Assignment 1: June 2018 Part B Question 1
Nur Izyan Binti Hamdan
2019584235
Contract II - LWB02L
The first issue is whether Chu Li Mo can take legal action against Zhang for the reliance
of statements made due to his stellar reputation and will collateral contract be established?
The doctrine of privity of contract is the contract that cannot confer rights or impose
those obligations arising under it, on any person except the parties to it. According to a definition
given by Lindy Willmott, while the performance of a contract may in the circumstances result in
the benefit or burden as a matter of fact upon the third party to the contract, as a matter of law, a
third party cannot enforce the contract nor be subject to liabilities imposed by the contract. This
can be referred to in the landmark case, Tweddle v Atkinson (1861), where the plaintiff’s father
in law agreed with each other to pay the plaintiff 100 pounds and 200 pounds respectively in
consideration of his intended marriage after the marriage they confirmed the agreement in
writing. The plaintiff sued his father in law’s executors for the 200 pounds unpaid. The action
failed because it was held that no stranger to the consideration can take advantage of the
contract. Even though it was one which was made for his benefit.
The modern case relating to doctrine of privity is the case of Beswick v Beswick (1966)
where the widow brought an action to enforce the nephew’s promise which after his uncle’s
death he would pay 5 pound per week to the uncle’s widow. The widow sued both in her own
rights and as administratrix. The house of lord held the widow could only enforce the nephew’s
promise as an administratrix and that she is entitled to an order of specific performance against
the nephew. There are two limbs relating to doctrine of privity. The first limb is Benefit Rule. It
denies complete strangers from enforcing contractual provisions and in cases where the contract
attempts, either expressly or impliedly to confer benefits on a third party. Persons who stand to
gain benefit from the contract are not entitled to take any enforcement action if they have been
denied the promised benefit. Such benefits can be financial, service, goods or other advantages
or exclusion of liability or indemnity in favour of a third party. The second limb is Burden Rule.
It attempts to impose a liability onto the third party. Based on the case of Baddiadin bin Mohd
Mahidin v Arab Malaysian Finance Bhd (1998) where the party to the contract sought an order
to compel the third party to restore the money received under the loan agreement entered into
between the parties to the contract.
Doctrine of privity is strictly a creature of Common Law. In the middle of the nineteenth
century the common law judges reached a decisive conclusion upon the scope of a contract. No
one may be entitled to or bound by the terms of a contract to which he is not an original party.
The principle is still the determining factor in the common law, but it must be received with
reservations. However, there are a few exceptions in order to mitigate the harshness in the
doctrine of privity of contract. One of the exceptions is collateral contracts.
Collateral contract usually takes the form of a unilateral contract. A unilateral contract is
where only one party to it makes a promise. This promise is usually in the form of doing
something in return for something else. The offer and acceptance of the agreement is the original
intention of the first contract that is in place. The consideration of the collateral contract is the
promise to enter into the original agreement. Collateral contract is used to mitigate the harshness
by doctrine of privity. A collateral contract was evidenced in the case of Shanklin Pier v Detel
Products [1951] 2 KB 854. In this case the plaintiffs were owners of a pier and were promised
by the paint manufacturers, who were the defendants, that their paint has a lifespan of seven
years. This was said in the attempt to induce the plaintiff into buying the defendant’s paint. Due
to this representation the plaintiff instructed the decorators to purchase the paint and use it to
decorate the pier. This was duly done, however the paint only lasted three months. During the
inception of the case the plaintiff’s did not appear to have a remedy as they had not provided the
defendants with any consideration for the promise. The only contract in force was between the
defendant and the decorators for the purchasing of the paint, this did not include the plaintiffs.
However, it was held that the plaintiffs could recover damages on the basis of a collateral
contract. It was held that the consideration for the promise as to the life of the paint was
sufficiently inductive to render it effective in the chain of purchase. The contract in existence in
this case was to purchase paint in order to re-decorate the pier.
The elements needed in order to establish collateral contract is Promissory in nature. A
collateral contract is one where the parties to one contract enter into or promise to enter into
another contract. Thus, the two contracts are connected and it may be enforced even though it
forms no constructive part of the original contract. In JJ Savage and Sons Pty Ltd v Blakney 19
CLR 435, Blakney (Resp) entered into a contract with JJ Savage & Sons (App) for the supply of
an engine for a boat. JJ Savage & Sons (App) gave Blakney (Resp) advice on three different
engines they had for sale and made a recommendation for a preferred option. Blakney (Resp)
purchased an engine from JJ Savage & Sons (App) on the basis of this recommendation. Blakney
(Resp) claimed a breach of collateral warranty. A mere expression of opinion was held
insufficient to be satisfied as a promise. In Crown Melbourne Limited v Cosmopolitan Hotel
(Vic) Pty Ltd a statement by a landlord made to intending tenants when negotiating a lease that
they would be “looked after at renewal time”, would not bind the landlord to offer a further five
year lease.
Next is the element of Intention to induce. The promisor must have expressly or
impliedly requested about the main contract and his promissory statement must have intended to
induce the entry of the other party into the main contract. According to Lord Denning MR, a
collateral contract is held binding "when a person gives a promise, or an assurance to another,
intending that he should act on it by entering into a contract'.
Lastly is the element of Consistency. A collateral contract, if forged between the same
parties as the main contract, must not contradict the main contract. That is, if the term was agreed
upon prior to the completion of the formal contract (but was still included as a term, and could
not be executed until completion of the second term), the first term will still be allowed.
Essentially the collateral contracts cannot contradict any element of the main contract nor the
rights created by it.
In applying to the current circumstances, Chu Li Mo Ltd hired Chaser Painting (Chaser)
to paint their newly renovated building. It was agreed in the contract that the machinery and
painting equipment were to be prepared by Chu Li Mo Ltd in return for the service rendered by
Chaser. Chu Li Mo Ltd spoke to Zhang Products Ltd (Zhang), a paint manufacturer company
with a stellar reputation about whether paint produced by them known as Wind Blue 05, was
suitable to be used for painting of the said building. Zhang assured that it was, and their paint has
a lifespan of seven years. Based on this conversation, Chu Li Mo Ltd instructed Chaser to use
Wind Blue 05 which the latter did. Nonetheless, the paint started to peel after four months and
Chu Li Mo Ltd had to re-paint the entire building. According to the rigidity of the privity of
contract, it has been said that the third party cannot be enforced to the contract which Mr. Zhang
cannot be liable to the loss suffered by Chu Li Mo when Chu Li Mo put on reliance on his
statement due to Mr Zhang’s stellar reputation. Doctrine of privity prevents Mr Zhang from
obtaining rights and burden of the contract and does not allow Chu Li Mo imposing any
liabilities or obligations on third party which is Mr Zhang.
However, this leads to injustice especially to Chu Li Mo since Mr. Zhang had given an
assurance to him about the life span of the paint and allowed him to be inducted into the contract
due to his stellar reputation. In order to mitigate the harshness by doctrine of privity towards Chu
Li Mo, common law came up with exceptions on it namely collateral contract. Collateral contract
is formed when there is only one party who makes promises to it or makes assurance on it and
that party is Mr. Zhang. The offer and acceptance between Chu Li Mo and Mr. Zhang must not
contradict with the first contract which a contract between Chu Li Mo and Chaser. The Doctrine
of Privity does not provide the consideration on Chu Li mo and Mr. Zhang’s contract and this is
where the collateral contract takes place. This is aligned to the referred case of Shanklin Pier v
Detel Products [1951] 2 KB 854. In this referred case, it was held that consideration for promise
as to the lifespan of the paint was sufficiently inductive to render it effective in the chain of
purchase. The contract in existence in this case was to purchase paint in order to re-decorate the
pier, same goes to the assurance made by Mr Zhang to Chu Li Mo about the life span of the
paint. To relate, both of these issues can relate to collateral contracts and must fulfill a few
elements regarding it.
The element of promissory in nature is the first element that must be fulfilled. Chu Li Mo
hired Chaser Painting (Chaser) to paint their newly renovated building, and the two parties
formed a collateral contract. When Chu Li Mo asked Mr. Zhang, a well-known paint
manufacturer, if that particular paint, Wind Blue 05, is suitable for painting the said building, Mr.
Zhang said yes and reassured him. Once Chu Li Mo put on reliance on the statement given by
Mr Zhang when he referred to him about the painting, they had automatically entered into
another contract. In order to fulfil this particular element, there must be a promise or assurance
made by a party which is Mr Zhang that will induce the other party, Chu Li Mo. As a result of
Chu Li Mo's reliance, a contract is formed, and the two contracts are linked and may be enforced
even though they do not form a constructive part of the original contract. In contrast to the
referred case of JJ Savage and Sons Pty Ltd v Blakney 19 CLR435, where the mere expression
of opinion was held insufficient to be considered a promise, Mr Zhang actually gave assurance
that it was a suitable paint to be used, and their paint has a seven-year life span. Chu Li Mo Ltd
was induced to it as a result of Mr Zhang's stellar reputation, and Chaser was instructed to use
Wind Blue 05, which he did. As a result, the word "assured" should not be regarded as a mere
opinion. Hence, the first element of both parties was satisfied when Mr Zhang's assurance
(promise) induced Chu Li Mo to sign the contract.
The second element is the intention to induce. The promisor, Mr Zhang must have
expressly or impliedly requested about the main contract and his promissory statement must have
intended to induce the entry of Chu Li Mo into the main contract. In this case, we can say that
Mr Zhang, the manufacturer of the company with a stellar reputation, assured Chu Li Mo that it
was a suitable paint to be used, and that their paint has a seven-year life span. Based on this
conversation, Chu Li Mo Ltd was persuaded to trust Mr. Zhang's assurance, and they did so
because of Mr Zhang's stellar reputation. Chu Li Mo then instructed Chaser to use Wind Blue05,
which he did. Nonetheless, after four months, the paint began to peel, and Chu Li Mo Ltd was
forced to repaint the entire structure. This results in Chu Li Mo's loss, which can also be
considered a warranty breach. According to Lord Denning MR, a collateral contract is held
binding "when a person gives a promise, or an assurance to another, intending that he should act
on it by entering into a contract' same goes to this case which it can be considered as a binding
collateral contract when Mr Zhang give assurance to Chu Li Mo about the life span of the paint
named, Wind Blue 05 which started to peel after four months that had him to re-paint the entire
building and to further strengthen the argument, Mr. Zhang owns a stellar reputation on it and
that particular factor actually induced Chu Li Mo into the contract. This is because a reasonable
person would seek out the advice of someone who has knowledge and experience in a field other
than their own, in this case, the longevity of the paint available. Hence, second element is
fulfilled.
The element of consistency is the third element. When the contracts of Chu Li Mo and
Chaser, Chu Li Mo and Zhang coexist, this element will win. Chaser Painting (Chaser) was hired
by Chu Li Mo Ltd to paint their newly renovated building. Chu Li Mo Ltd was to prepare the
machinery and painting equipment in exchange for Chaser's services, as stipulated in the
contract. This is the main contract by Chu Li Mo and Chaser Painting in the first place. However,
the second contract came into existence when Chu Li Mo Ltd spoke to Zhang Products Ltd
(Zhang), a paint manufacturer company with a stellar reputation about whether a paint produced
by them known as Wind Blue 05, was suitable to be used for painting of the said building. Chu
Li Mo's collateral contract with Mr. Zhang does not contradict anything in Chu Li Mo's main
contract with Mr Chaser. There is no conflict with the main contract because it was agreed that
Chu Li Mo Ltd would prepare the machinery and painting equipment in the first place, so it is up
to him to figure out how to make it work and who to refer to. The third element established when
the second contract made by Chu Li Mo and Mr Zhang about the paint and it clearly did not
contradict anything from the main contract.
In conclusion, an expression of assurance given by Mr Zhang was deemed sufficient to be
considered a promise because it was able to persuade Chu Li Mo to trust it and be induced into
the contract due to his stellar reputation. Therefore, a collateral contract has been established,
and Chu Li Mo can file a lawsuit against Mr Zhang and demand monetary compensation.
The second issue is whether the exclusion clause can exclude the liability of Chu Li Mo
from Mr Heartless’s injury?
An exclusion clause is a term in a contract that seeks to limit or eliminate all or part of a
party's liability in the event of a contract breach. An exclusion clause can be abused by one party
to the detriment of another. In Malaysia, however, the Contracts Act of 1950 does not regulate
exclusion clauses. Therefore, Malaysian courts have applied common law principles on
incorporation and interpretation on exclusion clauses.
Exclusion clauses can be added to a contract in three ways: notice, course of dealing, and
signature in a written document. An exclusion clause can be incorporated into a contract by
signature in a written document, and if a party signs a document or contract that contains an
exclusion clause, even if he has not read the contract, he is bound by it. his can be referred in the
case of L’Estrange v F Gracoub Ltd [1934] 2KB 394 whereby in this case, the plaintiff
purchased a cigarette vending machine from the defendant. In this case, the court held that the
plaintiff was bound by her signature despite the fact that the relevant clause was in small print
and despite the fact that she had not read it.
The Malaysian courts have also applied the signature rule to cases of exclusion clauses.
In Sebor (Sarawak) Trading Sdn Bhd & Anor v Syarikat Cheap Hin Toy Manufacture Sdn
Bhd[2003], the Court of Appeal held that the first appellant had established that there was
negligent of liability covered by the bill of lading (BOL). The fact that PW4 (a director of the
respondent company) signed on the reverse side of the BOL, which contained the exemption
clause, could be inferred that PW4 must have been aware of the clause, according to Mohd Saari
JCA, who delivered the court's judgement.
After the exclusion clause has been determined to be properly incorporated into the
contract, the clause has to be construed to determine if it covers the event which has occurred.
There are four matters that can be discussed in relation to the interpretation of exclusion clauses
which are contra proferentum rule, effect of negligence, rule of law and rule of construction. The
contra proferentum rule is an important rule often used by the courts whereby the exclusion
clause is construed strictly against the party who drafted and is relying on the clause. This rule
applies if there is an ambiguity in the meaning and scope of the words used in an exclusion
clause. In Malaysia, this rule can be referred to in the case of Premier Hotel Sdn Bhd v Tang
Ling Seng [1995]4 MLJ 229. In this case, the High Court determined that in today's world,
general words would not normally shield a party from liability for negligence. The words must
be sufficiently clear to be effective, either by referring to negligence or by using another
expression like "however caused”, as the appellant relied on an exclusion clause which states that
“ Hotel will not assume responsibility for valuables or money lost from the room.
In applying to the present case, the contract between Chu Li Mo Ltd and Chaser contains
an exclusion clause, clause9.1, which states that "the company shall not be liable for any injury
or loss suffered by the employee while in the course of employment, directly or indirectly." As
the contract between Chu Li Mo and Chaser has already been signed by both parties, clause 9.1
of that contract can be incorporated through a signed document in this case. Applying to the case
of L’Estrange v F Gracoub Ltd [1934], in which the court decided that the plaintiff was bound
by her signature despite the fact that she had not read it or was printed in small size shows that
Chu Li Mo and Chaser are bound with the exclusion clause as we can infer that Chu Li Mo and
Chaser had signed the document to establish the contract between them.
Furthermore, according to the judgment of Mohd Saari JCA in the case of Sebor
(Sarawak) Trading Sdn Bhd & Anor v Syarikat Cheap Hin Toy Manufacture Sdn Bhd[2003],
we can infer that Chu Li Mo and Chaser have been aware of the clause 9.1. It can also be
supported by the fact that Chu Li Mo Ltd reminded Chaser of the said clause, indicating that both
parties were aware of the clause before signing the contract. Hence, by signing a document, the
exclusion clause has been incorporated into the contract. The contra proferentum rule can be
applied to interpret the exclusion clause in this case. Applying to the case of Syarikat Uniweld
Trading v The Asia Insurance Co Ltd, there is an ambiguity with the words used in the
exclusion clause which is “employee”. It can be argued that the exclusion clause does not specify
which employee that Chu Li Mo Ltd wanted to exclude the liability. Therefore, we can infer that
Mr Heartless' injury, which occurred while he was working for Chaser Painting, is an exception,
because the word "employee" does not indicate that Chu Li Mo intended to limit his liability to
Chaser's employees.
Besides that, it can be interpreted as a result of negligence. In this case, it is possible to
argue that Chu Li Mo Ltd was negligent. Mr. Heartless was injured as a result of a basket crane
that had been improperly installed. By applying to the judgement in the case of Premier Hotel
Sdn Bhd v Tang Ling Seng, the words that have been used in the exclusion clause is not
sufficiently clear or does not specifically express that Chu Li Mo Ltd wanted to exclude his
liability of employee’s injury due to its negligence. Hence, Chu Li Mo may be liable because the
company does not specify or express a clear word in the exclusion clause to exclude its liability
for negligence on its part.
In conclusion, Chu Li Mo Ltd cannot exclude liability for Mr Heartless' injury because
the exclusion clause is ambiguous and lacks express language to exclude negligence liability.
