Tainted with Illegality – When Contracts Turn Rogue

Image by Fathromi Ramdlon from Pixabay.

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Introduction

Imagine this: you entered into a contract to buy a plot of land. You signed a Sale and Purchase Agreement, paid your deposit, secured a bank loan, and obtained the title deed to the land – everything seemed fine and dandy, or so you thought. You later found out that you had inadvertently bought Malay Reservation land, which you, as a non-Malay, are not permitted to do by the law. What happens now that your contract is tainted with illegality? Can you rescind the contract, or is it void anyway? Will you lose your deposit? This article explores the implications of a contract which is tainted with illegality, whether inadvertently or otherwise.

What is a contract ‘tainted with illegality’?

A contract ‘tainted with illegality’ means just that – a contract stained with some element of unlawfulness, whether in its purpose or the price paid for it. Under section 24 of the Contracts Act 1950 (“CA”), a contract tainted with illegality would be rendered void (unenforceable under the law) if the consideration (price) or object (purpose) of an agreement:

1. is forbidden by a law;
2. is of such a nature that, if permitted, would defeat any law;
3. is fraudulent;
4. involves or implies injury to the person or property of another; or
5. is regarded by the court as immoral, or opposed to public policy.

The price of illegality

In older cases, the Malaysian courts took a strict approach to contracts tainted with illegality. Traditionally, the consequences[i] of an illegal contract, depending on the parties’ level of culpability, can be summarised as follows:

Can You Recover Losses from an Illegal Contract? Exploring the Malaysian Courts' Move Towards a More Flexible Approach to Illegality

So, the court will not enforce an illegal contract, and you would not be able to claim for damages, but what if you expended money to the other party? Will you be forced to make peace with your loss while the other party gains a windfall from the illegal contract?

In recent years, the Malaysian courts have adopted a more flexible approach to illegality pursuant to the UK Supreme Court case of Patel v Mirza.[ii] In Patel, the court held that it would be inappropriate to allow the Defendant to profit from his own wrongdoing by participating in the illegality, and the court adopted a flexible approach to determine whether public interest would be harmed by allowing a claim which is in some way tainted by illegality. This approach takes into account the following trio[iii] of policy considerations:

1. considering the underlying purpose of the prohibition which has been transgressed;
2. considering conversely any other relevant public policies which may be rendered ineffective or less effective by denial of the claim; and
3. keeping in mind the possibility of overkill unless the law is applied with a due sense of proportionality.

The Malaysian courts have since adopted Patel’s trio of considerations in Pang Mun Chung & Anor v Cheong Huey Charn[iv] and Liputan Simfoni Sdn Bhd v Pembangunan Orkid Desa Sdn Bhd.[v]  

In Malaysia, adopting the decision in Patel may translate to parties to an illegal contract having recourse in the form of restitution under section 66 of the CA. In essence, Section 66 of the CA provides that parties who have received any advantage under a void contract are bound to restore it, or to make compensation for it, to the person from whom they received it.

This can be seen in the case of Tan Chee Hoe & Sons Sdn Bhd v Code Focus Sdn Bhd[vi] where the Federal Court granted restitution under section of the 66 CA despite both parties being fully aware of the illegal agreement when they executed the sale and purchase agreement in question.

More recently, the Court of Appeal in Public Bank Bhd v Ria Realiti Sdn Bhd & Ors[vii] explained that even in respect of enforcement of a contract tainted with illegality, the flexible approach introduced by Patel affords relief to the less culpable party in certain circumstances under section 66 of the CA. The court further explained that that even if both parties were aware of the illegality, restitution is still allowable which is a departure from the traditional approach taken by Malaysian courts in older cases.

Conclusion

While there is hope through section 66 of the CA, it must be noted that Malaysian courts are still navigating its application to illegal contracts. This can be seen in the very recent 2023 case of Triple Zest Trading & Suppliers v Applied Business Technologies Sdn Bhd[viii] where the Federal Court refused to grant restitution under section 66 of the CA for a contract held to be void for illegality because the “court will not render assistance to those who come before it with unclean hands and the remedy of restitution under Section 66 CA will not avail such litigants.”[ix] Unfortunately, the Federal Court did not refer to Patel and take into account the trio of considerations laid down therein.

Section 66 of the CA applies to both voidable contracts, as well as contracts which “becomes void”. As section 24 of the CA renders an illegal contract void, it follows that section 66 ought to apply to illegal contracts. However, based on the cases discussed, it appears that the application of section 66 of the CA to illegal contracts remains a developing area in Malaysia, and there is a possibility that parties may not receive any relief from the court. Therefore, it would be prudent to approach contractual arrangements with caution and ensure compliance with the law.

‍This article is written by  Raja Nadhil Aqran (Partner) and Jeypraba A/P Veerapan (intern). It only contains general information. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such.

For assistance with drafting legally sound contracts, contact our lawyers at info@aqranvijandran.com.

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[i] ABDA Airfreight Sdn Bhd v Sistem Penerbangan Malaysia Bhd [2001] 3 MLJ 641 (HC) at pp 687 - 688.

[ii] [2016] UKSC 42.

[iii] Ibid at paras [101] & [120] (Lord Toulson).

[iv] [2018] 4 MLJ 594 (CA).

[v] [2018] 1 LNS 1613 (FC).

[vi] [2014] 3 CLJ 141 (FC) at para [41].

[vii] [2021] 3 CLJ 772 (CA) at para [63].

[viii] [2023] 10 CLJ 187.

[ix] ibid at para [28].

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