Overview of the Privity Rule
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- The privity rule prevents third parties from enforcing benefits arising from contracts they are not part of.
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- While other Commonwealth countries like the UK (with the Contracts (Rights of Third Parties) Act 1999) have reformed this rule, Malaysia retains it in its traditional form despite its issues.
Problems with the Privity Rule
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- It blocks third parties from benefiting from contracts intended to benefit them.
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- Courts struggle to align outcomes with the original intentions of contracting parties, leading to unjust results (e.g., cases like Tweddle v Atkinson and Beswick v Beswick).
Mechanisms to Circumvent the Privity Rule
- Liberal Construction:
- Courts sometimes interpret contracts liberally to include third parties, though this approach is inconsistent and can create legal uncertainty.
- Collateral Contracts:
- A parallel contract between the promisor and a third party can be inferred, but this requires clear intent and consideration, which may not always be present.
- Agency:
- If one contracting party acts as an agent for the third party, courts allow the third party to enforce the contract. However, this requires proving an agency relationship.
- Trust:
- Courts use the trust mechanism, where a contracting party holds benefits in trust for the third party. Yet, proving the existence of a trust often requires specific evidence of intent.
- Tort of Negligence:
- If a contract breach causes harm, third parties can seek remedies under negligence, though this is not always feasible, especially when intentional breaches are involved.
- Estoppel:
- Promissory estoppel can prevent a promisor from going back on promises made to third parties if the latter relied on those promises to their detriment. However, its use to create new rights for third parties remains controversial.
- Specific Relief (Injunction and Specific Performance):
- Courts sometimes grant specific performance or injunctions to enforce contracts for third-party benefit, though these remedies are discretionary.
Disclaimer: This article is for informational purposes only and does not constitute any legal advice. If you have any questions or require further information on this matter, please do not hesitate to contact us directly.