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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. |
