Illegality (Q1 & Q4) - Tutorial PDF

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CONTRACT LAW IITUTORIALILLEGALITYQuestion 1 Although ss 24(a) and (b) of the Contracts Act may appear similar, it refers to 2 different situations. Section 24(a) refers to express contraventions of the law, most commonly provided in statutes. In s 24(b), there is no direct contravention but the cons...

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CONTRACT LAW II TUTORIAL ILLEGALITY Question 1 Although ss 24(a) and (b) of the Contracts Act may appear similar, it refers to 2 different situations. Section 24(a) refers to express contraventions of the law, most commonly provided in statutes. In s 24(b), there is no direct contravention but the consideration or object would, if permitted, have the effect of defeating the law. An example is given in Illustration (i). Having stated the legal position, it should be added that in practice, the line between the 2 paragraphs is a thin one. In Sababumi (Sandakan) Sdn Bhd v Datuk Yap Pak Leong, the court of appeal held that the prohibition in question set out in s 21(a) – (c) of the Pool Betting Act 1967 (Revised 1989) was not express and the agreement between the club and the appellant, if countenanced, would defeat the said Act, thus coming within s 24(b) of the Contracts Act. On appeal, the Federal Court held that the agreement is a contract or amounts to a contract to do an act forbidden or prohibited under s 21 of the Pool Betting Act 1967, thus, offending s 24(a). The judge in the course of his judgment made observations on ss 24(a) and (b) of the Contracts Act as follows: Section 24 appears to me to have been drafted after some fine tuning of the common law on which it is based. At common law, contracts fitting in with the said s 24(a) and (b) for contravening any law would be illegal for being against public policy, but in our Contracts Act 1950, the same contracts are covered by s 24(a) and (b), ie under 2 separate subsections… At common law, a contract may be illegal by common law or by statute, in either case the contract is unenforceable. It is to be borne in mind that s 24(a) of the Contracts Act involves the consideration and/or object of a contract being forbidden, and ‘law’ means common law or any statute. Thus, under s 24(a), aforesaid, an agreement is illegal and unenforceable when either the consideration or the object of the agreement is

to do an act forbidden by law, and this, in my view Is the culled essence of some part of the common law on illegality of contract, which says in a nutshell that a contract to do an act prohibited or forbidden by statute is unenforceable from another aspect or question as to whether a statute prohibits any contract. It is illegal and unenforceable under s 24(a) aforesaid because it is a contract involving consent by both parties to do the very act prohibited, by statute… To decide if s 24(a) makes a contract illegal and unenforceable in connection with a statute, and this bears repeating, one must find out first if the statute prohibits or forbids the act which the parties have contracted to do by the contract in question, and not whether the statute prohibits the contract or the making of the contract in question by the parties. This difference is real, though very subtle. In my view, the failure to bear in mind this fine distinction has given rise to some difficulties. The facts of this case have been fully set out in the discussion of the court’s decision on implied terms. In the context of illegality, the issue arose whether the agreement between the appellant and the club was in effect an assignment wholly or partly of the right of the club granted by the federal license. The Federal Court held that by the terms of the agreement wherein the operator was granted the exclusive right to conduct off-course and on-course betting authorized by the federal license, this would amount to an assignment, thus, contravening s 21 of the Pool Betting Act 1967. In this case, the Federal Court also held that ‘law’ in s 24(a) refers to common law or any statute. In Nafsiah v Abdul Majid, “any law: in s 24 (b) has been held to refer to Muslim law. An example of illegality under s 24(b) is Hee Cheng v Krishnan. In this case, the plaintiff and the defendant entered into a contract whereby the defendant agreed to sell to the plaintiff a house built upon a piece of land in respect of which a Temporary Occupation License (TOL) was issued. The plaintiff claimed for specific performance or, alternatively, for damages for breach of contract. The High Court held that the plaintiff’s claim must fail, as the alleged contract was an attempt to buy and sell the rights of the defendant under the TOL and therefore, void under s 24 of the Contracts Act as, it if

were allowed, it would frustrate the law. Thomas J stated that: …the intent of the parties, the alleged contract was in truth and in fact an attempt to sell and to purchase the defendant’s right under TOL. As such, it was in my opinion, unlawful by reason of s 24 of the Contracts Ordinance as being of such a nature that if permitted it would defeat the provisions of any law and that it is therefore by reason of that section void.

Question 4 REMEDIES: i) S.66 Contracts Act ii) Recovery of property transferred iii) Setting aside illegal purpose iv) Severance of illegal part from legal part

i) Section 66 of CA “When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under the agreement or contract is bound to restore it, or to make compensation for it, to the person to whom he received it.” Soh Eng Keng v Lim Chin Wah  Held: s.66 CA was not applicable, as both parties were aware of the illegality. “The term ‘discover’ here clearly indicates something which the parties were unaware of at the time of making the agreement and which they gained insight of or detected subsequently” “the word ‘becomes’ refers to something not present when the contract was signed but came into being at a later stage”. Discovered to be void  He must not be a party to the illegality  in pari delicto  Court will not aid a man who founds his cause of action upon an immoral or illegal act

 ex dolo malo non oritur actio  Must NOT be aware of the illegality  At the time the contract was entered into  Only discovered after the contract was formed Ng Siew San v Menaka  Menaka (R), a registered moneylender “AR PR M Firm”. R lent money to appellant, Ng Siew San (A), on the security of a charge of certain lands belonging to A.  R applied for an order for the sale of the land to satisfy the principal sum and interest.  A objected as the loan was not registered in the name of the moneylender (AR PR M Firm) and contravened s. 8(b) and (c) of the Moneylenders Ordinance 1951.  Held: Agreement void.  Forbidden by ss8(b) and (c) of the Moneylenders Ordinance 1951  S.66 - Respondents not aware of the illegality, $19,400 returned to the respondent

ii) Recovery of Property Transferred  Generally, if one party has transferred their property to another party based on an illegal contract, then neither party can recover what they had transferred to the other party,  However, there is an exception and P can recover the property if he can establish a cause of action without having to rely on the illegal transaction. Sajan Singh v Sardara Ali  Plaintiff (Sardara Ali) was a lorry driver. Wanted to acquire a lorry and use it to carry goods but he is unable to get the required haulage permit.  Defendant (Sajan Singh) was a haulier who did have a haulage permit.  Arrangment – SS will get a second-hand lorry, register and get a haulage permit in his name. Intention: it will belong to SA who would use it.  SS bought 6 lorries in his own name. Obtained haulage permit for the lorry, used by SA and operated it in the name of SS. This is in contravention of certain regulations governing the transfer and use of motor vehicles.

 SA paid $1,500 on understanding that one of the lorries should belong to him.  Parties argued. SS removed the lorry from SA’s possession. SA brought action for a declaration that he was the owner of the lorry  Held: Although the transaction between the parties was illegal, nevertheless, it had been fully executed and carried out and was capable of passing the property in the lorry to P. P succeeded in his cause of action based on detinue to recover his property. It was not one that was founded on an illegal act. Daniel s/o D William v Luhat Wan  P claimed that he had found a lottery ticket. D1 claimed that he had bought that lottery ticket and had given it with other lottery tickets to his wife for safe keeping.  D2 admitted that he had not been issued with a written authority, either by DirectorGeneral of Posts or the Chairman, to sell welfare lottery tickets. It was argued that since 1st had elected to prove his tittle by proving that he was the owner of the winning ticket, the only way in which he could do so was to rely on the contract of sale of the winning ticket entered into by D2 and D1.  Consequently, the contract of sale was illegal since the transaction infringed s 9(1) of the Social and Welfare Services Lotteries Board Act 1950.  Held: although the sale of the lottery ticket to D1 was unauthorized and the seller had committed an offence in selling it without authority. In this case, the illegal contract had been fully executed and the tittle to the lottery ticket had passed to D1.  P had neither the tittle not the right of possession to the winning ticket. In such a situation, judgment must be given to D1 since the court doe not confiscate the property because illegality.

iii) Setting Aside Illegal Purpose  Doctrine of locus poenitentiae  If money/property has been transferred under an illegal contract, the payer/person who performs the transfer is allowed to repent (locus poenitentiae) - IF the contract has not been performed, or

- A large part of it is still executory Palaniappa Chettiar v Arunasalam Chettiar  R bought 40 acres of rubber land in 1934 (already owned 99 acres). Under Rubber Regulations 1934, the production from rubber land exceeding 100 acres will be assessed by the Assessment Committee.  So, R transferred the 40 acres to his son (A). In memorandum of transfer, R acknowledged receipt of $7k. Transfer registered.  No money exchanged. Certificate shows son as owner but in R’s possession.  R received all income from it and paid all the wages and assessment. A paid nothing and received nothing.  Dispute occurred and R filed for an order to get property retransferred back to him.  Held: The transfer was for an illegal purpose and R could not avail himself of the court’s help. R having achieved his fraudulent purpose, it was held that the doctrine was inapplicable and the court would not lent its aid for an illegal act.  “If the fraudulent purpose had not been carried out, there might well have been room for repentance and the father might have been allowed to have the land retransferred back to him  But where the fraudulent purpose has actually been effected by means of the colourable transfer, there is no room for repentance.”

RECAP:  If money/property payer/person who

has

been

transferred

under

an

illegal

contract,

the

performs the transfer is allowed to repent (locus poenitentiae) - IF the contract has not been performed, OR - A large part of it is still executory

iv) Severance of Illegal part from legal part -

Refers to the concept that the illegal part of the contract is ‘severed’ from the legal part Is this possible in Malaysia?

-

Three situations to look at in the Contracts Act: Section 25, 58, 59. Section 25 CA: “If any part of a single consideration for one or more objects, or any one or any part of any one ofseveral considerations for a single object, is unlawful, the agreement is void.” - NO severance allowed Section 58 CA: “Where persons reciprocally promise, firstly, to do certain things which are legal, and secondly,under specified circumstances, to do certain other things which are illegal, the first set of promises isa contract, but the second is a void agreement.” - SEVERANCE Section 59 CA: “In the case of an alternative promise, one branch of which is legal and the other illegal, the legal branch alone can be enforced.” - SEVERANCE PRINCIPLE: Application of the doctrine is guided by two principles: 1. It is not contrary to public policy; and 2. It does not create a new contract...