DOCTRINE OF PRIVITY AND ITS APPLICATION IN RELATION TO SUB-CONTRACTOR S PAYMENT NOR AIDA BINTI MOHD AMIN

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1 DOCTRINE OF PRIVITY AND ITS APPLICATION IN RELATION TO SUB-CONTRACTOR S PAYMENT NOR AIDA BINTI MOHD AMIN A dissertation submitted in partial fulfilment for the award of the degree of Master of Science in Construction Contract Management Faculty of Built Environment UNIVERSITI TEKNOLOGI MALAYSIA JANUARY 2013

2 iii DEDICATION Thank you to Allah s.w.t, as with the awarded consent, I am able to finish this dissertation for the presentation. To my beloved family and friends, thank you for love and support.

3 iv ACKNOWLEGDEMENT First and foremost, I would like to express my sincere thankfulness to my supervisor, En. Norazam bin Othman, for his guidance, advice, support and thought in the preparation of this report. My appreciation goes to the other lecturers for the course of Master of Science (Construction Contract Management), especially Prof. Madya Dr. Maizon Hashim, Prof. Madya Dr. Nur Emma, En. Jamaluddin Yaakob and Prof. Madya Dr. Rosli bin Abdul Rashid for encouragement, guidance and critics. Special thanks to my classmates and colleagues for their friendly assistance and last but not least, deepest gratitude to my family members for love and support. Nor Aida binti Mohd Amin January 2013

4 v ABSTRACT This study examines the doctrine of privity and its application in the construction industry. Doctrine of privity is related to issues of the creation of contractual obligations, concerning with the question of who has rights and liabilities under a contract. Sanctity of doctrine of privity means giving recognition to the contractual framework with appropriate legislation. It is a general idea that once parties duly enter into a contract, they must honour their obligations under that contract. However, along the way during the construction period, the situation the employer tends to intervention the construction process by passing the main contractor and goes direct to the sub-contractor is almost common, particularly in the payment issues. The main obstacle in this intervention is there is no privity of contract between the employer and the sub-contractor. It is submitted that doctrine of privity contract theory cannot accommodate third party rights. The comparative study shows that the doctrine of privity is embedded comfortably in Malaysia and UK law based on the decision made by the Malaysia and United Kingdom court. Numerous decisions of the courts in Malaysia and UK had recognised and supported the application of the doctrine. However, this study identified that there are few exceptions exist within the doctrine of privity such as assignment, trust, collateral contract, bill of lading and insurance contract. In the construction environment, most of the exception was created by meeting the needs of the employer to overwhelm the crucial situation due to dispute created by parties in the construction contract.

5 vi ABSTRAK Tesis ini mengkaji doktrin priviti dan aplikasinya di dalam industri pembinaan di Malaysia. Doktrin priviti berhubung dengan isu-isu yang terlibat dengan kewajipan di dalam kontrak, mengambil kira persoalan tentang siapa yang mempunyai hak dan tanggungjawab di dalam sesuatu kontrak. Keagungan doktrin priviti bermakna memberi penghormatan kepada kontrak yang kesesuaian dalam pembentukan undang-undang. Pihak-pihak yang memasuki sesuatu kontrak mestilah memenuhi kewajipan yang telah ditetapkan di bawah kontrak tersebut. Akan tetapi, di sepanjang masa pembinaan, situasi di mana majikan cenderung untuk campur tangan di dalam proses pembinaan dengan menidakkan kewujudan kontraktor utama dan berhubung terus dengan sub kontraktor adalah sesuatu yang menjadi kebiasaan, terutama sekali di dalam soal pembayaran. Masalah utama di dalam campur tangan ini adalah tiada priviti kontrak di antara majikan dan sub kontraktor. Tesis ini mempertikaikan bahawa hak pihak ketiga di dalam kontrak boleh wujud di dalam teori kontrak priviti. Kajian secara bandingan menunjukkan bahawa doktrin priviti terletak di dalam keadaan selesa di dalam kes undang-undang di Malaysia dan United Kingdom berdasarkan keputusan yang di buat di mahkamah di Malaysia dan United Kingdom. Kebanyakan keputusan mahkamah di Malaysia dan United Kingdom memberi pengikhtirafan dan sokongan kepada aplikasi doktrin priviti. Akan tetapi, tesis ini juga mendapati terdapat beberapa pengecualian wujud di dalam doktrin priviti seperti perlantikan, amanah, kontrak kerosakan, surat barangan dan kontrak insurans. Di dalam persekitaran pembinaan, kebanyakan pengecualian yang telah di buat adalah untuk sebagai satu keperluan kepada majikan untuk melupuskan situasi tegang yang disebabkan oleh perbalahan yang di sebabkan oleh pihak di dalam kontrak pembinaan.