ILLEGALITY
Common law illegality
General
Effect: inability to enforce an illegal contract means that one of the parties will suffer the resulting loss, e.g. will not get paid for goods delivered or services rendered. $$$ paid or property transferred under an illegal contract is not recoverable. Loss lies where it falls – the law will not grant any assistance. Impossible to recover from illegal contract.
Competing interests: public interests vs private interests (fairness between parties)
Courts will not enforce a contract which is illegal or contrary to public policy: justice would be tainted and the dignity of the court offended by intervention on behalf of the claimant; lack of enforceability has a deterrent effect
A contract may be illegal or legal but contrary to public policy… (i.e. it would not be ok to enforce it)
Statutory illegality
Depends on the intention of parliament and the effect of the infringement of the statute upon the contract (statutes often state the effect of illegality on the contract, if any) + note problems with subsidiary regulations!
Depends on prior case law + the relevant public policy (risk of too much discretion…) Ting Siew May: concept of public policy is indeed an unruly horse and must therefore be applied wisely.
Contract can be illegal in itself or tainted by illegality or made for an illegal purpose.
Can affect formation of contract or arise in the performance of a contract
Civil vs criminal implications, not every breach of statute means that the contract involves the commission of a crime or that it has adverse civil consequences! (question may be: does criminal liability also have civil consequences?)
Question of interpreting the particular statute (i.e. determining legislative intent and purpose of statute, e.g. revenue generation or protection of public or protection of a particular class/profession + local “factors”)
The following contracts are unenforceable, i.e. no remedies available (list not exhaustive):
Contracts prejudicial to administration of justice (e.g. champerty); Contracts to deceive public authorities; Contracts to oust jurisdiction of courts; Contracts to commit (or involving) a crime, tort or fraud; Contracts prejudicial to public safety (trading with enemy or “certain nations”); Contracts promoting sexual immorality; Contracts that are liable to corrupt public life (“abuse” of office); Contracts entered into with object of committing an illegal act.
Covenants (clauses) in restraint of trade
Competing interests: foster competition vs uphold agreements?
First question: does the doctrine of restraint of trade apply to the particular question in the first place? Thorsten Nordenfelt v The Maxim Nodernfelt Guns and Ammunition: All restraints of trade are contrary to public policy and therefore void. But there are exceptions. It is sufficient justification if the restriction is reasonable (in reference to interests...), so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public. Second question (assuming the doctrine applies): is the particular restraint valid? (reasonable?)
Clauses in restraint of trade are prima facie invalid – burden of proof is on the party seeking to enforce the clause
Validity of restraint clause hinges on its reasonableness with reference to the interests of the parties and the public; Legitimate interest (must be defined or “definable”); Justifications in terms of scope, area, time
Severance – cutting out the illegal/invalid “bits” to preserve the contract or the clause. Man Financial: court to run a 'blue pencil' through offending words without altering meaning and rendering it senseless. Court will not rewrite contract.
Threshold requirement of contravention of statute (Ting Siew May). Second, inquiry was whether the statutory provision was intended to prohibit not only the conduct but the contract as well.
Does relevant statute expressly prohibit such contracts?
Does relevant statute implicitly prohibit such contracts?
Void.
Examine precise terms It may impose penalty but not prohibit the contract if it is made with a party who is innocent of the offence created by statute.
Not only prohibit the conduct (subj to penalty) but prohibit the very contract. Slow to find implied prohibition.
Ting Siew May
Unless there is a "clear implication" or "necessary inference" that this was what the statute intended; e.g. where a contract had as its whole object the doing of the very act which the statute prohibited. Here, no such clear implication. Although one of the objects of the Option was to enable resp to procure bank loan in contravention of the Notice, there were also other important objects such as sale and purchase of property. But nonetheless void at common law.
Judicial reticence is warranted bcos statutory illegality generally takes no account of parties' subjective intentions or relative culpability.
St John Shipping Corp v Joseph Rank Ltd (test)
Fundamental question is whether the statute means to prohibit the contract. The statute is to be construed in the ordinary way; one must have regard to all relevant considerations. 2 questions involved: does the statute mean to prohibit contracts at all? But if this be answered in the affirmative, then: does this contract belong to the class which the statute intends to prohibit?
2 general principles. Contract entered into with object of committing illegal act is unenforceable. Depends on proof of intent at time of contract to break law. If mutual intent, unenforceable. If unilateral, unenforceable at the suit of the party who is proved to have it. - analysed as type of common law illegality in Ting Siew May.
2nd qn in inquiry: belong to class which the statute intends to prohibit?
Some categories: protection of the public, revenue
Anderson Ltd v Daniel: When policy of the Act requires a contract be accompanied by certain formalities, and penalty imposed on those who omit those formalities / conditions, then contract w/o formalities / conditions is illegal.
Archbolds (Freightage) Ltd v Spanglett, Ltd: Road and Rail Traffic Act did not intend to impliedly prohibit the contract. Intention was to provide an orderly and comprehensive service.
Smith v Mawhood: if intention was merely to impose penalty that will go to govt rev, then generally speaking no adverse consequences as to validity of contract.
Illegal as formed vs illegal as performed. Former: no recovery. Latter: recovery possible, depends on whether performance turned contract into one that is prohibited (St John)
Ting Siew May: distinction not legally significant. focus on crux of inquiry which is whether or not the contract (as opposed to conduct) has been prohibited.
Ting Siew May
Category of contracts illegal at common law - contracts entered into with an illegal or unlawful object. Contract in themselves not unlawful. May include contracts with object of using the subject-matter of the contract for an illegal purpose, intention of using contractual documentation for an illegal purpose, and intended to be performed in an illegal manner.
Application of the doctrine to this category is subject to (limiting) principle of proportionality. If illegality is remote from contract / rendering it void is disproportionate response - enforceable. Necessary. Court will not permit guilty party to benefit from his own wrong as this would be affront to public policy. But some legal wrongs are relatively trivial, so might be disproportionate to render it void.
Even if contract involves lawful acts, and not expressly or impliedly prohibited by statute, still can be unenforceable due to illegal object.
(Balance (a) seriousness of illegality and (b) effect of avoiding contract for illegality (whether response proportionate))
Proportionality: ParkingEye v Somerfield Stores: contract not tainted by illegality because approval of the form of demand letters was collateral and distinct from main contract. Illegality neither central to nor necessary for perf of contract. Will lead to disproportionate result.
If illegal conduct too remote, to find that contract rendered void would be to administer doctrine of illegality and public policy in a disproportionate manner. Principle of proportionality is broader and more malleable than that of remoteness. Capable of encompassing remoteness, nature of illegality, effects of rendering contract unenforceable. Proportionality preferred for its simplicity and adaptability.
Factors to consider in proportionality test: proportionality in the context of contracts entered into with object of committing an illegal act: (a) whether allowing the claim would undermine the purpose of the prohibiting rule; (b) the nature and gravity of the illegality; (c) the remoteness or centrality of the illegality to the contract; (d) the object, intent, and conduct of the parties; (e) the consequences of denying the claim.
Application: Firstly, resp' object was to use the false date stated in the Option for a purpose which they knew was prohibited. Resp knew of 4 Oct Notice. Secondly, the nature of the illegal act was not trivial. The main policy objective of the Notice was to limit the quantum of residential property loans to foster stability in market. The part of the Notice which resp sought to contravene directly related to the policy objective, not merely trivial or administrative. Thirdly, allowing claim would undermine purpose of the rule. Fourthly, illegal purpose was not too remote from Option. Indeed an overt (integral) step in carrying out the unlawful intention.
Patel v Mirza: approved proportionality test in ParkingEye and expanded it. Must consider: (a) underlying purpose of prohibition, (b) any relevant public policies which maybe rendered ineffective / less effective by denial of claim, (c) keep in mind possibility of overkill unless law applied with due sense of proportionately. Some relevant factors include seriousness of conduct, centrality to the contract, whether intentional, and whether there was marked disparity in parties' respective culpability.
Recovery under illegal contract
- Statutory illegality: expressly / impliedly prohibited, no recovery. Courts may try to mitigate any potential unfairness through restitutionary relief.
- If not expressly / impliedly prohibited, and if only one of the parties intends for contract to be performed in illegal manner, generally only guilty party denied any remedy. Innocent party must not have intention to perform contract in illegal manner.
Public conscience test rejected in Tinsley v Milligan - Recovery refused even if it will shock the conscience of the court.
Class protection statutes:
If legislative intention is to protect a class of persons to whom one of the parties belongs, then allowed to recover benefits conferred under the illegal contract. Kiriri Cotton v Ranchhoddas Keshavji Dewani: Ordinance was a class-protection statute, intended to protect tenants from being exploited by landlords.
Fraud, duress, oppression. Render parties not equally at fault. Innocent party could still recover moneys paid.
Mistake. Aqua Art v Goodman Development: entered into illegal transaction as a result of a mistake as to the facts constituting the illegality. Restitutionary relief available to party who entered as a result of a mistake..constituting the illegality. Mistake not always mean parties not in pari delicto. Restitution may be allowed even if both parties equally mistaken.
Independent cause of action - Reliance principle . Radically altered by Patel v Mirza. Pre-requisite: independent cause of action required, aside from illegal contract, e.g. tort, collateral contract, unjust enrichment.
Where party who has conferred the benefit can establish an entirely independent cause of action that does not consider the illegal contract, the court will generally allow recovery of benefit conferred on other party.
Ting Siew May: Usually invoked by party seeking to recover what it has transferred to the other. And recovery traditionally premised upon independent cause of action, thus avoiding the need to rely upon illegal contract.
Repentance or timely repudiation. Possible for party to recover benefits conferred on other party if repent in time (before illegal purpose effected). Bigos v Boustead: must be genuine and voluntary.
For contract entered into with object of committing illegal act, general approach was to examine the relevant policy considerations so as to produce a proportionate response.
One clear situation would involve contravention of statutory provision. The contract which contravened a particular statutory provision but not prohibited by the provision per se could still be void, if one / both parties had intention / purpose of contravening the statutory provision in question. Illegality here was the contravention of a statutory instrument (Notice). Intentionally backdate. Illegality was in resp' intention to use Option to circumvent and contravene the Notice.
Resp said they abandoned original unlawful intention. Any abandonment could be taken into account only if there was ignorance of unlawfulness of intention in the first place.
Ting Siew May: Reliance principle (that court will not entertain the claim if he has to rely on own illegality to establish claim) usually invoked by party seeking to recover (restitutionary basis) what it had transferred to other party. Such recovery traditionally premised upon an independent cause of action, thereby avoiding the need to rely on the illegal contract. Not the situation here.The question was whether resp were endeavouring to enforce an illegal contract. No room for argument based on reliance principle once it was found that refusal to enforce the Option would be a proportionate response to the illegality. No cause of action other than one based on the Option.
Ting Siew May: No prohibition of Option. Parliamentary intention was not to interfere with private transactions relating to residential property, but to regulate and control financial institutions responsible for granting credit facilities for purchase of residential property. Not interfere with private transactions. Obligations in Notice imposed on banks, not individuals. Act only penalizes banks who do not comply.
Man Financial v Wong Bark Chuan: distinguish clearly between these 2 facets of reasonableness. Reasonableness in interests of the public vs between parties.
To help determine whether reasonable wrt parties and public interests...
Legitimate proprietary interest. e.g. trade secrets,
trade connections - personal knowledge of and influence over customers (Smile Inc: Patient happy with Dr Lui's services would easily switch to competing clinic where Dr Lui practised at...Too far reaching to conclude that employer on legitimate interest. CLAAS had legitimate proprietary interest to protect, it has paid for the goodwill of the business)
non-solicitation - Man Financial SG position appears that such non-solicitation clauses embody legitimate interest.
Also no legitimate interest to protect if work in other companies that are not competitors.
Area, time, activities and consideration for restraint (CLAAS): Man Financial, SG size considered a factor. There was significant consideration for restraint. Smile Inc Dental Surgeons v Lui Andrew Stewart: No time limit - unreasonable. Also, preventing new patients from going to Dr Lui does not protect legit interests. Area of restraint too wide (3km of a Smile clinic) and applied to clinics branches where Lui never worked.
Courts more liberal in sale of business contracts than employment. Man Financial: unlike employment, purchaser in sale of business context in whose the covenant is made is buying something tangible, which includes element of goodwill which would necessarily be reduced in no restrictive covenant. Second, likely to be more equality in bargaining power in sale of business.
Mano Vikrant Singh
Forfeiture-for Competition (yes restraint): payment concerned already vested in the employee, who is restrained from leaving employment to join competitor bcos to do so would be to give up a right which had already been vested in him.
Payment-for-Loyalty (incentive): not be giving up right already vested in him, but rather entering contractual agreement which would result in a similar right vesting in future.
If there is already another clause that protects trade secrets, need to show restraint of trade clause in qn covers a legitimate interest over and above protection of trade secrets.
Reasonableness with ref to public interest Nordenfelt*: public (and individual) have an interest in people carrying on his trade freely. Public interest for one to be free to work (access to person's skill, and ideal for one to work to feed). Also, e.g. restraint which would make a party a monopoly not in public interest.
Reasonable in interests of parties. Not reasonable if restrains all types of employment when they are not in the same business.