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

The Need for Legislative Reform of the Privity Doctrine in Commercial Contracts in Malaysia: A Comparative Analysis Anida Mahmood LLB (Manchester Metropolitan University) LLM (National University of Malaysia) A Thesis Submitted in fulfillment of the requirements of the degree of Doctor of Philosophy Faculty of Law Queensland University of Technology January 2013 Abstract This thesis commences with the proposition that the first limb of the doctrine of privity causes injustice to third party beneficiaries in Malaysia, particularly in commercial contracts The doctrine of privity has been the subject of criticism by the judiciary and academic commentators in common law jurisdictions, mainly directed at the first limb of the doctrine, whereby only parties to a contract can sue and be sued The first limb prevents a third party from enforcing benefits conferred on them by those contracts thereby resulting in third parties suffering loss and injustice to those parties In several common law countries, such as England, Australia, New Zealand and Singapore, legislative reform of the doctrine has occurred The legislative reform has abrogated to a significant extent the doctrine of privity in commercial contracts Malaysia is a common law country, where the doctrine of privity is still applied to contracts An analysis of Malaysian case law demonstrates that the most affected third party beneficiaries are those seeking to enforce insurance and construction contracts While a small number of other third parties to commercial contracts, such as agreements to pay for work done, sale and purchase agreements and tenancy agreements are also affected, the detriment is not as significant As a consequence, this thesis focuses primarily on the impact of the doctrine of privity on commercial contracts in the areas of insurance and construction in Malaysia The thesis aims to recommend appropriate reforms to address the injustices arising from the privity doctrine for third parties seeking to obtain the benefit of insurance and construction contracts, which may also benefit third parties to other types of commercial contracts While the Malaysian insurance, consumer protection, negotiable instruments and agency laws allow third party beneficiaries to enforce benefits in contracts, the rights are found to be inadequate As not all third parties seeking to enforce an insurance or construction contract can rely upon the legislation, the injustice arising from the doctrine of privity remains and needs to be addressed To achieve this aim, a comparative analysis of the rights of third party beneficiaries under insurance and construction contracts in Malaysia, Australia and England is undertaken The results of ii the analysis are used to identify appropriate elements for a legislative framework guided by the three essential criteria for effective law reform developed in the thesis The three criteria are certainty, public interest and justice The thesis recommends first the enactment of general legislation applicable to all commercial contracts including insurance contracts Secondly, the thesis recommends specific targeted legislation to address the injustice faced by third party beneficiaries in construction contracts iii List of Abbreviations BCIPA Building and Construction Industry Security of Payment Act 2004 (Queensland) BEA 1949 Bills of Exchange Act 1949 (Malaysia) 1999 Act Contracts (Rights of Third Parties) Act 1999 (England) CA 1950 Contracts Act 1950 (Malaysia) CIDB Construction Industry Development Board Malaysia CIPAA Construction Industry Payment and Adjudication Act 2012 (Malaysia) CLA 1956 Civil Law Act 1956 (Malaysia) CLJ Current Law Journal CPA 1999 Consumer Protection Act 1999 (Malaysia) IA 1996 Insurance Act 1996 (Malaysia) MBAM Master Builders Association Malaysia MLJ Malayan Law Journal MLRC Malaysia Law Reform Committee PLA 1969 Property Law Act 1969 (Western Australia) PLA 1974 Property Law Act 1974 (Queensland) RTA 1987 Road Transport Act 1987 (Malaysia) SCA 1974 Subcontractors’ Charges Act 1974 (Queensland) iv Keywords Doctrine of Privity - Third Party Rule - Third Party Beneficiaries – Malaysian Commercial Contracts- Insurance Contracts - Construction Contracts - Legislative Reform v 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 vi 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 Overview 1.2 Statement of the Problem 1.3 Purpose and Objective of the Research 1.4 Scope of the Research 1.4.1 First Limitation on the Research Scope 1.4.2 Second limitation on the Research Scope .15 1.5 The Importance of this Research 16 1.6 Research Methodology 20 1.6.1 Research Questions 20 1.6.2 Research Method 21 1.6.3 Research Design .25 1.6.4 Research Plan 25 1.6.4.1 Chapter Outlines 26 Chapter Two 30 The Underlying Theories and Principles of the Doctrine of Privity 30 2.1 Introduction 30 2.1.1 The historical Foundation of the Doctrine of Privity 31 2.2 Common Law Exceptions to the Doctrine of Privity 38 2.2.1 Agency 38 2.2.2 Trust 41 2.2.3 Assignment .43 2.2.4 Estoppel 44 2.2.5 Restitution/Unjust Enrichment .46 2.3 The Rationale For, Justifications For and Defence of the Doctrine of Privity 47 vii 2.4 Criticisms of the Doctrine of Privity 53 2.5 Conclusion 63 Chapter Three 65 A Case Based Comparative Analysis of the Application of the Privity Doctrine 65 3.1 Introduction 65 3.2 Purpose of the Analysis 65 3.3 Comparative Analysis of Judicial Decisions 66 3.3.1 Malaysia 66 3.3.1.1 The extent of the problem in Malaysia 67 3.3.1.2 Privity and Insurance Contracts 72 3.3.1.3 Abrogation by Malaysian courts of the application of the doctrine of privity to insurance contracts 73 3.3.1.4 Privity and Construction Contracts 84 3.3.1.5 The Abrogation of the Doctrine of Privity in Construction Contracts 89 3.3.2 Australia 94 3.3.2.1 The extent of the problem in Australia 94 3.3.2.2 Privity and Insurance Contracts 102 3.3.2.3 The abrogation of the doctrine of privity in insurance contracts 105 3.3.2.4 Privity and Construction Contracts 109 3.3.2.5 The abrogation of the doctrine of privity in construction contracts 110 3.3.3 England 116 3.3.3.1 The extent of the problem in England 116 3.3.3.2 Privity and Insurance Contracts 120 3.3.3.3 The Abrogation of the Doctrine of Privity in Insurance Contracts 123 3.3.3.4 Privity and Construction Contracts 127 3.3.3.5 The Abrogation of the Doctrine of Privity in Construction Contracts 129 3.4 Position of Third Parties in Malaysia Compared with Australia and England 134 3.4.1 Third Parties in Other Types of Commercial Contracts 134 3.4.2 Third Parties in Insurance Contracts 136 3.4.3 Third Parties in Construction Contracts .139 3.5 Is Reform in Malaysia Required? 140 Chapter Four 144 An Analysis of Legislative Reform and Judicial Decisions in Australia and England 144 4.1 Introduction 144 4.2 Purpose Of Analysis 144 4.3 Australia 145 viii 4.3.1 General Legislation: Western Australia .146 4.3.2 Judicial Decisions: Western Australia 148 4.3.3 Legislation: Queensland .154 4.3.3.1 General legislation: Property Law Act 1974 154 4.3.3.2 Construction Contracts 156 4.3.4 Judicial Decisions: Queensland 166 4.3.4.1 Property Law Act 1974 167 4.3.4.2 Subcontractors’ Charges Act 1974 175 4.3.5 Legislation: The Australian Commonwealth 186 4.3.5.1 Section 48 of the Insurance Contracts Act 1984 (Cth) 186 4.3.6 Judicial Decisions: The Australian Commonwealth 187 4.3.7 Conclusion 193 4.4 England 195 4.4.1 General Legislation .195 4.4.2 Judicial Decisions: England 202 4.5 Analysis and Conclusion 210 4.5.1 Efficacy of the Reforms 210 4.5.1.1 Australia 210 4.5.1.2 England 216 4.5.2 Third Party Beneficiaries who are not covered by the reform .224 4.6 Conclusions Relevant to Reform in Malaysia 230 Chapter Five 233 Legislative Reform in Malaysia 233 5.1 Introduction 233 5.2 Purpose of Analysis 233 5.3 Legislative Intervention To Protect Third Party Beneficiaries 234 5.3.1 Insurance Contracts: Insurance Act 1996 .234 5.3.2 Insurance Contracts: Civil Law Act 1956 .241 5.3.3 Insurance Contracts: Road Transport Act 1987 245 5.3.4 Construction Contracts: Construction Industry Payment and Adjudication Act 2012 251 5.3.5 Contracts Act 1950 .254 5.3.6 Negotiable instruments: Bills of Exchange Act 1949 255 5.3.7 Consumer contracts: Consumer Protection Act 1999 258 5.4 Effectiveness of Malaysian Reforms 262 5.5 Justification for Further Reform in Malaysia 266 ix following European countries, the United States of America and Scotland In relation to insurance contracts, Chan Wai Meng 901 suggests reform of the doctrine of privity and acknowledges that the enactment of England’s Contracts (Rights of Third Parties) Act 1999 has improved and strengthened the rights of third parties in insurance law In construction contracts, a discussion of the problems caused by the doctrine of privity was made by Ng Sock Hooi 902 and one of the identified problems was payment defaults by main contractors and also by employers However, no method of reform was suggested by the author Therefore, three previous postgraduate theses suggested there were problems caused by the doctrine of privity but none of them analysed or identified the contracts most at risk or suggested reform particularly aimed at these at risk contracts All of the researchers recommended adoption of a general legislation with England’s 1999 Act No research was conducted to identify the types of third party beneficiaries most affected by the doctrine of privity By comparison to the existing literature, the benefits of this research are: • First, this research identifies third parties under insurance and construction contracts as the third party beneficiaries most affected by the doctrine of privity • After identifying the types of third parties most affected by the application of the doctrine of privity, this research recommends appropriate and effective reform that ensures third parties most at risk may take advantage of legislative reform This research concludes that in order to ensure reform of the doctrine is effective the implementation of one generic legislative provision was not adequate to provide a solution for all at risk third parties • The reform suggested, that is, a combination of general legislation and specific targeted legislation is capable of resolving the problems faced by most third party beneficiaries in commercial contracts, insurance contracts and construction contracts Specific legislation in the form of amendments to the CIPAA will 901 902 Chan Wai Meng, Third Party Rights in Insurance Law in Malaysia (Sweet & Maxwell Asia, Malaysia, 2008) Ng Hock Sooi, Legal Position of the Issues Associated with Main Contractor's Insolvency (Master Thesis, Universiti Teknologi Malaysia, 2006) 354 assist in creating a new statutory right for sub-contractors to claim for direct payment from employers as promised The recommendations as suggested in this research will provide certainty of rights and an appropriate allocation of rights between contracting parties and third parties 355 Bibliography Articles/books/reports/conference papers/thesis A Mohaimin Ayus, 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