illegal contracts

7/25/2019 Illegal Contracts

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ILLEGAL CONTRACTs


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Table of Contents

No Content Remarks1.0 Introduction

2.0 Agreements affected by Illegalitya) Agreements forbidden by law

b) Agreements that defeat the lawc) Contracts involving fraudd) and causing injurye) Agreements that are immoral and

Opposed to public policy3.0 Consequences of illegality

4.0 Contracts not affected by illegality


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1.0 Introduction Illegal contract

Definition: Illegal contract is a promise that is prohibiteddue to its very nature. Such contracts are prohibited sincethe performance, formation, or object of theagreement is against the law.

An illegal agreement, is one that the courts will notenforce because the purpose of the agreement is toachieve an illegal end.

EXAMPLE: A contract for murder.

Section 10 CA 1950 provides that for an agreement tobe a contract, it must be made by the free consent of theparties competent to the contract and the considerationand object of the agreement must be lawful and are not

expressly declared to be VOID.


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Q: What agreements are affected by illegality ?

S24 spells out the situations wherein the consideration or

object of an agreement is unlawful.

Agreements forbidden by law

s.24 (a) CA 1950

Agreements that defeat the law

s.24 (b) CA 1950

Contracts involving fraud and causing injury

s.24 (c) & (d) CA 1950

Agreements that are immoral & opposed to publicpolicy

s.24 (e) CA 1950

Agreementsaffected by

illegality

s.24(a)

(e) CA1950


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In cases of (a)(e)of s.24 CA 1950 ,the consideration and object of the agreement is said tobe unlawful.

Every agreement of which the object or consideration isunlawful is VOID.

Section 2 (g) provides that a VOID agreement is anagreement not enforceable by law.


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2.0 AGREEMENTS AFFECTED BY ILLEGALITY

1. Agreements forbidden by LAW:

S.24 (a) (b) refers to agreements that are illegal for expresslycontraveninga statute or any subsidiary legislation. Case: Sababumi (Sandakan) Sdn Bhd v Datuk Yap Pak Leong

, clarified that an agreement is only void for illegality if the statuteprohibits the act.

Cases for sub-sec 24 (a) : An agreement made in contraventionof a statute for an illegal consideration is therefore a void contract.

Case: Manang Lim Native Sdn Bhd v ManangSelaman

The Resp entered an agreement to transfer land classified as NativeArea Land in Bintawa, Kuching to the App. The App lodged a caveat inrespect of the said land and it was duly registered in the Land Registry.Later, the Resp successfully sought an order from court to remove thesaid caveat.

Held:A non-native sought to deal in native area land; and this was

against the S8 of Sarawak Land Code unless the dealing wasauthorised by the Yang di-Pertua Negeri, Sarawak.


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2. Agreements that defeat the law (s.24 (b) CA)

Case: Hee Cheng v KrishnanBy a sale purchase agreement, the P sold his house builtupon a piece of land in respect of which he was theholder of a Temporary Occupation Licence (TOL) to the D.The D refused to perform the agreement & P claimedspecific performance of the agreement or alternatively,damages for the Dsbreach of contract.

Held: that the agreement entered into was an attempt tosell & to purchase the Ps right under TOL. This is

contrary to rule 41 of the Land Rules 1930 whichstates: No licence for the temporary occupation ofthe State land shall be transferable.


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3. Contracts involving fraud and causing injury

(s.24 (c) & (d) CA)

s. 24 (c) of the Act covers agreements that arefraudulent.

Example: ILLUSTRATION (e) and (g) to s. 24 are

examples of considerations or objects of an agreementbeing fraudulent.

Case: Datuk Jagindar Singh v Tara Rajaratnam

The respondent who was the registered proprietor of land,claimed that she was induced by the fraud and underinfluence of the 1stand 2ndappellant to transfer her land tothe 2ndappellant.


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Held: The appellants and respondent were in asolicitor-client relationships, the transaction wasunconscionable, the burden was on the appellants torebut the presumption of undue influence. Since theyhad not discharged that burden, the transaction was set

aside. In addition to undue influence, the trail court alsofound that the appellants conduct had been fraudulentand exercised its discretion in awarding damages whichwas upheld by the appellate court.

The App were guilty of fraud, breach of agreement andundue influence and awarded damages to therespondent.


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(d) Contracts involving fraud and CAUSING INJURY

Case : Syed Ahmad Alhabshee v Puteh bt Sabtu

Trustee of the land belonging to a child has agreed to

sell the land to the plaintiff. Held: If the purchase is allowed, it would be

detrimental to the interests of the children andtherefore, the court ruled that the transaction is void.The dealing was detrimental to the infants interest &

was struck down by the court.


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4. Agreements that are immoral s.24 (e) CA

s. 24 (e) of the Act covers agreements that the court wouldregard as immoralor opposed to public policy.

Example: ILLUSTRATION (j) and (k) to s. 24 are examples ofconsiderations or objects of an immoral agreement.

Case: Oh Theresa v Sia Hok Chai

The P sued the D summarily for damages for breach of promiseto marry the P. The D denied that he had promised to marry the Pand even if he had, she knew that he was a married man andthus the agreement was immoral and against the public policy.

Held: that the status of such a promise has not been fully settledin law and that the D should not have adopted the summaryprocedure and should have gone for a full trial.


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5. Agreements that opposed public policy s.24 (e) CA

s. 24 (e) of the Act covers agreements that the court wouldregard as opposed to public policy.

The principle of public policy is that no man can lawfully do thatwhich has a tendency to be injurious to the public welfare.

The origin of public policy is said to be obscure & itsboundaries vague.

There are 5 groups of agreements that the COMMON LAWgenerally classified as void on grounds of public policy; wherethe consideration or object is:-

a) Illegal by common law or legislation

b) Injurious to good governance, either in the field of domesticor foreign affairs

c) Interfere with proper working of the machinery of justice

d) Injurious to family life

e) Economically against the public policy


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A. ILLEGAL BY COMMON LAW OR LEGISLATION

where the object contravenes any statute orsubsidiary legislation, it is unlawful & the agreementvoid & unenforceable.

S.24(a) and (b) CA covers this category.


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B. INJURIOUS TO GOOD GOVERNANCE, EITHER INTHE FIELD OF DOMESTIC OR FOREIGN AFFAIRS

Case: Datuk Ong Kee Hui v Sinyium Anak Mutti

Resp was a member of the Sarawak United PeoplesParty (SUPP). He entered into an agreement with theparty that in consideration of the party adopting him as a

party candidate & bearing all expenses for his election,he promised that in the event of his being successfullyelected he would give all his parliamentary remunerationto the party and to forfeit his seat in the Dewan Rakyatshould he do any act which would be contrary to the

interest of the party.

Held: that the arrangement was illegal. It was anagreement tending to injure the public service.


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C. INTERFERE WITH PROPER WORKING OF THEMACHINERY OF JUSTICE

these include agreements to contract out of statutoryprovisions, agreements to stifle prosecution andmaintenance of law suit.

Case: Engku Leh bin Engku Dris v Che Wok bt AwangMat

The App faced a charge for criminal breach of trust ofcertain jewellery entrusted by the Resp to him. He thengave a guarantee (in consideration of not to prosecute him)

to the Resp who sued him on it.HELD: The App gave the guarantee to stifle the criminalprosecution & that the agreement of guarantee was void asbeing opposed to public policy.


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D. INJURIOUS TO FAMILY LIFE

Case: Hamzah b. Musa v Fatimah Zaharah bt MohamedJalal

Hamzah was a man from Kelantan who married 9 times & haddivorced his wives of nine times. He had agreed at the time of hismarriage to the Fatimah, one of his ex-wives, to pay her the sum

of RM5,000 if he were to divorce her. He did & she sued him forthe said sum. H argued that the object of the agreement wasimmoral or opposed to public policy.

HELD: this case was considered under the category that it maybe injurious to family life & held that since the agreement is not

against Muslim law, it is NOT immoral or opposed to publicpolicy.


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E. Economically against the public policy

these are agreements to defeat the revenue laws of the country; examplesuch as an agreement to avoid tax payable under Real Property Gains Tax Act

1976. Case : Thong Foo Ching v Shigenori Ono

The Resp agreed to buy two pieces of land together with adouble-storey shop house erected thereon from the App forRM6.5m. Since the sale of the property was over RM5 in value,

the Resp needed to obtain the prior approval of the ForeignInvestment Committee (FIC) under the guidelines issued by thegovernment. These guidelines are meant for the general wellbeing of the Malaysian citizen. It protects the general publicinterest and safe guard the public welfare.

Held: Since the App bought the property in 1985 and sold it to the

Resp in 1990, they were selling the property during the fifth yearof acquisition and this attracted 5% tax under the Real PropertyGains Tax Act 1976. With the reduction in the purchase price fromRM6.5m to RM4.9m, the Government of Malaysia lost RM80,000by way of real property gains tax payable by the App andRM27,000 by way of stamp duty under the Stamp Act 1949

payable by the Resp. The transaction was unlawful and VOIDbecause clearly contrary to the public policy under S.24(e).


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CONSEQUENCESOF ILLEGALCONTRACTS

ANY ADVANTAGE

RECEIVED MUSTBE RESTORED ORCOMPENSATED

THE CONTRACT ISUNENFORCEABLE


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CONSEQUENCES OF ILLEGALITY:-

A. The contract is unenforceable

Under the CA 1950 & English law the court will not lend its

assistance to enforce an illegal contract. No person can claim any right or remedy whatsoever under an illegal

transaction in which he has participated-- no action will arise from awrong done (the ex turpi causa non oritur actio rule applies), i.e. noaction may be founded on illegal or immoral conduct.

Case: Chung Khiaw Bank Ltd v Hotel Rasa Sayang Sdn Bhd

The appellants extended loans to the respondents and the loan wassecured by documents and guarantees. The documents evidencing theloans showed that the hotel whose shares were being purchased by acompany had given financial assistance to that company for thepurpose of purchasing the share equity of the Hotel. By securing thisloan, the hotel is assisting the company in purchasing the Hotelsshares.

Held: This act contravened Section 67 of the Companies Act 1965. thatthe bank with the benefit of legal advice had knowledge of and wasclearly implicated in the illegality. The bank was indeed a party to anagreement to defeat the object of a statute. Accordingly, the bank

should be precluded from suing upon it.


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B. Any advantage received must be restored or compensated

S.66 CA 1950 provides the remedy of restitution to parties thatdiscovered the agreement to be VOID and had given anadvantage to the another.

That the party seeking restitution under s. 66 must have given anadvantage under the void agreement to the other party. Once

proved, the other party must restore the advantage received orcompensate it to the party from whom he received it.

2 conditions for the availability of the remedy of restitution:

(a) The agreement is discovered to be VOID and Ahmad bin Udoh v Ng Aik Chong (pg450)

(a) The other party has received an advantage

Ng Siew San v Menaka (pg453)


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CONTRACTS WHICH ARE NOT AFFECTED BY ILLEGALITY:

I. The statute itself saves the contractA Contract that is prohibited by

statute does not become void & unenforceable if the statute itselfsaves the contract.

Case : Foo Say Lee v Ooi Heng Wai

The D agreed to sell a piece of land in Kota Bharu to the P.The P paid $1500 upon signing the agreement and the

balance $3500 was payable to the D upon the transfer of theland to the P. At the date of the agreement the land belongs toa Malay person. The agreement provided that the sale wassubject to the approval of the Kelantan government and theRuler-in-Council. S13 A (i) of the Enactment gives the powerof the Ruler-in-Council in his discretion to approve a transferof Reservation Land from a Malay person to a non-Malayperson.

Held: that the Enactment itself provides a method ofexecuting a transfer of a Reservation land from a Malayperson to a non-Malay person. A transfer by such method soprovided by the Enactment itself cannot be said to be null and


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2. Claims wholly independent of the alleged illegalcontract

Case: Sajan Singh v Sardara AliSA entered into an agreement with the SS, whereby SSwas to acquire a lorry, register it in his own name &obtain a haulage permit for its operation. But it wasintended that the lorry should in fact be purchased by SA

& used on his own account. A document of sale waseffected & SA paid RM5,000.00 for the lorry. The schemecontravened certain regulation governing the transfer &use of motor vehicles & in particular, the conditions ofhaulage permit which was personal to permit holder.

SA used the lorry as his own & operated it under thename of SS who had the haulage licence. Later, theyquarreled & SS removed the lorry from the possession ofSA without his permission. SA brought an action to

recover the lorry for trespass.


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HELD: Although the agreement between SS and SAwas illegal, it was fully executed and carried out. thatwhere the P s claim is wholly independent of the allegedcontract, the contract is lawful and thus enforceable. SAcould recover damages for trespass as he did not seekto base his claim on the illegal transaction. SA couldsucceed on detinue as well as on trespass, he wasentitled to rely on his possession.

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