Privity of Contract – Explained

The rule of privity of contract is the principle that a third-party cannot sue for damages on a contract to which he is not a party. This rule has been criticised particularly in cases where the contract is for the benefit of the third-party. At this time there has been no statute introduced and the rule persists in Malaysian Law to prevent a third-party enforcing contractual provisions made in their favour.

The existence of this rule is the reason behind the rise in the use of collateral warranties. Collateral warranties bypass the rule by creating separate independent contracts collateral to the consultancy or construction contract. It allows future owners of developments to sue consultants or contractors for defects in the design or construction under the collateral warranty. There would be no cause of action under the original consultancy or construction contract.

A further fundamental principle is that the assessment of damages for breach of contract is meant to be compensation for damage, loss or injury suffered through the breach. It therefore allows the party to the contract to sue for his loss but does not allow him to sue for the loss caused to a third-party. (more)

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2 responses to “Privity of Contract – Explained

    • Basically case brought in Tort would not be seeking correction or damages in the works executed under the Contract (Breach of Contract) They would be seeking recovery of damages which were as a a result e.g. injuries or damages to third party property or claims for negligence etc but not for breach of contract. Privity of contract would not apply as long as party instigating the action did not attempt to pursue as a breach of contract issue. Hope that helps