Privity and Law of Contract

A contract is an agreement between two or more parties that creates an obligation to do or not to do something. The parties to the contract are under an obligation to perform the terms and conditions which are laid down in the contract. Thus a contract can give rights or impose obligations arising under the contract on the parties to the contract. Third parties cannot be under such an obligation to perform or demand performance under a contract. This is referred to as Privity of contract. The meaning, history and evolution of the doctrine.

The doctrine of privity means that as a general rule, a contract cannot bestow rights or impose obligations arising under the contract to any person except the parties to it. An individual or corporate entity that is not a party to the contract are called third parties. A third party does not have enforceable rights or obligation under the contract. Even if a person is mentioned in the contract and the contract was intentionally to benefit this third party, he cannot rely on or put into effect the terms and obligation of the contract or sue the other parties.

Similarly the parties to the contract cannot sue a third party even if the contract was made to benefit the third party. The above facts are established in the16th and 17th century case of case of Buirne v. Mason (1669) 1 Ventr 6; 86 ER5: and Crow v. Rogers (1724) 1 St 592; 93 ER 719; where the third party beneficiary rights were rejected on ground that they were no parties to the contracts because no consideration were given by them. These cases involved the facts. B owes money to C. A would agree with B to pay C on account that B do some work for A.

But A would not pay and C would sue A. It was held that C had given no consideration for the promise of A. Thus C lost the case. However there are cases which were contrary to the cases above. For the 200 years before 1861 it was settled law that if a promise in a simple contract was expressly made for the benefit of a third person in such circumstances it was intended to be enforceable by him, although he was not a party to the contract. This fact can be supported in the case of Dutton v. Poole (1678) 2 Lev 210; 83 ER 523. Here a son promised to his father to pay ?

1000 to his sister on ground that his father does not sell the wood. The father refrained from selling the wood but the son did not pay to his sister. It was held that the sister could sue, on ground that consideration and promise of the father may well extend to her on account of blood relation. This decision was further supported by the decision of Lord Mansfield in Martyn v. Hind (1776) 2 Cowp 437, 443; 98 ER 1174, 1177. It is generally agreed that the modern day third party rule is conclusively established in 1861 in Tweedle v. Atkinson (1861) 1B & S 393; 121 ER 762.

The fact involved an agreement by a father of a bride to pay the groom a sum of money. When the bride’s father failed to pay the groom was unsuccessful in suing the bride’s father. The authority of this case was soon acknowledged and applied to several other subsequent cases. In the case of Gandy v. Gandy (1885) 30 ChD 57, 69. Bowen LJ said that, in spite of earlier cases to the contrary, Tweedle v. Atkinson had laid down “true common law doctrine”. Although there were contradictory ruling on the right of the third party, the general rule that a third party cannot enforce a contract made for its benefit prevails.

(Ireland Law Reform Commission, 2008) There is no universally accepted practice of applying the doctrine of privity. While the ruling in Tweedle v. Atkinson laid down the foundation of the doctrine of privity in English common law, this had been disregarded in India in the case of Debnarayan Dutt v Ramsadhan. The aim of the Mofussil Courts of Justice in British India was to do complete justice according to the principles of Justice, equity and good conscience. Thus it is through a series of case laws the doctrine has evolved in different countries.

(Narayan, 2008) In Malaysia the contract Act 1950 makes no mention of the doctrine of privity but the Malaysian Courts have placed great reliance on the principles of common law to supplement the Contract Act 1950 thus the doctrine is applied. Relationship between privity and consideration In most of the common law countries such as England, consideration plays an important role in determining the parties to the contract and who has the capasity to enforce the contract. For example in English law consideration should flow from the promisee.

This means the person who gets the promise must give something in return as the consideration for the promise. The motive is that if a person provides no consideration, such person is not a party to the contract. This fact is established in the case of Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd. (1915) where Dunlop sold its tires to a whole seller on condition that it should not be sold below a certain price. On that condition whole seller sold them to retailers and Selfrisge & Co. Ltd was one such a retailer who sold below the specified price.

There appeared to be no privity of contract between Dunlop and Selfridge. The court also held that consideration does not flow from Dunlop to Selfridge thus it was not possible for Dunlop to sue Selfidge. However, unlike the English law, there is a deviation in who can give consideration in the Malaysian Law. Under the Malaysian Contracts Act 1950, consideration for the contract need not necessarily come from the promisee. But still the promisee can enforce the contract even if he has not personally provided any consideration provided that some other person has given the consideration.

This is established in the case of Venkata Chinnaya v. Verikatara’ma’ya (1881) I. L. R. 4 Mad. 137. In this case a sister who agreed to pay an annuity of Rs. 653 to her brother who provided no consideration for the promise. On the same day, their mother gave the sister some land on condition that the sister pay annuity to her brother. Later the sister failed to pay the annuity. The court held that the sister was liable to pay the brothers even though no consideration was given by him. But the consideration from their mother was a valid consideration for the promise of the sister. Privity under different laws.

If the doctrine of privity is applied without any flexibility, it will cause considerable injustice and inconvenience. Thus several exceptions to the doctrine of privity have been developed. Agency is one of the exceptions PRIVITY AND THE LAW OF AGENCY Many contracts are made through intermediaries and are subject to the law of agency. In Malaysia the law of agency is governed by the contract Act 1950. Section 135 of the Act defines an “agent as “a person employed to do any act for another or to represent another in dealing with third person”, and a “principal” as “the person for whom such act is done, or who is so represented”.

From this definition it can be derived that, under the contract of agency the agent gets the authority from the principal to enter into contracts with third parties and such contract would be binding on the principal. Thus third party can sue and can be sued in case of breach of contract. The true test of agency depends on in answering the question whether a person has the capasity to create contractual relationship between the principal and a third party and to bind the principal by his acts.

If the answer to this question is yes, there exists the relationship of agency. Even though the contract is signed between the agent and the third party, the contract is enforceable on the principal. Thus deviating from the doctrine of privity of only contracting parties can enforce contract. An agency can be established either expressly or impliedly. In either of the situation the contract is binding on the principal and the third party. This means the principal is bound by the terms agreed by the agent with third party.

This can be seen from the case Summers v. Solomon (1897) AC 22, a real estate agent was instructed by a hotel owner to find a buyer for the hotel. The agent did as instructed and received a deposit from the prospective buyer. The owner then brought an action to cancel the agent’s action. The court held that even though the agent was not expressly authorized to collect deposit money he was presumed to have acted under the ambit of implied authority of an agent. Privity and Agency by Estoppels or Holding out.

According to Section 190 of the Malaysian Contract Act 1950, “when an agent has, without authority, done acts or incurred obligations to third person on behalf of his principal, the principal is bound by those acts or obligations if he has by his words or conduct induced such third person to believe that those acts and obligations were within the scope of the agent’s authority”. For example; X tells Y in the presence and within the hearing of Z that he (X) is Z’s agent. Z does not contradict this statement. Later on Y enters into a contract with X believing that X is Z’s agent.

In such a case Z is bound by this contract. Privity when Sub-agents or Substitute agents are appointed Now the question arises, will the contract be binding on the principal if the agent appoints a sub-agent or a substitute agent? As a general rule the agent cannot delegate his authority to another person because an agency relationship is personal in nature and involves trust and confidence. However there are exceptions to this rule. If the agent appoints a sub-agent with the approval of the principal, than the principal will be binding on the acts of sub-agent.

If the agent appoints a sub-agent in his personal capasity and without the prior approval of the principal, the agent should be liable for any damages that arise due to the act of sub-agent, because there is no contractual relationship between the principal and the sub-agent. Substitute agent is a person who is named by the agent holding an express or implied authority to name another person, to act for the principal in the business of the agency. Such person is an agent for the principal for that part of the agency as is entrusted to him.

In such cases the third party can enforce the contract on the principal. PRIVITY AND THE LAW OF PARTNERSHIP The Malaysian partnership Act 1961 defines partnership as “the relationship which subsists between persons carrying on a business in common with a view of profit. ” A partnership is distinct from a company; a partnership firm is not a separate legal entity from its founders. It is merely a relationship between the individuals who intends to do a business. Thus when an action is brought against the partnership firm, the action is actually against all the partners.

Mutual agency is one of the essential elements of partnership. ‘Mutual Agency’ relationship means that each partner is both an agent and a principal to other partners. Each partner is an agent in the sense that he has the capasity to bind other partners by his acts. Similarly each partner is a principal in the sense that he is bound by the act of other partners. A partner to bind other partners, his action must be carried out within the scope and ambit of his authority and in the usual way of partnership business.

Even if the partnership agreement expressly deny an authority which deviates the usual way of partnership business and if a partner still exercise such an authority, other partner would be binding on such an act and the third party can sue the partners. This was established in the case of Mercantile Credit Ltd. v. Garrod (1962) All ER 1103, in this case P and G were partners in a garage business. One of the terms of their agreement prohibited the partners from buying and selling cars. Without the knowledge of G, P sold a car to Mercantile Credit for a sum of ?

700 and the money was deposited into the firm’s bank account. When Mercantile Credit Ltd initiated a suit to claim the money back, the Court held that G was liable to the plaintiff. Even though P was prohibited by the partnership agreement to engage in buying and selling cars, the act of P was usually done by those who engaged in a garage business. Therefore as long as the mutual agency relationship exists, the partners would be liable for each other’s acts in the business of partnership and third parties can sue the partners and the partners can sue third parties.

However section 7 of the Malaysian partnership act provides that the partner who has no authority to act for the firm will not bind the firm if third party knows that the partner has no authority. In such cases privity of contract is held. For example B was unauthorised to buy goods exceeding the Rf 20,000. C made a contract with B for the supply of goods worth Rf50,000 to the partnership firm. The firm would not be bound by the contract. Thus C cannot enforce the contract on the partners.

Privity and the act of civil and criminal liability of partners A civil liability arising from tort by a partner’s act in the ordinary cause of the business, and the act was carried out in good faith and with the consent of other partners; all the partners are liable to the same extent as the partner who has committed the wrongful act. However in the case of criminal offences committed by a partner, the privity rule is held as only the partner who committed the act would be liable unless there is sufficient evidence to prove that other partners participation in the commission of the act.

Chung Shin Kian & Anor v. Pendakwaraya (1980) 2 MLJ 246. Privity and the liability for holding out When a person foreign to a partnership firm represents himself or allow himself to be represented as a partner so that a third party is induced to believe him as a partner and carries out business, such a person would be personally liable for the debt of the firm on that transaction. However, if the real partners knew about the representation but did not deny, than the partners would be jointly liable. R Buchanan & Co. (1876) 4 QSCR 202. (Rahman D. R. , 2010) PRIVITY AND THE LAW ON SALES OF GOODS.

Section 4(1) of the Sales of Goods Act 1957 defines a contract of sales of goods, “a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. ” A contract to sell is made when an offer to buy or sell the goods for a price and acceptance of such offer. Thus, in a valid contract of sale of goods, only the contracting parties have the privity of contract. Only the buyer and the seller could enforce the contract. It is one of the implied conditions on the part of the seller that, in the case of sales, he possesses the right to sell the goods.

And also in the case of agreement to sell that he will have the right to sell the goods at the time when the property is to pass to the buyer. If this is not the case the third party (true owner of the goods) can sue for the tort of conversion against the unauthorized seller and the innocent buyer. Thus a breach of condition enables the innocent buyer to repudiate the contract and recover the full amount from the seller. This is established in the case of Rowland v. Divall (1923) 2 KB 500, For example: X purchased a car from Y.

After six months Z, the true owner of the car demanded it from X. X is obliged to return the car to its true owner. X is also entitled to recover full amount from Y even though several months have passed. A third party who has bought goods from a merchantile agent who has acted within the ambit of his authority will have the right to enforce the contract on the owner of the goods which is the principal. Thus the privity rule is not held. Therefore in a valid contract of sales, privity of contract occurs only between the parties to the contract.

Even in a situation where a manufacture sells a product to a whole seller who sells the product to a retailer and a consumer buys the product from the retailer, there is no privity of contract between the manufacture and consumer. However this does not mean that third parties do not have another form of rights under other acts such as the Consumer Protection Act Contracts Concerning Land A contract for the sales of land creates an equitable proprietary interest in the land which can be enforced against a subsequent purchaser with notice.

Certain kinds of covenants are concerning land are enforceable against third party whether or not there is notice. If A lease to B, there is privity of contract between them. but covenants in a lease which have reference to the subject-matter of the lease will be enforceable, not only between A and B, but against assignees of the lease or of the reversion. Tulk v. Moxhay (1848) 2 Ph. 774 (Beatson, 2008)

PRIVITY AND THE LAW ON HIRE PURCHASE In section 2(1) of the hire purchase Act 1967, hire purchase is defined as, “a letting of goods with an option to purchase and an agreement for the purchase of goods by instalments (whether the agreement describes the instalments as rent or hire or otherwise), but does not include any agreement: a)Whereby the property in the goods comprised therein passes at the time of the agreement or upon or at any time before delivery of the goods; or b)Under which any person by whom the goods are being hired or purchased is a person who is engaged in the trade or business of selling goods of the same nature or description as the goods comprised in the agreement”

In hire purchase, the ownership or title of the goods does not pass at the time of delivery. In hire purchase there would be a seller who offers the goods to the purchaser but the seller does not provide payment by instalment to the purchaser. Thus the seller would sell the goods to a finance company which will eventually hire the goods to the buyer under the terms of the hire purchase agreement. Thus there are two contacts, one contract between the seller and the finance company and another contract with buyer and the finance company.

If the privity of contract rule is applied than the purchaser cannot acquire any rights against the seller of the goods for any breach of contract or misrepresentation, because there is no contractual relationship between the seller and the hire purchaser. However there are other laws which override the privity rule in relation with hire purchase agreements, giving consumer the right to enforce the contract on both the finance company and the seller. QUESTION 2 A contract is formed when the acceptance is communicated to the proposer without any reservations to the original offer.

The communication of offer and acceptance must be complete so as to bind the parties, because as soon as the communication is complete the parties loose the right of withdrawal or revocation. Communication of offer; the communication of offer is complete when it comes to the knowledge of the person to whom it is made. Now the question arises whether the offer made by Mike Sdn. Bhd was communicated to Nilma Sdn. Bhd. The offer was sent by a letter signed by Shela, a staff of Mike. In case of offer made by post, its communication will complete when the letter containing the offer reaches the offeree.

In the case it is very clear that on December 1, 2010, Bong a staff of Nilam received the letter containing the offer from Mike, thus the offer was communicated. Communication of acceptance; communication of acceptance is complete at different times for the proposer and acceptor. As a general rule the communication of acceptance is complete: a)as against the proposer when the acceptance is put in the cause of transmission to him, so that it is out of the power of the acceptor. b)As against the acceptor, when it comes to the knowledge of the proposer.

Since acceptance was made on telephone it is important to see the rule of communication of acceptance over telephone. Acceptance over telephone: Acceptance made by telephone, telex or fax is treated on the same principal as oral agreements between two parties when they are face to face with each other. However when acceptance is made by any of these manners, than acceptance does not occur when communication is made or transmitted, but when acceptance is received by the proposer. This is because it is possible that the communication may fail and the message may not reach the proposer.

In the case of Mike and Nilma, Bong a staff of Nilma telephoned Shela’s (staff of Mike) office to communicate the acceptance but since Shela was on a medical leave Bong left a message saying; “Looks good. We would like to continue with the purchase. Please call me when you come back to the office, so we can discuss details. ” Leaving a message on Shela’s voice mail box when she is on leave does not amount to acceptance. It is very clear that the intended person has not received the message.

The instantaneous communication of acceptance was first established in the case of Entores Ltd v Miles Far East Corporation [1955] EWCA Civ 3 the judge Denning IJ found that the postal rule of acceptance does not apply in the case of instantaneous communication, thus ruled that acceptance occurs when and where the message is read. Later on there were several other cases such as Brinkibon Ltd v Stahag Stahl [1983] 2 AC 34 where decision were consistently applied using the same principal. Analysis of the case to establish formation of contract

One of the conditions for a valid acceptance is that, acceptance should be absolute and unqualified. Acceptance must be made on the same terms and conditions without any variation or reservations to the original offer; otherwise it will amount to a counter offer. If the parties are still in the process of negotiation, there is no question of any agreement. Bong offering to discuss details suggests that, the earlier words “looks good. Like to continue with the purchase”, is inconclusive and they are still in the process of negotiation.

It suggests that Bong needs to know other details which could affect the final decision if discussions turn to be unfavorable. It is also not clear from the case whether Bong left the message on the telephone voice mail box or with another staff in Shela’s office. Considering that the message is left on the voice mail box, than it is very clear that Shela has not received it because she was on medical leave. And the duration of the leave is not known. However on 5th December Shela has contacted Bong, suggests that Shela got the message only on 5th.

But before Shela made the call, Bong has already received a fax from Ronald withdrawing the offer, thus there is every reason to believe that the offer has been successfully revoked because given the limited information in the case it can only be seen that Shela got the message and contacted Bong after the offer has been revoked. Thus no contract is formed. Even if the message is left with another staff in Shela’s office, it may not amount to acceptance if the person is not authorised to accept, because it is one of the conditions for a valid acceptance that acceptance is communicated to a person who is authorised to receive the acceptance.

Otherwise it will not give rise to any legal relation. This was established in the case of Felthouse v. Bindley (1862), 11 CB. (N. S) 869, 142 E. R. 1037 In this telephone conversation Shela has told Bong that Mike would not deliver the furniture for less than the initial offer price which is RM 1 million. This again shows that Bong has requested a price reduction following their budget cut. Otherwise there is no reason for Shela to mention this on her first call to Bong since there was no such communication before. This will amount to a counter offer.

Thus a counter offer would not amount to acceptance it invalidates the initial offer therefore no contract is formed. Hyde v. Wrench (1840) 3 Beav. 334 Was Mike obligated to sell furniture to Nilam Legal obligations would only arise out of a binding contract, thus the question whether Mike is obligated to sell the furniture to Nilma for Rf 1million depends up on the formation of a valid contract between both parties. From the analysis of the case to establish formation of contract shows that no contract is formed between Mike and Nilma.

Thus in the absence of a valid contract between both the parties, neither of the two parties would have any obligations over another party. Nilma’s Rights and remedies against Mike Rights remedies arise in the case of breach of contract by one party which causes damages or losses to another party Breach of contract may arise if any party refuses to or fail to perform his part of the contract by his act or makes it impossible to perform his obligation under the contract. In case of breach of contract the aggrieved party is relieved from performing his obligation and gets the right to proceed against the party who breached the contract.

A breach of contract may arise in two ways a)Anticipatory breach of contract; anticipatory breach of contract occurs when the party declares his intention of not performing his contractual obligation before the performance is due. b)Actual breach of contract: actual breach occurs where one party refuses to perform his obligations under the contract on the due date or performs incompletely. A breach of contract, no matter how the contract has been breached gives the innocent party the right to initiate action for damages. Remedies.

A remedy is the course of action available to an aggrieved party for the enforcement of a right under the contract. There are various remedies available for the innocent party and he may opt any of the remedies depending on the situation he is left as a result of the breach. 1. Rescission of contract 2. Suit for damages 3. Suit for Specific Performance 4. Suit for injunction 5. Suit upon quantum meruit 1. Rescission of Contract: When Mike refuses to perform the contract after entering into the contract, Nilma gets the right to rescind or put an end to the contract.

In such case Nilma is relieved from all the contractual obligations under the contract. Nilma is thus entitles to claim compensation for damages which she has sustained as a result of Mike’s refusal to sell the furniture for RM 1 million. 2. Suit for Damages Damages are monetary compensations allowed for the loss suffered by the innocent party due to the breach of contract. The purpose is to make good the financial loss suffered by the innocent party. In the Malaysian Contract Act the claim for damages is provided under Section 74 to 76.

The rules regarding the damages are based up on the judgment in the English case of Hadley v. Baxendale (1854) 9 Ex 341. Even though the contract Act provides for compensation only certain types of damages are to be compensated. These inludes 1. Such damages which naturally arose in the usual course of things from such breach. This relates to ordinary damages arising in the usual course of things 2. Such damages which the parties knew, when they made the contract, to be likely to result from breach. This relates to specific damages. 3.

The aforesaid compensation is not given for any remote or indirect loss or damage sustained by reason of the breach, Based up on the above conditions provided in the Contract Act for claiming damages in case of breach of contract, we shall now look at the damages incurred by Nilam and the compensations Nilam might be entitled to claim from Mike. From the case it can be identified that following the communication of acceptance by Bong to Shela, a wall had been demolished in 3 rooms and a contract had been signed for the new electrical installation.

These are the damages which Nilam could have possibly suffered. Now the question arises whether Nilam is entitled to claim compensation for these damages. It is not clear from the case whether Nilam communicated to Mike that they would be signing a contract for electrical installation and demolishing a wall to install the new furniture. If Mike was unaware of this, Nilam may not get compensation for this. This is because, in transaction like this such damages does not naturally arise in the usual course of things from such breach.

However since Mike’s representative drew a sketch of the alteration that was required for Nilam’s office to install the furniture, suggests that Mike would know that once the contract is finalised Nilam would be bringing the structural changes necessary for furniture installation. Thus Nilma would be entitled to claim compensation under specific damage. Similarly the contract signed for new electrical installation cannot be considered as an ordinary damage due to the fact that the nature of the contract does not necessitate Nilam to sign such a contarct.

However this also may become a specific loss if this has been communicated to Mike, in that case Nilam would be entitled to claim compensation. Specific performance Suit for specific damages means demanding the court’s direction to the faulty party to perform the promise according to the terms of the contract. Specific performance may be directed by court in the following circumstance. a)When the act agreed to be done is in the performance, wholly or partly, of a trust. b)When there is no standard to ascertain the actual damages coursed by non- performance.

c)An act agreed to be performed is such that its non-performance would not afford adequate relief. d)When it is possible that pecuniary compensation cannot be obtained for non-performance of the act agreed to be done. Based on these conditions Nilam would not be entitled to demand for specific performance if the damages can be considered adequate as a compensation for the loss. However Nilam could demand for specific performance if the compensation is inadequate because of the type, quality and designs of furniture, Mike sells are rare and such design and quality cannot be purchased elsewhere and it would affect the business of Nilam.

Compensation for loss of profit Since Nilma is a property developer, Mike’s failure to supply furniture may obstruct Nilam’s business resulting loss of profit The starting point for considering damages for breach of contract is the leading authority, Hadley & Baxendale. Damages can be recovered if either: 1. The loss arose naturally from the breach itself; or 2. The loss was the probable result of a breach that may reasonably have been in the contemplation of the parties at the time of the contract. (Evans, 2011) thus if any of the conditions is fulfilled,