Jurisdiction - Singapore
News
Singapore – When Is A Contract Unenforceable For Illegality?

16 July, 2014

 

Legal News & Analysis – Asia Pacific – Singapore – Corporate/M&A

 

Introduction

 
In general, the law is not inclined to enforce an illegal contract. However, the doctrine of illegality is notoriously complex, and what constitutes an illegal contract goes far beyond agreements that have been banned by statute, or agreements to commit an offence. In the case of Ting Siew May v Boon Lay Choo [2014] SGCA 28, the Singapore Court of Appeal set out a series of guidelines to determine exactly when a contract is unenforceable for illegality.

 
The contract in question was an option to purchase a property, which was backdated in order to obtain a higher bank loan by circumventing MAS Notice No 632, which regulates residential property loans. The Court of Appeal held that the option was not enforceable as it was a contract entered into with the object of committing an illegal act.

 
Although the option in itself was not prohibited, there was an unlawful intention behind the option, thus rendering the contract itself unlawful. Examining the circumstances of the case, the Court then found that it would be a proportionate response to the illegality to refuse the enforcement of the option.

 
This decision provides a demonstration of the scope of the doctrine of illegality, and that an unlawful intention, if closely enough related to the contract, may render the entire agreement unenforceable.

 
Brief Facts

 
The Respondents were seeking to purchase a property, and had obtained an in-principle agreement from the bank for a loan capped at the loan-to-value (“LTV”) ratio of 80%. At the time, this was the prevailing limit set by the Monetary Authority of Singapore (“MAS”). However, on 5 October 2012, MAS issued an amendment to MAS Notice No 632 (the “5 Oct Notice”), reducing the LTV ratio to 60%.

 
The Respondents then arranged to purchase a property from the Appellant. On 13 October 2012, the Respondents signed an option (the “Option”) from the Appellant which was backdated to 4 October 2012. The backdating was at the request of the Respondents in order to obtain a loan on the more favourable terms allowed before the 5 Oct Notice.

 
However, before the expiry of the Option, the Appellant withdrew the offer, stating that she did not want to be party to any illegality or irregularity. The Respondents then sought the specific performance of the Option.

 
Holding Of The High Court

 
The High Court held that the Option was valid and binding on the Appellant, and granted the Respondents an order for specific performance.

 
(i) There was no statutory illegality as there was no legislative intent that the backdating of the Option would render the Option unenforceable.

 

(ii) There was no illegality at common law as the illegal manner in which the Respondents intended to procure financing was too remote from the contract, and the Respondents did not need to rely on the backdating to found their claim.

 
Holding Of The Court of Appeal

 
The Court of Appeal overturned the High Court’s decision regarding illegality at common law, holding that the Option was in fact void and unenforceable at common law for being a contract that was entered into with the object of committing an illegal act. While it agreed that there was no statutory illegality, this common law illegality was enough to render the Option unenforceable.

 
Illegality

 
The doctrine of illegality can be divided into two areas – statutory illegality and illegality at common law.

 
Statutory illegality requires the contravention of a statutory provision. Further, the Court must look into the legislative intent behind the provision, and ascertain whether the provision intended that the contract itself be prohibited, as opposed to only the conduct.

 

 

Illegality at common law depends on whether the contract in question is prohibited by any heads of public policy. A straightforward example is that a contract to commit a crime, tort, or fraud would be unenforceable at common law.

 
A more complicated head of public policy would be where the contract is entered into with the object of committing an illegal act. These contracts are in themselves not unlawful, but may breach public policy by being a contract which is:

 
(i) Entered into with the object of using the subject matter of the contract for an illegal purpose;
(ii) Entered into with the intention of using the contractual documentation for an illegal purpose; and
(iii) Intended to be performed in an illegal manner.

 
The Court will then examine the facts and circumstances of the case to determine whether rendering the contract unenforceable would be a proportionate response to the illegality. In doing so, the Court will consider, inter alia, the following factors:

 
(i) Whether allowing the claim would undermine the purpose of the prohibiting rule;
(ii) The nature and gravity of the illegality;
(iii) The remoteness or centrality of the illegality to the contract;
(iv) The object, intent, and conduct of the parties; and
(v) The consequences of denying the claim.

 
Application

 
The Court of Appeal held that the Option was entered into with the object of committing an illegal act, and thus unenforceable at common law.

 
In this case, the Option was entered into with the intention of using the contractual documentation for an illegal purpose. The Respondents intended to use the backdated Option itself to circumvent and contravene the 5 Oct Notice so as to obtain a bank loan on more favourable terms.

 
The Court then applied the factors of proportionality, and found that refusing the enforcement of the Option would be an appropriate response.

 
(i) The object and intent of the Respondents was to use a false date, which they knew was prohibited.

(ii) The nature of the illegal act was not trivial, as it was directly related to the policy objective of limiting property loans so as to restore stability in the market.
(iii) Allowing the Option to stand would undermine the purpose of the 5 Oct Notice.
(iv) The illegal purpose was not too remote from the Option.
(v) The minor losses incurred by the Respondents as a result of denying the Option would not be so great as render it disproportionate to the illegality.

 
Therefore, the Court allowed the appeal and refused the enforcement of the Option.

 
Concluding Words

 
For a contract to be found unenforceable due to illegality, the contract need not be an agreement to commit an offence. There are far less obvious applications of the doctrine of illegality, as the illegality in question can occur in less direct applications of the contract.

 
As seen in this case, the doctrine of illegality applies where the contracting party intended to use the contractual documentation to avoid a statutory loan limitation. One can imagine numerous other similar scenarios, such as where the documents are to be used to avoid tax obligations, to sidestep certain business prohibitions, or to otherwise mislead a public authority.

 
Parties should thus be aware that the Courts will not uphold such contracts, and that contracts tainted by illegality in the manner set out above will be rendered unenforceable.

 

Rajah & Tann

 

For further information, please contact:

 

Adrian Wong, Partner, Rajah & Tann
adrian.wong@rajahtann.com

 
Yew Fei Lai, Partner, Rajah & Tann

yew.fei.lai@rajahtann.com

 

Rajah & Tann Corporate/M&A Practice Profile in Singapore


Homegrown Corporate/M&A Law Firms in Singapore

 
 

Comments are closed.