The Need For Legislative Reform Of The Privity Doctrine In Commercial Contracts In Malaysia: A Comparative Analysis

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

The Need for Legislative Reform of the Privity

Doctrine in Commercial Contracts in Malaysia:

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

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

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

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

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

Third Party Beneficiaries who are not covered by legislative reform in Australia and England 229

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

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)

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

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

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

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

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

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

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-Selatan11 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

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

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

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

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

Contracts

Other types of commercial contracts

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

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

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 Balan28 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

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.33Subsequently, 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

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

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 thesis36 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

1.6.1 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 Kotz38 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:

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

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

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

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

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

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)

Chapter 3

Case analysis in Malaysia, Australia and England

Stage 3

Post Reform Analysis

Chapter 4

Legislation and post refom case analysis

Chapter 5

Legislation in Malaysia

Stage 4

Analysis and Recommendations

Chapter 6

Analysis

Chapter 7

Recommendations and Conclusions