30 May 2018

Ochroid Trading Ltd & Anor v Chua Siok Lui & Anor [2018] SGCA 5

The law of illegality in contracts is a technical and complicated area of the law. Generally, where a contract is prohibited under statute or an established head of common law public policy, the contract is void and unenforceable. If a contracting party has paid money to his counterparty under such an (illegal) contract, he may not be able to recover it.

However, the bar against recovery is not absolute and subject to exceptions. For example, a contracting party who repents and withdraws from the illegal contract in a timely fashion may still be able to recover under the doctrine of locus poenitentiae (Latin for “a place of repentance”).

In Ochroid Trading Ltd & Anor v Chua Siok Lui & Anor, a five-judge panel in the Singapore Court of Appeal clarified the law in this area.

The facts

In this case, the claimant was an unlicensed money lender who extended loans to the defendant in breach of the Moneylenders Act. When the defendant defaulted, the claimant sued in court. The claim was denied at first instance by the High Court. The claimant appealed to the Court of Appeal unsuccessfully.

Principles of law

In dismissing the appeal, the Singapore Court of Appeal laid down a clear analytical framework for dealing with illegality.

First, the court has to consider whether a contract is prohibited either under a statute and/or an established head of common law public policy. The latter group of contracts include contracts for bribery, contracts to deceive public authorities, and contracts to commit a crime. No recovery is permitted for prohibited contracts as they are void and unenforceable.

Apart from prohibited contracts, there are contracts which are not illegal per se but nevertheless involve the commission of a legal wrong. For such contracts, the court will consider a range of factors - including the nature and gravity of the illegality; the object, intent and conduct of the parties; and whether denying the claim would be disproportionate - before deciding whether the contract is enforceable or not.

Second, even if the contract is illegal and void, a claimant may still be able to recover payments made under the contract under one of three separate avenues, as examined below.

In pari delicto (claimant and defendant not equally at fault)

If the parties are not in pari delicto (Latin for “in equal fault”) because the claimant was induced by fraud, duress, mistake or oppression into entering into the illegal contract or is a member of a vulnerable class of persons specifically protected by the statute declaring the contract invalid (e.g. a minor under the age of 18 who is protected by a statute declaring contracts with minors void), then the claimant may still be able to recover payments made under the contract.

Locus poenitentiae (claimant has repented)

Where the claimant has made a genuine, voluntary and timely withdrawal from the illegal enterprise in the illegal contract before the illegal purpose was achieved, the claimant may be able to recover payments made under the contract.

The doctrines of in pari delicto and locus poenitentiae are fairly well established at common law.

Unjust enrichment, provided there is no stultification

The claimant may also bring an independent cause of action in unjust enrichment, provided the claim will not stultify the fundamental policy that rendered the underlying contract void and unenforceable in the first place.

As the late Professor Peter Birks put it (as cited by the Court of Appeal): “to stultify is to make a fool of or to make nonsense of. It is important that the law…in one area should not make nonsense of the law…in another.”

Hence, the question is “whether allowing the claim in unjust enrichment would make nonsense of the law’s condemnation of the illegal contract in question and of its refusal to enforce the illegal contract.”

For example, the court would deny a lender’s claim for recovery of an illegal loan extended to a borrower that was in breach of foreign exchange control regulations. Allowing the recovery claim in unjust enrichment would make a mockery of the foreign exchange control regulations; it would provide the lender with a lever against the borrower to secure compliance with the illegal loan (i.e. if the borrower defaulted, the lender could still sue the borrower in unjust enrichment to get his money back), and a safety net if he ran afoul of the regulations (i.e. even if the lender were to be found in breach of the foreign exchange regulations, he would still be able to recover his principal at least).

In essence, the court would carefully examine the relevant policy which rendered the contract illegal, before considering if the same policy would be undermined if the claim in unjust enrichment were allowed.

Decision

Applying the above principles, the Court of Appeal found that the lending contracts in this case were in breach of the policy underlying the Moneylenders Act - which was to deter illegal moneylending in Singapore. Allowing a claim in unjust enrichment (even if only for the principal of the illegal loan) would still allow the illegal lender to have a lever against the borrower to compel performance, and a safety net against breaches of the Moneylenders Act. Accordingly, the claim was denied.

Practical implications

The position on illegality is now quite clear. When entering into contracts, thorough legal due diligence should be done on the potential impact of illegality on the contract.

Some questions to consider would include: does the contract involve any illegality? What is the fundamental policy underlying the illegality? What are the consequences if the contract is not performed - would the claimant be able to recover and would such recovery contravene the policy behind the illegality? The Court of Appeal’s decision provides a valuable framework and much welcome clarification for analysing these issues.

 

Download PDF