1998) 46(4) The American Journal of Comparative Law 617.

Review Editorial Committee of the Modern Law, 'The Law Revision Committee's Sixth Interim Report' (1937) 1(2) The Modern Law Review 97.

Richter, T, 'Did Stair Know Pufendorf' (2003) 7 Edinburgh Law Review 367.

Roe, T, 'Contractual Intention under Section 1(1)(b) and 1(2) of the Contracts (Rights of Third Parties) Act 1999' (2000) 63(6) The Modern Law Review 887.

Rogers, A, 'Contract and Third Parties' in Paul Desmond Finn (ed), Essays on Contract (1987).

364

Sakina Shaik Ahmad Yusoff and Azimon Abdul Aziz Suzanna Mohamed Isa, 'Hak Pihak Ketiga Dalam Kontrak: Pembukaan Ruang oleh Daya Kreatif Kehakiman Menerusi Kaedah Kontraktual' (2011) 4 MLJ xxvi.

Sakina Shaik Ahmad Yusoff and Suzanna Mohamed Isa, 'Doktrin Privity ke Jus Quaesitum Tertio: Rasional Peralihannya' (2007) 11 Jurnal Undang Undang & Masyarakat 41.

Sakina Shaik Ahmad Yusoff, 'Kontrak jualan barang: Doktrin priviti sebagai halangan tuntutan pengguna' (2000) 3 Malayan Law Journal cclvii.

Salewski, S, 'Is the Abolishment of Privity Necessary in Modern Warranty Law-A Comparative Analysis of the System in the US, the CISG, the European Union, and Germany' (2005) 7 European Journal of Law Reform 367.

Samuels, G, 'Contracts for the Benefit of Third Parties' (1967-1968) 8 U.W. Austl. L. Rev 378.

Schmitthoff, M, 'The Science of Comparative Law' (1939) 7(1) The Cambridge Law Journal 94.

Seddon, NC and Ellinghaus, MP, Cheshire & Fifoot's Law of Contract (Ninth ed, LexisNexis, 2008).

Seng, L.K, 'Motor Insurance: Distinguishing Contractual Rights from Statutory Rights' (1998) Singapore Journal of Legal Studies 172.

Shalev, G, 'Third Party Beneficiary: A Comparative Analysis' (1976) 11 Israel Law Review 315.

Shazali Abu Mansor and Alias Radam, 'Productivity and Efficiency Performance of the Malaysian Life Insurance Industry' (2000) 34 Jurnal Ekonomi Malaysia 93.

Shepherd, A, et.al, 'Subcontractors' Charges Act and Proofs of Debt-Beware the Double Dip' (2003) 90(May/June) Australian Construction Law Newsletter 51.

Smith, L.D, 'Disgorgement of the Profits of Breach of Contract: Property, Contract and Efficient Breach' (1994) 24 Canadian Business Law Journal 121.

Smith, S.A, 'Contracts for the Benefit of Third Parties: In Defence of the Third Party Rule' (1997) 17(4) Oxford Journal of Legal Studies 643.

Soh, K.B, 'Privity of Contract and Restitution"(1989)' 105 LQR 4.

365

Spencer, T, 'Section 48 of the IC Act 1984 - We Didn't Expect the Undisclosed Principal in Contract' (2004) 15 Insurance Law Journal 225.

Stanley Jeremiah, 'Nominated Beneficiaries under Life Policies: Bound to Benefit?' (1994) 3 Malayan Law Journal i.

Stevens, R, 'The Contracts (Rights of Third Parties) Act 1999' (2004) 120 (APR) Law Quarterly Review 292.

Stoljar, S.J, A History of Contract at Common Law (Australian National University Press, Canberra, 1975).

Stone, R, The Modern Law of Contract (Seventh ed, Routledge-Cavendish, England, 2008).

Sundra Rajoo, 'The PAM 2006 Standard Form of Building Contract - A Change in Risk Allocation' (2010) 4 MLJA cxlvii.

Sutton, K, 'Insurance Contracts Act 1984 (Cth), Section 48' (1993) 21 Australian Business Law Review 155.

Sutton, K, Insurance Law in Australia (Third ed, LBC Information Services, 1999).

Suzanna Isa, 'The Privity of Contract: Third Party Rights under Malaysian Contract Law' (2009) 4(4) The International Journal of Interdisciplinary Social Sciences 185.

Suzanna Mohamed Isa, Jus Quaesitum Tertio: Regim Pemakaian di Malaysia (PhD Thesis, National University of Malaysia, 2009).

Swan, J, 'The Rights of Third Parties to Contracts: A Suggested Basis for Recognition' in Peter Kincaid (ed), Privity: Private justice or public regulation (Ashgate Publishing, 2001).

Syed Ahmad Alsagoff, Principles of the Law of Contract in Malaysia (Third ed, LexisNexis, Malaysia, 2010).

Tan Pei Meng, 'Circumventing the Privity Rule in Malaysia' (2009) 4(4) Journal of International Commercial Law and Technology 262.

Tan Pei Meng, The doctrine of privity in Malaysia: The need for reform and the way forward (PhD Thesis, Malaya University, 2009).

Theis, W.H, 'Third-Party Beneficiaries in Multimodal Contracts of Carriage-Norfolk Southern Railway Co. v. James N. Kirby, Pty Ltd' (2005) 36 Journal of Maritime Law and Commerce 201.

366

The Law Reform Commission of Western Australia, 'Financial Protection in the Building and Construction Industry' (82, 1998).

Trebilcock, M, 'The Doctrine of Privity of Contract: Judicial Activism in the Supreme Court of Canada. (Education, Administration, and Justice: Essays in Honour of Frank Iacobucci)' (2007) 57(2) University of Toronto Law Journal 269.

Treitel, G, The Law of Contract (Tenth ed, Sweet & Maxwell, London, 1999).

Treitel, G.H, 'Law Reform in the Court of Appeal' (1966) 29(6) The Modern Law Review 657.

Treitel, S.G, 'Article in Tribute: Some Comparative Notes on English and American Contract Law' (2002) 55 Southern Methodist University Law Review 357.

Turner, C, 'The Effect of Non-disclosure by an Insured on the Rights of Third Party Beneficiaries: Appeal on Insurance Claim by Former Compass Airline Directors' (1994) 14 The Queensland Lawyer 105.

UK Law Commission, 'Privity of Contract: Contracts for the Benefit of Third Parties' (No. 242, 1996).

UK Law Commission, Privity of Contract: Contracts for the Benefit of Third Parties, Consultation Paper No. 121 (1991). Vernon, V.P, 'The History of Privity - The Formative Period (1500-1680)' (1989) 33 American Journal Legal History 3.

Vlasto, T and Clark, J, 'The Effect of the Contracts (Rights of Third Parties) Act 1999 on Voyage and Time Charter Parties' (2000) 25 Tulane Maritime Law Journal 519.

Visu Sinnadurai, Law of Contract (4th ed, LexisNexis, 2011).

Waddams, S, '‘Modern Notions of Commercial Reality and Justice’: Justice Iacobucci and Contract Law' (2007) 57 University of Toronto Law Journal 331.

Wan Arfah Hamzah and Ramy Bulan, Introduction to Malaysian Legal System (Oxford Fajar, 2002).

Waters, A.J, 'The Property in the Promise: A Study of the Third Party Beneficiary Rule' (1985) 98(6) Harvard Law Review 1109.

Weinrib, E.J, 'Corrective Justice in a Nutshell' (2002) 52(4) The University of Toronto Law Journal 349.

Williams, G, 'Contracts for the Benefit of Third Parties' (1944) 7(3) Modern Law Review 123.

367

Williston, S, 'Contracts for the Benefit of a Third Person' (1902) 15(10) Harvard Law Review 767.

Willmott, L, et al, Contract Law (Third ed, Oxford University Press, Victoria, 2009).

Wilson, L, 'Contract and Benefits for Third Parties' (1986) 11 Sydney L. Rev. 230.

Wu Min Aun & Beatrix Vohrah, The Commercial Law of Malaysia (Heinemann Educational Books, 1979).

Yeo, T.M, 'When do Third Party Rights Arise under the Contracts (Rights of Third Parties) Act 1999 (UK)?' (2001) 13 Singapore Academy of Law Journal 34.

Zweigert, K and Kotz, H, Introduction to Comparative Law (Third Revised ed, Clarendon Press, Oxford, 1998).

368