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    04:03 PM Jonathan Muk (Justices' Law Clerk, Supreme Court of Singapore)

    Ting Siew May v Boon Lay Choo and another: Aspects of Illegality

        

    The facts 

    In mid-2012, the respondents wanted to purchase a landed property. They approached United Overseas Bank (“the Bank”) for financing and were granted an in-principle approval for a loan capped at the loan-to-value (“LTV”) ratio of 80%. However on 5 October 2012, the Monetary Authority of Singapore (“MAS”) issued MAS Notice No 632 (“Notice 632”), a statutory instrument pursuant to s 71 of the Banking Act (Cap 19, 2008 Rev Ed) (“the Banking Act”) which compelled the respondents to lower their LTV ratio to 60%. 

    On 10 October 2012, the respondents orally offered to purchase the appellant’s property. On 13 October 2012, the appellant granted the respondents an Option to Purchase (“OTP”) with respect to the appellant’s property. This was backdated to 4 October 2012, allegedly on the advice of the Bank’s employee, Mr Ong. It would have meant that the respondents could continue to take advantage of the original terms of their bank loan. 

    However, on 24 October 2012, one day before the OTP’s expiry, the appellant’s solicitors wrote to the respondents’ solicitors stating that the appellant did not want to be part of any illegality and was withdrawing her offer. This was because on 19 October 2012 she had learnt of Notice 632 and was advised by her solicitors not to proceed with the property sale. Despite the respondents’ solicitors replying and stating that she had no right to withdraw the OTP and proposing to proceed with the property sale on the basis that it was dated 13 October 2012, no agreement was reached between the parties. The respondents thus sought a declaration that the OTP was valid and binding, an order that the OTP be specifically performed or alternatively, damages.

    The High Court decision

    The High Court held that the OTP was valid and binding on the appellant and granted the respondents an order for specific performance. The Court also found that there was no statutory illegality since there was no express or implied legislative intention that backdating the OTP would render it unenforceable. Also, the OTP was not void and unenforceable for common law illegality because the illegal manner in which the respondents intended to procure financing was too remote from the contract.  Moreover, the respondents did not need to rely on the backdating to establish their claim against the appellant. 

    The Court of Appeal decision

    The High Court’s ruling was reversed by the Court of Appeal (“CA”): the OTP was held to be void and unenforceable. The respondents’ claims for specific performance and damages were accordingly dismissed. The CA considered the following issues:

    • Whether the OTP was void and unenforceable at common law for being against public policy, in particular:
      • Whether the OTP was void and unenforceable because it was a contract to commit the tort of fraud or deceit; and
      • Whether the OTP was void and unenforceable because it was entered into with the object of committing an illegal act.
    • Whether the OTP was expressly or impliedly prohibited by statute.

    The CA held that the OTP was rendered void and unenforceable by reason of common law illegality, even though there is no express or implied statutory prohibition against the backdated OTP. The underlying basis for the defence of illegality and public policy was one grounded in general policy principles and the wider public interest, as opposed to other doctrines where the contract is void due to some legally objectionable conduct by one of the contracting parties. 

    Common law illegality

    First, the CA held that while public policy was a nebulous concept, the case fell within established categories of public policy and the following categories were relevant to the case at hand:

    • Contracts to commit a crime, tort or fraud; and
    • Contracts entered into with the object of committing an illegal act.

    The CA’s holding: Contracts to commit a crime, tort or fraud

    The CA observed that there might be an overlap between this head of common law illegality and statutory illegality. Put simply, sometimes a contract to commit a crime, tort or fraud might also be void due to statutory illegality. Contracts made to commit fraud include contracts to commit a fraud on a third party, giving rise to a cause of action in the tort of fraudulent misrepresentation. The standard of proof however remains a relatively high one: Wee Chiaw Sek Anna v Ng Li-Ann Genevieve (sole executrix of the estate of Ng Hock Seng, deceased) and another [2013] 3 SLR 801. As there was no crime, tort or fraud committed in the present case, this category was not immediately relevant.

    The CA’s holding: Contracts entered into with the object of committing an illegal act

    Next, the CA held that this is a more general category of contracts which might be void and unenforceable at common law, following St John Shipping Corp v Joseph Rank Ltd [1957] 1 QB 267. Proof of an intention to break the law is required to make out a claim under this head of illegality. If the intention was mutual, the contract would be unenforceable by both parties. If it was unilateral, it would be unenforceable by the party guilty of the requisite intention. 

    The CA also recognised, and rightly so, that there are different degrees of legal wrongs, ranging from the severe to the trivial.  As such, it can be disproportionate if contracts are rendered void and unenforceable in all cases of legal wrongs. Accordingly, the CA proceeded to consider an appropriate test to determine the proportionate legal response in different scenarios. In addressing what this test might be, the CA analysed two seemingly irreconcilable English cases, ParkingEye Ltd v Somerfield Stores Ltd [2013] 2 WLR 939 and 21st Century Logistical Solution v Madysen [2004] 2 Lloyd’s Rep 92 (“Madysen”). The former put forward the test of proportionality to decide the enforceability of such contracts; the latter employed the test of remoteness or proximity. 

    The CA held that there is no substantive difference between the two tests. This is because if the illegality were too remote from the contract, it could be argued it would be disproportionate to hold the contract void and unenforceable. The concept of proportionality encompasses the idea of remoteness.  Put simply, remoteness is a factor in determining the proportionality test, and the CA thus endorsed the proportionality test.

    In a case where the contract is alleged to have been entered into with the object of committing an illegal act, the court’s task is to examine the relevant policy considerations underlying the illegality principle. This exercise must be undertaken with reference to the following questions: (a) whether allowing the claim would undermine the purpose of the prohibiting rule; (b) the seriousness of the offence; (c) the causal connection between the claim and the illegal conduct; (d) the conduct of the parties; and (e) the proportionality of denying the claim. On the facts, the CA held that the illegality sought to be committed was the contravention of Notice 632. The OTP was void and unenforceable because:

    • The intention by the respondents was to use the OTP for a prohibited purpose;
    • The nature of the illegal act was not trivial because Notice 632 sought to contain a property bubble in Singapore;
    • Allowing the respondents’ claim would undermine the purpose of Notice 632; and
    • This illegal purpose was not too remote because there was an overt step in carrying out the respondents’ unlawful intention taken in the OTP.

    Comments

    As commented in Ewan McKendrick, Contract Law (Palgrave Macmillan, 7th Ed, 2007) at pp 331 to 332: “In deciding whether a particular contract is ‘contrary to public policy’, the courts cannot shelter behind the argument that they are simply giving effect to the intention of Parliament. They must evolve their own conceptions of public policy.” The evolution of public policy standards has been observed in Jack Beatson, Andrew Burrows and John Cartwright, Anson’s Law of Contract (Oxford University Press, 29th Ed, 2010) at p 384 where it is observed that principles relating to transactions between cohabiting couples have changed over time, just as those relating to financing of litigation have. Michael Furmston, Cheshire, Fifoot and Furmston’s Law of Contract (Oxford University Press, 16th Ed, 2012) at p 457 comments that this is due to the fact that the law of illegality at common law originated on the basis that contracts which are injurious to society will not be tolerated. 

    It is suggested that here, the consequences of allowing parties to backdate their OTPs to bypass Notice 632 are too severe.  It would not only have widespread ramifications to the Singapore housing market but also lead to widespread social ramifications. This is because of Singapore’s economic structure in which property ownership is intended as a means to finance one’s retirement – circumvention of Notice 632 intended to guard against a property bubble would lead to the inflation of home prices, impinging on affordability and also potentially leading to a severe property bust in an economic downturn. 

    Statutory illegality

    The CA’s holding

    Second, the CA held that where statutory illegality was concerned, what needed to be ascertained first was the legislative intent. It drew a distinction between the contravention of the law and the validity and enforceability of a contract. Not all legal contraventions would lead to a contract being invalid and unenforceable.

    A contract’s validity might be expressly or impliedly prohibited by statute. However, express prohibitions which are found in the clear wording of statutes are rare, and implied prohibitions required enquiry into the object of the statute. An implied prohibition could occur where a contract had as its entire object the commission of the very act impliedly prohibited by statute.  

    On the facts, the CA found that the OTP was not rendered void and unenforceable by statutory illegality. There is no express provision in the Banking Act to the effect that backdated contracts like the OTP in the present case are void and unenforceable. The OTP was also not impliedly prohibited by the Banking Act for the following reasons:

    • The parliamentary intention behind Notice 632 is to regulate and control financial institutions granting credit facilities to buy residential properties and not interfere with private transactions relating to that property; and
    • There is no clear implication or necessary inference that the Banking Act is intended to prohibit the OTP since while there was a latent object to procure an illegal bank loan, there are also other important objects of the OTP. 

    Comments 

    It is often difficult to discern Parliamentary intention not least because parliamentary intent is an abstract and complex concept in itself. At times, Parliament might not have considered whether a contract that has contravened the statutory regime should be void or uneforceable. Had it done so, the consequences would have been clearly spelt out in the relevant statute, rendering the case an instance of express prohibition.  Indeed, in St John Shipping, the English Court of Appeal recommended judicial restraint in readily finding that a contract is impliedly prohibited by statute. One could thus surmise that implied statutory prohibition would be found in very exceptional cases under Singapore law, as was indicated by this case’s judicial tenor.

    It is suggested that reference can also be taken in future from Australian case law, which has explored the issue of implied statutory illegality in greater detail. In Miller v Miller [2011] HCA 9 at [26], the Australian High Court cited Nelson v Nelson (1995) 184 CLR 538 at pp 551–552 and held that the three kinds of scenarios were to be distinguished:

    • An express statutory provision against the formation of a contract by mandating an act which is essential to the contract’s formation.
    • An express statutory prohibition prohibiting the doing of an act–an agreement that the act be done is treated as impliedly prohibited by the statute and illegal.
    • Contracts not directly against the statute by reason of any express or implied prohibition but which are 'associated with or in furtherance of illegal purposes.  

    At present, it is unclear whether the Australian distinctions will be applied in Singapore–the reticence with which the CA now treats implied statutory illegality does not point favourably towards an adoption of the Australian guidelines. Nevertheless, this point is best left to a future case for development.

    The reliance principle

    The CA’s holding

    Lastly, the CA held that the “reliance principle” has a narrow ambit of operation and is usually invoked only by a contracting party who sought restitution of the value of what had been transferred under an illegal contract. Also, the CA clarified that once a contract has been determined to be void and unenforceable at common law, it is irrelevant whether the illegality had to be relied on to make out one’s claim.  This clarificatory note has the effect of diminishing the significance of the technical operation of the reliance principle in illegality context, and encouraging courts to directly engage with the underlying merits of the case, difficult as it might be to discern the policy objections in each case.  It remains to be seen whether the Court might apply the same enlightened approach in respect of the reliance rule in Tinsley v Milligan, the equitable counterpart of the reliance principle.

    Comments

    It is submitted that the reliance principle has now been confined to addressing cases where the parties enter into contracts bona fide but subsequently embark on courses of action that are illegal: the method of performance was noticeably not a factor in assessing whether voiding the contract is a proportionate response. The CA also used the language of restitution in its discussion of the reliance principle and commented that recovery on the basis of the reliance principle was usually premised on an independent cause of action. Moving forward, the interplay between the reliance principle and contracts which have been held to be illegal but enforceable will be an interesting one – in those circumstances, would the wrongdoer be allowed to reclaim money he paid to the other party on the ground of restitution, since he would not be relying on the illegal contract in his claim? 

    It is suggested that the Australian case of Equuscorp Pty Ltd (formerly Equus Financial Services Ltd) v Ian Alexander Haxton and others [2012] HCA 7 illustrates this point well. In Equuscorp, the respondents had invested in tax-driven blueberry farming schemes and taken a loan from Rural. However Rural had not issued a prospectus when the schemes were promoted, which was in contravention of s 170(1) of the Australian Companies Code. The loan agreements were held to be unenforceable for illegality and the issue was whether Equuscorp which had been assigned the loan agreements had a right of restitution for failure of consideration. The Australian High Court, by a majority (Heydon J dissenting), held in the negative as the respondents were the class of persons sought to be protected by s 170(1) of the Companies Code. 

    This point is best argued in the future. For present purposes, it is observed that Equuscorp was concerned with the coherence of the law (at [34]) and held that the statutory purpose giving rise to the illegality would be considered as well as whether the claimant was involved in the illegality. On the facts, the court found that Rural had been closely affiliated with the blueberry farms and had furthered the illegal purpose of the scheme. Allowing Equuscorp to recover the loans would be allowing recovery from the class of person sought to be protected by the Companies Code.  As such, to ensure consistency in the law, there could not be recovery via restitution.

    Conclusion

    In conclusion, Ting Siew May is a judgment that has set out clearly the basis on which the illegality defence is founded, both at common law and in statute. It is also now clear that the reliance principle does not apply if the contract is void and unenforceable at its inception due to common law illegality. It is nevertheless hoped that the issues identified above will be further developed in future cases as they come before the courts. 

    * This blog entry may be cited as: Jonathan Muk, "Ting Siew May v Boon Lay Choo and another: Aspects of Illegality" Singapore Law Blog (4 October 2014)

    ** The opinions contained in the commentary reflect the author’s own views and are not to be understood as reflecting the views of the author’s employer.

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

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