Tutorial 5 - Illegality PDF

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VOID AGREEMENTSA. Illegality With reference to decided cases, explain the differences between s24(a) and s24(b) of the Contracts Act 1950. 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...

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VOID AGREEMENTS

A.

Illegality

1.

With reference to decided cases, explain the differences between s24(a) and s24(b) of the Contracts Act 1950.

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.

2. Liaw made an agreement with Mow whereby Mow was to have use of Liaw’s premises for 8 months at a rent of RM950 per month. Liaw was aware that Mow intended to use the premises to make fireworks without a licence from the Government. Before Mow could start his illegal activities, Liaw decided that he wanted his premises back. He has not collected his rental at all.

Advise Liaw whether he has a valid contract and whether he can collect arrears of rental. Can he recover his premises from Mow before the agreement period is over? The first issue is whether liaw has a valid contract with mow? It falls under s 24(a), because Liaw was aware that Mow intended to use the premises to make fireworks without a license from the government. If Liaw doesn’t know that the furniture is rented out for an illegal purpose then it will fall under s 24(a). Case: Dimplex Gems Singapore Pte Ltd v Yusoof…. The second issue is whether Liaw could seek for relief under s 66 of Contracts Act? S 66, case: Sivaramakrishnaiah v Narahari Rao, this case does not apply to Liaw because he is not innocent he knew about the illegal purpose of the Mow The third issue is whether liaw can recover his premise? Case: Palaniappa Chettiar v Arunasalam Chettiar Application is since a large part of this contracts is still in executory because Mow has not yet started his firework making process and Liaw has not collected his rental at all. Then, Liaw is allowed to repent. Moreover, he just rent it to Mow. The premise is not transferred fully it just Mow got possession over the premise. 3. ‘A person who cannot enforce an illegal agreement may instead rely on section 66 of the Contracts Act 1950 to recover money paid or property transferred under the said illegal agreement.’ Discuss the above statement with reference to decided cases. In the case of Ng Siew San v Menaka, the respondent, Menaka, was a registered moneylender under the name “AR PR M Firm”. The respondent had lent money to the appellant, on the security of a charge of certain lands belonging to the appellant. On the respondent’s application for an order for the sale of the land to satisfy the principal sum and interest, the appellant objected to the application on the ground that the loan was not in the registered name of the moneylender and contravened ss

8(b) and (c) of Moneylenders Ordinance 1951. The Federal Court held that the said agreement was void as it was forbidden by ss 8(b) and (c) of the said Ordinance. However, since the respondent was not aware of the illegality of the transaction at the time they executed the agreement, s 66 of the Contracts (Malay States) Ordinance was applicable and the High Court was right to order the return of 19400 dollars to the respondent. The appellant appealed to the Privy Council. The Privy Council dismissed the appeal ad confirmed the Federal Court’s decision on the application of s 66 to void agreements. The FC quoted the High Court’s reference to a passage in Kanuri Sivaramakrishnaiah v Venuri Venkata Narahari Rao. It is manifest that in order to invoke this action, the invalidity of the contract or agreement should be discovered subsequent to the making of it. This cannot be taken advantage of by parties who knew from the beginning the illegality thereof. It only applies to a case where one of the parties enter into an agreement under the belief that it was a legal agreement, i.e. without the knowledge that the agreement is forbidden by law or opposed to public policy and as such illegal. The effect of s 65 (s 66 of CA) is that, in such a situation, it enables a person not in pari delicto to claim restoration since it is not based on an illegal contract but dissociated from it. That is permissible by reason of the section because the action is not founded on dealings which are contaminated by the illegality. The party is only seeking to be restored to the status quo ante. At the Privy Council, the judge stated that their Lordships are therefore of opinion that the contract and the security, having been made in contravention of s 8, are unenforceable. As the contract is not enforceable by law, it is void. Neither party was aware of the illegality at the time of making the loan transaction and the documents were prepared and executed on both sides in complete good faith, the contract was “discovered” to be void only after these proceedings had been started. S 66 of the Contracts Ordinance, therefore, applies and both parties before this Board accepted that it does. According to the case of Soh Eng Keng v Lim Chin Wah, the HC held that s 66 of the CA was not applicable and distinguished the facts in the instant case from Menaka, as both parties were aware of the illegality. The judge stated that this section has to be applied with care and is not open to indiscriminate use by unlicensed moneylenders whose claims have been defeated by reason of the contravention of the provisions of the Moneylenders Ordnance 1951. S 66 of the CA is not intended to override those provisions of the Moneylenders Ordinance which make contracts in moneylending transactions void but is meant to provide some relief to a party whose

rights in an agreements have become unenforceable through no fault of his own making. The words “discovered” and “becomes” appearing in s 66 above are not superfluous words used by the legislators. On the contrary, they are words inserted in that section for a specific reason and that is to qualify or restrict the type of agreements to which that section will apply. The term “discover” here clearly indicates something which the parties were unaware of at the time of making the agreement and which they gained sight of or detected subsequently and the word “becomes” refers to something not present when the contract was signed but came into being at a large stage. Based on the case of Yeep Mooi v Chu Chin Chua, the appellant deposited a sum of $5,000 with a person carrying on the business of a pawnshop bearing interest at the rate of 14.4 % per annum. Upon the death of the pawnbroker, the appellant commenced proceedings for the recovery of the sum. At first instance, the president of the Sessions court held that the deposit was a void agreement as the transaction was caught by the Moneylender Ordinance; the appellant was held to be an unlicensed moneylender who hand lent money to the pawnbroker despite her knowledge that she was not licensed to act as a moneylender. The FC went on to hold that the appellant was entitled to restitution pursuant to s 66 of the CA. 4. With reference to decided cases, discuss the remedies that are available to a plaintiff who is a party to an illegal agreement. The remedies that are available to a plaintiff who is a party to an illegal agreement are recovery of property which has been transferred, setting aside the illegal purpose and severing the illegal part from the legal part. Firstly, the recovery of property which has been transferred. Under the common law, 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 a plaintiff can recover the property if he can establish a cause of action without having to reply on the illegal transaction. Based on the case of Berenger v Rozario, the defendant, a married woman, was separated with her husband and was living with the plaintiff. The plaintiff bought a car and gave ownership of it to the defendant. an argument ensued afterwards and the plaintiff wanted to claim back the car. The court decided that the contract between the 2 parties was immoral but allowed the plaintiff’s claim based on Bowmakers Ltd v Barnet Instruments Ltd. As a general rule, a person’s right to obtain chattel rights will be

enforced against another who is withholding the chattel even though the chattel had become his property through an illegal contract, on the condition that he does not need to rectify his actions based on the illegal contract or show the illegality in order to make the claim.

Secondly, setting aside illegal purpose. Another exception to the rule of nonrecovery of property transferred under illegal contracts is the doctrine of locus poenitentiae. Following this doctrine, if money or property has been transferred under an illegal contract, the payer or the person who perform the transfer is allowed to repent if the contract has not been performed, or a large part of it is still executory. In the case of Palaniappa Chettiar v Arunasalam Chettiar, the respondent bought about 40 acres of rubber land in 1934. At the time, he already owned 99 acres of rubber land so that, with his new purchase, his total holding of rubber land exceeded 100 acres. Under the Rubber Regulations 1934, for holdings of 100 acres or more, the permissible production was assessed by an Assessment Committee while holdings of less than 100 acres were assessed by the local District Officer. To overcome this Regulation, the respondent transferred 40 acres of his rubber land to his son, the appellant. In the memorandum of transfer, the respondent acknowledged receipt of $7,000 as consideration, but it was found as a fact by the trial judge that no money was paid by the appellant. The transfer was duly registered. The certificate of title showing the appellant as proprietor of the 40 acres remaining in the possession of the respondent all the time. The respondent also received all the income from the property and paid all the wages and assessment. The appellant paid nothing and received nothing in respect of the property. Later a dispute occurred and the respondent filed for an order for the property to the re-transferred to him. The Privy Council held that the property was for an illegal purpose and the respondent could not avail himself of the court’s help. The judge stated that 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 re-transferred to him. But where the fraudulent purpose has actually been effected by means of the colorable transfer, there is no room for repentance. The father cannot use the process of the courts to get the best of both worlds which are to achieve his fraudulent purpose and also to get his property back.

Thirdly, severance of illegal part from legal part. The doctrine of severance was applied in the case of Murugesan v Krishnasamy, the defendant occupied several acres of land under TOL and had applied for EMR titles in respect of the land. the defendants entered into an agreement with the plaintiff which recited that the defendants had applied for state land and for the considerations stated therein the defendants would execute transfers of the lands to the plaintiff as soon as titles were issued to them. In the meantime, the plaintiff was to enter upon the lands and enjoy the proceeds thereof. Subsequently, the defendants’ applications for EMR titles were rejected and the plaintiff claimed for the return of the money paid by him as the contract had become impossible of performance. The defendants contended that the contracts were attempts to sell and purchase rights under TOLs and thus, were unlawful and void for illegality. The HC held that the illegal promise in the agreement, namely, permitting the plaintiff to occupy the land, was severable from the remainder of the contract. Thus, that part of the contract dealing with the transfer of the land was valid and enforceable....