|
Void contracts
06/02/2007 The Star Articles of Law by BHAG SINGH
THERE are many instances where two parties to a transaction have had one,
or both of them, confer some benefit on the other. However, due to various
reasons, the contract may be void.
Where a contract is void, the position of the parties will be as if no contract
had been entered into. In such a situation, no rights will be created and,
consequently, no liabilities.
But what if one of the parties has already given a benefit to the other prior
to realising that the contract is void, or before it has been declared so?
Does the other party get to retain the benefit or must he/she give back what
has been received?
If void is a situation in which the parties find that the contract never existed
at all, then it is only fair that they should be able to revert to the original
position. This would suggest that if no rights were created, then any benefit
obtained should also be returned.
Generally, this would appear to be the position. In a void contract scenario,
all parties who receive an advantage and benefit should return it or make
compensation for it. Section 66 of the Contracts Act 1950 clearly:
“When an agreement is discovered to be void, or when a contract becomes void,
any person who has received any advantage under the agreement or contract
is bound to restore it, or to make compensation for it, to the person from
whom he received it.”
The section goes on to provide an example of a contract to sing, for which
payment in advance has been made. The illustration in the Contracts Acts 1950
sets out an example:
“A contracts to sing for B at a concert for $1,000 which is paid in advance.
A is too ill to sing. A is not bound to make compensation to B for the loss
of the profits which B would have made if A had been able to sing, but must
refund to B the $1,000 paid in advance.”
However, it is not always the case that anyone who extends or has conferred
a benefit on another in such a situation will be entitled to be restored to
his position prior to the contract being entered, or be compensated.
Many years ago, in the case of Ahmad bin Udoh & Anor v Ng Aik Chong, the respondent
had entered into an agreement with the appellants for the lease of paddy land
for a period of six years. Pursuant to the agreement, a sum of RM1,500 was
paid to the appellant, who subsequently refused to allow the respondent to
till the land.
In an action to recover the sum paid under the agreement, the Sessions Court
gave judgment to the respondent. On appeal, the appellant contended that the
agreement was illegal for contravening Section 3(1) of the Padi Cultivators
Ordinance 1965 and the sum paid under the illegal agreement was not recoverable
by the respondent.
Wan Suleiman J (as he then was), in dismissing the appeal, held “That under
Section 66 of the Contracts (Malay States) Ordinance 1950, all that needed
to be proved is that the illegal purpose has not been achieved; and the agreement
was one which came within the ambit of the words if discovered to be void
in Section 66 and the respondent was therefore entitled to the refund of the
money paid under the illegal agreement.”
In Yeep Mooi v Chu Chin & Ors, the appellant had deposited some money with
a person who had a borrowing business. As he was not a public company or a
licensed borrowing company, the appellant did not know nor suspect that the
deposit transaction contravened the Act. She placed her money on deposit in
good faith and subsequently received interest from it.
She only became concerned about the safety of her money when she learnt of
the depositee’s death and demanded a refund, but was refused. She then filed
a suit against the estate. She only became aware that the transaction had
contravened the Act when she received a copy of the statement of defence claiming
the transaction was void and unenforceable.
It was under such circumstances that the appellant became entitled to the
restitution of her deposit under Section 66 of the Contracts Act. On appeal,
the Federal Court said:
“An agreement ‘discovered to be void’ does not mean that the contract is void
on discovery or void because of discovery of illegality. It means what it
says, in that the contract was void ab initio without the parties at the time
being aware of the true legal position. It is only later that the contract
is found to be void ... We are of the view, therefore, that Section 66 of
the Contracts Act applied to this, and the appellant is entitled to the restitution
of her money by the pawnshop which received an advantage from its use.”
However, this issue was decided differently in the case of Thong Foo Ching
and Anor v Shigenori Ono, who had entered into the contract with Thong in
relation to a transaction related to the purchase of property.
The agreements had been structured in such a way that, from the individual
person’s point of view, he would have to pay less tax as well as stamp duty.
But from the government’s point of view, they caused loss of revenue because
of less real property gains tax less stamping fee being collected.
Differences developed between the purchaser and the vendor, with the result
that the respondent who had paid a substantial amount as deposit withdrew
from the transaction and sought a refund.
However, the attempt to recover what he had paid was opposed on the ground
that he was not entitled to be paid back, by virtue of the fact that consideration
or object of the agreement was unlawful.
It would, therefore, appear that parties involved in an illegality may not
be entitled to be paid back and will be placed in the same position as before
the transaction. This was summed up by the Federal Court in the case of Datuk
Ong Kee Hui v Sinyium Anak Mutit:
“As the arrangement between the respondent and his party in the matter of
his remuneration and resignation is illegal and the illegality is not only
with regard to its performance but in its very inception, such arrangement
is therefore void ab initio and the parties are outside the pale of the law.
The respondent being a party thereto cannot claim any remedy under this arrangement.
He is not entitled to the refund of the balance of his remuneration kept by
the party, nor could he claim any damages, special or general.”
The decisions in the different cases appear inconsistent. However, there is
a difference because in the earlier cases referred to above, the parties seeking
a refund were unaware of the illegality and therefore, were innocent.
However, in the later case, the plaintiff was actively involved in structuring
the transaction and assisted by professional advisers. The effect of the commiting
the illegality causes the contract to be void by reason of knowledge of such
action and a desire to benefit.
Thus, when a contract is held to be void, all may not be lost in so far as
the party that has paid money is concerned. This, however, depends on the
conduct and knowledge of the persons involved and also the circumstances.
|
