CONSTRUCTION LAW & CONTRACT

ADMINISTRATION

LEGAL BACK GROUND TO STANDARD FORMS OF

CONTRACTS

DR ZULHABRI ISMAIL

MCIArb, MIEEE, Dip, B. (Hons), MSc, PhD

 Content
1. Privity of contract.
2. Implied terms / warranty in construction contracts.
3. Dual liability.

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 Privity of Contract

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 Definition
As a general rule, contractual rights and liabilities affect
only the parties to the contract and a person who is not
party can neither sue nor be sued on the contract.

(Ainah, 2005).

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Dunlop Pneumatic Tyre Co. Ltd. V Selfridge & Co. Ltd.
(1914)

Facts
In the contract Dew & Co., wholesalers, agreed to buy tyres
from Dunlop. They did so on the express undertaking
that they would not sale below certain fixed prices.

Dew sold tyres to Selfridge based on the same terms but

Selfridge broke the agreement and sold tyres at
discount prices. Dunlop sought an injunction.

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Dunlop Pneumatic Tyre Co. Ltd. V Selfridge & Co.
Ltd. (1914)
Held
Dunlop application for injunction was failed for lack of
Privity. In the House of Lords, Lord Haldane said:-

Only a person who is a party to a contract can sue on

itsuch a right may be conferred by way of property, as,
for example, under a trust, but it cannot be conferred on a
stranger to a contract

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 The Doctrine of Privity of Contract

A contract cannot usually give rights or

impose obligations on anyone who is not a
party to the contract (Bone, 2001).

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 The Doctrine of Privity of Contract

Only binds the parties to a contract. A person not a party to

a contract cannot:-

Recover benefits under the contract even though the contract

expressly confer that benefits: Tweddale v Atkinson [1861].

Have obligation imposed on him by the contact, even if he

aware of it: McGruther v Pitcher [1904]; Adler v Dickson [1954].

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Price v Easton (1833)

The defendant had agreed with a third party that if that third
party did specified work for him he would pay 19 to
plaintiff.

While the work was completed by the third party, the

defendant failed to pay plaintiff who then sued. The
plaintiff s claim was unsuccessful. The plaintiff had given
no consideration for the arrangement and was not
therefore a party to the contract.

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Tweddale v Atkinson (1861)

Facts
Fathers of a young couple who intended to marry agreed in
writing each to settle a sum of money [200] on the
couple.

The young woman s father died before giving over the

money and the young man then sued the executors when
they refused to hand over the money.

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Tweddale v Atkinson (1861)

Held
Even though he was named in the agreement, he failed
because he had given no consideration for the
agreement.

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 CONTRACT TO PASS MONEY TO
THE YOUNG COUPLE BETWEEN

Tweedles father: Miss Guys father:

The consideration is the promise to The consideration is the promise to
pay the money to the young couple in pay the money to the young couple
return for the same promise by the in return for the same promise by
other the other

The consideration
William Tweedle:
must move from Gave no consideration under the
the promisee agreement so had no claim against
the estate

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 AA Valibhoy & Sons v Habib Bank Ltd (1984)

Facts
The plaintiffs brought an action against the defendants in
their claim for damages for breach of contract. The claim
was based on the alleged breach by the defendants of
their duties as collecting bankers.

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AA Valibhoy & Sons v Habib Bank Ltd (1984)

Held
Rajah J held that there was no privity of contract between
the parties, the plaintiffs cannot sue the defendants who
were the sub agents.

Quiz How is it related to the construction industry?

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 Traditional General Contracting
Employment contract
Architect / S.O Employer

Communication
Main Contract /
Standard Form
M/C

Subcontract Communication
Direct agreement i.e.
payment provisions
NSC, NS
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Employer and Consultants?
The responsibilities of the consultant and employer
underpinned by the privity of contract between them.
The consultants can be sued for professional negligence
either in contract or tort (dual liability).

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 Terms of A Contract

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Contents of a Contract
Contents of a contract are made up of terms either:-

Expressed The terms that the parties have in fact agreed

or which they will be taken to have agreed.

Implied these are terms, which the courts will write

into the contracts even where the parties have not included
in them.

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Terms implied
Terms implied by fact
Implied by custom or habit.
Implied by trade or professional custom.
Implied to give sense and meaning to the agreement.
Implied to give business efficacy to a commercial
contract; The Moorcock.
Implied because of the prior conduct of the contracting
parties; Hillas v Arcos.

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Terms implied
Terms implied by law
by the court.
by statute.

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Implied Warranty on Contractors
Obligation

The courts have over time, implied in all building

contracts that the builder or contractor will do his work
in:
1. Good and workmanlike manner
2. That he will supply good and proper materials and that,
3. It will be reasonable fit for the purpose required.

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Why terms are implied?
The description of equal bargaining power can be referred
to fairness in trying to reach an agreement with another
person that is satisfactorily which can be referred to same
bargaining power in the matter of rights, status and
advantages between the parties of a contract.

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Pasuma Pharmacal Corporation v McAlister & Co. Ltd
(1965)
The Federal Court in Pasuma explained the process by which
the courts may imply terms into a contract:-

To give efficacy to the transaction. That is, terms may be

implied from the presumed intention of the parties and
upon reason so that there will not be a failure of
consideration The Moorcock.

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Pasuma Pharmacal Corporation v McAlister & Co. Ltd
(1965)
Contd
By applying the officious bystander test or what is
commonly known as the Oh, of course! Test. That is, if at
the time the contract was negotiated, someone had said to
the parties, What will happen in such a case?, the parties
would both have replied, Of course, such and such will
happen. We did not trouble to say that, it is too clear.
Reigate v Union Manufacturing Co. Ltd. [1918] and Shirlaw v
Southern Foundries [1939] 2 KB 206.

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Moorcock (The) (1889)
Facts

The defendants owned a wharf with a jetty on the Thames.

They made an agreement with the claimant for him to dock
his ship and unload cargoes at the wharf. Both parties were
aware at the time of contracting that this could involve the
vessel being at the jetty at low tide.

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Moorcock (The) (1889)
Facts (Contd)

The ship became grounded at the jetty and broke up on a

ridge of rock. The defendants argued that they had
given no undertaking as to the safety of the ship.

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Moorcock (The) (1889)
Held
The court held that there was an implied undertaking that
the ship would not be damaged. Bowen LJ explained
that:-

In business what the transactions such as this, what the law desires to
effect by the implication is to give such business efficacyas
must have been intended at all events by both parties
who are businessmen.

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 Standard Contracts and
Exemption Clauses

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Standard Contracts
Construction Industry
PAM Private Edition With or Without Quantities Edition
1998/2006; PAM NSC 98/2006.
PWD FORM 203A (Rev. 10/83); Rev 2007); 203N, DB/T
(2000 Edition).
CIDB Standard Form of Contract for Building Works 2000
Edition.
IEM.CE 1/89; IEM.CES 1/90.

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Standard Contracts
Other industries
Banking standard formats of contracts
Insurance
Air travel

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Exemption / Exclusion Clauses
Definition
A clause in a contract excluding or limiting the liability of
one or other of the parties.

Such clause must be expressly incorporated in the

relationship between the parties from the outset;
Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163, CA.

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Exemption / Exclusion Clauses
Discussion
Although exemption / exclusion clauses are permissible, both
the courts have been reluctant to allow these clauses to
operate successfully where they have been imposed on
a weaker party i.e. ordinary customer by a stronger party,
such a person or corporation in business to supply goods or
services.

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Exemption / Exclusion Clauses
Contra proferentem
Any commercial document / contract need to be interpreted
more strongly against the person putting forward.

Based on a responsibility of a person for uncertainty; it will

work against the party seeking to rely on the exclusion
clause having put in the clause in contract that party cannot
rely upon unless it is certain.

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Exemption / Exclusion Clauses
Contra proferentem
The principle of CP only applies as a general rule of
construction when all others have failed. Where parties to a
contract had agreed on the term of a document, the court
will be hesitant to apply CP.

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Sze Hai Tong Bank Ltd v Rambler Cycle Co Ltd
(1959)

It was held that a fundamental breach of obligations of a

contract cannot be allowed to pass unnoticed under the
cloak of a general exemption clause.

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 Dual Liability

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Liability in Contract and Tort
Contract
Contract may be defined as an agreement enforceable by
law.

Privity of contract?

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Sri Kajang Rock Products Sdn Bhd v Mayban Finance
Bhd (1992)
To constitute a valid contract, there must be:-
Separate and define parties thereto; those parties must be
in agreement,
that there is consensus ad idem;
Those parties must intend to create legal relations in the
sense that the promises of each side are to be enforceable
simply because they are contractual promises;
And the promises of each party must be supported by
consideration.
(VC George J)

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 Formation
Elements of Valid & Enforceable Contract

1. Firm offer / proposal

2. Unqualified acceptance
3. Consideration
4. Free consent
5. Intention to create legal relation
6. Lawful object & consideration
7. Certainty of terms
8. Physical / legal possibility
9. Legal capacity to contract
10. Formality [written form?]

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Liability in Contract and Tort
Contract
Privity of contract

Tort
The law of tort is mostly to be found in the common lawTort can be defined
as a civil wrong independent of contract; or as breach of a
legal duty owed to person generally. The practical consequences of
the law of tort are concerned with the adjustment of losses. Where the
elements of fault and damage exist, the law determines who should bear the
resulting financial loss.

(Prof. John Uff, 2002, p.419)

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Liability in Contract and Tort
Tort
The law of tort is mostly to be found in the common lawTort can be
defined as a civil wrong independent of contract; or as
breach of a legal duty owed to person generally. The
practical consequences of the law of tort are concerned with the
adjustment of losses. Where the elements of fault and damage exist,
the law determines who should bear the resulting financial loss.

(Prof. John Uff, 2002, p.419)

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Liability in Contract and Tort
Winfield (1931) has said that :

Tortious liability arises from the breach of a duty primarily fixed

by law; such duty is towards persons generally and its breach
is redressed by an action for unliquidated damages.

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 The Law of Torts - Aims

There are two aims of the law of torts that also point
towards the major remedies available, damages and
injunctions.

A1. Compensation the main outcome of a successful

tort action is to compensate the victim of the
wrong to the extent of the damage suffered.

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 The Law of Torts -Aims
A2. Deterrence / prevention the most satisfactory way
of dealing with any wrong is to ensure that it does not
happen again or, even, better, to prevent it occurring at
all i.e. injunction.

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 Teh Khew On & Anor v. Yeoh & Wu
Development Sdn. Bhd. & Ors. (1995)
Facts
The plaintiffs claimed against the first
defendant (the builder) in contract for
defective works in the construction of the
house purchased by the plaintiffs. They also
claimed against the second defendant (the
architect) and the third defendant (the
engineer) for damages in negligence.

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 Teh Khew On & Anor v. Yeoh & Wu
Development Sdn. Bhd. & Ors. (1995)
Held
The learned Judge found the builder liable for
breach of contract but dismissed the claim
against the architect and the engineer with
whom the plaintiffs had no contractual
relationship, the claim being for pure
economic loss.

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 Henderson v Merrett Syndicates Ltd
(1994)
House of Lords held that where the
facts of a case satisfy the
requirements of claims in both
contract and tort, the claimant is
in principle free to choose which
cause of action to pursue.

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Donoghue v Stevenson (1932)

Established the principle that a duty of care arises

whenever a person can reasonably foresee that his
acts or omissions would injure or cause damage
to another - neighbour principle.

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Donoghue v Stevenson (1932)

Facts
The claimant claimed to suffer shock and gastroenteritis
after drinking ginger beer from an opaque bottle out
of which a decomposing snail had fallen when the
dregs were poured. A friend had brought her the
drink, so she could not sue in contract. She claimed
500 from the manufacturer for his negligence
and was successful.

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Donoghue v Stevenson (1932)

Held by Lord Atkin

1) Lack of privity of contract did not prevent the
claimant from claiming.
2) Negligence was accepted as a separate tort in its
own right.

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Donoghue v Stevenson (1932)
3) Negligence would be proved by satisfying a three-part
test:
a. the existence of a duty of care owed to the claimant by
the defendant.
b. a breach of that duty by falling below the appropriate
standard of care.
c. Damage caused by the defendants breach of duty that
was not too remote a consequence of the breach.

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Donoghue v Stevenson (1932)
The moral behind
A manufacturer would owe a duty of care to the ultimate
consumer, irrespective of the lack of any contractual
agreement between them.

Since the plaintiff had suffered as a result of the

manufacturers alleged lack of care in ensuring that the
product was fit for consumption, the manufacturer was
liable to the girl in negligence.

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 Tort and Contract

AREA CONTRACT TORT

Liability Based on the consent of Imposed by law.
the parties [agreement]. Duty is owed towards
Privity of contract. persons generally.

Measure of damages The amount awarded to The amount awarded as

put the plaintiff in the far as possible, restore
position if the contract him to his original
had been performed. position.

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Pure Economic Loss

Ann v Merton (1977) & Junior Books v Veitchi (1983) -

allow for economic loss claims for buildings.
D&F Estates v Church Commisioners of England
(1988) and Murphy v Brentwood (1990) due to open
of floodgate, the court reverted back that pure
economic loss claims were not appropriate in tort but
if it result to physical loss it may be admissible.

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Pure Economic Loss

Malaysia initially appeared to follow Murphy but in Dr

Abdul Rashid v Jurusan Malaysia Consultants (1997) and
then in Steven Phoa Cheng Loon v Higland Properties
(2000), James Foong J held that architects, engineers etc
could owe a duty not to cause economic loss.
In Dr Abdul Rashid Abdul Hamid, he stated to adopt the
decisions in Murphy and D&F Estates which are based on
a policy of no application here would leave the entire
group of subsequent purchasers in this country without
relief against errant builders, architects, engineers and
related personnel who are found to have erred.

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Dual Liability
Prior to 1964
For a long time and as recent as 1964 [Bagot v. Stevens, Scanlan
& Co. Ltd. (1966)] it was an accepted principle (English
Law) that where there was a contract in existence
between two parties, the obligations between those two
were to be found only in the contract and neither was
under a duty to the other part from the contract.

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Bagot v. Stevens, Scanlan & Co. Ltd. (1966)
In Bagot case, it was held that an architect owed no duty to
his client in tort for negligence and his duties arose
solely and exclusively under the contract with his
client.

That decision was critised by Lord Denning obiter in Esso

Petroleum Co. Ltd. v. Mardon [CA] [1976].

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Midland Bank Trust Co v Helt, Stubs and Kemp
(1979)
It was held that solicitors owed a dual liability to their
clients in contract and in tort. This was approved by the
Court of Appeal in Balty v Metropolitan Properties Ltd and Ors
(1979) and followed in Ross v Caunters (1980).

In construction industry?

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The Present Position

All contracting parties owe a duty to the other not party in

contract but also in tort.

Thus quite irrespective of any breach of terms of the

contract [PAM, PWD, FIDIC contract etc], a contractor
may be liable to the employer for workmanship which
is negligent.

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 Sutcliffe v Thackrah (1974)
Fact
In Sutcliffe the architect over-valued a series of certificates
and the employer duly paid the contractor.

The contractor then went into liquidation / winding up before

the job was completed.

As a result the employer could not recover the money that

had been overpaid.

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 Sutcliffe v Thackrah (1974)
Held [House of Lords]
The CA / architect was not acting in a quasi-judicial
capacity and had no immunity from liability.

The architect was liable to compensate the employer for

the money lost.

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Pratt v George J Hill Associates (1987)

In Pratt, a contractor who was strongly recommended by

the defendant architects proved to be highly
unsuitable. He became insolvent [bankruptcy (company)]
leaving a trial of defective work.

It was held that the defendants CA / architects were

liable to the client for the money she was unable to
recoup from the builder.

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 Townsends (Builders) v Cinema News Property
Management (1959)

The contractor had been liable to the employer for certain

breaches of statute (installation of toilets in
contravention of a by-law).

The CA held that, since the architect had led the

contractor to rely on him and ensure compliance with the
by-laws, the contractor was entitled to recover from the
architect the damages that he had to pay the
employer.

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 Conclusion

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 Thank You

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