1.

0 Freedom of Contract in Sales of Goods Act 1957

The Latin expression caveat emptor is emblematic of the concept of freedom of contract. Similar
to the phrase "sold as is," this term means that the buyer assumes the risk that a product may fail
to meet expectations or have defects. In other words, the principle of caveat emptor serves as a
warning that buyers have no recourse with the seller if the product does not meet their
expectations. It is established that it is an implied term in a contract of sale of goods that the
seller must deliver the goods contracted for, free from defects, otherwise the buyer will be
entitled to reject the goods whether he has stipulated for freedom from defects or not. One of the
leading cases under freedom of contract in Sales of Goods Act goes as per following:
1. LEstrange V. Graucob F. [1934]
The buyer of an automatic slot machine signed and handed over to the sellers an order form
containing in ordinary print and writing the essential terms of the contract, and in small print,
certain special terms one of which was any express or implied condition, statement or warranty,
statutory or otherwise not stated herein, is hereby excluded. When the machine was delivered, it
did not work satisfactorily and the buyer brought an action for breach of an implied warranty that
the machine was not fit for the purpose for which it was sold. The sellers pleaded that the
contract expressly provided for the exclusion of all implied warranties. The buyer replied that at
the time when she signed the order form she had not read it and knew nothing of its contents and
that the clause excluding warranties could not easily be read owing to the smallness of the print.
The court rejected this argument, holding that, as the buyer had signed the written contract and
had not been induced to do so by any misrepresentation, she was bound by the terms of the
contract, and it was wholly immaterial that she had not read it and did not know its contents.

2.0 The Privity of Contract Doctrine

According Kenna (2015), the doctrine of privity of contract is that a contract cannot confer rights
or impose those obligations arising under it, on any person except the parties to it. The privity of
contract doctrine dictates that only persons who are parties to a contract are entitled to take
action to enforce it. A person who is in the stance of being conferred or obtaining any form of
benefit from the contract, for instance, a third party beneficiary possesses no entitlement to
enforcement through any legal action in the event of denial of the promised benefits stipulated in
the contract. In essence, a third party (C) does not have enforceable rights or obligations under
the contract between A and B.
To illustrate:
A promises B, for consideration moving from B, to pay C $ 100.
Here A and B are parties to the contract privy to the contract and can sue each other if there is
a breach by the other. C is not a party to the contract and cannot sue A is A fails to pay C the sum
of $ 100.
2.1 Relationship between Privity and Consideration
Assuming the vantage point of doctrine of consideration, it is observed the rule that
consideration must move from a promisee and that such person, in the capacity of a promisee
who has given and provided consideration can enforce a promise. Pursuant to the afore-conferred
statement, it is plausible to argue that the third party (C) could not undertake any action of
enforcement hinging that C had not provided any consideration for the agreement between A and
B.

2.2 Privity of Contract in Sales of Goods Act 1957

Illustration
If a consumer buys a car on a finance deal, and the car turns out to be defective, the consumer
may sue either the dealer or the finance company, despite the fact that, depending on the finance
package, the actual sale might be between the dealer and the finance company.
2.2.1 Case:
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
2.3 Sales of Goods: Product Liability in Contract Arise of Privity
Product liability and safety are inclusive of contractual liability of vendors or suppliers of goods.
Contractual liability arises in the event where the product is determined to be faulty or defective.
This constitutes a breach of contract as there are implied terms in the contract of sales of
goods which state that the goods must be fit for purpose. The contractual relationship between
the parties implies also other implied terms as in accordance with the statute. On the other
spectrum, tortious liability may arise if there was damage caused by defective product and if
there is no direct contractual relationship between the parties but however an element of
negligence is discovered. Under the notion of contractual liability, the party affected is endowed
the right to recover compensation for damage which was caused by the use of defective products.
It also bestowed the affected party the right to reject usage of any of such defective goods. In
spite of such rights granted to the consumers, a rift of significant disadvantage as to contractual
liability exists since only the parties who are the parties to the contract will be able to have a
claim under the same. This doctrine is called privity of contract. If the buyer buys the goods
which are defective, he or she can only have a claim under contract of sale against the seller,
which is most prevalently the retailer instead of the manufacturer. In the event where the retailer
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is insolvent, no further claims will be possible. The buyer or consumer will therefore be left
without any remedy. On top of that, no third parties will be able to claim against the retailer
either.
2.4 Difficulties Arise from the Privity Rule
In the recent wake of judicial system however, the law has recognized that with the increasing
complexity in the world of commerce, certain essential alterations are required to accommodate
certain exceptions to the general rule and guarantee restitution to the aggrieved. Growing
consumer rights questions including warranty claims have contributed to this amendment of
approach.
2.5 Exception and Circumvention to Privity Rule
Hinging on the predicaments created by the privity rule, some courts have abandoned the use of
legal fictions to avoid the harsh operation of the privity rule. The courts instead, established
instead various public policy exceptions to its application. One of the most prevalent exceptions
is in the case of injury due to impure food, for example China Tainted Milk Scandal 2008. A
significant number of courts have imposed strict liability upon the manufacturer of the
deleterious and unwholesome foodstuffs on the basis of an implied warranty. In the leading case:
1. Jacob E. Decker & Sons, Inc. v. Capps
The Texas court opined that the non-negligent manufacturer who processes and sells food to a
retailer for resale for human consumption is liable to the consumer for injuries resultant of the
food consumption. Liability was based upon an implied warranty. The court reasoned: Liability
in such case is not based on negligence, not on breach of the usual implied contractual warranty,
but on the broad principle of public policy to protect human health and life. It is a well-known
fact that articles of food are manufactured and placed in the channels of commerce, with the
intention that they shall pass from hand to hand until they are finally used by some remote
consumer. It is generally not realistic and impracticable for the ultimate consumer to analyze the
food and ascertain its suitability for consumption.

In recent, a steer towards the departure of privity is occuring. This trend represents a major
upheaval in present-day products liability theory. It imposes strict liability upon a manufacturer
because the manufacturer, through intensive advertising, has represented to the consumer that its
product is pure or harmless. Thus, if the consumer relies on these advertisements, purchases the
product from a third party, and while using it is injured, the manufacturer has been held liable on
an express warranty. As Justice Skeel (1952) reasoned: The warranties made by the manufacturer
in his advertisements and by the labels on his products are inducements to the ultimate consumer,
and the manufacturer ought to be held to strict accountability to any consumer who buys the
product in reliance on such representations and later suffers injury because the product proves to
be defective or deleterious.

2.5.1 Exception and Circumvention: Tort of Negligence

In certain scenarios, hinging on terms stipulated within contract, a third party will be able to
enforce a contractual term unless specifically excluded by the contract. If a party to the contract
suffers pecuniary loss caused by the defective goods which injured a third party, compensation is
recoverable for such loss. In the event where a party can establish that there was negligence
which was the cause of the damage, a party may have a claim in tort. One of the leading cases in
the light of tort is as per below:
1. Donoghue v Stevenson [1932]
It was held that the manufacturer can be liable in tort if it can be proven that he was negligent
and if personal injury or damage to property was suffered by a consumer of the manufacturers
product. This precedent establishes the fact that a third party may have a claim against the person
in tort even if there is no contractual relationship between them. Some damage must be caused in
order to have a claim in tort. In spite of that, in accordance with Malaysia Consumer Protection
Act (CPA) 1999, negligence is no longer a requirement to be proven in relation to death, personal
injury, consumer property. It is only necessary to prove that the Defendant produced defective
product which caused damage to the claimant. Similar liability is imposed by European
convention on Products Liability in regard to personal injury and death. Consumer Protection Act
however does not cover all types of damage or loss which may be caused be defective products.
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2.5.2 Exception and Circumvention: Trust

A contract is enforceable by the third party under the circumstance where a completely
constituted trust was created in their favor by the contract. Albeit in certain cases the court was
ostensibly willing to elicit the implication upon the existence of a trust in the realm of giving
rights to third parties, however, this has been criticized largely as a cumbrous fiction. On the
current tide, courts are most often than not, reluctant to determine the presence of a trust unless it
is lucid and succinct that the third party intention is of such. The rationale behind such approach
hinges on fact that the creation of a trust is deemed to be a critical undertaking with different
consequences to a contract. In the presence of a trust, the parties (A and B) cannot rescind or
annul the agreement in absence of the consent of the third party beneficiary. Withal to that, a
trustee may owe various special duties to the third party beneficiary. As an illustration:
If B had contracted with A in the capacity of trustee for C, C as beneficiary under the trust has
enforceable rights.
Given the above illustration, the promisee acts as the trustee who enters into a contract with the
promisor for a third party. If the promisor breaches the contract, the promisee can sue the
promisor for breach of contract and recover the losses suffered by the third party. If the promisee
fails to sue the promisor, the third party can enforce the contract against the promisor by joining
the promisee as a defendant.
In the realm of circumventing the privity rule in Malaysia, such trust mechanism is prevalently
utilized by the Malaysian courts (Tan, 2009). In proving the existence of trust, one of the
requirements is to make evident that an intention to create trust is present (certainty of intention).
Assuming the vantage point of a settlor, it is not necessary for him or her to come to the
knowledge that he or she is creating a trust at the time it is created for as long as the effects that
he or she intends are synonymous to the effects of a trust that he or she intends to divest
ownership in the subject matter of the trust to the beneficiary (Tan, 2009). In spite of that, a mere
intention to benefit a third party is deemed insufficient. It should warrant our attention the
intention to create trust can be either expressed or inferred. Under the judicial system in
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Malaysia, the courts occasionally exert on the need to determine a lucid expressed intention of
the contracting parties to create a trust. On the other continuum of occasions, the courts in
Malaysia determine the presence of an intention to create a trust with relative ease pursuant to
the intention of the contracting parties to benefit the third party. The following legal precedence
is vividly reflective of such:
1. Malaysian Australian Finance Co. Ltd. v The Law Union & Rock Insurance Co Ltd
The applicant was the owner of a motor vehicle (caterpillar tractor) who entered into a hirepurchase agreement with Choong. Choong entered into a contract for an insurance policy with
the respondent to insure the tractor against losses as required under the hire-purchase agreement.
The insurance policy contained a clause which acknowledged that the applicant was the owner of
the motor vehicle insured in the insurance policy and any money payable under the policy shall
be paid to the owner. An issue arose whether the owner had the right to institute a claim in its
own right to recover damages for the loss of the tractor against the respondent as the contract of
insurance was created by Choong and the respondent. It was held that the owner was entitled to
make the claim on the insurance contract. The owners right under the contract of insurance was
co-extensive with the rights of the hirer who contracted with the respondent. This conclusion
was reached on the basis that the owner was a party to the contract of insurance. Alternatively, if
the owner was not a party to the contract, the trust mechanism was applicable to assist him. This
is ostensibly in congruence and in line with the old English cases such as Tomlinson v Gill,
Gregory and Parker v Williams, Fletcher v Fletcher.
2.5.3 Exception and Circumvention: Agency
The status and vicarious liability issues of an agent also conjure exceptions to the rule of privity.
When an agent negotiates a contract between his principal and a third party, it is prevalently
prepended as being between the principal and the third party. In spite of that, scenarios that spur
the doubt or question as to whether or not an agent acted on his own behalf or not exist.
Elevation to new heights of complexity could happen when an agent makes use of a sub-agent,
spawning twin questions of whether or not the contract will now be between the principal and the

sub-agent or the agent and the sub-agent. The agency mechanism was applied in a number of
cases by Malaysian courts to sidestep the privity rule.
1. 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. It was held 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. Such opinion hinges on the fact that the contract
between the manufacturer and each dealer was of exact and no difference. Withal to that, it was
determined that neither 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 the manufacturer
fills in bringing the parties together and their recognition of the relationship which his efforts
have created is the test of agency.

3.0 Implication and Conclusion:

Pursuant to the afore-conferred postulation from a multitude of academic sources, the
illustration, dictations, arguments and preceding cases succinctly reflect increasing jurisdictions
have come into acceptance and acknowledgement of the challenge broiled by present-day
marketing and advertising procedures. The shackles of stare decisis have no doubt been
abandoned (Tan, 2009). In the ever-blooming, mushroomed and expanded economy, privity of
contract is deemed no longer suitable and a radical alteration towards such doctrine is
imperative. Modern advertisements inform a consumer that he/she is purchasing a perfect
product, free from tendrils of defects and dangers. Embroidered, preposterous and absurd claims
are conjured by advertisements in absence of mulling towards potential consequences. Such
undesired practice should be emended. In the drive of doing so, if it implies that a manufacturer
is to be held as an insurer of its product, the burden of responsibility shall therein shouldered by
the manufacturer of its products on the claims made via advertisements. The deceptive or vague
statements should be deemed fraud upon the consumer and in the event that the consumer relies
on them and is thereby exposed to injuries or harm, recovery should hail from the party who is
truly responsible instead of retailers who had no control over the ingredients of a product in a
sealed package. However, a retailer may opt to carry or not to carry such merchandise,
particularly upon the discovery of harmful or tainted ingredients used by the manufacturer. With
the abandonment of privity, products liability is embarking upon a new era. Malaysian
consumers will finally be recognized as persons who deserve the full protection of the law.
Withal to that, the manufacturer will no longer be permitted to rely on the impenetrable aegis of
privity in eluding from responsibility under ancient doctrines such as privity of contract and
caveat emptor.