ILLEGALITY : ENGLISH LAW

TWO GENERAL RULES

Courts Will:

(1) Never Enforce Illegal Contracts. This Is An Inflexible Rule With No Exceptions.

(2) Generally Not Permit Recovery Of Benefits Conferred Under Illegal Contracts. But This Is Not An
Inflexible Rule.

Holman v Johnson (1775) 1 Cowp 341

Per Lord Mansfield:

“The principle of public policy is this: ex dolo malo non oritur actio. No court will lend its aid to a man
who founds his cause of action on an immoral or an illegal act. If, from the plaintiff's own stating or
otherwise, the cause of action appears to arise ex turpi causa, or the transgression of a positive law of
this country, there the court says that he has no right to be assisted.”

Rationale for the General Rules

Both rules are justified on the broad concept of “public policy”.

In duress, undue influence and misrepresentation (voidable contracts) the law is concerned with the
protection of one party, the innocent party.

In illegality, the law is primarily concerned with the more general concerns of the proper scope of the
law of contract and its associated remedies.

Atiyah and Enonchong: 2 main reasons why illegal contracts are unenforceable:-

(1) Deterrence – a person must not be allowed to benefit in any way from ‘illegal’ behaviour – the threat
of unenforceability of an illegal contract may be of greater deterrence than the threat of criminal
prosecution.

But this does not explain why the law will not generally assist even an innocent party i.e. a party who
does not realise he is infringing the law in recovery claims.

(2) To protect “the integrity of the judicial system by ensuring that the courts are not seen by law-
abiding members of the community to be lending their assistance to claimants who have defied the
law.” (Enonchong) or as Atiyah calls it “the undesirability of jeopardising the dignity of the courts.”

This reason better explains why courts generally refuse to assist even the innocent party in recovery
claims.

Rationale for allowing recovery claims

The 2 General Rules can conflict with another policy consideration – desirability of preventing injustice
to a claimant who is innocent or preventing a windfall gain by a defendant arising from his illegality.

The law has therefore tried to steer a middle course by, in some instances, allowing one party to
recover (get back) any benefits he may have conferred on the other in a transaction tainted with
illegality.

Until the UKSC decision in Patel v Mirza [2016] UKSC 42 this middle course was achieved by recognising
that there were ‘exceptions’ to the 2nd general rule which were applied in a formulaic manner so as to
allow recovery.

In Patel v Mirza the UKSC disapproved of the formulaic ‘exceptions’ approach.

The question whether the courts should assist a litigant to recover property or benefits conferred under
an illegal contract is now to be answered purely on public policy considerations – whether public
policy would be better served by refusing recovery or whether it would be better served by allowing
recovery.

Clearly, there is a tension between 2 competing policies that courts have to deal with in regard to
recovery claims tainted with illegality:

(1) Discouraging entry into illegal contracts on the one hand; and

(2) Preventing unjust enrichment of one party whilst upholding freedom of contract, on the other.

CONTRACTS CONTRARY TO LAW

(1) Contracts for the commission of a Crime;

are void i.e. unenforceable

Alexander v Rayson [1936] 1 KB 169

Contract to defraud the revenue authorities

Rayson leased a flat from Alexander at an annual rent of £1,200.

However, the transaction was recorded using 2 documents:

 a lease agreement showing annual rent as £450; and

 a ‘services’ agreement for rendering services at £750 annually. However, services to be
rendered by Alexander to Rayson were identical under both agreements.

Purpose of this arrangement (known to both parties) was to defraud the rating authority and
accordingly Alexander concealed the services agreement from the authorities.

Rayson paid full amount under the lease agreement for some time but, being dissatisfied with
Alexander’s services, stopped payment under the services agreement.
Alexander then sued Rayson for the arrears relying on the services agreement.

Held: both agreements were void (unenforceable) for illegality

 An agreement to

 do an act that is illegal [or immoral or contrary to public policy], or

 do any act for a consideration that is illegal, immoral, or contrary to public policy

is unlawful and therefore void.

In such a case any party to the agreement who had the unlawful intention is precluded from suing upon
it. Ex turpi causa non oritur action. [no action can be based on a disreputable cause]

The court will not lend its help to such a plaintiff.

Alexander was therefore not entitled to seek the assistance of a court of justice in enforcing either the
lease or the services agreement.

The ‘act’ of entering into a lease agreement and a services agreement was not unlawful in itself.

But both the agreements were made with the intention of one or both parties to make use of the
subject-matter for an unlawful purpose (defrauding the Revenue authority).

Bigos v Boustead [1951] 1 All ER 92

Agreement made in England that P would provide D’s family a sum of Italian money equivalent to £150
during their stay in Italy.

D deposited some shares with P as security for repayment of the money to be advanced by P.

Both parties were aware that entering into such an agreement was an offence under the Exchange
Control Act 1947.

P breached the agreement when he did not send the money to D’s family in Italy and instead sued D for
“recovery” of the “loan”.

D pleaded the true facts as a defence to P’s claim, and counterclaimed for return of his shares.

At trial P abandoned his claim; only D’s counterclaim proceeded.

The share-deposit agreement sprang from the main agreement which was illegal.

It was therefore tainted with the same illegality as that which attached to the main agreement.

Further, as the parties were in pari delicto [equally at fault] at the time of making the agreement, D
was not entitled to seek the aid of the court to recover the certificate.

The court would, in such a case, let the loss lie where it falls.
 (2) Contracts for the commission of a Civil Wrong;

are Void

Begbie v Phosphate Sewage Co Ltd (1875) LR 10 QB 491

Contract entered into in furtherance of Tort of Deceit – void

D who had a patent registered in England sold to P the exclusive right to use it in Prussia for £15,000

D was unaware, but P was aware that the patent needed to be registered in Prussia.

P had agreed to buy the right because he intended to fraudulently sell, at a profit, the supposed right to
use the patent in Prussia to a company.

However P’s plan did not materialise and he sued D to recover the £15,000.

P, being aware that no exclusive right to use the process in Prussia could be obtained, had entered into
the contract with D in contemplation of a fraud upon the shareholders of the intended company.

P therefore could not maintain an action to recover back the money from D, on the well-established
principle that money paid in furtherance of a fraud or other unlawful purpose cannot be recovered
back [by the ‘guilty’ party].

Clay v Yates (1856) 1 H&C 73

Performance of Contract involving defamation - void

P agreed to print for D a treatise on “Military Tactics”, to be prefixed by a dedication.

P printed the treatise but refused to print the dedication because he discovered that it contained
defamatory (libelous) statements in it.

D refused to pay P for printing of the treatise contending that their contract was for P to print both the
treatise and the dedication.

A contract to publish a libel (a tort) is illegal. Therefore P was justified in refusing to print the dedication

Further, since P was unaware of the libellous nature of the dedication when he entered into the
contract he was entitled to recover costs of printing the treatise.

(3) Contracts contravening express statutory provisions.

Such contracts are void because:

(1) Either entry into agreement Is forbidden by statute;

A statute could, expressly or impliedly forbid entry into or making of a particular type of contract and
thereby rendering such contract illegal.

Such contracts are said to be ‘illegal on formation’ and are void ab initio.
However, if, as a matter of construction, the statutory provision breached was enacted for a specific
different purpose (e.g. punishment) and not enacted merely to prevent formation of such contracts, the
contract will not be declared illegal.

In such cases, the contract will be upheld, although one or both parties will have to face the
consequences spelt out in the provision that has been breached.

Harse v Pearl Life Assurance Co [1904] 1 KB 558

The Life Assurance Act 1774 prohibits making of an insurance contract on the life of a person in which
the insured has no insurable interest.

P took out insurance on his mother’s life based on an innocent misrepresentation as to the law by D’s
agent that such a policy was valid.

Upon discovering that the policy was void, P sued D to recover premiums paid.

The policy was void for illegality on formation.

P being party to an illegal contract was prima facie debarred from recovering any money paid under that
contract to the other person.

Here P and D were in pari delicto [equally at fault] in that they both made the same mistake as to the
law.

P was not entitled to recover the premiums.

Re Mahmoud and Ispahani [1921] 2 KB 716

Under the Seeds, Oils and Fats Order 1919 “a person shall not…buy or sell…linseed oil without a
licence”.

P sold D some linseed oil based on D’s misrepresentation that he (D) had the necessary licence to buy
linseed oil.

When D refused to take delivery of the linseed oil, P sued D for damages for breach of contract.

D’s raised the defence that the contract was illegal on formation because of breach of the 1919 Order
and therefore P could not enforce it.

The court will not enforce a contract which is made illegal on formation by a statutory Order,

 even though the question of illegality is raised by the guilty party (D, the buyer), and
 even though the innocent party (P, the seller) honestly believed, as a result of statements made
to him by the guilty party (D, the buyer), that no breach of the Order was being committed.

“As the language of the Order clearly prohibits the making of this contract, it is open to a party,
however shabby it may appear to be, to say that the legislature has prohibited this contract, and, the
court will not lend its aid to the enforcement of the contract.”

Smith v Mawhood (1845) 14 M&W 452

Whether a statute prohibits the making of a contract is a matter of construction of the actual wording
used in the statute.

A contract will not be declared illegal on formation if the provision that has been breached is for a
specific different purpose.

Here the statute provided that any person selling tobacco products without the required licence would
be liable to a fine of £200.

Issue: what was the real purpose of this prohibition?

“the object of the legislation was not to prohibit a contract of sale by the dealers who have not taken a
licence…but only to impose a penalty upon the party offending for the purposes of the Revenue.”

The contract was therefore enforceable despite the contravention i.e. the buyer would have to pay for
the tobacco, although the seller, if prosecuted, would be liable to punishment and would have to pay a
fine of up to £200.

(2) Or, although entry into agreement is not forbidden, its performance will involve
contravention of a statute.

Here the provision concerned does not make entry into the contract in question illegal but the
performance such a contract would necessarily involve the breach of the statute.

Such contracts are said to be ‘illegal in their performance’.

They are not void ab initio but become unenforceable as soon their performance commences.

But, again, if the statutory provision breached is aimed at some other purpose performance of the
contract may still not render the contract unenforceable.

Anderson Ltd v Daniel [1924] 1 KB 138

Statute required that a seller must give a buyer of fertilisers an invoice listing certain chemicals
contained in the product.

Seller’s invoice to the buyer did not contain such listing.

Buyer did not pay for the fertilisers, and when sued, raised defence of illegality based on seller’s failure
to comply with the statute.

The provision contravened by the seller was enacted for the protection of consumers.

Enforcing this contract would tend to defeat the purpose of the statute contravened.

Thus, although, the contract of sale in itself was not prohibited, the absence of the invoice rendered it
illegal in its performance, and hence unenforceable.

Shaw v Groom [1970] 2 QB 504

Failure by landlords to provide their tenants with a rent book was an offence under a particular statute,
punishable by a penalty.

Tenant did not pay rent since landlord had not provided him a rent book.

Held:

The purpose of the provision was to impose a penalty for non-compliance rather than invalidating the
tenancy agreement itself.

Landlord could therefore claim the rent from the tenant.

St John Shipping Corp v Joseph Rank Ltd [1956] 3 All ER 683

D chartered P’s ship to carry grain from UK to USA.

P overloaded the ship – overloading was an offence punishable under the Merchant Shipping
Regulations – and P was convicted of such offence.

D disputed their liability to pay P the freight arguing that the contract had been performed in an illegal
manner.

The illegality relied on by D must relate to the central purpose of the contract to make the contract
void.

The issue is whether the statute prohibits contracts as such or only penalises certain behaviour.

The contract for the carriage of goods by sea was not illegal merely because of overloading.

It was not the purpose of the statute was to render contracts for carriage of goods illegal.

To do so would have allowed the other party to avoid payment with no justification.

CONTRACTS CONTRARY TO PUBLIC POLICY (COMMON LAW) are VOID

What is contrary to Public Policy depends on the view of the Courts; here courts are not giving effect to
the intention of Parliament.

Richardson v Mellish (1924) 2 Bing 229

But, public policy is “a very unruly horse, and once when you get astride it you never know where it will
carry you” per Burroughs J.

Enderby Town FC Ltd v The Football Association Ltd [1971] Ch 591

On the other hand “with a good man in the saddle, the unruly horse can be kept in control. It can jump
over obstacles” per Lord Denning MR.

Contracts Promoting Immoral Conduct

Pearce v Brooks (1866) LR 1 Ex 213

D, a prostitute, hired a brougham from P to be used in ploughing her trade in public.

P was aware of D’s purpose in hiring the brougham.

D failed to pay the balance of the hire and P sued her.

Held:

P could not recover the amount not paid by D.

Prostitution per se is not an illegal activity, although there are several offences relating to prostitution,
both in English and Malaysian law.

Per Pollock CB

Any person who contributes to the performance of an illegal act by supplying a thing with the
knowledge that it is going to be used for that purpose, cannot recover the price of the thing so supplied.

No distinction can be made between an illegal and an immoral purpose.

The rule which is applicable to the matter is Ex turpi causâ non oritur actio (‘no cause of action will arise
from a base cause’)

Contracts Prejudicing the Public Service/Corruption

Parkinson v Royal College of Ambulance [1925] 2 KB 1:

Secretary of RCA misrepresented to P that if P donated money to the RCA, he or the RCA could get P a
knighthood.

P donated £3,000 to the RCA but he did not get a knighthood; he sought to recover the donation.

Held: Contract was against public policy and hence illegal. P could not recover the donation.

Per Lush J

A contract to guarantee or undertake that an honour will be conferred by the Sovereign, if a certain
contribution is made to public charity, or if some other service is rendered, is against public policy, and,
therefore, an unlawful contract.

Apart from being derogatory to the dignity of the Sovereign it would produce, or might produce,
mischievous consequences.

A contract for the purchase of a title, however the money is to be expended, is in itself an improper
contract.

P “knew that he was entering into an illegal and improper contract. He was not deceived about the
legality of the contract. How, then, can he say that he is excused [so as to be able to recover the
donation]?”
Contracts Tending to Pervert the Course of Justice

Examples:

(1) Promise to pay money to another to give false evidence on promisor’s behalf;

(2) Bribing a prosecution witness to withdraw a charge of rape

(3) Agreements to obstruct bankruptcy proceedings

(4) Contracts to oust the jurisdiction of courts (but parties may validly agree to refer disputes to
arbitration or other alternative dispute resolution mechanisms)

Fisher & Co v Apollinaris & Co (1875) LR 10 Ch App 297

F were infringing A’s trade-marks and A started a prosecution under the Trade Marks Act against F.

The prosecution was compromised when F agreed to issue a written apology to A and A in return
offered no evidence against F whereupon F was acquitted.

A advertised F’s apology for 2 months. This undermined F’s business.

F then sought an injunction to restrain A from further publication of the apology arguing that the
compromise agreement was against public policy.

There is nothing illegal or improper in a compromise of criminal proceedings taken against a person.

It was not against public policy to allow the injured party [A] to enter into the compromise.

Further, F’s apology was not made under duress, and the compromise agreement was also not voidable.

Therefore, F had no cause of action against A and A could not be restrained by injunction from
continuing with the publication.

Contracts Prejudicial to Public Relations

Foster v Driscoll [1929] 1 KB 470:

5 persons entered into a partnership agreement to buy whisky in Great Britain and, directly or indirectly,
obtain its importation into and sale in the United States where at all material times such importation
and sale was a criminal offence.

Claims and counterclaims by the various parties were filed in respect of breaches of this agreement.

A partnership formed for the main purpose of deriving profit from the commission of a criminal offence
in a foreign and friendly country is illegal and against public policy.

As the agreement was against public policy, the court would not assist any of the parties. All claims and
counter-claims against one another were dismissed.
“recognition [of such a contract] by our courts would furnish a just cause for complaint by the United
States government against our government and would be contrary to our obligation of international
comity, and, therefore, would offend against our notions of public morality”.

RECOVERY CLAIMS WHERE CONTRACT IS TAINTED WITH ILLEGALITY

The Approach BEFORE Patel v Mirza

The maxim in pari delicto potior est conditio defendentis – where there is equal fault, the defendant is in
the stronger position –was applied as the starting point and to generally refuse recovery.

But, over time, recovery was allowed in defined exceptional categories of cases in order to prevent
unjust enrichment of the defendant at the expense of the claimant.

Holman v Johnson [1775-1802] All ER Rep 98

P sold and delivered tea to D in Dunkirk, France (i.e. the contract was concluded in France where such a
contract in itself was legal)

Both parties knew that the tea was then to be smuggled into England.

But P himself would not be required to, and did not, participate in the smuggling.

P sued D in England for the price of the tea.

D raised the defence of illegality.

Since the contract was concluded in France, where the contract (to buy and sell tea) was clearly legal,
illegality was not a defence to P’s claim.

However, (obiter): “No court will lend its aid to a man who founds his cause of action on an immoral
or an illegal act. If, from the plaintiff's own stating or otherwise, the cause of action appears to arise ex
turpi causa, or the transgression of a positive law of this country, there the court says that he has no
right to be assisted.”

Pre Patel v Mirza exceptions to the General Rule of non-recovery

The court assisted the claimant to recover money paid or property transferred to the defendant under
an illegal contract in the following exceptional situations.

 Where the claimant is not in pari delicto (not equally at fault)

A party to an illegal contract who is not equally at fault with regard to the illegality may recover benefits
conferred to the other party under the illegal contract.

Oom v Bruce (1810) 12 East 225

An English insurance agent took out an insurance policy in England on goods on behalf of a Russian
principal.
Unknown to the agent, hostilities had broken out between Russia and England when the insurance
policy was taken out.

As a result the policy, being a contract with an enemy alien, was void in its inception

The agent sought to recover the premium paid on the insurance policy.

Held: The agent was entitled to a return of the premium paid as he was ignorant of the fact of such
hostilities when he entered into the contract.

Hughes v Liverpool Victoria Friendly Society [1916] 2 KB 482

P paid insurance premiums on 5 life insurance policies on lives in which he did not have any insurable
interest based on a fraudulent misrepresentation by D’s agent.

Upon discovering that the insurance policies were void for illegality, P sought recovery of insurance
premiums paid.

Held: The insurance policies were void for illegality but since P was not equally at fault (because he had
relied on D’s agent’s misrepresentation) P was entitled to recover the premiums paid to D.

Per Swinfen Eady LJ

In Harse v Pearl Life Assurance Co, Ltd…there was no fraud, and the plaintiff was [equally at fault], and
so failed to recover, but [that case did not decide] that where a person is induced to insure a life, in
which he has no insurable interest, by an insurance agent making a misrepresentation of fact, that the
parties are necessarily [equally at fault].

Per Scrutton LJ

“…an innocent plaintiff is entitled to say that he is not [equally at fault] with the defendant, whose
agent by a false and fraudulent representation induced him to believe that the transaction was an
innocent transaction, and one which was enforceable in law.”

Class-protecting Statutes

Kiriri Cotton Co Ltd v Dewani [1960] AC 192, PC

A tenant had paid a premium for renting certain premises.

The Uganda Rent Restriction Order made it an offence, punishable by a fine, for landlords to accept
premiums.

The tenant sued to recover the premium as having been paid under an illegal contract.

Held – the tenant could recover the premium.

Per Lord Denning

…if as between [the parties to the contract] the duty of observing the law is placed on the shoulders of
one of them rather than the other – it being imposed on him specifically for the protection of the other
– then they are not [equally at fault] and the money can be recovered back.

Oppression

Atkinson v Denby 158 ER 749

A creditor refused to accept a composition agreement unless he was paid an extra £50.

The debtor brought an action to recover the £50 .

Held: the debtor could recover. Although the agreement was an illegal contract, the element of
oppression by the creditor meant that an exception to the general rule was justified. The oppression
meant that the debtor was not equally at fault.

 No reliance upon illegal nature of contract

A claimant may be able to recover money paid or property transferred under an illegal contract to the
defendant if he can establish his right to the money or property without having to rely on the illegal
contract.

Bowmakers Ltd v Barnet Instruments Ltd [1945] KB 65 (CA)

P lawfully purchased some machines from Smith.

P then entered into 3 hire-purchase agreements with D and delivered the machines to D. The
agreements in fact contravened the Defence Regulations as P did not have the necessary licence from
the Ministry of Supply.

D sold some of the machines to a third party and also refused to return the remaining machines to P or
to pay the hire to P under the hire-purchase agreements.

P sued D for damages for conversion (a claim in tort) of his machines.

D sought to rely on the illegality of the hire-purchase agreements to resist P’s claim.

Held: P entitled to damages for conversion

“So far as their claim in conversion is concerned, they [P] are not relying on the hiring agreements at all.”

“They simply say that the machines were their property, and this…cannot be denied…[title] had passed
from Smith to the plaintiffs, and still remained in the plaintiffs at the date of the conversion.”

“No question of the defendants' rights arises. They do not, and cannot, pretend to have had any legal
right to possession of the goods at the date of the conversion.”
“Prima facie, a man is entitled to his own property, and it is not a general principle of our law…that
when one man's goods have got into another's possession in consequence of some unlawful dealings
between them, the true owner can never be allowed to recover those goods by an action.”

Tinsley v Milligan [1994] 1 AC 240 (HL)

T and M jointly contributed to the purchase price of a house, but only T was registered as its owner.

The purpose (known to both parties) of doing so was to enable T to make false social security claims.

Later M informed Department of Social Security of what she had done.

T and M quarreled and T moved out of the house.

T then brought an action seeking possession of the house asserting she was the sole owner of the house
since it was registered in only her name.

M argued that she had an equitable ½ share interest in the house since she had contributed equally to
the purchase price.

T argued that M was not entitled to assert her equitable interest because M had participated actively in
the fraud on the Department of Social Security i.e. M had not come to the court with “clean hands” and
therefore M had no claim to a ½ share.

Held (by a 3:2 majority)

The same rule applies at common law and in equity – M was entitled to a ½ share because she did not
have to rely on the illegality to establish her equitable interest.

M’s equitable interest to a ½ share arose independently of and had nothing to do with the illegality – it
arose as soon as she had contributed equally to the purchase price under the presumption of a resulting
trust.

 Locus Poenitentiae – withdrawal from the illegality

Locus poenitentiae refers to a space, time or opportunity for repentance.

In the context of illegal contracts, this refers to the claimant repudiating or withdrawing from an illegal
purpose in time i.e. before the illegal purpose is carried out, so that he is then entitled to recover a
benefit he may have conferred on the other party prior to withdrawing.

In such cases, the law allows the claimant to lead evidence of the illegal contract to explain the true
reason why the property that he wants to recover was transferred to the defendant.

Taylor v Bowers (1876) 1 QBD 291

P assigned his goods to X as part of a scheme to defraud his creditors with whom he intended to enter
into a composition agreement.
X parted with the goods to D who knew of P’s fraudulent scheme.

P held meetings with his creditors but no composition agreement was ever reached.

P then brought an action for the return of his goods from D.

D raised the issue of illegality of the assignment to X in defending P’s action.

Held: P could recover his goods from D under the locus poenitentiae principle as he (P) had withdrawn
from the fraudulent scheme before it had been carried out.

Per Mellish LJ

“If the scheme had been carried out, and a composition…had been made, the plaintiff could not…recover
his goods; but the scheme has not been carried out, and the effect has been to put all the parties in the
same position as they were before.

If money is paid, or goods are delivered, for an illegal purpose, and that purpose is afterwards
abandoned and repudiated… the person paying the money or delivering the goods may recover; but if
he waits until the illegal transaction is carried out, or seeks to enforce it [i.e. the illegal transaction],
he cannot maintain his action.”

Kearly v Thomas (1890) 24 QBD 742

P had paid money to solicitors for agreeing not to appear at the public examination of a bankrupt friend
of P.

P later changed his mind and sought to recover the money so paid.

Held: Where money is paid under an illegal contract which has been partially carried into effect in a
substantial manner, the money cannot be recovered back. The locus poenitentiae principle did not
apply.

Tribe v Tribe [1996] Ch 107

Father (F) transferred some shares to his son (S). Purpose of transfer was to defraud his landlords,
whom he expected would be making a lawful demand on him for monetary contribution towards repair
of the premises.

The transfer was put in the form of a sale to S, who, in fact, never paid any money for them, and who
was fully aware of the illegal purpose of the transfer.

However, the landlords never made the demand for contribution to the repairs on F. Thus, no one was
defrauded.

F then sought to recover the shares from S.

S resisted F’s claim arguing that the shares were a gift to him based on the rebuttable presumption of
advancement.

F sought to lead evidence of the true purpose of the transfer of the shares to his son to rebut that
presumption.
F could lead evidence of the true purpose of the transfer, even though such purpose was fraudulent,
to rebut the presumption of advancement.

Since F had withdrawn from the transaction before any part of the illegal purpose had been carried into
effect, he was allowed to use the explanation of what had been planned as a basis for setting aside the
apparent sale of shares to his S.

F was allowed to recover the shares from S.

RECOVERY CLAIMS WHERE CONTRACT IS TAINTED WITH ILLEGALITY

The Approach after Patel v Mirza

Patel v Mirza [2016] UKSC 42

P had given M £620,000 to bet on a bank's share price using insider information, both of them knowing
that this agreement amounted to a conspiracy to commit the offence of insider dealing.

However, as the insider information did not materialise, M did not place the bet, but he did not return
the money to P.

P sought to recover it, claiming breach of contract by M, and/or unjust enrichment.

Applying the "reliance principle" in Tinsley v Milligan [1994] 1 A.C. 340, the High Court judge held that
P's claim was unenforceable because he had to rely on his own illegality to establish it.

P appealed to the Court of Appeal.

The majority in the Court of Appeal held that the High Court judge had correctly applied the “reliance
principle”, but nevertheless allowed P’s claim because the scheme had not been executed (i.e. the
majority applied the “withdrawal” exception and allowed P to recover).

M appealed to the UK Supreme Court, which was heard by a full bench of 9 Supreme Court judges.

The issue before the UKSC was whether the maxim in Holman v Johnson , that the court would not
assist a claimant who based his cause of action on an immoral or illegal act, precluded a party to a
contract tainted by illegality from recovering, on the basis of unjust enrichment, money he had paid
under the contract to the other party.

Held (unanimously): M’s appeal dismissed

Per Lords Toulson, Kerr, Hale, Wilson and Hodge JJ.S.C. who advocate the new approach.

(1) There were two policy reasons for the common law doctrine of illegality as a defence to a civil
claim:

(i) a person should not be allowed to profit from his own wrongdoing, and

(ii) the law should be coherent, not self-defeating, and should not condone illegality.
(2) In deciding whether to allow or to refuse a claim for recovering money paid under a contract
tainted with illegality, courts should not follow the rule-based approach.

(3) Rather, courts should decide, as a matter of policy, whether allowing the claim would be harmful
to the integrity of the legal system.

The trio of considerations identified by Lord Toulson

(4) Whether allowing a claim would be harmful to the integrity of the legal system depended on

 whether the purpose of the prohibition that had been transgressed would be enhanced by
denying the claim;
 whether denying the claim might have an impact on another relevant public policy; and
 whether denying the claim would be a proportionate response to the illegality.

(5) Within that framework, a range of factors might be relevant but it was not helpful to prescribe a
definitive list.

(6) That said, the courts could not decide cases in an undisciplined way, and a principled and
transparent assessment had to be made.

(7) Potentially relevant factors included

 the seriousness of the conduct,

 centrality of the illegality to the contract,

 whether the illegality was intentional, and

 whether there was disparity in the parties' respective culpability.

The response should be proportionate

(8) Punishment for wrongdoing was the responsibility of the criminal courts.

(9) The civil courts were generally concerned with determining private rights and obligations, and
should

 neither undermine the effectiveness of the criminal law

 nor at the same time impose additional penalties disproportionate to the nature and
seriousness of any wrongdoing.

A good example of a case where denying the claim would have been disproportionate was ParkingEye
Ltd v Somerfield Stores Ltd [2012] EWCA Civ 1338, [2013] Q.B. 840, in which

 the claimant had not set out to break the law,

 the illegality did not affect the main performance of the contract, and
 denying the claim would have given the defendant a substantial unjust reward.
(10) In deciding whether to allow or refuse a claim, the courts had to abide by the terms of any
relevant statute, but they were to have regard to the policy factors and the nature and circumstances
of the illegal conduct.

(11) The reliance rule as laid down in Tinsley should no longer be followed.

Gloster LJ had taken the correct approach in her dissenting judgment in the Court of Appeal. She asked
whether the policy underlying the rule which made the contract between P and M illegal would be
stultified if P's claim was allowed, and she concluded that there was no reason why public policy
should require P to forfeit the money he had paid to M. P was seeking to unwind the arrangement,
not profit from it.

Generally, illegality will not prevent a claim in unjust enrichment

(12) A claimant who satisfied the ordinary requirements of a claim for unjust enrichment should not
be debarred from enforcing his claim simply because the money he sought to recover had been paid
for an unlawful purpose. While there might be rare cases where the enforcement of such a claim might
undermine the integrity of the justice system, there were no such circumstances in the instant case (see
paras 99-101, 107-115, 120-122, 133, 144, 186 of judgment).

Minority rejects the new approach

Per Lords Neuberger, Mance, Clarke and Sumption JJ.S.C.

(1) As a general rule, a claimant should be entitled to recoup money paid pursuant to a contract to
carry out an illegal activity.

 That was so even if the contract had been wholly or partly performed, as long as restitution
could be achieved and was consistent with policy and proportionality (paras 145-146, 157-175,
186, 197-198, 202-203, 210, 246-255 ).

Per Lords Sumption, Mance and Clarke JJ.S.C. (dissenting in part)

(2) Lord Toulson's "range of factors" approach converted a legal principle into an exercise of discretion
and required the courts to make value judgments about the respective claims of the public interest
and each of the parties.

(3) Such a change was unjustified and was not necessary to achieve substantial justice in most cases.
Moreover, it would lead to complexity, uncertainty, arbitrariness and a lack of transparency (paras
204-209, 214, 218-222, 261-265).

SEVERANCE

• Courts may be willing to “sever” an illegal part of a contract and enforce the remainder.
 • The remainder however, must not be radically different from the original contract.

• Severance itself must not be contrary to the public policy which rendered the contract illegal.

Blue Chip Trading Ltd v Helbawi [2009] IRLR 128

H, a foreign student, was studying in England on a visa that allowed him to work for maximum of 20
hours a week during term time.

There was no such restriction for working during vacation.

He often worked more than 20 hours both during term time and during vacation, thereby breaching the
terms of his visa.

As his employers did not pay him the minimum statutory wages, he brought this claim to recover the
difference.

His employers raised the defence of illegality.

They argued that since H was in breach of his visa restrictions the contract was unenforceable in its
entirety.

The contract could be severed, and H could recover the minimum wage in respect of those weeks when
he had not breached the visa restrictions during term time.

H could also recover the full minimum wage in respect of all weeks he had worked in vacation time since
the restriction in the visa did not apply to vacation time.

CONTRACTS IN RESTRAINT OF TRADE: ENGLISH LAW

The expression ‘contracts in restraint of trade’ refers to contracts where one party agrees with another
to restrict, in some way, his freedom

(i) to trade or

(ii) to conduct his profession or business as he pleases.

GENERAL RULE

At common law contracts in restraint of trade are regarded as being contrary to public policy and are
therefore prima facie void and unenforceable.

But if the restraints imposed are “reasonable” such contracts are valid.

Rationale

Courts are reluctant to

 (1) endorse an arrangement whereby one party effectively gives up his right to his livelihood as a
requirement of the stronger party. Everybody has the right to earn a living without interference
(protection of individual rights)

(2) see the public deprived of that party’s skill or expertise (protection of the public).

Meaning of “Reasonable”

Reasonableness of a provision that restrains trade is measured in 2 ways:

(1) the restraint must be reasonable as between the parties i.e. the restraint must be no
wider than is needed to protect the legitimate interests of the party imposing the
restraint

(2) the restraint must be reasonable in the public interest or at least not injurious to the
public interest.

Contracts containing restraint clauses

3 main categories:

(1) Contracts of Employment

A restraint placed on an employee during the course of employment is, of course, NOT against public
policy.

However, a very common restraint is one where an employee’s freedom to work elsewhere after
termination of employment is prohibited or restricted in some way.

 Whether such a restraint is valid will depend on whether the restraint is “reasonable”.

 The test of reasonableness as between parties:

(i) Whether only the legitimate interest of the employer is being sought to be protected.

(ii) If yes, whether restraint is reasonable in terms of subject-matter, locality and time.

 Usually if restraint is reasonable as between the parties, the courts would also regard it as
reasonable in the interests of the public.

(a) Protecting Legitimate Interest, and no more, of Employer

Herbert Morris Ltd v Saxelby [1916] 1 AC 688 (HL):

Covenant by the employee in a contract of service that he would not at any time during a period of 7
years from the date of his ceasing to be employed by the employer carry on or be concerned, directly or
indirectly in the United Kingdom in the same industry as his employer.

The employer’s business involved with the sale and manufacture of pulley blocks, overhead runways
and overhead travelling cranes.
Having regard to all the circumstances of the case, the covenant was not reasonable in reference to the
interests of the parties and was prejudicial to the interests of the public, and, therefore, it was void
and unenforceable.

The restraint in effect covered the whole range of the employer’s business and the employee’s potential
expertise.

Per Lord Parker

To uphold a restraint on an employee, the employer must have some proprietary right, whether in the
nature of trade connection or trade secrets, for the protection of which such a restraint is, having
regard to the duties of the employee, reasonably necessary.

Per Lord Atkinson

It is in the public interest that a man should be free to exercise his skill and experience to the best
advantage for the benefit of himself and all those who desire to employ him.

No person has an abstract right to be protected against competition per se in his trade or business.

An employee is entitled to make use in any other employment of the knowledge which he has acquired
in the first-named employment of the general organization and management of a business of the kind in
question.

Forster v Suggett (1918) 35 TLR 87

P was a glass manufacturer who employed D as a works engineer.

D’s employment contract provided that

(i) D was not to divulge any trade secret during his employment or thereafter except in the proper
course of business; and

(ii) on the determination of his employment D was not, for five years, to carry on in the United
Kingdom or to be interested in glass bottle manufacture or any other business connected with
glass making carried on by P.

During his employment D had gained specialist skills as a glassblower.

Held:

the agreement was not unreasonably in restraint of trade; D’s acquired skill amounted to a trade secret
which P were entitled to protect.

Hannover Insurance Brokers Ltd v Schapiro [1994] IRLR

HIB was a subsidiary company of Hannover Association.

HIB’s contract with their directors included a restraint preventing the directors from soliciting clients of
Hannover Association and all its subsidiaries.
3 ex-directors of HIB set up their own brokerage

HIB brought an action against them for breach of the restraint relating to soliciting clients.

The ex-directors argued that the restraint clause was too wide and should be declared void as they had
worked only for HIB.

The clause was void to the extent that it purported to extend to all Hannover Association’s subsidiaries.

However, under the doctrine of severance, it could be upheld in respect of the clients of HIB. Protecting
one’s client base is protecting one’s legitimate interest.

(b) Subject-matter, Locality & Time

An employee restraint clause must not be too wide. Thus:

(1) An employer may not restrain an employee from carrying on a different business [subject-
matter].

(2) Restraint must not be wider in area than is necessary to protect employer’s interest [locality]

(3) Restraint must be reasonable in terms of time [duration]

Commercial Plastics Ltd v Vincent [1965] 1 QB 623 (CA)

CPL employed V as an expert plastics technologist to coordinate CPL’s research and development. In his
employment contract, V agreed:

"In view of the highly technical and confidential nature of this appointment…not to seek employment
with any of [CPL’s] competitors in the P.V.C. calendering field, for at least one year after leaving
[CPL’s] employ."

CPL had 5 competitors, all based in the UK.

V’s work involved only R&D in the field of PVC calendered sheeting for adhesive tape.

Issue: was the covenant reasonable?

The party in whose favour the restriction is imposed [CPL] has the burden of showing that it is
reasonable as between the parties.

CPL had confidential information capable of being protected by a suitably drafted condition or covenant
in restraint of trade.

 But, the particular restraint was too wide and more than was reasonably required for CPL’s
protection in that

(i) it was world-wide, whereas on the facts CPL did not require protection outside the
United Kingdom, and
 (ii) it extended to their competitors in the whole P.V.C. calendering field, whereas CPL only
required protection vis-à-vis Vincent against competition in P.V.C. calendered sheeting
for adhesive tape.

The restraint was unreasonable, and, therefore, void and unenforceable.

Home Counties Dairies Ltd v Skilton [1970] 1 WLR 526

Two restraints were imposed on an employee who was a milk roundsman for his employer

(1) Not to enter any employment connected with the “dairy business”

(2) Not to work as a roundsman or serve any existing customer for a period of one year
after leaving employment

Held:

 The first restraint was too wide to be reasonable.

 The second restraint was reasonable since it protected the employer’s legitimate interests and
was for a short period of time.

(2) Contracts for the sale of a Business

A common restraint found in agreements for the sale of a business together with its goodwill is that
the seller of the business agrees not to set up a similar business in a particular area for a certain
period of time.

For such restraint to be valid, purchaser must, again, show that it was reasonable as between the
parties (i.e. it protects no more than the legitimate interests of the purchaser) and in the public
interest.

Goodwill – an intangible asset – is the value of business’ brand name, good customer relations,
extensive customer base, excellent employee relations and any proprietary technology or patents. These
assets are not separately identifiable.

Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co [1894] AC 535 (HL)

N had a successful world-wide guns and ammunition manufacturing business.

He owned several patents. His clients were all Governments of countries all over the world.

He sold his business and patent to MNGA .

In the sale agreement he agreed that for a period of 25 years, he would not “engage, except on behalf
of [MNGA], either directly or indirectly in the trade or business of a manufacturer of guns or ammunition,
or in any business competing or liable to compete in any way with that carried on by [MNGA].”

N argued that this was a general restraint in terms of area and void.
Held: the restraint was valid

The area supplied by MNGA would be practically unlimited, since the customers would be governments
of countries all over the world, and so the covenant was reasonable and not wider than the protection
of MNGA required

Per Lord Herschell LC

A covenant entered into in connection with the sale of the goodwill of a business is valid where the full
benefit of the purchase cannot be otherwise secured to the purchaser.

Per Lord Watson

A restraint which is absolutely necessary in order to protect a transaction which the law permits in the
interests of the public ought to be regarded as reasonable.

(3) Restrictive trading agreements

Esso Petroleum Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269 (HL)

H owned 2 garages.

In respect of the 1st garage, H agreed to buy all its petrol supplies only from Esso for 5 years (the solus
agreement).

In respect of the 2nd garage, H took a loan from Esso, and mortgaged it to Esso, redeemable in 21 years.
Mortgage deed also contained H’s agreement to buy all its petrol only from Esso for the period of the
mortgage (i.e. 21 years).

H wished to change the brand of petrol that they sold and Esso sought an injunction to restrain them
from doing so.

The agreements were within the scope of the doctrine of restraint of trade because H had given up their
previous right to sell other petrol.

In respect of the 1st garage, 5 years was not in the circumstances longer than was necessary to afford
adequate protection to the legitimate interests of Esso in maintaining a stable system of distribution.
Therefore, this covenant was valid.

But, in respect of the 2nd garage, a tie of 21 years went beyond any period for which developments were
reasonably foreseeable and in the absence of evidence of some advantage to Esso for which a shorter
period would not be adequate, the agreement was void.

Further, the existence of the mortgage did not exclude the doctrine of restraint of trade.

But note that the categories are not closed.

The better approach is in any case “to ascertain what were the legitimate interests of the [party
imposing the restraint] which they were entitled to protect and then to see whether these restraints
were more than adequate for that purpose” per Lord Reid in Esso Petroleum Co Ltd v Harper’s Garage
(Stourport) Ltd.
ILLEGALITY: MALAYSIAN
INTRODUCTION

The Contracts Act 1950 does not refer to “illegality” as such, but under s 24, if the consideration or
object of an agreement is unlawful such agreement is void.

S. 2 (g): An agreement not enforceable by law is said to be void.

An agreement may be void [unenforceable] for reasons other than unlawful consideration or object:

S. 21- mistake of fact by both parties

S. 26 – no consideration

S. 27 – restraint of marriage

S. 28 – restraint of trade

S. 29 – restraint of legal proceedings

S. 30 – uncertainty

S. 31 – wager

An agreement made for an unlawful consideration or object is NOT A CONTRACT (S.10)

It is therefore a misnomer to speak of “void contracts” in Malaysian law.

Proper terminology: “void agreements”

SECTION 24 CONTRACTS ACT 1950

An agreement is void if

(i) the Consideration for the agreement or

(ii) the Object of entering the agreement,

(a) is forbidden by a law; or (entry)

(b) would defeat any law; or (can enter, but the performance defeats law)

(c) is fraudulent; or

(d) involves injury to another person or property; or

(e) is immoral or against public policy

 “Object” – not defined but generally understood to mean the purpose (i.e. what is intended to
be achieved) of entering into the agreement.

Illustrations to S. 24

 Illustrations (a) to (d)

o examples of lawful consideration: mutual promises in common situations

 Illustrations (e) and (h)

o examples of unlawful objects (purpose): agreement for division of proceeds of fraud,

and compromise of a criminal offence

 Illustration (f)

o unlawful consideration: mutual promises – promise to pay a bribe in exchange for a

promise to secure employment in public service

 Illustration (g)

o unlawful object or unlawful consideration? (fraud by concealment; it would defeat a

principle of equity – an agent must not make a secret profit)

 Illustration (i)

o unlawful consideration? Or unlawful object?

o defeat object of law (circumventing prohibition on defaulter of revenue purchasing
estate)

 Illustrations (j) – unlawful object (corruption)

 Illustration (k) – unlawful object (k) sexual immorality

Consideration or Object
(i) Forbidden by Law (s. 24(a);
(ii)Would Defeat any Law (s. 24(b))

Sababumi (Sandakan) Sdn Bhd v Datuk Yap Pak Leong [1998] 3 MLJ 151, FC

Per Peh Swee Chin, FJ

“S. 24 (a) and (b) are similar, yet distinct, provisions.

S. 24(a) covers express contraventions of law – i.e. the question is whether “the statute
prohibits or forbids the act which the parties have contracted to do…[or] whether the statute
prohibits…the making of the contract”
(1st limb of Peh Swee Chin FJ’s explanation – illegal on performance; 2 nd limb – illegal on formation

Difference between A and B)

“S. 24(b)covers situations of no direct contravention of any express law, but the consideration or object
if permitted would have the effect of defeating some law.”

Arumugam v Somasundram (1934) FMSLR 322 (HC)

D employed P to drive D’s car for D’s private use or for hire although D’s car was licensed only for
private use.

On D’s instructions P, drove it for hire. This contravened the Motor Vehicles Enactment 1928.

D did not pay P his wages.

Magistrate gave judgment to P for his unpaid wages and D appealed to the High Court.

Issue: Was the object of the agreement to drive for hire unlawful

 as being forbidden by law [i.e. did the object fall within S. 24(a)] or

 of such a nature that if permitted it would defeat the provisions of any law [i.e. did the object
come within S. 24(b)]?

(Can use the car for hire: ok, But no license, so if allowed, defeats purpose of the law, So falls under
second limb (b))

“There is…nothing illegal in agreeing to drive a car for hire, but [since] the object of the agreement was
to drive an unlicensed car for hire, then…the object of the agreement was unlawful within the meaning
of [S. 24 (b)]”.

The enforcement of the agreement would have the effect of defeating a law.

Hence the P could not recover his unpaid wages.

Hee Cheng v Krishnan [1955] MLJ 103 (HC)

The State Authority had granted D a temporary licence to occupy land (“TOL”) personal to D.

Although the land could not be transferred by D to anyone else as the State remained its owner D
entered into an agreement to ‘sell’ his house built on the TOL land to P.

When D subsequently refused to sell it, P applied for specific performance of the agreement.

If the object of the parties (to sell and buy D’s rights under the TOL) were permitted it would defeat the
provisions of the law under which the TOL was issued.

The agreement was therefore unlawful and void under S. 24(b) and specific performance was refused.
(No law to forbid the sale. If the courts allow the contract to go on, defeats the purpose of the law: limb
b

For sth to fall under limb a, needs to be very clear: expressly must forbid)

Sufficient Nexus between Statute breached and the Agreement

For an agreement to be rendered void under S. 24 (a) or (b) there must be a sufficient nexus
(connection) between the law that has been breached and the subject-matter of the agreement.

If not, the agreement is not unlawful and not void under S. 24.

(Nexus: connection/link)

Asia Television Ltd & Anor v Viwa Video Sdn Bhd [1984] 2 MLJ 304 (FC)

Per Eusoffee Abdoolcader FJ

“If the statute prohibits the making of the contracts of the type in question, or provides that one of the
parties must satisfy certain requirements (e.g. by obtaining a licence or registering some particulars)
before making any contract of the type in question, then the statutory prohibition or requirement may
well be sufficiently linked to the contract…” to render the contract void for illegality.

Hopewell Construction Co Ltd v Eastern & Oriental Hotel (1951) Sdn Bhd [1988] 2 MLJ 621(HC)

Hopewell (a Hong Kong company) contracted with E&O to do some construction works in Penang.

Hopewell did not register itself as a foreign company as required under the Companies Act 1965.

Issue: was the agreement between the parties void under S. 24(b) CA 1950 because of Hopewell’s
breach of the Companies Act 1965?

Held: contract was not void for illegality

The contract in question was simply a construction contract.

The Companies Act 1965 did NOT prohibit the making of such a contract.

“The Act also does not lay down any requirement which a foreign company must comply with before
entering into such a contract.

There is, therefore, no sufficient nexus between the Companies Act and the said contract…the contract
in question is a valid contract.”

(Construction contract)

(CA didn’t invalidate: didn’t say must register first)

Purpose of the Statute breached must be considered

Even when there is a breach of a statutory provision, the contract is not necessarily void.

The court must consider the purpose of the statutory provision in question in deciding whether or not
the contract is void.

(Purpose: Just to impose a penalty)

Ling Wah Press Sdn Bhd v Pustaka Utama Pelajaran Sdn Bhd [1994] 3 CLJ 346 (HC)

LWP printed educational materials for PUP, but failed to include its own name as printer on the
materials.

This was a contravention of the Printing Presses and Publications Act 1984.

LWP sued PUP for the price of work done.

PUP raised a defence that the agreement was unenforceable under S. 24(b) CA 1950 because of LWP’s
contravention of the 1984 Act.

Held: contract was not void for illegality

“…we must ask ourselves whether the contract was entered into with the object of committing an illegal
act, in which case the contract will be unenforceable. There is nothing intrinsically unlawful in
contracting with a printer to print work books and trial answer papers for the…purpose of educating
school children”

It is not enough that there was some incidental act or omission which was made punishable. The test is
whether the real objective of the [1984 Act] was to make the [printing] contract unenforceable.”

(Purpose was not to make the printing contract void

Can claim for printing expenses)

Types of prohibitory statutory provisions

In relation to the application of S. 24 (a) or S.24 (b) Contracts Act 1950, there are 4 different types of
prohibitory statutory provisions involved.

(a) Express or implied Prohibition

The court has to interpret the provision to discover what was the intention of the legislature or what
was the purpose in making that prohibition

i.e. whether the prohibition was intended (expressly or impliedly)

 o to render the agreement void or

o was it for some other purpose?

Thus, not all agreements entered into in contravention of an express statutory prohibition are
necessarily void.

Ismail v Haji Taib [1972] 1 MLJ 259 (FC)

The Padi Cultivators (Control of Rent and Security of Tenure) Ordinance 1955 required tenancy
agreements of padi land to be in writing and to be registered.

Ismail, the tenant, sought to rely on an oral unregistered agreement.

Haji Taib, the landlord, argued that the Ordinance rendered their agreement void.

Issue: did the provision of the Ordinance render an oral tenancy of padi land void? To answer this
question the Federal Court asked itself what was the purpose of the provision?

Held: the agreement was not illegal

The object of the Ordinance was to protect tenants of padi lands from the whims and fancies of
landlords in relation to renewal of the tenancy.

The Ordinance did not render the making of an unwritten or unregistered tenancy agreement illegal.

(Purpose of law: protecting the tenants)

(Did not protect everyone, just a class of people

The tenants: farmers)

(b) Statute requiring some Act to be Done

In some cases the statute merely makes it a requirement that either before or after making the
agreement one or both of the parties must do some act.

In such cases, the parties are regarded as having entered into a conditional agreement, so that if that act
is performed, or if the parties have agreed that the act will be performed, the contract is valid.

The conditional agreement will be void only if the act is not performed.

(Before: condition precedent)

Foo Say Lee v Ooi Heng Wai [1969] 1 MLJ 47, FC

Under s 13A (i) of the Kelantan Malay Reservations Enactment 1930 the approval of the Ruler in Council
in respect of the sale and purchase of Malay Reserve Land in Kelantan by any non-Malay is mandatory.
Parties entered into an agreement for the sale and purchase of such land which expressly provided that
the transaction was “subject to the approval of” the Kelantan State Government and the Ruler in
Council, as provided in the 1930 Enactment i.e. it was an agreement subject to a condition precedent.

Held: agreement was not void

The Enactment allows such a sale if the Ruler in Council approves the sale.

Here the parties had agreed that they would apply for the approval. Thus, until such time as the Ruler
does not give his approval, the agreement is valid. In other words, the agreement would only become
void if no approval was given.

(No time period here. Was it valid or void? Because there was a condition precedent

Its valid until malay ruler says no)

(c) Statute Contravened May Save Contract Expressly Or Impliedly

Sometimes another provision in the statute may, expressly or impliedly, save a contract from being
rendered void for contravening the statute.

Chung Khiaw Bank Ltd v Hotel Rasa Sayang Sdn Bhd & Anor [1990] 1 MLJ 356 (SC)

1st Loan (to JTSB)

JTSB and the Hotel were both companies registered under and subject to the provisions of the
Companies Act 1965.

1980: Bank granted a loan to JTSB to enable JTSB’s directors to purchase shares in the Hotel. This loan
was secured by a charge over Hotel’s land.

In other words, the Hotel was giving financial assistance to JTSB’s directors for the purchase of its own
shares in contravention of S. 67 Companies Act 1965.

Under S.67 Companies Act 1965 (as it then stood) a company [i.e. the Hotel] is prohibited from giving
financial assistance to anyone [i.e. JTSB’s directors] for the purchase of its (company’s) shares.

2nd Loan (to the Hotel)

1982: Bank granted a loan to the Hotel on condition that part of this loan would be utilised to pay off the
1st loan given to JTSB.

Hotel defaulted on the 2nd loan and Bank brought proceedings to recover the 2 nd loan.

Hotel contended that since the 1 st loan was illegal as S.67 Companies Act had been contravened, the 2 nd
loan, which was so closely connected to the 1st loan, was tainted with that illegality and therefore
unenforceable under S.24(a) or (b) CA 1950.

Bank contended that even if the 2 nd loan was tainted with illegality the Bank could rely on the saving
provision set out in S. 67(6) Companies Act 1965 which then read:
“Nothing in [S. 67] shall operate to prevent the company from recovering…any amount for which it
becomes liable on account of any financial assistance given in contravention of this section.”

Held: Bank could not rely on S. 67(6) Companies Act, only Hotel could

“As a general principle a contract the making of which is prohibited by statute expressly or by
implication, shall be void and unenforceable unless the statute itself [expressly] saves the contract or
there are contrary intentions which can reasonably be read from the language of the statute itself [i.e.
impliedly].”

The 1980 loan was clearly a transaction prohibited by statute and the 1982 loan was tainted with
illegality because the two loans should be regarded as one continuous transaction.

No relief could be granted to the Bank which had knowledge of the illegality. [i.e. the Bank was not in
pari delicto].

Furthermore, the exception as set out in S. 67(6) Companies Act operated only in favour of the
company entering into the transaction (i.e. Hotel), not the Bank.

[Note: S. 67(6) was later amended to include the words “or any person” after the word “company”.]

(Saving provision provided by the law itself

The loan was given to a company to buy shares from a company, hotel provided security (between bank
and company)

Second loan: (hotel and bank) the money would be used to pay the first loan

purpose: to prohibit a company from giving financial assistance to anyone for the purchase of shares

Saving provision: a company can recover

Bank couldn’t rely on it,because only companies can

Now companies act 2016 (section123))

(d) Express Prohibition with Saving Provision and Exception to the Saving
Provision
(1) Express Prohibition
(2) Saving provision
(3) Exception to the Saving Provision

If a contract falls within (3) it is excluded from (2) and the contract in question may be unlawful since it
would then contravene the express prohibition (1).

Coramas Sdn Bhd v Rakyat First Merchant Bankers Bhd & Anor [1994] 1 MLJ 369 (SC)
Express prohibition

S. 45(1), Banking and Financial Institutions Act 1989 (BAFIA): “…no person shall enter into an
agreement…to acquire or dispose…shares of a licensed [local bank or financial institution]…without
obtaining the prior written approval of the Minister [of Finance] to enter into such agreement…”

(Financial Services Act (no more Bafia))

Saving provision and exception to saving provision

S.125: “Except as otherwise provided in this Act [exception to saving provision]…no contract,
agreement or arrangement, entered into in contravention of any provision of this Act shall be void solely
by reason of such contravention…[saving provision]”

(Saving provision is to protect the parties to the contract)

Application for approval of sale of shares in a licensed bank pursuant to s 45(1) was rejected by the
Minister.

Buyer then terminated the agreement, and seller sued for damages for breach of contract.

Buyer contended that the termination was proper as the contract was void for breach of S. 45(1).

Seller contended that the contract was not void as it fell within the saving provision in S.125 BAFIA.

The agreement had contravened S. 45(1).

Although s 125 is a general saving provision, there is an exception to the saving provision engrafted on it.

Therefore the saving provision did not apply because of that exception.

In the circumstances, the agreement was by reason of S.24 of the Contracts Act 1950 void.

SECTION 24 (e) – IMMORAL AGREEMENTS OR AGREEMENTS OPPOSED TO PUBLIC POLICY

The scope of immoral contracts
lllustration (j) to s. 24 indicates that “immorality” is NOT confined to sexual immorality only.
Sinnadurai:
“…there is no convincing reason why ‘immoral’ agreements under the Act should be confined to
contracts which have an element of sexual immorality only.”
Further, “[Malaysian] courts should be slow in adopting the moral values of another country.
The customs, values and attitudes on certain fundamental issues, especially on sexual
immorality vary from country to country and hence any recourse to foreign decisions, in such
situations, would not be helpful.”
The scope of public policy
It is unclear whether the scope/concept of ‘public policy’ in S. 24(e) is the same as that in
common law.
It is also questionable whether Malaysian courts should regard themselves as being bound by
the common law boundaries or ‘heads’ of public policy.
There seems no reason why Malaysian courts should not strike out on their own to delineate
the scope of public policy.
Theresa Chong v Kin Khoon & Co [1976] 2 MLJ 253 (FC)
Public policy in Malaysia follows the common law heads of public policy.
KKC were stock-brokers. The Stock Exchange of Malaysia and Singapore Rules required
registration of all remisiers appointed by members of the Stock Exchange.
KKC appointed TC as remisier who was not registered as such under the Rules.
KKC sued TC for certain losses suffered by KKC whilst TC was acting as remisier.
TC contended inter alia that since KKC had breached the Rules her contract with KKC was illegal
and therefore unenforceable.
“…the doctrine of public policy will not be extended beyond the classes already covered by it [in
English Law]. No court can invent a new head of public policy.”
“Not being registered as a remisier is not contrary to public policy because the bye-laws of the
Stock Exchange are the bye-laws of a private body which have no force of law.”
Further, the fact that KKC may be liable to a penalty under the bye-laws of the Stock Exchange
did not mean that their contract with TC was contrary to public policy.
Even if illegality is not pleaded, “a court is bound to take cognizance of it…”.
(If no damage, can follow common law
Malaysia follows)

Banque Nasionale de Paris v Wuan Swee May & Anor [2000] 3 MLJ 587 (HC)
A different view was expressed by Abdul Hamid Mohamad J (but this is not a case under S.
24(e) Contracts Act 1950):
“…when a Malaysian court is considering the issue of public policy in Malaysia, it should look at
Malaysian law, Malaysian government policy, Malaysian moral values and all other relevant
factors then prevailing in Malaysia…It is wrong to ‘marginalise’ government policies in
considering what is the public policy in Malaysia. Who can better claim to represent the
public than a democratically elected government?...”

(a) Contracting out of statute

Ooi Boon Leong v Citibank NA [1984] 1 MLJ 222 (PC)
Under S.86, 92 and 94 Contracts Act 1950 (‘the Relevant Provisions’) a surety is discharged
from liability upon the occurrence of the events stipulated in these sections i.e. these sections
are intended to protect sureties.
OBL signed a guarantee in CNA’s favour which excluded the operation of the Relevant
Provisions.
When the bank sought to enforce the guarantee, OBL raised defence that the guarantee was
void under S.24(e).
OBL’s contended that the guarantee was against public policy because it had excluded the
protection afforded to guarantors by the Relevant Provisions.
Held: guarantee not void
Parties are free to agree upon any terms that they wished including contracting out of any
statutory provisions intended for their protection.
“If freedom to contract [out of the provisions of a statute] is to be curtailed in relation to a
particular subject matter…the prohibition [should] be expressed in the statute, and not left by
the legislature to be picked up by the reader as an implication based upon sections dealing with
different subject matters.”

SEA Housing Corporation Sdn Bhd v Lee Poh Choo [1982] 2 MLJ 31 (FC)
The Housing Development (Control and Licensing) Rules 1970 prescribed a standard sale and
purchase agreement (SPA) between developers and house buyers, which included a clause that
damages were payable by developers to purchasers for late delivery of houses.
The SPA between P and developer contained a non-standard clause exempting developer from
liability for late delivery.
The 1970 Rules did not expressly state whether parties could or could not exclude the late
delivery damages clause found in the standard SPA.
P sued developer for damages for late delivery as provided in the agreement.
Developer purported to rely on the exemption clause.
P argued that the clause was void as being against public policy.
Having regard to the fact that the Rules were enacted to protect house buyers:
o “…only terms and conditions designed to comply with the requirements of the rules…
may be inserted in a contract…governed by the Act and rules…
o …terms and conditions which purport to get around the Act and rules so as to remove
the protection of home buyers may not be so inserted…”
This was clearly a decision based on public policy although S.24 CA 1950 is not mentioned in the
judgment.

(b) Agreements to stifle criminal prosecution

Ooi Kiah Inn Charles & Anor v Kukuh Maju Industries Sdn Bhd [1993] 2 MLJ 224 (SC)
KMI had a civil claim against a company of which D1 and D2 were directors; KMI also a lodged
police report against D1 and D2 accusing them of committing a crime.
D1 and D2 signed a guarantee to pay the company’s debts in KMI’s favour in consideration inter
alia of KMI withdrawing all charges against them.
KMI sued D1 and D2 on the guarantee.
They raised defence inter alia based on S. 24 Contracts Act 1950, and referring specifically to
Illustration (h).
Illustration (h) reads: “A promises B to drop a prosecution which he has instituted against B for
robbery, and B promises to restore the value of the things taken. The agreement is void, as its
object is unlawful.”
Held: guarantee was against public policy
An agreement to stifle a prosecution is an abuse of the law: where the person accused is
innocent [the law] is abused for the purpose of extortion; where he is guilty, [the law] is abused
for making a trade of a crime.
Such contracts to stifle prosecution are unlawful because their consideration or object is
against public policy and they are caught by the second limb of s 24(e) of the Act.
Further, such an agreement is void even if the prosecution is pending i.e. has not yet been
formally instituted.
 (c) Agreements to evade tax and revenue laws
Case law has sometimes regarded agreements to evade tax in whole or in part as being void for
public policy under S. 24(e) and other times as being void based on S. 24(b).

Amalgamated Steel Mills Bhd v Ingeback (Malaysia) Sdn Bhd [1990] 2 MLJ 364 (HC)
A written agreement for the sale and purchase of land showed a lower purchase price than that
which had been orally agreed.
This was done for the purpose of reducing stamp duty payable under the Stamp Duty
Ordinance 1949.
Held: agreement was void under S. 24(e).

Lim Kar Bee v Duofortis Properties (M) Sdn Bhd [1992] 2 MLJ 281 (SC)
“…the real test…in any given transaction [is] whether the primary purpose of the transaction is
to avoid tax; if it is, it is an illegal purpose i.e. of such a nature that if permitted, it would defeat
the tax law in question, coming under [S. 24(b)]…”

(d) Bribery
PT International Nickel Indonesia v General Trading Corporation (M) Sdn Bhd [1978] 1 MLJ 1
(CA) (Singapore)
“It is clear law that the contract between the briber and the recipient of the bribe is an illegal
contract and it cannot form the basis of a claim before the courts…”

EFFECT OF, AND RELIEF FOR VOID AGREEMENTS

S. 24 states that where the consideration or object of an agreement is unlawful, the agreement
is void and S. 2(g) provides that a void agreement is not enforceable by law.
Thus, there cannot be any relief based on the rights under the unenforceable contract.
Further, the general principle is that in the case of illegal contracts, the loss will lie where it
falls.
However, in some circumstances, the law would allow relief that is restitutionary in nature i.e.
restoration of advantages received under the void agreement.
4.1 S. 66 CA 1950
“When an agreement is discovered to be void…any person who has received any advantage
under the agreement… is bound to restore it, or to make compensation for it, to the person
from whom he received it.”

Meaning of “Discovered to be void”

Common Law rule: the party not in pari delicto [ie. not equally at fault] may recover under an
illegal agreement.
This rule is embodied in S.66 in the words discovered to be void i.e. party relying on S.66 must
not be aware of the illegality when the agreement was made but only later “discovers” the
illegality.
[Because he is unaware of the illegality when the agreement is made, he is not in pari delicto.]

Ng Siew San v Menaka [1973] 2 MLJ 154 (FC)

Menaka, a registered moneylender, lent money to Ng, secured by a charge over Ng’s land, in
the name of her attorney. This amounted to a contravention of s. 8 Moneylenders Ordinance
1951.
Ng defaulted on repayment of the loan, and Menaka brought an application to sell the charged
land.
Ng opposed Menaka’s application on grounds that loan agreement was void for illegality as it
had convtravened the Ordinance.
Trial judge found as a fact that neither Menaka nor Ng were aware of the illegality when the
agreement was made.
(Both were innocent: void but can recover)
Held (at the Malaysian Federal Court)

As the loan agreement was void under S. 24(a) CA 1950 due to the contravention of S.8, Moneylenders
Ordinance, the charge was also void.

However, Menaka could rely on S. 66 to recover the loan sum.

To invoke S. 66 CA 1950, “the invalidity of the…agreement should be discovered subsequent to the

making of it…”.

The effect of S. 66 is that “it enables a person not in pari delicto to claim restoration…”
Ng was ordered to repay loan sum to M

Held (at the Privy Council) [1977] 1 MLJ 91

“…the contract and the security, having been made in contravention of section 8, are unenforceable.

As the contract is not enforceable by law, it is void under section 2(g)...

Neither party was aware of the illegality at the time of making the loan transaction…

The contract was “discovered” to be void only after these proceedings had been started.

Section 66…therefore applies…”

Soh Eng Keng v Lim Chin Wah [1979] 2 MLJ 91 (HC)

Here both parties were aware of the illegality at the time the agreement was made.

Held:

 S. 66 CA 1950 did not apply

 parties could not be said to have “discovered” the agreement to be void (for illegality) as they
were aware of the illegality when they made the contract.

 The court let the loss lie where it fell.

Recovery of Property Transferred under agreement void for illegality

Malaysian law has followed the pre-Mirza v Patel common law on this issue.
Thus far Mirza v Patel has NOT been referred to in Malaysian case law.
(Look at other categories for recovery under eng position
-if not at fault
-if not without depending on illegality
-if halfway through)
Thus, recovery of property transferred under a void agreement has been allowed by Malaysian
courts if the:

 claimant is not in pari delicto; or

See discussion of S. 66 above.

 claimant can establish his cause of action without having to rely on the illegal
transaction; or
 Sajan Singh v Sardara Ali [1960] 1 MLJ 52, PC
The plaintiff, SA, was a lorry-driver who wanted to carry out a haulage business, but,
who, due to the policy of the authorities, stood no chance of getting a haulage permit.
He approached the defendant, SS, who, due to the policy of the authorities, stood a
good chance of getting a haulage permit.
In 1948, they agreed that SS would purchase a lorry and apply for haulage permit, and
upon getting the permit, would allow SA to use the lorry and the permit to run his (SA’s)
own business.
In December 1948, SS purchased 6 lorries. SA contributed $1,500 (part of the purchase
price of 1 lorry) and the parties agreed that that lorry would belong to SA.
However, all the lorries were registered in SS’s name to enable SS to obtain the
necessary haulage permits for all of them.
SS subsequently obtained the necessary haulage permit in respect of SA’s lorry, and SA
then started his business, although on paper it appeared to be SS’ business.
In August 1950, SA paid a further sum of SS towards purchase of the lorry, and SS signed
a document confirming the sale to SA.
Later the parties had a falling out, and SS removed the lorry from SA’s possession.
SA brought an action for a declaration that he owned the lorry since he had paid the
purchase price, and for damages for detinue (in tort) against SS. SA relied on the August
1950 sale document to prove his ownership of the lorry.

Held: SA’s claim allowed

“…the contract between the parties was an immoral one…” [and therefore
unenforceable]
“..if [SA’s] claim was based on the contract…it would necessarily fail…”
However, SA did “not claim on the contract, but on his title [i.e. on the ground that P
owned the lorry since he had paid the purchase price]. ”
“Although the transaction between [the parties] was illegal, nevertheless it was fully
executed and carried out; on that account it was effective to pass the property [i.e.
title/ownership] in the lorry to [SA].”
SA “having got the property [i.e. title/ownership], can assert his title to it against the
world, not because he has any merit of his own, but because there is no one who can
assert a better title to it.”
The Court does not confiscate the property because of the illegality – it has no power to
do so – so it says… ‘Let the estate lie where it falls’.”

 principle of locus poenitentiae applies.

Palaniappa Chettiar v Arunasalam Chettiar [1962] MLJ 143, PC
To overcome certain provisions in the Rubber Regulations 1934, AC transferred 40 acres
of rubber land that he owned to his son, PC.
 The transfer was registered in PC’s name but AC kept the title document and all the
income from the property for many years and PC received nothing in respect of the
property.
Many years later AC filed proceedings for an order that the property be re-transferred
to him, so that he could sell it to a third party.
PC opposed AC’s claim.
Held: transfer was for an illegal purpose; locus poenitentiae did not apply
“…the father has of necessity to put forward, and indeed, assert his own fraudulent
purpose, which he has fully achieved…
…therefore… ‘No court will lend its aid to a man who founds his cause of action upon an
immoral or 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 re-transferred
to him…
But where the fraudulent purpose has actually been effected by means of the colourable
transfer, there is no room for repentance… ‘Let the estate lie where it falls’…

RESTRAINT OF TRADE: MALAYSIAN LAW

Eng: Void unless it is reasonable
S. 28 CA 1950: Subject to 3 exceptions “every agreement by which anyone is restrained from
exercising a lawful profession, trade or business of any kind, is to that extent void.”

Exception 1
Saving of agreement not to carry on business of which goodwill is sold;
One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a
similar business, within specified limits, so long as the buyer…carries on a like business therein:
Provided that such limits appear to the court reasonable, regard being had to the nature of the
business.

Exception 2
Saving of agreement between partners prior to dissolution
Partners may, upon or in anticipation of a dissolution of the partnership, agree that some or all
of them will not carry on a business similar to that of the partnership within such local limits as
are referred to in Exception 1.

Exception 3
Saving of agreement between partners during continuance of partnership
Partners may agree that some one or all of them will not carry on any business other than that
of the partnership, during the continuance of the partnership.
(All contracts under restrain of trade are void whether reasonable or unreasonable unless they fall
under the three exceptions

Even if it falls under exception)

Unlike the Common Law there is no overall test of reasonableness.

All restraints of trade are void unless one of the 3 exceptions apply
Note the words “to that extent void”. This means that:

 only the provision in restraint of trade is unenforceable

 other provisions of agreement remain valid and binding

 i.e. severance is possible

Superintendence Company of India (P) Ltd v Krishnan Murgai AIR 1980 SC 1717
“…there is nothing in the wording of [Section 28] to suggest that the principle stated therein
does not apply when the restraint is for a limited period only or is confined to a particular
matter. Such matters of partial restriction have effect only when the facts fall within the
exception.”

Wrigglesworth v Wilson Anthony [1964] MLJ 269 (HC)

W and WA were both advocates and solicitors.
In his contract of employement with W, WA agreed that he would not practise or carry on the
business or profession of an advocate and solicitor, without W’s prior written consent:
◦ for a period of 2 years after leaving W’s service,
 ◦ within a five mile radius of Kota Bharu without W’s prior written consent.
In breach of this agreement, WA set up his own legal practice in Kota Bharu.
W brought an action to enforce the restraint clause.
English cases are not applicable as S.28 is not based on the English law of contract.
S. 28 is quite clear – every agreement by which anyone is restrained from exercising a lawful
profession is to that extent void.
The distance and place in respect of the restraint are irrelevant.

Polygram Records Sdn Bhd v The Search & Anor [1994] 3 MLJ 127 (HC)
The Search, a group of artistes, undertook to provide exclusive recording rights to P during
currency of their recording contract with P (1st restraint).
Another clause in their agreement prohibited The Search from making any recordings for a
period of 2 years after contract with P expired. (2nd restraint)
The 1st restraint was “not a covenant in restraint of trade and is therefore not rendered void
under S.28 [which] is only applicable in cases where a person restrained from carrying on his
trade and profession…in the post-contract period and not during the currency of the contract.”
The 2nd restraint was “clearly…a covenant in restraint of trade in the traditional sense…Once
the Malaysian courts take the view that a particular covenant is…in restraint of trade, the
courts have no discretion, but to declare it to be void under S.28…” unless the case falls within
one of the 3 exceptions.