TABLE OF CONTENTS

INTRODUCTION_________________________________________________________________________________1

DIAGRAM OF MAIN CONTRACTUAL ACTIVITIES_____________________________________________________2

CONTRACTOR SIGN AND RETURNS LETTER OF ACCEPTANCE OF TENDER._____________________________3

Letter of Acceptance Definition___________________________________________________________________3

SITE POSSESSION________________________________________________________________________________3

CONTRACTOR DEPOSITS OR SUBMIT RELEVANT INSURANCE POLICIES________________________________4

CONTRACTOR DEPOSITS OR SUBMIT PERFORMANCE BOND OR BANK GUARANTEE_____________________6

Performance Bond Definition_____________________________________________________________________6

CONTRACTOR SUBMIT WORK PROGRAMME________________________________________________________7

Work Programme Definition______________________________________________________________________7

CONTRACTOR EXECUTED WORKS INCLUDING DELIVERY MATERIAL._________________________________8

S.O MAKE VALUATION OF THE WORKS EXECUTED & MATERIAL DELIVERED EVERY MONTH.____________9

S.O ISSUES CERTIFICATION OF COMPLETION._____________________________________________________10

DEFECT LIABILITY PERIOD (DLP) AND S.O ISSUES SCHEDULE OF DEFECT.___________________________11

CONTRACTOR VERIFY AND REPAIR ALL THE DEFECTS._____________________________________________12

FINAL CERTIFICATE____________________________________________________________________________12

PRIVITY OF CONTRACT_________________________________________________________________________13

Privity of Contract Definition____________________________________________________________________13

What is Privity of Contract?_____________________________________________________________________13Precedent Case 1____________________________________________________________________________14Precedent Case 2____________________________________________________________________________14Precedent Case 3____________________________________________________________________________14Precedent Case 4____________________________________________________________________________15

Rule of Privity of Contract_______________________________________________________________________15

What are the Rules?____________________________________________________________________________16

Exceptions to the Rule of Privity__________________________________________________________________17

SUMMARY_____________________________________________________________________________________23

CONCLUTION__________________________________________________________________________________29

REFERANCE___________________________________________________________________________________30

INDEX_________________________________________________________________________________________31

Appendix_______________________________________________________________________________________32

1. Sample Letter of Acceptance form Jabatan Kerja Raya Malaysia (Surat Setuju Terima Tender)

2. Sample Contractor All Risk Insurance policy from Kurnia Insurance.

3. Sample Performance Bond used in Government Project.

4. Sample Interim Certificate by the Architect.

OCTOBER 2010

QUESTION 3

a) Explain by mean of annotated diagram the main contractual activities under a government contract starting from issuance of letter of acceptance to issuance of final certificate.

b) What is the rule of Privity of Contract? Discuss how this rule of law effects the contractual relationship between employer, main contractor and sub-contractors.

INTRODUCTION

For this assignment I had chose question from examination paper October 2010 question

3. The question have two (2) part, (a) and (b). Question (a) regarding contractual activity

for Government that use P.W.D forms of contracts. The standard forms of construction

contract used by the Malaysian Public Sector normally JKR. The standard form consists

PWD 203, PWD 203A, PWD 203N, PWD 203P as well as PWD DB/T. Each of the form

of the contract has its own role and function to play in the government project.

In question (b) it consist in Privity of Contract and it rule and how it effects contractual

relationship between employer, main contractor and sub-contractors. In this case, a lot of

precedent case will be use to explain the detail of the Privity of Contract and it rule.

DIAGRAM OF MAIN CONTRACTUAL ACTIVITIES

Contractor Sign And Returns Letter Of Acceptance Of Tender.

START

Site Possession

Contractor Deposits or Submit Relevant Insurance Policies.

Contractor Deposits or Submit Performance Bond or Bank Guarantee

Contractor Submit Work Programme

Contractor Executed Works Including Delivery Material

S.O Make Valuation of the Works Executed & Material Delivered Every Month

S.O Issues Certification of Completion

Defect Liability Period (DLP) and S.O Issues Schedule of Defect

Contractor Verify and Repair all the Defects

Final Certificate

END

Final Account

Certificate of Making Good Defect

Period of Final Measurement and Valuation

CONTRACTOR SIGN AND RETURNS LETTER OF ACCEPTANCE OF TENDER.

Letter of Acceptance Definition

Written confirmation of an award of a contract by a customer (owner or principal) to a

successful bidder, stating the amount of the award, the award date, and when the contract

will be signed. It may also contain a notice to proceed. Also called award letter or notice

of award, it is sometimes also used in lieu of a purchase order to a vendor.

(BusinessDictionary.com)

Essential information to include in a letter of award include the following

1. Amount of award – Contract Amount.

2. Site Possession Date.

3. Date of Completion.

4. Liability Period.

5. S.O for the Project.

6. Document that contractor must submit such as;

a. Performance Bond.

b. Public Liability Policy.

c. Insurance Policy for the Work.

d. Social Security Scheme.

7. Contractor signature with witness and date.

SITE POSSESSION

Contractor is definitely entitled to exclusive possession of the whole construction site. If

the employer fail to give the contractor site possession on the date stated in LA (Letter of

Acceptance) The S.O must issue instruction in regard to the revision of date of possession

and the date for completion as stated in clause 38.4 P.W.D. FORM 203A(Rev.2007)

The Clause;

38.4 In the event of any delay in giving possession of the site from the “Date for

Possession” as stated in Letter of Acceptance or delay in giving any section or part of the

Site as provided in clause 38.3, the S.O. may issue instructions in regards to the revision

of the “Date for Possession” and the “Date for Completion” shall be appropriately revise

under clause 43.1(h) hereof, but the Contractor shall not be entitled to claim for any loss

or damage caused by such delay in giving possession of Site, nor shall he be entitled to

terminate this contract.

Precedent Case

In a precedent case between London B. of Hounslow Vs Twickenham Garden

Developments Ltd (1970) 7 BLR81, the verdict was: ‘’the contract necessarily required

the building owner to give the contractor such possession, occupation or use as is

necessary to enable him to perform the contract’’ (business-freetips.com)

CONTRACTOR DEPOSITS OR SUBMIT RELEVANT INSURANCE POLICIES The contractor must submit all relevant insurance that stated in LA (Letter of

Acceptance) such as;

a. Public Liability Policy.

The policy must be issue by competence insurance company on the name of

employer and the Contractor. The policy must covered the contract period, defect

liability and three (3) month 14 days afterwards. The Policy covered any accident

at site.

b. Insurance Policy for the Works.

The policy must be issue by competence insurance company on the name of

employer and the Contractor. The policy must cover the contract period. The

contract policy must covered liability against loss and damages by fire, lightning,

explosions storm, tempest, flood, ground subsidence, bursting, or over-flowing

over water tanks, apparatus or pipe, aircraft and others aerial devices or article

dropped there from, riot and civil commotion, all works executed and all unfix

material and goods, delivered to, placed on or adjacents to the works and intended

thereof (but excluding temporary buildings, plants, tools and equipment owned or

hired by the Contractor or any Sub-contractor, nominated or otherwise).

All the relevant insurance must submit to employer before Contractor start their works or

the Contractor can submit Cover Note of the insurance policy and all the premium receipt

that had been paid.

P.W.D. FORM 203A (Rev. 2007), Insurance Policy Clause .

15.0 INSURANCE AGAINST PERSONAL INJURIES AND DAMAGE TO

PROPERTY.

15.1 Taking of insurance

(a) Without prejudice to his liability to indemnify the government under clause 14

hereof, the Contractor shall, as condition precedent to the commencement of any

work under this contract, effect and maintain such insurances whether with or

without an excess amount as specified in Appendix hereto as are necessary to

cover the liability of the Contractor, whether nominated or otherwise.

(b) Such insurance shall be for the purpose of personal injuries or death, damage or

loss to property, moveable or immovable, arising out of , or in the course of, or by

reason of the execution of the work and cause by any negligence, omission,

breach of contract or default of the Contractor or any sub-contractor, whether

nominated or otherwise. Where and excess amount is specified in Appendix, the

Contractor shall bear the amount of such excess. The policy or policies of

insurance shall contain a cross liability clause indemnifying each of the jointly

insured against claims made by on him by the other jointly insured.

(c) Such insurance as referred to under sub-clause (a) hereof shall be effected with an

insurance company as approved by the Government and maintained in the joint

names of the government and Contractor and all sub-contractor, whether

nominated or otherwise. Such insurance shall cover from period of the date of

possession of site until the date of issuance of certificate of Making Good Defect

for any claim occasioned by the contractor or any subcontractor in the course of

any operations carried out by the Contractor or any sub-contractor for the purpose

of complying with his obligations under Clause 48 hereof.

15.2 Production of Polices

It shall be the duty of the Contractor to produce and shall deposit the relevant

policy or policies of the insurance together with receipt in respect of premiums

paid to the S.O., whether demand or not.

CONTRACTOR DEPOSITS OR SUBMIT PERFORMANCE BOND OR BANK GUARANTEE

Performance Bond Definition

A bond issued to one party of a contract as a guarantee against the failure of the other

party to meet obligations specified in the contract.  (investopedia) 

For example, a contractor may issue a bond to a client for whom a building is being

constructed. If the contractor fails to construct the building according to

the specifications laid out by the contract, the client is guaranteed to use the money for

any monetary loss.

The value of the bond must 5% from the total amount of the contract. If the contract

amount was RM 2, 485,396.00 the bond value was RM 124, 269.80.

 P.W.D. FORM 203A (Rev. 2007), Performance Bond Clause.

13.0 PERFORMANCE BOND / PERFORMANCE GUENTEE SUM

13.1(a) The Contractor shall, on the date of the possession of site, provide a Performance

Bond or Performance Guarantee Sum as the case may be substantially in the form

as in Appendix issued by and approved licensed bank or financial institution

incorporated in Malaysia in favour of the Government for a sum equivalent to five

percent (5%) of the total Contract Sum as specified in Appendix to secure the due

performance of the obligations under this contract by the Contractor. The

Performance Bond shall remain valid and effective until twelve (12) month after

the expiry of the Defect Liability Period or issuance of the Certificate of

Completion of Making Good Defect, whichever is the later.

13.3 Notwithstanding anything contained in the Contract, the Government shall be

entitled at any time to call upon the Performance Bond, wholly or partially, in the

event that the Contractor fails to perform or fulfil its obligation under this

Contract and such failure is not remedied in accordance with this Contract.

CONTRACTOR SUBMIT WORK PROGRAMME

Work Programme Definition Specifies the detailed implementation of the specific programmes. It comprises detailed

descriptions of the activities (detailed thematic priorities, instruments used, evaluation

criteria, deadlines, roadmaps). It provides all information necessary to launch calls for

proposals. The extent to which a proposal addresses the objectives of the work

programme is an evaluation criterion (i.e. in order to prepare a successful proposal, one

has to read carefully the work programme related to the call addressed). (Marie Cure

Actions, 2006)

The Contractor must submit the work programme to show and to ensure the construction

activity and Contractor meet the dateline. Together with work programme the Contractor

has to submit construction method and the entire material sample such as,

a. Tiles sample.

b. Window material.

c. Sanitary.

d. Ceiling and other relevant material.

P.W.D. FORM 203A (Rev. 2007), Work Programme Clause.

12.0 PROGRAMME OF WORK

12.1 Where a programme of work is not provided by the S.O., the Contractor shall

within fourteen (14) days after the date of the Letter of Acceptance, submit to the

S.O. for his approval a programme of work of the execution of the works in such

forms and details as the S.O. shall reasonably determained.

12.2 If at any time it should appear to the S.O. that the actual progress of the works

does not conform to the fixed or approved programme of work refered to clause

12.1 hereof, the Contractor shall produce, a revised programme of work showimg

the necessary modifications to the approved programme necessary to ensure

completion of the works within the time for completion as defined in clause 39

hereof or any extended time granted pursuant to clause 43.

Clause in P.W.D FORM 203A (Rev. 2007), started that the Contractor shall provided

relevant sample.

35.2 The Contractor shall, entirely at his own cost, provide sample of material and

goods for testing purposes. The Contractor shall, when instructed by S.O. to open

up for inspection any work covered up, or arrange for or carry out any test of any

material or goods (whether or not already incorporated in the works) or of any

executed work with the S.O. may in writing require and the cost of such opening

u or testing (together with the cost of making good in consequence thereof) shall

be added to the Contract Sum unless provided for in the Bill of Quantities by way

of Provision Sum or otherwise or unless the inspection or test show that the work,

materials or goods are not in accordance with this Contract.

CONTRACTOR EXECUTED WORKS INCLUDING DELIVERY MATERIAL.

Contractor start work accordance to specification of the drawing. At this stage also

Architect or S.O. will monitor and inspect Contractor work. During the construction, the

Contract shall provided progress of works with picture. The Contractor shall submit or

present to the S.O. the progress in weekly meeting and submit the progress report to S.O.

including ‘S’ curve show that the progress of work in comparesion between planning and

actual works.

The S.O. has the right to instructs the Contractor to remove the work that not follow the

specification as stated in P.W.D. FORM 203A (Rev. 2007), in clause,

36.3 The S.O. may issue instruction to contractor to remove from the site or rectify any

work, goods which are not in accordance with this Contract at it own cost.

36.4 The Contractor shall, as may be required by the S.O. from time to time, provided

such assistance, instruments, machines, labour and materials as are normally

required for the purpose of examining, measuring and testing of any work, as well

as and the quality, weight or quality of the material used, and shall supply sample

of material before incorporation in the works for testing.

S.O MAKE VALUATION OF THE WORKS EXECUTED & MATERIAL DELIVERED EVERY MONTH.

The S.O. or architect and Contractor evaluate the executed works by contractor for

Contractor to make their interim claim. The works included percentage of the work done

and unfix material at site. The evaluation for interim claim was stated in P.W.D. FROM

203A (Rev. 2007) in clause,

28.1 When the Contractor has executed works including delivery to or adjacent to the

Works of any unfixed materials or goods intended for incorporation into the

Works in accordance with the term of this Contract and their total value of work

thereof has reached the sum referred to in Appendix, the S.O. shall at the time

make the first valuation of the same.

28.2 Thereafter, once (or more often at the discretion of the S.O.) during the course of

each succeeding month the S.O. shall make a valuation of the works properly

executed and of unfixed materials and goods delivered to or adjacent to the Site,

provided the total value of the work properly executed and the value of unfixed

materials and goods as specified in clause 28.4 thereof, delivered to the Site

intended of incorporation into the Works in each subsequent valuation shall not be

less than the sum referred to in Appendix.

Architect or S.O. shall issue Interim Certificate to Contractor within fourteen (14) days

from the date of evaluation. It was stated in P.W.D. FORM 203A (Rev. 2007) in clause,

28.3 Within fourteen (14) days from the date of any such valuation being made and

subject to the provision mentioned in the clause 28.1, the S.O. shall issue an

Interim Certificate starting the amount due to the Contractor from the

Government. PROVIDED THAT the signing of this Contract shall not be a

condition precedent for the issue of the first Interim certification (and no other) so

long as the Contractor has returned the Letter of Acceptance of Tender duly

signed and has deposited with the S.O. or the Government the relevant insurance

policies under clause 15 and 18 hereof.

28.4 The amount stated as due in an Interim Certificate shall, subject to any agreement

between the Parties as to payment by stages, be the estimated total value of the

work properly executed and up to ninety percent (90%) of the value of the unfixed

materials and goods delivered to or adjacent to the Site intended for incorporation

into the permanent Work up to and including the date the valuation was made,

less any payment (including advance payment) previously made paid under the

Contract. PROVIDED THAT such certificate shall only include the value of the

said unfixed materials and goods as and from such time as they are reasonably

and properly and not prematurely delivered to or adjacent to the Site and

adequately protected against weather, damage or deterioration.

S.O ISSUES CERTIFICATION OF COMPLETION.

The Certification of Completion shall be issue by the S.O. if the contractor fulfill their

contract within the dateline and The Contractor shall notify the S.O. if the works achieve

practical completion and the S.O. shall issue Certification of Practical Completion to the

Contractor ast stated in P.W.D. FORM 203A (Rev. 2007) in clause,

39.2 If the Contractor considers that the works have achieved practical completion, the

Contractor shall notify the S.O. in writing to that effect.

39.3 Within 14 days of receipt of such notice, the S.O. shall carry out

testing/inspection of the Works. Pursuant to such inspection/testing, the S.O. shall

(a) issue the Certificate of Practical Completion to the Contractor if in his

opinion the whole Works have reached Practical Completion and have

satisfactorily passed any inspection/test carried out by the S.O. The date of

such completion shall be certified by the S.O. and such date shall be the

date of the commencement of the Defects Liability Period as provided in

clause 48 hereof; or

(b) give instruction to the Contract specifying all defective works which are

required to be compete by the Contractor before the issuance of the

Certificate of Practical Completion.

DEFECT LIABILITY PERIOD (DLP) AND S.O ISSUES SCHEDULE OF DEFECT.

After received the Certificate of Completion, the S.O. will give Defect List to the

Contractor to review and shall repaired all the defect within the Defect liability Period,

twelve (12) month from issue of Certificate of Compilation and S.O. will certified the

works, it was sated in P.W.D. FORM 203A (Rev. 2007) in clause,

48.1 Completion of Outstanding Work and Remedying Defects

(a) At any time during the Defect Liability Period as stated in Appendix

hereto (or if none stated the period is twelve (12) months from the date of

Practical completion of the Works), any defect, imperfection, shrinkage or

any other fault whatsoever which may appear and which are due to

materials or goods or workmanship not in accordance with this Contract,

the S.O. shall issue written instruction to the Contractor to make good

such defect, imperfection, shrinkage or any other fault whatsoever at the

Contractor’s own cost. The Contractor shall complete all such works with

due expedition or within such time as may be specified by the S.O.

CONTRACTOR VERIFY AND REPAIR ALL THE DEFECTS.

The Contractor shall repair and made goods all the defect in Schedule of Defect within

the Defect Liability Period. The clause in P.W.D. FROM 203A (Rev.2007) is 48.1(b) as

below,

(b) Without prejudice to sub-clause (a), any defect, imperfection, shrinkage or

any other fault whatsoever which may appear during the Defect Liability

Period to be made good by the Contractor, shall be specified by the S.O. in

the Schedule of Defects which he shall delver to the Contractor not later

than fourteen (14) days after the expiration of the Defect Liability Period.

The defect, imperfection, shrinkage or any other fault whatsoever

specified in the schedule of Defects shall be made good by the Contractor

at his own costs and to completed within a reasonable time but in any case

not later than three (3) months after the receipt of the said Schedule.

PROVIDED THAT the S.O. shall not be allowed to issue any further

instruction requiring the Contractor to make good any defect,

imperfection, shrinkage or any other fault whatsoever after the issuance of

the said Schedule of Defect or after fourteen (14) days from the expiration

of the said Defect Liability Period, whichever is the later.

FINAL CERTIFICATE

The S.O. shall issue Final Certificate after all the defect works done by Contractor and

been approved by S.O.

PRIVITY OF CONTRACT

Privity of Contract Definition

The general requirement that a person who sues upon a contract must be the pomisee or

must have some legal interest in the undertaking. There are some exceptious to the rule:

(a) Where assets come into the promisor’s hands which in equity belong to a third person;

(b) Where the plaintiff is the beneficiary solely interested in the promise, i.e., where the

contract is for the beneft of a third party beneficiary. (DHEERSJ, 2005)

What is Privity of Contract?

A contract is an agreement made under legal obligations and entered into by 2 or more

parties. The contract may be written or oral, but both subscribe to the contract that only

those who have entered into the contract can reap the benefits of the agreement or must

abide by whatever terms and conditions were stipulated in the contract. This legal

concept refers to privity of contract.

Privity of contract is a legal concept that deals with issues surrounding what legal

obligations the parties under contract are subject to. This may also include the possibility

of suing a party in the event of a breach of contract. This happens when a party cannot

fulfill the terms and conditions or deliver the promises he or she agreed to. This is

because parties subject to the contract have certain rights and obligations that one must

respect and follow. However, such rights and obligations are not usually extended to third

parties in a contract because they are not included in the privity of contract.

There are instances however when a third party can be granted the right to privity of

contract. This can be done through assignment wherein one of the parties under contract,

referred to as an assignor, transfers rights or responsibilities due from the contract to the

third party, referred to as an assignee. Once an assignment occurs, the assignor loses his

or her rights in the contract while the assignee receives the rights. It’s also possible to

gain privity of contract through delegation of duties wherein the delegator gives his or her

rights to the delegatee. (What is Privity of Contract?)

Precedent Case 1

Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. Ltd. (1915)

Dunlop sold its tires to a wholesaler on the condition that they were sold to retailers who

agreed to sell at the specified prices. Selfridge was one such retailer and they sold at

prices below the specified prices. There appeared to be no privity of contract between

Dunlop and Selfridge. The court also noted that there was no consideration flowing from

Dunlop to Selfridge so it was not possible for Dunlop to enforce against Selfridge.

(CONTRACT LAW)

Precedent Case 2

Beswick v. Beswick (1966)

A nephew bought out his uncle’s coal business. One of the terms was that the nephew

would pay support to the uncle’s wife upon the uncle’s death. When the uncle died, the

nephew reneged. The widow sued. The widow was able to sue, not personally, but as

executor of the uncle’s estate and on his behalf (the uncle, of course, having been a party

to the contract). “Where a contract is made with A for the benefit of B, A can sue on the

contract for the benefit of B and recover all that B could have recovered if the contract

had been made with B himself.” (CONTRACT LAW)

Precedent Case 3

McCannell v. Mabee McLaren Motors Ltd. (1926)

In this case, the issue was the extent to which a contract between a car manufacturer

(Studebaker) and a dealer could be enforced by another dealer, with exactly the same

contract with the manufacturer. The court decided that the manufacturer was “the agent

of the several dealers to bring about privity of contract between them. The consideration

is not moving from the company to the dealer, but from one dealer to another.” The court

based its opinion on the fact that the contract between the manufacturer and each dealer

was exactly the same. Nor was the court swayed by the absence of an express designation

to the effect that the manufacturer was the agent of the dealers. “The function which he

(the manufacturer) fills in bringing the parties together and their recognition of the

relationship which his efforts have created is the test of agency.” (CONTRACT LAW)

Precedent Case 4

London Drugs Ltd. v. Kuehne & Nagel International Ltd. (1992)

A transformer belonging to London Drugs was stored by the defendant, a storage

company. Their contract had a liability clause limited to $40. When two employees of the

storage company, through their negligence, damaged the transformer to the tune of

$33,955 of damages, London Drugs sued them personally, for the whole amount. The

employees sought to invoke the liability limitation clause. Canada’s Supreme Court

recognized that the privity of contract rule prevented beneficiaries from enforcing a

contract to which they were not a party. To this, the court made an outright exception in

the case of employees. “An employer such as Kuehne & Nagel performs its contractual

obligations with a party such as the appellants through its employees. As far as

contractual obligations are concerned, there is an identity of interest between employer

and employee.” The court then set two conditions allowing “employees (to) be entitled to

benefit from a limitation of liability clause found in a contract between their employer

and the plaintiff: … (1) the limitation of liability clause must, either expressly or

impliedly, extend its benefit to the employee(s) seeking to rely on it; and (2) the

employee(s) seeking the benefit of the limitation of liability clause must have been acting

in the course of their employment and must have been performing the very services

provided for in the contract between their employer and the plaintiff when the loss

occurred.” (CONTRACT LAW)

Rule of Privity of Contract

Contractual relationship between employer, main contractor and sub-contractor. Rule of

the Privity of Contract show that main-contractor only have contract with employer not

with the sub-contractor. In construction industries sub-contractor only have contract with

main-contractor even though employer introduce or recommend sub-contractor to main-

contractor. The Main-Contractor shall responsible for any damage or any adequate in

construction by the Sub-Contractor because of privity between them.

There have been cases which show how the rules of privity work.

In the case of Port Line v Ben Line Steamers (1958), the court decided that the

contract was enforceable.

In the case of Beswick v Beswick (1968), this is where a third party to a contract

tried to enforce payment under a contract which was between her late husband

and her nephew. Section 56 of the Law of Property Act 1925, was used to obtain

property by a third party. However, the court decided that Mrs Beswick would not

be allowed to enforce payment using the Act. (In Brief free legal information)

What are the Rules?

There are rules which stipulate who can take action to sue another party within a contract.

In the case of Dunlop v Selfridge (1915), this is where there was a contract between two

parties, Dunlop and Selfridge, however, a third party could not sue Selfridge over an

agreement over the price because the third party was not in contract with Selfridge. The

court decided that there was no contract between the third party, and it could not have the

right to sue. The privity rule shows only those who have engaged in a contract have the

right to sue.

However, in the case of Tweddle v Atkinson (1861), the contract was created for the

benefit of a third party, but that person was not able to benefit from the payment that was

intended for him under the contract.

The rules of privity can cause disadvantages, for instance in the case of Jackson v

Horizons Holidays (1975), this is where the plaintiff, Mr Jackson, booked a holiday for

himself, his wife and his two children. Mr Jackson was informed that his original holiday

was not ready and was offered an alternative, which he accepted. However, the holiday

tuned out unsatisfactory and Mr Jackson and his family were disappointed. The plaintiff

sued the company for breach of contract; the company initially denied the claims made

by the plaintiff, but later admitted liability. The court awarded Mr Jackson damages; but

the court did not divide the damages between the family members, and only awarded

them Mr Jackson. The court decided that it was for Mr Jackson to consider his family in

the damages awarded, and that the court could not award them separately. Mr Jackson

appealed, the court decided that he sued for breach of contract for himself and his family,

and therefore his damages recovered were for him and his family. The court also decided

that the figure awarded was right when considering himself and his family. However, it

was decided that the damages could be extended to his family. (In Brief free legal

information)

Exceptions to the Rule of Privity

There are certain exceptions to the rule of privity.

In the case of Eurymedon (1975), this is where an agent was involved in the

contract. Statute laws that are made can also act as exceptions to the rule, and can

override the common law in place.

Collateral contracts are when there is a situation where it allows a party to find a

way to avoid the rule, an example of this is in the case of Shanklin Pier v Detel

(1951). Another exception is covenants which run with the land, which are

restrictive and positive. For restrictive, this is in the case of Tulk v Moxhay

(1848). For positive, in the case of Smith and Snipes Hall Farm v River Douglas

Catchment Board (1949), the court decided that the covenant could run with the

land.

In certain circumstances, restrictions on price are also allowed, which is another

exception to the rule. (In Brief free legal information)

Eurymedon (1975)

This case (The Eurymedon [1975] AC 154) demonstrates that although an existing

contractual obligation cannot usually be consideration in an agreement between the

contracting parties, it is possible for an obligation to a third party to be so deemed. There

is some rather tortuous reasoning in the judgement; this probably arises because in fact

the intentions of all the contracting parties were clear; the court strove to find terms under

which it could deliver a judgement that reflected these intentions.

The case concerns a carrier of goods by sea, the owners of the goods (the plaintiff) and

the stevedors (defendents). The owner contracted with the carrier to deliver a piece of

machinery. The contract contained an exemption clause to the effect that the owners

could not sue for damages in respect of negligence after one year, and that the owners

would extend the same exemption to the carriers' agents at the docks (the stevedors, in

this case).

The stevedors damaged the machine at the dock; that this was a result of their negligence

is not in dispute. However, the owners did not bring suit until the time set out in the

exclusion clause had elapsed. They could not sue the carrier, as the exclusion clause

would have defeated their suit. So they sued the stevedors. The owners argued that there

was an implied contract between themselves and the stevedors, and under the terms of

this implied contract the stevedors should have exercised due care in the unloading.

Because they did not, they were liable for damages.

This seems on the face of it to be a good case. However, it is clear that when the owner of

the goods contracted with the carrier, they fully consented to exempt the carriers and their

agents from liability for negligence. It hardly seems fair that they should wriggle out of

this exemption on a technicality.

Now, the stevedors could not rely on the exemption clause as a term in the original

contract itself, as this would be contrary to the principles of Privity of contract, even

though the clause was for their benefit. So the problem for the court was to find a way in

which there was an implied agreement between the stevedors and the owners that did

include this clause. The reasoning goes like this:

in contracting with the carriers, the owners of the goods made a unilateral offer to

the effect that a party (as yet unknown) could unload the goods at dockside with

the benefit of the exclusion clause.

the stevedors accepted this offer; acceptance was signalled by their performing

the requested action (as per Carlill v Carbolic Smoke Ball Co,)

this acceptance formed a valid implied contract, because all the required

provisions for validity were in place; the only tricky one was consideration, which

was deemed to be the process of unloading the goods.

therefore the stevedors had a contract with the owners, in which they were

exempted from liability after one year.

therefore the stevedors were not liable.

Although the reasoning is strained, the judgement gives effect to the original intentions of

the contractees, and does not offend against any other precedents.

However, it is interesting to ask what the situation would have been if the stevedors had

damaged the goods before fulfulling their consideration, e.g., on ship itself. Then,

presumably, there would no consideration and no contract. (Lawiki.org, 2010)

Shanklin Pier Ltd v Detel Products Ltd [1951]

Shanklin Pier Ltd v Detel Products Ltd [1951] 2 KB 854 is a leading judgment on the

subject of collateral contracts in English contract law. In it the High Court of Justice

King's Bench Division created the principle of collateral contracts, an exception to the

rule of privity of contract where a contract may be given consideration by entering into

another contract.

Facts

Shanklin Pier Ltd hired a contractor to paint Shanklin Pier. They spoke to Detel Products

Ltd about whether a particular paint was suitable to be used, and Detel assured them that

it was, and that it would last for at least seven years. On the basis of this conversation

Shanklin Pier Ltd instructed the contractors to use a particular paint, which they did. The

paint started to peel after three months, and Shanklin Pier attempted to claim

compensation from Detel Products. This was complicated by the fact that there was no

direct contract between the two companies, only between Shanklin Pier and the

contractors, and between the contractors and Detel Products. (wikipedia, 2010)

Tulk v Moxhay (1848).

Per LORD COTTENHAM, LC: If an equity is attached to property by the owner, no one

purchasing with notice of that equity can stand in a different situation from that of the

party from whom he purchased.

Appeal by the defendant from an order of LORD LANGDALE MR, in an action for an

injunction.

In 1808 the plaintiff, being then the owner in fee of a vacant piece of ground in Leicester

Square, London, as well as of several of the houses forming the square, sold the piece of

ground by the description of:

"Leicester Square Garden or Pleasure Ground, with the equestrian statue then standing in

the centre thereof and the iron railing and stone work round the same,"

to one Elms in fee. The deed of conveyance contained a covenant by Elms, for himself,

his heirs, and assigns, with the plaintiff, his heirs, executors, and administrators.

"that Films, his heirs, and assigns should, and would from time to time, and at all times

thereafter at his and their own costs and charges, keep and maintain the said piece of

ground and square garden and the iron railing round the same in its then form, and in

sufficient and proper repair as a square garden and pleasure ground, in an open state,

uncovered with any buildings, in neat and ornamental order; and that it should be lawful

for the inhabitants of Leicester Square, tenants of the plaintiff, on payment of a

reasonable rent for the same, to have keys at their own expense and the privilege of

admission therewith at any time or times into the said square garden and pleasure

ground."

The piece of land so conveyed passed by divers means conveyances into the hands of the

defendant, whose purchase deed contained no similar covenant with his vendor, but he

admitted that he had purchased with notice of the covenant in the deed of 1808. The

defendant having manifested an intention to alter the character of the square garden, and

asserted a right, if he thought fit, to build upon it, the plaintiff, who remained owner of

several houses in the square, filed this bill for an injunction. An injunction was granted

by the Master of the Rolls, to restrain the defendant from converting or using the piece of

ground and square garden and the iron railing round the same to or for any other purpose

than as a square garden and pleasure ground in an open state, and uncovered with

buildings. The defendant moved to discharge that order.

JUDGMENT:

LORD COTTENHAM LC:

That this court has jurisdiction to enforce a contract between the owner of land and his

neighbour purchasing a part of it that the purchaser shall either use or abstain from using

the land purchased in a particular way is what I never knew disputed. Here there is no

question about the contract. The owner of certain houses in the square sells the land

adjoining, with a covenant from the purchaser not to use it for any other purpose than as a

square garden. It is now contended, not that the vendee could violate that contract, but

that he might sell the piece of land, and that the purchaser from him may violate it

without this court having any power to interfere. If that were so, it would be impossible

for an owner of land to sell part of it without incurring the risk of rendering what he

retains worthless. It is said that, the covenant being one which does not run with the land,

this court cannot enforce it, but the question is not whether the covenant runs with the

land, but whether a party shall be permitted to use the land in a manner inconsistent with

the contract entered into by his vendor, with notice of which he purchased. Of course, the

price would be affected by the covenant, and nothing could be more inequitable than that

the original purchaser should be able to sell the property the next day for a greater price,

in consideration of the assignee being allowed to escape from the liability which he had

himself undertaken.

That the question does not depend upon whether the covenant runs with the land is

evident from this, that, if there was a mere agreement and no covenant, this court would

enforce it against a party purchasing with notice of it, for if an equity is attached to

property by the owner, no one purchasing with notice of that equity can stand in a

different situation from that of the party from whom he purchased. There are not only

cases before the Vice-Chancellor of England, in which he considered that doctrine as not

in dispute, but looking at the ground on which LORD ELDON disposed of Duke of

Bedford v British Museum Trustees it is impossible to suppose that he entertained any

doubt of it. In Mann v Stephens before me, I never intended to make the injunction

depend upon the result of the action, nor does the order imply it. The motion was, to

discharge an order for the commitment of the defendant for an alleged breach of the

injunction, and also to dissolve the injunction. I upheld the injunction, but discharged the

order of commitment on the ground that it was not clearly proved that any breach had

been committed, but, there being a doubt whether part of the premises on which the

defendant was proceeding to build, was locally situated within what was called the Dell,

on which alone he had under the covenant a right to build, and the plaintiff insisting that

it was not, I thought the pendency of the suit ought not to prejudice the plaintiff in his

right to bring an action if he thought he had such right, and, therefore, I gave him liberty

to do so.

With respect to the observations of LORD BROUGHAM in Keppell v Bailey he never

could have meant to lay down, that this court would not enforce an equity attached to

land by the owner unless under such circumstances as would maintain an action at law. If

that be the result of his observations, I can only say that I cannot coincide with it. I think

this decision of the Master of the Rolls perfectly right, and, therefore, that this motion

must be refused with costs. (CVN Law School, 2011)

Smith and Snipes Hall Farm v River Douglas Catchment Board (1949)

Facts

The River Douglas Catchment Board agreed with a number of landowners between the

River Douglas and the Leeds and Liverpool Canal) to carry out some work if some

contribution to the cost was given. In 1940 Mrs S, one of the covenantees, sold her land

("Low Meadows") to Smith, which incorporated Snipes Hall Farm Ltd in 1944. In

Autumn 1946 the Ellen Brook burst its banks and flooded Smith and Snipes Hall Farm

land. They made a claim against the Board for damages in tort and breach of contract.

The question was whether not having been privy to the original agreement was a bar to

any recovery.

Judgment

The Court of Appeal all held that the Board was in breach of contract, and that breach

caused damage to the farm. The agreement showed the intention that the obligation

would attach to the land, and it would not matter whose hands the land came into: the

owner could enforce the covenant. Because the covenant ran with the land, under section

78 Law of Property Act 1925 it could be enforced by the covenantee and successors in

title. Denning LJ's notable decision went as follows.

There is in Lancashire a river called Eller Brook, which is liable to overflow its banks

and flood the adjoining land. In 1938, in order to prevent the flooding, eleven owners of

land through which the river ran made an agreement with the local catchment board,

whereby the board undertook to widen, deepen and make good the banks of the river, and

thereafter to maintain them, and the landowners paid a contribution towards the cost. The

board did the work and practically completed it by 1940, but they did it so unskilfully

that, in the opinion of experts, it was from the first doomed to failure. The landowners, of

course, did not know this and set about cultivating the land. The low meadows, which

had been rough marshland, were broken up and brought under the plough. Crops were

sown and harvested. But the banks of the river were not strong enough to stand serious

floods. In 1944 they burst. The breach on that occasion was soon closed, but the board's

engineer was aware of the danger. He reported to the board that "the bank is a bad one

under any conditions." In 1945 there was another burst near by, and he reported that "this

bank is largely composed of sand. I propose to put a machine on to strengthen it as soon

as one is available." But apparently he did nothing, or at any rate nothing effective. The

landowners and their tenants went on cultivating the land. They did not know that the

banks were doomed to failure. Then in 1946 the worst happened. Serious floods arose,

the banks burst, the fields were flooded, and the crops ruined. This action is brought by a

tenant of the fields against the board to recover the value of the crops he has lost. The

present owner joins in the action, claiming his loss of rent, but the substantial claim is by

the tenant company.

On those facts it is my opinion that the board broke their contract. It was an implied term

that they should do the work with reasonable care and skill, so as to make the banks

reasonably fit for the purpose of preventing flooding. The proper way of doing this,

according to the experts, was to put a clay core in the banks, or to make them very much

wider, but they did not do either. It may be that the board had not sufficient funds

available to carry out such works; but that seems to me to be an irrelevant consideration,

or, at any rate, just as irrelevant in the case of a public board as in the case of a private

contractor. No private contractor who was engaged to make works for a specific purpose

could excuse himself for bad results by saying that he had not sufficient money to erect

proper works. It follows, therefore, that if the original landowner with whom the

agreement was made had himself cultivated the fields, and suffered damage by the

breach, he could recover from the board. But he sold the land and he has suffered no

damage. The damage has been suffered partly by the man who purchased the land, but

principally by the tenants, and the question is whether they can sue on the contract.

Mr. Nield says that the plaintiffs cannot sue. He says that there is no privity of contract

between them and the board, and that it is a fundamental principle that no one can sue

upon a contract to which he is not a party. That argument can be met either by admitting

the principle and saying that it does not apply to this case, or by disputing the principle

itself. I make so bold as to dispute it. The principle is not nearly so fundamental as it is

sometimes supposed to be. It did not become rooted in our law until the year 1861

(Tweddle v Atkinson, and reached its full growth in 1915 (Dunlop v Selfridge). It has

never been able entirely to supplant another principle whose roots go much deeper. I

mean the principle that a man who makes a deliberate promise which is intended to be

binding, that is to say, under seal or for good consideration, must keep his promise; and

the court will hold him to it, not only at the suit of the party who gave the consideration,

but also at the suit of one who was not a party to the contract, provided that it was made

for his benefit and that he has a sufficient interest to entitle him to enforce it, subject

always, of course, to any defences that may be open on the merits. It is upon this

principle, implicit if not expressed (i.) that the courts, ever since 1368, have held that a

covenant made with the owner of land for its benefit can be enforced against the

covenantor, not only by the original party, but also by his successors in title. (ii.) that the

Courts of Common Law in the seventeenth and eighteenth centuries repeatedly enforced

promises expressly made in favour of an interested person; (iii.) that Lord Mansfield held

that an undisclosed principal is entitled to sue on a contract made by his agent for his

benefit, even though nothing was said about agency in the contract; and (iv.) that Lord

Hardwicke decided that a third person is entitled to sue if there can be spelt out of the

contract an intention by one of the parties to contract as trustee for him, even though

nothing was said about any trust in the contract, and there was no trust fund to be

administered.

Throughout the history of the principle the difficulty has been, of course, to say what is

sufficient interest to entitle the third person to recover. It has sometimes been supposed

that there must always be something in the nature of a "trust" for his benefit. But this is

an elusive test which does not explain all the cases, and it involves the trustee being made

a nominal party to the action either as plaintiff or defendant, unless that formality is

dispensed with, as it was in Les Affréteurs Réunis Société Anonyme v Leopold Walford

Ltd. The truth is that the principle is not so limited. It may be difficult to define what is a

sufficient interest. Whilst it does not include the maintenance of prices to the public

disadvantage, it does cover the protection of the legitimate property, rights and interests

of the third person, although no agency or trust for him can be inferred. It covers,

therefore, rights such as these which cannot justly be denied; the right of a seller to

enforce a commercial credit issued in his favour by a bank, under contract with the buyer;

the right of a widow to sue for a pension which her husband's employers promised to pay

her under contract with him; or the right of a man's servants and guests to claim on an

insurance policy, taken out by him against loss by burglary which is expressed to cover

them; cf Prudential Staff Union v Hall. In some cases the legislature itself has intervened,

as, for instance, to give the driver of a motor car the right to sue on an insurance policy

taken out by the owner which is expressed to cover the driver. But this does not mean that

the common law would not have reached the same result by itself.

The particular application of the principle with which we are concerned here is the case

of covenants made with the owner of the land to which they relate. The law on this

subject was fully expounded by Mr. Smith in his note to Spencer's case which has always

been regarded as authoritative. Such covenants are clearly intended, and usually

expressed, to be for the benefit of whomsoever should be the owner of the land for the

time being; and at common law each successive owner has a sufficient interest to sue

because he holds the same estate as the original owner. The reason which Lord Coke

gave for this rule is the reason which underlies the whole of the principle now under

consideration. He said in his work upon Littleton that it was "to give damages to the party

grieved." If a successor in title were not allowed to sue it would mean that the covenantor

could break his contract with impunity, for it is clear that the original owner, after he has

parted with the land, could recover no more than nominal damages for any breach that

occurred thereafter. It was always held, however, at common law that, in order that a

successor in title should be entitled to sue, he must be of the same estate as the original

owner. That alone was a sufficient interest to entitle him to enforce the contract. The

covenant was supposed to be made for the benefit of the owner and his successors in title,

and not for the benefit of anyone else. This limitation, however, was, as is pointed out in

Smith's Leading Cases, capable of being "productive of very serious and disagreeable

consequences," and it has been removed by s. 78 of the Law of Property Act 1925, which

provides that a covenant relating to any land of the covenantee shall be deemed to be

made with the covenantee and his successors in title, "and the persons deriving title under

him or them" and shall have effect as if such successors "and other persons" were

expressed.

The covenant of the catchment board in this case clearly relates to the land of the

covenantees. It was a covenant to do work on the land for the benefit of the land. By the

statute, therefore, it is to be deemed to be made, not only with the original owner, but also

with the purchasers of the land and their tenants as if they were expressed. Now if they

were expressed, it would be clear that the covenant was made for their benefit; and they

clearly have sufficient interest to entitle them to enforce it because they have suffered the

damage. The result is that the plaintiffs come within the principle whereby a person

interested can sue on a contract expressly made for his benefit.

I would not wish to leave this subject without referring also to s. 56 of the Law of

Property Act, 1925 , which says that a person may take the benefit of any covenant or

agreement respecting land or other property, although he may not be named as a party to

the instrument. That section is no doubt, as Lord Greene has said, confined to cases when

the person seeking to take advantage of it is a person "within the benefit" of the covenant

or agreement;but, subject to that limitation, there is no reason why the section should not

be given its full scope, just as Lord Dunedin was prepared to give full scope to its

narrower predecessor, s. 5 of the Real Property Act 1845. Section 56 means, therefore,

that a person may enforce an agreement respecting property made for his benefit,

although he was not a party to it. So construed it is a clear statutory recognition of the

principle to which I have referred and it is applicable to this case. If the principle had

been canvassed in In re Miller's Agreement, it should, I think have been held there that

the daughters had a right at common law to sue for their pension, a right which was

reinforced by s. 56. I cannot believe that the covenantors there could break their contract

with impunity. So much for the question of principle.

Mr. Nield did urge that the benefit of the covenant should not run with the land here

because there was no clearly defined piece of land to which it was attached. It is true that

the agreement did not describe the lands by metes and bounds, but it did give a

description of them which was capable of being rendered certain by extrinsic evidence;

and that is sufficient. Id certum est quod certum reddi potest. Mr. Nield also argued that

there was no servient tenement. But that is only material when there is a question whether

the burden of a covenant runs with the land. This is a question of the benefit running, and

ever since The Prior's case it has been held that the covenantor is liable because of his

covenant given to the owner of the dominant tenement and not because of his relationship

to any servient tenement. In my opinion, therefore, the board are liable to the plaintiffs in

damages for breach of covenant. It is thus unnecessary to consider whether they are liable

in tort, but I will add a word about it. The decision of the House of Lords, in the East

Suffolk case, shows that, in the absence of a contract, a catchment board is under no duty

to exercise its powers with efficiency or dispatch or at all; but it also shows that if it does

exercise its powers it must use reasonable care not to injure persons likely to be affected

by its operations. The present case is very different from that one, because here the

landowners, in consequence of the works done by the board, ploughed up the land and

cultivated the fields; and in the result suffered damage which they would not have done if

the board had done nothing, for in that case they would have had no crops there. The

decision of the House of Lords does show, however, that, in considering whether the

board broke its duty in tort, it is material to inquire into the expense of the works which it

is said they ought to have constructed. An adjacent landowner must not be too critical if

the board prefers thrift to efficiency, I suppose on the principle that he should not look a

gift horse in the mouth and must be prepared to take it with some faults. But the duty in

contract is a very different thing. There is no question of a gift horse there. The

landowner paid his contribution in return for the board's promise, and they are in duty

bound to fulfil it. I agree, therefore, that the appeal should be allowed.

SUMMARY

There have a relationship between Contract Administration and P.W.D. FORM 203 (Rev.

2007), for the Government project normally handle by JKR it Contractor obligation the

follow all the instruction in P.W.D. start from receiving L.A (Letter of Acceptance) or

‘Surat Setuju Terima Tender’ until finish project when the Contractor receiving Final

Certificate from the S.O. The Contractor shall follow the instruction in P.W.D to ensure

the smoothness of contraction works and meet the date line that has been stated in Letter

of Acceptance.

Rule of Privity of Contract show that only parties in the contract can sues other parties, if

the third parties that not involved in the contract want to take legal action the contract

was void to him. However, there also have exception in the Privity of Contract that can

overwrite the Privity of Contract as the case of Eurymedon [1975].

CONCLUTION

In order to ensure the smoothness and to prevent the project from delay, all the parties

that involve in construction site such as, Main-Contractor, Engineers, Architects,

Nominated Sub-Contractor and Quantity Survey have to follow the Standard Form of

Contract. Between this two (2) question there have a relationship, the Privity of Contract

in construction site show that a person cannot enforce obligations under a contract to

which he is not a party, in this case the employer cannot sues the Supplier if the Supplier

supply the material that poor in quality. The Main- Contractor also must know their

obligation on Sub-Contractor and Supplier, if the Sub-Contractor works not follow the

specification and the Supplier supply low quality material, Main-Contractor have to

responsible even thought the Sub-Contractor or Supplier been introduce by others parties

such as Architect or Employer himself.

REFERANCE

1. En. Sharif Husin, Juruteknik JABATAN KERJA RAYA, Chukai, Kemaman, Terengganu.

2. (n.d.). Retrieved February 26, 2011, from BusinessDictionary.com.

3. (n.d.). Retrieved February 22, 2011, from business-freetips.com.

4. (n.d.). Retrieved March 3, 2011, from investopedia: www.i.investopedia.com

5. (2006, January 20). Retrieved March 4, 2011, from Marie Cure Actions:

http://ec.europa.eu

6. CONTRACT LAW. (n.d.). Retrieved February 22, 2011, from CIVIL LAW

NETWORK: htpp://civillaenetwork.wordpress.com

7. CVN Law School. (2011). Retrieved march 9, 2011, from

lowschool.courtroom.com: httpp://lawschool.courtroom.com

8. DHEERSJ, S. &. (2005). LEGAL DICTIONARY. PETALING JAYA:

INTERNATIONAL LAW BOOKES ERVICES.

9. In Brief free legal information. (n.d.). Retrieved February 22, 2011, from In

Breaf: www.inbrief.co.uk

10. Lawiki.org. (2010, February 3). Retrieved March 8, 2011, from

http://www.lawiki.org

11. What is Privity of Contract? (n.d.). Retrieved February 22, 2011, from

htpp://brainz.org

12. wikipedia. (2010, April 13). Retrieved March 9, 2011, from wikipedia.org:

httpp://en.wikipedia.org

INDEX

B

Beswick v. Beswick (1966) 16

C

Certification of Practical Completion 12

D

Defect liability Period 13Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co.

Ltd. (1915) 16Dunlop v Selfridge (1915) 18

E

Eurymedon [1975] 19

I

Insurance Policy for the Works. 6Interim Certificate 11

L

London B. of Hounslow Vs Twickenham 6London Drugs Ltd. v. Kuehne & Nagel

International Ltd. (1992) 17

M

McCannell v. Mabee McLaren Motors Ltd. (1926)16

P

Performance Bond 8Performance Guarantee Sum 8possession of Site 6Privity of contract 15privity rule 18Public Liability Policy. 6

W

work programme 9

Appendix

1. Sample of Letter of Acceptance form Jabatan Kerja Raya Malaysia (Surat Setuju Terima Tender)

2. Sample of Contractor All Risk Insurance policy from Kurnia Insurance.

3. Sample of Bank Guarantee used in Government JKR Project.

4. Sample of Interim Certificate by the Architect.