Jurisdiction - Singapore
Reports and Analysis
Singapore – Crossing the Line: When Backdated Contracts Become Illegal.

1 September, 2014

 

 

In late May 2014, the Court of Appeal (“CA”) issued a landmark decision on the enforceability of an option to purchase a property (Ting Siew May v Boon Lay Choo [2014] SGCA 28). The buyers had backdated the option to circumvent a notice prescribed by the Monetary Authority of Singapore (“MAS”). The effect of the MAS notice was that the buyers would obtain financing on less favourable terms from 6 October 2012; hence the option was backdated to 4 October 2012. 


Upon discovering the buyers’ intent to circumvent the MAS notice, the seller decided to withdraw her offer as she did not want to be complicit in “any illegality or irregularity”. However, the buyers insisted that the seller perform the option and took the matter to court.
The buyers succeeded in their action before the High Court, which held that the option was enforceable. The High Court reasoned that the option was “perfectly legal” and did not breach the Banking Act, under which the MAS notice was issued. Even if the buyers had intended to breach the law by backdating the option, the option was not automatically unenforceable. This was because although the way in which the buyers intended to obtain financing was illegal, it was merely incidental to the sale of the property.


The CA’s Decision 


The CA reversed the High Court decision and disagreed that the illegal manner in which the buyers sought financing was too remote from the sale. 


In holding that illegality at common law was established in this case, the CA preferred to adopt the principle of proportionality, instead of the principle of remoteness. Although the CA acknowledged that no real difference existed between the two principles in most cases, it preferred the principle of proportionality for its “simplicity and adaptability”. The CA observed that the principle of proportionality was “broader and more malleable than that of remoteness” because it was “capable of encompassing not only the concept of remoteness of the illegality but also considerations such as the nature of the illegality … and the relative effects on the parties of rendering the contract concerned unenforceable”.

 

In summary, the CA set out the following general non-exhaustive factors that the courts should examine in assessing proportionality in the context of contracts entered into with the object of committing an illegal act:

 

  • Whether allowing the claim would undermine the purpose of the prohibiting rule; 
  • The nature and gravity of the illegality; 
  • The remoteness or centrality of the illegality to the contract; 
  • The object, intent and conduct of the parties; and 
  • The consequences of denying the claim.

On the facts, the CA found that the illegal act that the buyers set out to commit was “the (intended) contravention of” the MAS notice, by using the option itself, namely, its documentation, to “circumvent and contravene” the MAS notice. The CA considered that refusing to enforce the option was a “proportionate response” to the buyers’ illegal act because:

 

  • allowing the buyers’ claim would undermine the policy objective of the MAS notice, which was to foster price stability in the property market;
  • the nature of the illegal act which the buyers set out to commit was not trivial. By intending to circumvent the notice through the backdated option, the buyers were in fact trying to defeat the MAS’ policy objective to promote price stability in a volatile property market by tightening the number of property loans; 
  • the buyers’ illegal purpose was not too remote from the option because the option “misrepresented the actual facts by stating a false date” in order to further the buyers’ illegal purpose. Moreover, the sale was a one-off contract, and not a long-term one where the parties could continue to perform the contract lawfully after the illegality was remedied; 
  • the buyers’ object and intent from the outset was to use the false date stated in the option for a purpose which they knew was prohibited by the MAS notice; and 
  • any loss suffered by the buyers in losing the entitlement to buy the property, such as the possibility of incurring cancellation fees, “would not be so great as to render it a disproportionate response to the illegality”.

Essentially, the CA was concerned with the substance of the transaction, and not its form. Structuring the sale in a way to “evade the law” would not be condoned, as it was contrary to the principle that “the court as a matter of public policy will not assist … a party to benefit from his own wrongdoing”. Thus, the broad category of contracts entered into with the intention of committing an illegal act played “an important ‘bridging’ role to ensure that a party who has entered into a contract with the intention of contravening a statutory provision will not (subject to the principle of proportionality) be entitled to enforce that contract”.

 

Implications Of The CA’s Decision 


What does this decision mean for the man-in-the-street who is involved in the sale and purchase of a property? 


Two points stand out. Firstly, it is only a short step from pseudo-legality to illegality. Dressing up a contract to make it appear lawful, when it is not, will likely be caught by the proportionality test adopted by the CA. Errant buyers or sellers will find it difficult to slip out of the phalanx of non-exhaustive factors that the Singapore courts will use to decide whether to enforce a contract entered into with the object of committing an illegal act. This is especially so when it is difficult to predict accurately how the Singapore courts will weigh the different factors in each case. As the CA emphasized, the inquiry into proportionality was “fact-centric” and the factors “should not be applied in a rigid or mechanistic fashion”. 


Secondly, the decision does not represent the start of a trend by the Singapore courts to strike down contracts on any evidence that an illegal act was prohibited by law. Indeed, in holding that statutory illegality was not established in this case, the CA pointed out that it will not lightly find that an illegal act is prohibited by a statute, if no clear language exists. On the facts, the CA found that the option was not expressly or impliedly prohibited by the MAS notice as it was targeted at banks, and not the public at large. 


Given the high volume of regulatory provisions in the modern administrative state, the CA rightly recognized that contracts involving breaches of statutory law, whether intentional or inadvertent, should be addressed by the principle of proportionality under common law illegality. This is a sensible solution as trivial breaches of statutory law, such as failing to comply with traffic regulations, should not automatically result in a contract (for instance, for the carriage of goods) being set aside. 


Comment 


The CA’s decision is to be welcomed for illuminating the complex area of illegality which has been associated with unruly horses and the like. It resonates with our intuitive views, as well as broader public policy principles, that the courts should not assist a party who crosses the line by bringing a cause of action that is closely associated with the party’s illegal act.

 

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For further information, please contact:

 

Yong Chan Sim, RHTLaw Taylor Wessing

yongchan.sim@rhtlawtaylorwessing.com


Lay Hong Tan, RHTLaw Taylor Wessing
layhong.tan@rhtlawtaylorwessing.com


Yiyang Chen, RHTLaw Taylor Wessing
yiyang.chen@rhtlawtaylorwessing.com

 

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