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    12:26 PM Jarret Huang* (B.A. Cambridge) (LL.M. Harvard)

    Ochroid Trading: Illegality and Unjust Enrichment after Patel v Mirza

        

    Introduction

    In Patel v Mirza [2016] UKSC 42 (‘Patel’), a nine-judge coram of the UK Supreme Court (‘UKSC’) rejected the much-criticised rule-based approach to contractual illegality in favour of a more discretionary one incorporating questions of public policy and proportionality. In deciding thus, the UKSC rejected the ‘reliance rule’ promulgated in Tinsley v Milligan [1994] 1 AC 340, which had held that a claim would succeed only if it did not have to ‘rely on’ the illegality to be made out. On the Patel approach, a claimant who had entered into an illegal contract with and transferred money to his counterparty would be able to recover that sum in unjust enrichment subject to the underlying purpose of the transgressed prohibition, public policy, and proportionality.

    In Ochroid Trading Ltd and another v Chua Siok Lui (Trading as VIE Import and Export) and another [2018] SGCA 5 (‘Ochroid’), the Singapore Court of Appeal provided welcome guidance as to the impact of Patel on the legal landscape in Singapore. Declining to adopt the broad discretion Patel necessitated, the Court of Appeal affirmed the two-step test first laid out in Ting Siew May v Boon Lay Choo and another [2014] SGCA 28 (‘Ting’) to ascertain a) whether the contract itself (as opposed to behaviour required to fulfil the contract) was prohibited, and b) whether a party would nonetheless be able to obtain restitution of the transferred monies on the ground of unjust enrichment.

    Facts of Ochroid

    The appellants (Ochroid Trading) advanced money to the respondents (VIE Import and Export) pursuant to a series of investment loan agreements, with dates stipulated for repayment with a ‘profit’. In breach of the agreements, the respondents failed to repay the appellants. The appellants therefore sued in breach of contract for the entire outstanding sum and, alternatively, in unjust enrichment for the unpaid principal sums (less the ‘profit’ stipulated). They also brought claims in tort for conspiracy to defraud and false representation.

     

    Decision of the High Court

    The High Court rejected the appellants’ claims, finding that the agreements were in fact unlicensed moneylending agreements which were unenforceable under the Moneylenders Act 2008 (‘MLA’). The unjust enrichment claim was rejected as a backdoor attempt to enforce an unenforceable contract. The claims in tort were likewise dismissed on the basis that the appellants had themselves engineered the entire charade by requesting the use of fake tax invoices. The appellants then appealed to the Court of Appeal. 

    Decision of the Court of Appeal

    The five-member coram of the Court of Appeal dismissed the appeal on largely the same grounds. The unjust enrichment claim was rejected on the basis of the illegality defence, specifically that to do otherwise would stultify ‘the fundamental social and public policy’ against unlicensed moneylending. Phang JA, for the Court, also took the opportunity to elaborate on the framework with which future cases of illegality in contract would be approached.

    Step One: Ascertaining Contractual Illegality

    The Court opened its analysis by outlining the law on contractual illegality in Singapore pre-Ochroid, as reflected in Ting Siew May: The traditional division in the law of contractual illegality was between statutory illegality and common law illegality. In both areas, however, a contract would be void and unenforceable if the contract (as opposed to merely the conduct contracted to be done) was prohibited. Ting’s central addition to the jurisprudence on the matter was to recognise that in the context of common law illegality, a category of contracts existed which was not unlawful per se, but merely entered into with the object of committing illegal acts. The Court in Ting recognised that for this category of common law illegality, it would be unjust to deem all such contracts wholly unenforceable, since the legal wrongs intended might have been relatively trivial. It was thus decided that the application of illegality to this category of contracts was ‘subject to the limiting principle of proportionality’.

    The Court in Ochroid then contrasted the Ting position with Patel, juxtaposing the willingness in Patel to apply a balancing exercise of public policy, proportionality, and the purpose of the transgressed prohibition ‘across the board in all cases of illegality at common law’, with the reticence of the Court in Ting, which applied the principle of proportionality ‘in only a very limited sphere’ of common law illegality where the contract was not prohibited per se. The Court then outlined three reasons why the narrower position in Ting was preferred over the broader Patel approach:

    First, the majority approach in Patel applying the broad ‘balancing exercise’ for common law illegality but not statutory illegality was said to create an ‘unprincipled distinction’. The Court rhetorically posed, ‘why should the legal position not be the same, notwithstanding the fact that a contract has been prohibited under the common law (and not statute)?’

    Second, the Patel approach was unnecessary to achieve remedial justice in the Singaporean context and instead conflated the principle of illegality with the alternative restitutionary remedies that might follow. The Court found that the ‘possibility of restitutionary recovery … substantially mitigate(d) the harshness of the traditional rule’. Further, Ting and the application of the proportionality principle in the context stipulated provided a further avenue for the Court to achieve remedial justice should it be disproportionate to render a contract wholly unenforceable.

    Third, the majority approach in Patel engendered uncertainty. The Court cited Goudkamp ((2017) 133 LQR 14) approvingly that ‘the policy-based test…requires the courts to weight incommensurable factors’, and noted that Lord Toulson had himself acknowledged in Patel that no single factor was determinative. The Court took pains, however, to distinguish this approach from that in Ting, underscoring that the uncertainty created in the latter was considerably reduced because a) Ting was constrained to ‘only a residuary area of common law illegality’, and b) the balancing principle in Ting was ‘anchored to the overarching principle of proportionality’, which was a well-established legal principle.

    In sum, the approach to ascertaining the effect of illegality in contractual situations remains largely unchanged from Ting.

    Step Two: Restitution as another means of Recovery

    The second step of the Court’s framework examines ‘three possible legal avenues for … restitutionary recovery of the benefits conferred’ under an illegal contract:  a) where the parties are not in pari delicto, b) where the repentance doctrine (‘locus poenitentiae’) applies, and c) where an independent cause of action arises. The Court took pains to distinguish ‘restitutionary recovery of the benefits conferred’ from out-and-out enforcement of the contract (and by extension the profits agreed on). 

    Parties not in pari delicto

    Where the parties were not in pari delicto (ie, where the plaintiff was less blameworthy than the defendants), restitutionary recovery would be permitted. The underlying premise of the doctrine is that the party seeking restitutionary recovery is not legally deemed to be ‘equally at fault vis-à-vis the other party’. The doctrine was limited to three defined categories: a) where the relevant legislation which caused the illegality was a ‘class protection statute’ that was intended to protect the class of persons to whom the plaintiff belonged, b) where the plaintiff entered into the contract on the basis of fraud, duress or oppression, or c) where the plaintiff entered into the illegal transaction as a result of a mistake as to the facts constituting the illegality.

    The Locus Poenitentiae Doctrine                                             

    The Locus Poenitentiae doctrine allows a party to an illegal contract to obtain restitutionary recovery of benefits if he ‘repents’ before the illegal purpose is effected. The Court held, rejecting the looser approach in Tribe v Tribe [1995] EWCA 20, that ‘genuine and voluntary’ withdrawal from the illegal enterprise was required for the doctrine to apply. It would not apply in cases where the illegal purpose was frustrated by circumstances outside the plaintiff’s control, or had been rendered unnecessary.

    Independent Causes of Action

    Ochroid was the first Singapore authority to definitely recognise that a claim in unjust enrichment as an independent cause of action could permit recovery of the benefits conferred under an illegal contract. Previously, the position in Top Ten Entertainment Pte Ltd v Lucky Red Investments [2004] 4 SLR(R) 559 was that the reliance principle established in Tinsley ‘would preclude a claim in unjust enrichment…if the plaintiff [had] to “rely on” the illegal contract to establish his claim’. This was rejected in Ochroid.

    Ochroid recognised two distinct conceptions of reliance which must be disengaged: a procedural sense triggered whenever the plaintiff has to assert (in pleading or evidence) the illegal acts, and a substantive sense which is only engaged when a plaintiff seeks to enforce, and thereby profit from, the illegal contract. The ‘procedural’ sense of reliance does not allow the plaintiff to profit from enforcing the illegal contract, but simply puts the parties in the position they would have been in if they had never entered into the illegal transaction. This jurisprudential distinction was the basis for rejecting the Top Ten Entertainment position, which treated all reliance as substantive.

    Having established that merely procedural reliance on the illegal contract would not bar recovery in unjust enrichment, the Court also clarified whether, after a claim in unjust enrichment was prima facie made out, a separate defence premised on illegality and public policy might prevent recovery. The Court held that the principle governing this question was Birks’ stultification principle, which would bar recovery in unjust enrichment if to permit recovery would ‘undermine the fundamental policy that rendered the underlying contract void in the first place’. In considering whether the principle of stultification was engaged in a particular case, the Court identified factors like a) whether permitting recovery would provide a lever with which similar plaintiffs could get their counterparties to perform the illegal contract (‘the lever argument’), and b) whether it would create a safety-net for those seeking to engage in similar illegality (‘the safety-net argument’). The Court did not place express limits on the other factors to be considered.

    The Court also suggested, albeit tentatively, that the stultification principle would also apply for other independent causes of action like the vindication of property rights.

    Analysis

    Contractual Illegality

    Post-Ochroid, the starting point for analysis in cases of contractual illegality is ascertaining whether the proportionality exception in Ting will apply. However, two issues arise from this approach:

    Taxonomy

    First, the taxonomy-heavy approach raises questions of consistency and justification. The Court in Ochroid rightly criticised (at [114]) the difference in treatment depending on whether illegality was statutory or by common law when rejecting the Patel approach, but chose to maintain the disparate treatment in keeping the Ting exception. The result is that in situations where the contract is not prohibited, but has been entered into with the object of committing an illegal act, a claimant whose illegal act was prohibited by statute will be in a worse position than one whose act was prohibited by common law. Insofar as the origin of the legal prohibition does not reflect on the relative blameworthiness of the acts, one may question why this distinction is drawn. This taxonomical uncertainty is exacerbated by situations where there exists both common law and statutorily-derived prohibitions, and their precise interface is uncertain.

    Granted, one might argue that the Ting exception remains desirable because of the remedial jurisdiction it provides in a narrow and more ‘deserving’ category to assuage the harshness of the law, but a) if remedial jurisdiction is desirable in common law situations, it should also be in the statutory illegality context, b) the availability of an independent cause of action in unjust enrichment would prevent loss in these more ‘deserving’ situations nonetheless, and c) the potential for the contract to nonetheless be enforced on grounds of proportionality may be at tension with the ‘substantive’ notion of reliance (ie. it potentially allows the claimants to rely on an unlawful act to profit if the contract is enforced, as opposed to just preventing loss). By contrast, the removal of the exception will avoid situations where claimants are able to avail themselves of a proportionality-based exception on purely fortuitous situations outside their control.

    Proportionality vs Stultification

    Second, and separate from the uncertainty the existing categorisation creates, questions arise from how the ‘proportionality’ exception would cohere with the principle of stultification. In particular, given the willingness of the Court to apply the principle of stultification in other situations like in adjudicating independent claims in tort or for property, why should the principle of stultification not also apply in the Ting exception instead of proportionality? Insofar as the Court deems the Ting category of exceptions worthy of disparate treatment and access to the proportionality principle, it may be questioned why the disparity is aggravated by the application of proportionality as the governing principle instead of stultification. The Court suggested that stultification being an ‘underlying thread throughout…the law relating to restitutionary recovery pursuant to an independent cause of action’ would be a ‘desirable outcome’, and questions may also thus arise of the outer limits of stultification, and whether it should take on a broader character like the proportionality test has.

     

    Restitution

    Ochroid has done much to clarify the law in this area, and is certainly to be welcomed. Nonetheless, three areas may be examined for further consideration:

    Identification of ‘the fundamental policy’

    First, in reference to the stultification principle, there may be uncertainty as to what the ‘fundamental’ policy which rendered an underlying contract void and unenforceable in the first place is. In cases where a prohibition has multiple causes and seeks to achieve a range of different objectives, identifying the precise ‘fundamental’ policy may not be as simple as in Ochroid.

    Overlaps between the Restitutionary Avenues

    Second, and as recognised by the Court (at [170]), there are clear overlaps between the in pari delicto doctrine and the independent action in unjust enrichment. The duress or mistake which causes the parties to not be ‘in pari delicto’ could also serve as an unjust factor for an unjust enrichment claim. One may thus question whether it is necessary for this doctrine to remain distinct and separate. 

    Misdirected Moral Opprobrium

    Third, one may question whether Lord Sumption’s view in Patel that restitutionary relief in the form of unjust enrichment should always be available ought to have been dismissed so quickly. The Court in Ochroid deemed at [146] that Lord Sumption’s approach had ‘little to commend it’, noting that ‘even in the context of restitutionary relief, there will be cases where to allow the claim in unjust enrichment would bring the court into disrepute and undermine the integrity of the law’. The example provided was to question whether restitutionary relief should be granted even in claims involving a contract to commit a murder. Lord Grabiner QC suggested that it was ‘difficult to think of a more offensive or objectionable outcome’ than to permit recovery in such a scenario, but this polemic can be unpacked further:

    A contracts to pay B $10,000 to murder C. B is unable to because of C’s untimely (but unrelated) death. The potential ‘undermining’ of the integrity of the law is largely ameliorated by the existence of alternative (criminal law) means for the state to seize or impound the money transferred. Thus, even if A would otherwise be able to reclaim the $10,000 through an independent action in unjust enrichment, he would remain barred from the money by such measures. The practical effect is thus the same: A is not able to enjoy the $10,000, and the ‘integrity’ of the law is not compromised. Instead, it may be argued that the ‘integrity’ of the law is in fact enhanced: rather than conflating i) the moral opprobrium directed at A with ii) his rights over the money, Lord Sumption’s approach has the benefit of clearly delineating a) the application of the unjust enrichment remedy and b) the tools the state has for seizing the money. A morally-suspect individual like A is still able to own and dispose of property, and he should not be denied money that would normally be his in the context of a void contract, subject to criminal law seizure, solely because of moral outrage.

    If anything, one might suggest that B keeping the money, as would likely happen if A’s unjust enrichment claim failed, would be similarly deleterious for the ‘integrity’ of the law. B fully intended to murder C, and is similarly blameworthy. The moral outrage ought to be with either A or B keeping the money, not solely against A. The way to address this issue is to have that money denied to both parties, as opposed to giving B an unjustified windfall.

    Granted, one may question whether there always exists an alternative means for the state to seize or confiscate the money involved, which may vary by country and offence, but the broad principle remains. Insofar as A (and B) are parted from the money, the integrity of the courts is largely protected. With that overarching concern settled, attention can be turned to the precise logic of the Court in refusing the restitutionary application of unjust enrichment in illegal contracts. The Court in Ochroid quoted Lord Mansfield in Holman v Johnson (1775) 1 Cowp 341 approvingly, that a claimant ‘may be equally undeserving, but it was not for his sake that the rule operated’. Rather, it was premised on protecting the integrity of the courts. The integrity of the courts is important, but the court should also not lose sight of the integrity of its doctrines. There should be more compelling explanations for the rejection of Lord Sumption’s position, which is largely in line with the orthodox application of unjust enrichment, than merely moral outrage.

    Conclusion

    The Court in Ochroid echoed that in Ting, noting that ‘the law relating to illegality and public policy is generally confused (and confusing)…given the nature of the subject itself’. The Court rightly underscored the ‘important threshold point that any approach…needs, in the circumstances, to be as straightforward as possible’. The Court has provided welcome clarity and a useful framework for analysis in this sphere. The rejection of Patel and the potentially uncertain multifactor analysis underscores Singapore’s commitment to (commercial) certainty in this area of law. While areas of law like taxonomy in cases of illegality or how to ascertain the ‘fundamental policy’ in stultification remain to be developed, Ochroid is a strong pragmatic step in this inherently nebulous field. 

    * The author wishes to thank Mr Harry Francis Millerchip and Dr Andreas Televantos. The views in this article should not be taken as representative of any organisations I am affiliated to. All errors herein are my own. 

    ** This blog entry may be cited as Jarret Huang, “Ochroid Trading: Illegality and Unjust Enrichment after Patel v Mirza”  (15 June 2018) (http://www.singaporelawblog.sg/blog/article/212)

    *** A PDF version of this entry may be downloaded here

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