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?_____________________________________________________________________13
Precedent Case 1____________________________________________________________________________14
Precedent Case 2____________________________________________________________________________14
Precedent Case 3____________________________________________________________________________14
Precedent 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

START

Contractor Sign And Returns Letter Of Acceptance Of Tender.

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

Certificate of Making Good Defect

Period of Final Measurement and Valuation

Final Account

Final Certificate

END
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.[ CITATION
Bus11 \l 1033 ]

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’’[ CITATION bus11 \l 1033 ]

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.  [ CITATION inv11 \l 1033 ] 

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). [ CITATION
Mar06 \l 1033 ]
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. [ CITATION SIN05 \l 1033 ]

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. [ CITATION Wha11 \l 1033 ]

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.
[ CITATION CON11 \l 1033 ]

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.” [ CITATION CON11 \l 1033 ]

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.” [ CITATION CON11 \l 1033
]

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.” [ CITATION CON11 \l 1033 ]

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. [ CITATION InB11 \l 1033 ]

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. [ CITATION InB11 \l
1033 ]

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. [ CITATION InB11 \l 1033 ]

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. [ CITATION Law10 \l 1033 ]

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.[ CITATION wik10 \l 1033 ]
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.[ CITATION CVN11 \l 1033 ]

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

Terengganu.

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

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

INTERNATIONAL LAW BOOKES ERVICES.

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INDEX

B L

Beswick v. Beswick (1966) 16 London B. of Hounslow Vs Twickenham 6

London Drugs Ltd. v. Kuehne & Nagel
C International Ltd. (1992) 17

Certification of Practical Completion 12 M

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

16
Defect liability Period 13
Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge & Co. P
Ltd. (1915) 16
Dunlop v Selfridge (1915) 18 Performance Bond 8
Performance Guarantee Sum 8
E possession of Site 6
Privity of contract 15
Eurymedon [1975] 19 privity rule 18
Public Liability Policy. 6

I
W
Insurance Policy for the Works. 6
Interim Certificate 11 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.