SETTING ASIDE ILLEGAL & VOID CONTRACTS
By
A. Vishnu Kumar
Advocate & Solicitor
INTRODUCTION
This talk will encompass the following areas:-
1. the difference between an illegal agreement and a void contract;
2. the circumstances and principles to set aside illegal and void contracts;
3. the approach taken by Courts in setting aside an illegal agreement and void
contracts; and
4. the remedies available to parties for such contracts.
A.
DIFFERENCE BETWEEN AN ILLEGAL AGREEMENT AND A
VOID CONTRACT
Many a times, writers, academics and legal minds understand and use the words
illegal and void contracts interchangeably.
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However is there a difference between an illegal agreement and a void contract ?
The answer is yes.
The simple example is this.
Say, I tell you that if you kill Mr. X, I will pay you
RM100. Now this is an illegal contract because to kill someone is an illegal act.
If I were to say, I will sell this pen to you for RM0 (zero ringgit), then it is a void
contract because of absence of consideration. So the contract is not illegal but it is
a void contract because of the absence of the essentials of a contract.
The above type of illustration has been judicially observed in the case of Kantilal v.
Ranchhoddas [1953] AIR (Bombay) 98 where the Court said the following:-
“Now, it must be observed that the word ‘illegal’ and ‘void’ are often
loosely used as synonymous terms even by lawyers, jurists and sometimes
judges. None the less for the purposes of the present discussion it is
essential to distinguish between what is illegal and what is merely void.
All unlawful or illegal agreements are void; but all void agreements are
not necessarily illegal.”
Now this is an important distinction to be made for the purposes of how the Courts
view and approach it and the remedies which are available, which will be discussed
later.
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B.
CIRCUMSTANCES & PRINCIPLES TO SET ASIDE ILLEGAL
AGREEMENT AND VOID CONTRACT
Under our Contracts Act 1950, it provides various situations where the contract is
void.
For example, Section 21 states:-
“Where both the parties to an agreement are under a mistake as to a
matter of fact essential to the agreement, the agreement is void.”
Another example alluded earlier is Section 26 which states:-
“An agreement made without consideration is void ….”
Another example is the Contingent / Conditional Contract under Section 33 till 37.
Take Section 36 for example. It essentially states where in the contract itself it
states that if a particular event does not happen within a particular time, then the
contract becomes void, as held in Ja’afar Ibrahim v. Gan Kim Kin [1984] 2 CLJ
89:-
“On a true construction, (A1) i.e. (the Agreement) would be annulled or
become void on the happening of an event, i.e. if the application for
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subdivision of the land made to the relevant authorities, (over which both
parties had no control, not involving, of course any omission or fault of
the agent in submitting such an application), was not approved by 31
December 1977. The validity of (A1) depended on this approval of his
application by this date, and the existence of mutual obligations
depended on this condition of approval by the relevant authorities by 31
December 1977. From the evidence of the parties, forming the
background of (A1), the essentiality of the speed of approval of the
application for subdivision or to put it more succinctly its approval by 31
December 1977, was for both parties, as regards (A1), everything or
nothing. (A1) should in my view be construed as a conditional contract or
contract subject to a contingency, i.e. conditional on, or contingent on the
approval of the application by that specified date.”
“I hold that (A1) (i.e. the Agreement) was annulled or became void on 31
December 1977 when the application for subdivision of the land was not
approved by the relevant authorities on that day ….”
Now for illegal contracts, one needs to look at Section 24 which states:-
“The consideration or object of an agreement is lawful, unless(a)
it is forbidden by a law;
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(b)
it is of such a nature that, if permitted, it would defeat any law;
(c)
it is fraudulent;
(d)
it involves or implies injury to the person or property of another;
(e)
the court regards it as immoral, or opposed to public policy.
For an illegal contract, the Court will set it aside. Let’s take Section 24 (e) where the
Court regard the illegal contract as immoral or opposed to public policy.
The Supreme Court case of Charles Ooi Kiah Inn v. Kukuh Maju Industries Sdn
Bhd [1993] 2 MLJ 224 aptly illustrates the principle of Section 24. In that case, the
defendants entered into an agreement with the plaintiff under the terms of which two
civil suits were compromised. The Defendants also executed a guarantee. The
Plaintiff had, while the disputes were afoot, lodged a police report alleging that
he had been cheated. As part of the compromise the Plaintiff agreed to
withdraw the charges set out in the Police Report. Subsequently, the Plaintiff
sued on the guarantee for the balance remaining unpaid under the principal
agreement. The Court held that the agreement in question was one that stifled a
prosecution and was therefore illegal.
The rationale for it is this:-
a. if a person lodges a police report against the offender because the offender
has committed a criminal offence, the predominant requirement of public
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policy is that the offenders must be brought to justice and the appropriate
punishment be meted out;
b. therefore any payment of money to avoid prosecution is reprehensible and
would certainly be against public policy;
c. hence when a party agrees to the drop or withdraw the Police Report as a
consideration in the contract, it would be against public policy;
Therefore, in order to determine whether the contract is void or the contract is illegal,
one needs to study the factual matrix and the evidence of each case in order to
decide which course of action to take when advising the litigant or when proceeding
the matter in Court.
This conveniently leads to the next item of this talk.
C.
APPROACH TAKEN BY COURTS IN SETTING ASIDE ILLEGAL
CONTRACTS AND VOID AGREEMENTS – AND – THE
REMEDIES
How would the Court approach in setting aside illegal contracts and void contracts ?
What remedies are available for a party to a void contract ? Are remedies available
for a party to an illegal contract ?
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To answer these questions, one must again look at the factual matrix to determine
whether it is an illegal contract or a void contract.
Take the illegal contract first. Again the same example, I will pay you RM100 if you
kill Mr. X.
Subsequently you kill Mr. X. I refuse to pay you RM100. You then sue
RM100 against me. What would the Courts do ?
Trite law that party must come to Court in clean hands. Everybody knows it. So if
you come to Court to enforce your RM100 claim, it will be dismissed.
But what is the rationale for it ?
The rationale would be:-
1.
It would be against the in pari delicto doctrine i.e. a plaintiff who has
participated in wrongdoing may not recover damages resulting from
the wrong doing;
2.
The Court will refuse to give effect to damages under the contract
because this would be assisting in something that is illegal as held by
the Court Of Appeal in Lee Nyan Hon v. Metro Charm Sdn Bhd
[2009] 6 CLJ 626 at pg 643 & 648:-
“ Should the court grant an order to sustain the claims instituted
by the plaintiff it would be tantamount to the court encouraging or
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even giving countenance … to … erect structures illegally in
contravention of laws and that is clearly contrary to public
policy.”
3.
So the loss will fall where it lies and the Plaintiff will get nothing.
Let’s take a void contract. How would the Court deal with a void contract ? Say I sell
to you a pen for RM100. You agreed.
I then deliver the pen to you and you
received it. You then fail to pay RM100 to me. I can sue you for breach of contract
for that RM100 or alternatively I can sue you for the return of the pen for failure of
consideration under Section 26.
In such situations, the Court will assist the innocent party unlike an illegal contract
scenario because in the illegal contract scenario both parties are at fault. Whilst the
void contract situation, the innocent party is not at fault.
Now lets take a difference scenario. What happens when parties initially sign a
contract thinking it is valid and subsequently the contract becomes void. How would
the Court approach it and is there any remedies for the parties ?
Thankfully this has been answered in the case of Ahmad bin Udoh v. Ng Aik
Chong [1970] 1 MLJ 82 where the Federal Court held:-
“Under an agreement executed by the parties, the defendants agreed to
lease out their padi land under SP Nos 15408 and 24189 to the plaintiff
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for the years 1965 to 1970 at an annual rent of $250 and on the execution
of the agreement received the six years' rent in advance amounting to
$1,500.”
“ Section 3 of the Padi Cultivators (Control of Rent and Security of
Tenure) Ordinance 1955 provides that no tenancy agreement for the
cultivation of padi shall be for a term of less than one season or more
than one year and s. 16 provides that any contravention of any provisions
of the Ordinance is an offence.”
“ … both parties were completely unaware of s. 3 of the Padi Cultivators
(Control of Rent and Security of Tenure) Ordinance 1955 and that
therefore they were executing an illegal agreement.”
“In other words 'There may be cases where parties enter into an
agreement honestly thinking that it is a perfectly legal agreement and
where one of them sues the other or wants the other to act on it, it is
then that he may discover it to be void ….”
… since the facts and circumstances of the case as found by the learned
trial Judge proved that the parties were ignorant that they were
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executing an illegal agreement, s. 66 of the Contracts (Malay States)
Ordinance would apply and that therefore the plaintiff was entitled to
the return of his advance.
Now Section 66 provides:-
“ When an agreement is discovered to be void, or when a contract
becomes void, any person who has received any advantage under such
agreement or contract is bound to restore it, or to make compensation for
it, to the person from whom he received it."
Hence Section 66 makes it clear.
If the contract becomes void – OR – when a
contract is discovered to be void meaning initially parties think they are signing a
valid contract, only to discover later the contract is void, then Section 66 will apply
because of the words “when a contract is discovered to be void”.
The Courts will
order the parties back to status quo i.e. before the transaction was entered into.
Note :- A word of caution.
Section 66 cannot be applied carte blanche. Just
because the contract becomes void, that does not mean the parties are restored to
their original position. There is a caveat in Section 66.
It is this.
The innocent party must not know of any wrongdoing or illegality at the
time of entering into the contract.
If he does know then Section 66 will not avail him
as held in the Ahmad Udoh’s Case whereby the Federal Court said:10
“ It is manifest that in order to invoke this section, the invalidity of the
contract or agreement should be discovered subsequent to the making of
it. This cannot be taken advantage of by parties who knew from the
beginning the illegality thereof. It only applies to a case where one of
the parties enters into an agreement under the belief that it was a legal
agreement, ie., without the knowledge that the agreement is forbidden
by law or opposed to public policy and as such illegal.”
“The effect of s. 66 is that, in such a situation, it enables a person not in
pari delicto to claim restoration since it is not based on an illegal
contract but dissociated from it. That is permissible by reason of the
section because the action is not founded on dealings which are
contaminated by illegality. The party is only seeking to be restored to the
status quo ante."
Now what happens when you are fighting your case, and you discover from the
documents during Case Management stage that the contract is illegal. You did not
plead it in your pleadings. What would you do ?
The answer is found in Lo Su Timber v. Southern Estate Sdn Bhd [1971] 2 MLJ
161 at page 203 where the Federal Court held:-
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“The point whether the court can take cognizance of a point of illegality,
whether pleaded or not, has been the subject of numerous decisions. I
need only refer to the case of Snell v. Unity Finance Limited where most
of the authorities were dealt with. In that case Willmer LJ referred with
approval to the propositions set out by Devlin J in Edler v. Auerbach
who, following the reference toNorth-Western Salt Company Limited v.
Electrolytic Alkali Company Limited, said:
“ That case authorises, I think, four propositions: first, that where a
contract is ex facie illegal, the court will not enforce it, whether the
illegality is pleaded or not; secondly, that where, as here, the contract is
not ex facie illegal, evidence of extraneous circumstances tending to
show that it has an illegal object should not be admitted unless the
circumstances relied on are pleaded; thirdly, that where unpleaded facts,
which, taken by themselves show an illegal object, have got in evidence
(because, perhaps, no objection was raised or because they were adduced
for some other purpose), the court should not act on them unless it is
satisfied that the whole of the relevant circumstances are before it; but,
fourthly, that where the court is satisfied that all the relevant facts are
before it and it can see clearly from them that the contract had an
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illegal object, it may not enforce the contract, whether the facts were
pleaded or not.”
Therefore where there is an illegal contract which you discover from the documents
during Case Management and it was not pleaded because you did not have the
documents when drafting your pleadings, you need not worry because the Court will
not enforce an illegal contract provided you bring it to the attention of the Court.
Then you may ask the question that – since I did not plead illegality but I discovered
it later during Case Management, and the Plaintiff has earlier taken some benefit or
money from my client from this illegal transaction, how am I going to ask for the
return of the money ?
Should I file a fresh action ? How am I going to put a prayer in my Statement of
Defence ?
In such situations, you can rely on the pleadings of the Opponent namely the prayer
under “such further and other relief as the Court deems fit just and necessary.”
This prayer which you see at the pleadings is not for show or a mere ornament.
Courts will use this prayer as an effective tool to mete justice as held in the Supreme
Court Case of Lim Eng Kay v. Jaafar Mohamed Said [1982] CLJ 190:-
“In any case prayer (e) in para. (7), "Any other relief which this
Honourable Court deem fit to grant" must not be treated as a mere
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ornament to pleadings devoid of any meaning. We think that this prayer
and the prayer for "loss of earning" in para. 5(a) should entitle the Court
to make such an assessment.”
This principle was reaffirmed again in Taipan Focus Sdn Bhd v. Tunku Mudzaffar
Tunku Mustapha [2011] 1 CLJ 133 where the Federal Court held:-
“The Court of Appeal acted under s.44 of the CJA (reproduced earlier).
It is clear from a plain reading of the section that the Court of Appeal has
wide discretionary powers to prevent prejudice to the claim of the parties
pending an appeal. The main complaint canvassed by counsel for
Taipan is that the orders made were not prayed for. She pointed out that
TM had only applied for an interim order to preserve and extend the
said private caveat until the disposal of the appeal.
“In my judgment, there is no merit in Taipan's argument because the
motion also asked for "such further or other relief or other order as the
court deems fit". That prayer is not for show. The Court of Appeal is
clearly entitled to act on that prayer.
One final note before I conclude.
Can a Court Consent Order be set aside on the
same grounds mentioned above ?
How would the Courts approach it ?
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The answer to this is simple i.e. despite it being a Court Consent Order, it can be set
aside like any other contract. If the Consent Order is void or illegal, it can be set
aside like any other contract.
This is exactly what happened in Lian Mong Yee v. Abdul Rashid Maidin & Ors
[2001] 3 CLJ 905 whereby there was a Consent Order recorded in Court.
The relevant portion of the terms of the Consent Order is reproduced below:-
“ … DAN DIPERINTAHKAN BAHAWA plaintif akan memohon kepada
semua pihak-pihak berkuasa yang berkenaan untuk kebenaran menarik
balik semua aduan-aduan dan lapuran-lapuran terhadap defendandefendan …”
And the Court of Appeal held that
“ In my judgment, the jurisdiction to set aside a contract is universal and
extends to all types of void contracts. It demonstrates the flexibility of
equity in the field of remedies and its ability to do complete justice in
cases where the common law is found wanting. Like any other equitable
jurisdiction, it is subject to discretionary bars that operate upon the
conscience of the particular litigant. So, laches, unclean hands, want of
mutuality and so forth are grounds upon which equitable relief may be
denied.
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In the present instance, if the respondents are right in their argument,
the consent order is void for illegality. It may therefore be set aside like
any other agreement. The learned judge accordingly had ample
jurisdiction to make the order that he did.
In the Lian Mong Yee Case, the Court Of Appeal dismissed the Appellant’s Appeal
and held that the Court Consent Order is illegal for stifling of prosecution:-
“Here too, the appellant had agreed not to go forward on the charge of
cheating he had alleged in his police report against the first respondent.
As observed by the Supreme Court in Charles Ooi's case, cheating being
a non-compoundable offence, an agreement to retract a police report that
alleged such an offence is against public policy and void.”
CONCLUSION
The above is not a complete guide to this topic.
The above briefly illustrates the
distinction between an illegal contract and a void contract and how the Courts view
and approach it. Much depends on the factual matrix of each case to determine the
correct approach to take. With that thank you.
Vishnu Kumar
Civil Law Subcommittee Chairman of the Selangor Bar
[Selangor-Bar-Talk-19.10.2012-2]
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