Illegality and contracts State of the law in Singapore

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1 January 2018 Illegality and cntracts State f the law in Singapre As any hapless law student attempting t grapple with the cncept f illegality knws, it is almst impssible t ascertain r articulate principled rules frm the authrities relating t the recvery f mney r ther assets paid r transferred under illegal cntracts. Lady Justice Glster in Patel v Mirza [2014] EWCA Civ After the recent Singapre Curt f Appeal decisin in Ochrid Trading Ltd v Chua Sik Lui (trading as VIE Imprt & Exprt) [2018] SGCA 5 hapless law students (and practising lawyers) can nw sleep easy. The decisin has helpfully clarified and restated the dctrine f illegality under Singapre law. It als tk the pprtunity t cnsider the UK Supreme Curt decisin in Patel v Mirza [2016] UKSC 42 which established a new (and cntrversial) apprach t the questin f whether a defendant will be able t rely n the defence f illegality. Cntents UK psitin befre Patel... 1 Patel v Mirza... 2 The Singapre radmap... 2 What happened in Ochrid Trading?... 4 Summary and key takeaways... 6 Appendix... 7 UK psitin befre Patel The leading Huse f Lrds decisin befre Patel was Tinsley v Milligan [1994] 1 AC 340. Tinsley and Milligan were living tgether. They bth cntributed t the purchase price f a huse which was held in the sle name f Tinsley. The purpse f this was t allw Milligan t cntinue making fraudulent scial security claims. The relatinship between the tw sured and Milligan sued fr a beneficial interest in the prperty. As Milligan had cntributed t the purchase price, there was an equitable presumptin that Tinsley held the huse n resulting trust fr bth parties. With the benefit f the presumptin, Milligan did nt need t rely n evidence f her illegal mtive and her claim succeeded. This became knwn as the reliance principle. The reliance principle was criticised by academics, judges and in varius Law Cmmissin Reprts. The main criticism was the arbitrariness f the rule. If Tinsley and Milligan had been husband and wife, there wuld have been n presumptin f trust (an equitable presumptin f advancement wuld have arisen in its place); the burden f prf wuld have been reversed; and Milligan s claim wuld have failed because she wuld have needed t rely n the evidence f her illegal mtive in cntributing t the purchase price f the huse. Illegality and cntracts 1

2 Patel v Mirza Mirza tld Patel that Mirza wuld be btaining inside infrmatin abut an impending gvernment annuncement which wuld affect RBS share price. Patel transferred 620,000 t Mirza t bet n the price f RBS shares, cntrary t sectin 52, Criminal Justice Act (dealing in securities n the basis f inside infrmatin). Mirza did nt btain the inside infrmatin and the illegal purpse was nt carried ut. Patel requested his mney back. Mirza, with much bfuscatin, failed t pay the sum. Patel sued fr recvery. Mirza relied n the defence f illegality. The nine-member UK Supreme Curt held that Patel culd recver his 620,000. Hwever, the curt tk different appraches in arriving at its decisin. The majrity rejected the reliance principle and tk the psitin that the defence will apply if enfrcing the claim wuld be harmful t the integrity f the legal system. In assessing whether that is the case, the curt will undertake a balancing exercise and must cnsider: whether the underlying purpse f the law which has been brken will be enhanced by denying the claim; any ther relevant public plicy which may be affected by denying the claim; and whether denying the claim wuld be a prprtinate respnse t the illegality. When cnsidering the prprtinality pint, varius factrs wuld be relevant althugh the curt wuld nt lay dwn a prescriptive list. By way f example nly, factrs might include the seriusness f the cnduct, its centrality t the cntract, whether it was intentinal, and whether there was marked disparity in the parties' respective culpability. The majrity cncluded that there was n reasn why enfrcement f Patel's claim might be regarded as undermining the integrity f the justice system. Therefre, his claim succeeded. At the risk f versimplificatin, the minrity tk the view that the law shuld permit a party t an illegal arrangement t recver any sum paid under it s lng as restitutin is pssible. This is because an rder fr restitutin simply returns the parties t the psitin in which they wuld and shuld have been, had n such illegal arrangement been made. The Singapre radmap Just as the UK Supreme Curt increased its usual panel size t cnsider Patel, the Curt f Appeal cnvened a five-member panel instead f the usual three t decide Ochrid Trading. Hwever, nly ne Judge f Appeal delivered the judgment f the curt as the thers were in agreement. There is nw a clear radmap as t hw we shuld apprach the dctrine f illegality under Singapre law: Illegality and cntracts 2

3 The first questin is whether the cntract is prhibited either pursuant t a statute (expressly r impliedly (althugh the latter shuld nt arise ften)) r under an established head f cmmn law public plicy (fr example, a cntract t cmmit a crime, trt r fraud). If a cntract is prhibited by statute r under cmmn law, then there can be n recvery pursuant t the cntract (subject t the limited exceptins belw). Althugh the categries f illegality at cmmn law are nt clsed, the curt will nt readily add new categries. The Singapre Curt f Appeal in an earlier decisin (Ting Siew May v Bn Lay Ch [2014] SGCA 28) recgnised that cntracts which are nt unlawful per se but which nevertheless invlved the cmmissin f a legal wrng either in their frmatin, purpse r manner f perfrmance was prhibited under cmmn law. Hwever, there is n general rule that these cntracts, typically referred t as cntracts tainted by illegality, wuld be autmatically unenfrceable. There might be legal wrngs which are relatively trivial and it wuld be disprprtinate t render the cntract unenfrceable. Therefre, cntracts tainted by illegality are subject t the principle f prprtinality. In Ting Siew May, the parties backdated an ptin t purchase a prperty in rder nt t be subject t a new Mnetary Authrity f Singapre ( MAS ) ntice n husing lans. The curt held that t refuse the enfrcement f the ptin was a prprtinate respnse t the illegality, taking int accunt the fllwing relevant factrs in assessing prprtinality: The plaintiffs intent frm the utset was t use the (false) date stated in the ptin fr a purpse which they knew was prhibited. The illegal act which the plaintiffs set ut t cmmit was nt trivial. Allwing the plaintiffs claim wuld undermine the purpse f the MAS ntice. The plaintiffs illegal purpse was nt t remte frm the ptin, given that the stating f a false date in the ptin cnstituted an vert step taken in the cntract itself in furtherance f this illegal purpse. The cnsequences f denying the plaintiffs' enfrcement f the ptin wuld nt be s great as t render it a disprprtinate respnse t the illegality. If a cntract is prhibited by statute r cmmn law r in the case f a cntract tainted by illegality, the cnsequences f denying enfrcement wuld nt be s great as t render it a disprprtinate respnse t the illegality, the party wh has transferred benefits pursuant t an illegal cntract might still be able t recver thse Illegality and cntracts 3

4 benefits n a restitutinary basis (as ppsed t recvery n a cntractual damages basis). There are three pssible avenues fr such recvery: First, where the parties are nt in pari delict 1 which include the mre specific categries f class prtectin statutes, situatins where there has been fraud, duress r ppressin, and cases where the plaintiff entered int the illegal transactin because f a mistake. Secnd, where the dctrine f lcus penitentiae 2 applies because there has been timely repudiatin r "repentance" by the plaintiff f the illegal cntract. There must be genuine and vluntary withdrawal by the plaintiff frm the illegal enterprise fr the dctrine t apply, and that it wuld nt apply in cases where the illegal purpse was frustrated by circumstances beynd the plaintiff s cntrl r is simply n lnger needed. Third, where the plaintiff brings an independent cause f actin fr the recvery f the benefits cnferred under the illegal cntract, namely: A claim in unjust enrichment. A claim in trt r the law f trusts based n the plaintiff s prperty r title. The availability f claims in unjust enrichment, trt r trusts is subject t the principle f "stultificatin". This means that the curt has t determine whether t allw the claim wuld undermine r make nnsense f the fundamental plicy that rendered the cntract vid and unenfrceable in the first place. What happened in Ochrid Trading? The plaintiff advanced several sums t the defendant pursuant t several agreements (ver 700). The plaintiff sued t recver the sums in cntract (the principal amunts plus prfit amunting t apprximately S$10 millin) and in unjust enrichment (the principal amunts (withut prfit) amunting t apprximately S$9 millin) in respect f apprximately 70 agreements. The defendant relied n the defence f illegality in that the sums were lans and the plaintiff was nt a licensed mneylender under the Mneylenders Act (Cap 188) ( MLA ). Please nte that the curt was cncerned with the versin f the MLA in frce n 1 March 2007 and sme f the relevant statutry prvisins have been amended since then (althugh their substance remains unchanged). The curt applied the abve radmap and decided as fllws. 1 Literally meaning in equal fault s that the curt will allw recvery fr the party wh is less at fault. 2 Literally meaning place f repentance. Illegality and cntracts 4

5 Claim in cntract After reviewing the facts and agreements, the curt cncluded that: the transactins were lans. The argument that the payments were investments in the defendant's business n a prfit-sharing jint venture basis was rejected; the plaintiff was carrying n the business f mneylending. The curt fund that there was a system and cntinuity in the transactins because there was an rganised system under which the amunt required by the defendant fr each mnth wuld be determined and repaid and there was cntinuity given that there were ver 700 agreements in ttal pursuant t which mre than S$58 millin was disbursed ver a curse f ver three years; the plaintiff was unlicensed under the MLA; the cntract was prhibited and unenfrceable under sectin 15 f the MLA (sectin 14(2)(a) in the latest iteratin f the MLA). As the cntract was expressly prhibited by statute, the curt did nt have t apply the principle f prprtinality and the plaintiff's claim in cntract failed. Claim n a restitutinary basis On the facts, the first (in pari delict) and secnd (lcus penitentiae) avenues f recvery n a restitutinary basis were nt relevant. The curt fund that the requirements fr the third avenue, unjust enrichment, were satisfied: The defendant had been enriched. The enrichment was at the plaintiff's expense. The enrichment was unjust as there was a ttal failure f cnsideratin (i.e. the failure f the defendant t repay the lan amunts which was the prmised cunter-perfrmance based n which the lans were disbursed). The key questin then was whether the defence f illegality applied t defeat the independent claim in unjust enrichment; i.e. whether t permit recvery f the principal sums wuld stultify r undermine the fundamental plicy underlying the MLA and make a nnsense f the statutry prhibitin which rendered the lan agreements unenfrceable. Identificatin f the fundamental plicy An examinatin f the legislative plicy underpinning the MLA indicated that unlicensed mneylenders shuld be precluded frm recvering any cmpensatin whatsever fr their illegal lans. Permitting restitutin f the principal sums lent wuld make a nnsense f this plicy and render ineffectual the prhibitin in sectin 15 f the MLA (nw sectin 14(2)(a)), which reflects the strng need t deter illegal mneylending due t its status as a serius scial menace in Singapre. Illegality and cntracts 5

6 Therefre, the defence f illegality defeated the plaintiff's claim in unjust enrichment. Summary and key takeaways Clear radmap: The Singapre Curt f Appeal has cme up with a clear and structured radmap t deal with illegality and cntracts. The radmap, which we have set ut in the Appendix, shuld make analysing the legal issues relating t illegality and cntracts mre straightfrward. Patel balancing exercise nt applicable: The balancing exercise invlving a range f factrs advcated in Patel des nt represent the law in Singapre. Limited rle f prprtinality: One f the factrs suggested in Patel is the principle f prprtinality. This principle is relevant under Singapre law but nly in the situatin where we are dealing with a cntract tainted by illegality. It des nt apply if the cntract is prhibited by statute r ne f the established heads under cmmn law. In a situatin invlving a cntract tainted by illegality, if the illegality is trivial and it wuld be disprprtinate t hld the cntract t be unenfrceable, there may still be recvery. As demnstrated in Ting Siew May, the applicatin f the prprtinality principle will be largely fact-centric. Characterising and identifying substance f the cntract: If the facts f Patel ccurred in Singapre, the utcme may well be different. Arguably the parties entered int a cntract t cmmit a crime (insider dealing) which wuld have been prhibited under ne f the established cmmn law public plicy heads. Therefre, a claim in cntract wuld autmatically fail. There wuld have been n scpe t apply the prprtinality principle. It is interesting that the Singapre Curt f Appeal thught that while there was illegal cnduct in Patel, the cntract between Patel and Mirza was nt a cntract t cmmit a crime per se and therefre it was nt autmatically prhibited under an established head f cmmn law public plicy. Identifying the fundamental public plicy: The curt emphasised that the principle f stultificatin depended n identifying the fundamental plicy that rendered the cntract unenfrceable in the first place. There culd cnceivably be situatins where allwing a claim might undermine a plicy which is nt central t the prhibitin f the cntract in questin. Applying the Singapre curt s apprach t the claim in unjust enrichment in Patel, we submit that the claim wuld als arguably fail. T allw enfrcement wuld stultify the fundamental public plicy behind ur insider dealing laws which we submit is t maintain the integrity f Singapre as an internatinal financial centre. Illegality and cntracts 6

7 Appendix Cntract prhibited by statute r cmmn law public plicy Cntract tainted by illegality N recvery in cntract N Is denying enfrcement a disprprtinate respnse t illegality Yes Recvery pssible in cntract Claims n restitutinary basis Unjust enrichment Trt r trusts Lcus penitentiae Parties nt in pari delict Subject t principle f stultificatin and identificatin f fundamental public plicy Illegality and cntracts 7

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