WHEN two or more people enter into an agreement and all the terms and conditions are agreed

to, then in the absence of any negating factor it will constitute a contract, which will be a binding arrangement. In some cases, the performance of obligations of both parties is simultaneous. Where property is bought in cash, the interest of both parties is protected by the deposit of the purchase price with the stakeholder who releases the money to the seller when the property is registered in the name of the purchaser. However, there are many instances where one party has to carry out all or part of its obligations first, and the other party will only do so later. At this stage it is discovered that the agreement entered into is void. An agreement is void if not made with the free consent of parties competent to contract, for a lawful consideration or with a lawful object, and in other cases are expressly declared to be void. The result is that the agreement is of no effect and neither party has any right against the other. To indicate this lack of rights the word void ab initio is used in contrast to voidable. However, what happens when one of the parties has made payments which the other party has received but before the latter could perform its obligations, it becomes known the agreement is void? Of course, the person who has already obtained the benefit could still carry on with his obligation if he wishes to. However, more often then not a party who for some reason or other has changed its mind will opt to rely on the invalidity to refuse to carry on with what has been agreed to. But what happens to the money that one party has already paid to the other in such a situation? If the party that has received the benefit fails to return the money, the question that arises is whether the person who has parted with the money is legally entitled to recover it? One view with regard to a void contract is that the loss should lie where it falls. On the other hand, it would appear to be unfair and inequitable to have a situation where one party benefits out of the invalidity that now emerges. A starting point would be Section 66 of the Contracts Acts 1950 which reads: 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. It would appear at first that parties would be entitled to revert to the status quo before the transaction was entered into. However, this is not always the case. It is relevant to consider whether one or both parties were aware of the illegality at the time of entering into the agreement. If one entered into the arrangement under the belief that it was within the law, then such a party would be able to rely on the section for this relief.

In Ahmad bin Udoh & Anor v Ng Aik Chong, the respondent had entered into an agreement with the appellants for the lease of padi land for a period of six years. Pursuant to the agreement, a sum of RM1,500 was paid to the appellants, who subsequently refused to allow the respondent to till the land. In an action to recover the sum paid, the Sessions Court judged in favour of the respondent. On appeal, the appellants raised a new issue that was not pleaded earlier that the agreement was illegal for contravening S3(1) of the Padi Cultivators Ordinance 1965 and that therefore the sum paid under the illegal agreement was not recoverable by the respondent. The High Court dismissed the appeal and on further appeal to the Federal Court, Suffian FJ (as he then was) held that for an agreement discovered to be void under S66, it includes an agreement that was void from its inception. His lordship held that based on the facts: There is no evidence that the respondent was in pari delicto and that he knew when he entered into the agreement that it was forbidden by law, the illegality of the agreement was discovered subsequent to the making of it, the claim for restoration of his money is not based on the illegal contract but dissociated from it ... In Yeep Mooi v Chu Chin Chua & Ors, the appellant had deposited some money with a person who was carrying on a borrowing business and as he was not a public company or a licensed borrowing company, the transaction was illegal, void and unenforceable under S3 of the Borrowing Companies Act 1969 (the Act). 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 depositees death and demanded a refund but was refused and she 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 that the transaction was void and unenforceable. It was under such circumstances that the appellant became entitled to the restitution of her deposit under S66 of the Contracts Act where the court went on to say: 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 and so they became aware of its voidness. We are of the view, therefore that S66 of the Contracts Act applies to this, and the appellant is entitled to the restitution of her money by the pawnshop ... However, in Thong Foo Chin & Ors v Shigenori Ono, the respondent failed to recover the sum of RM1.6mil that he had paid for the purchase of shares and the RM980,000

he had paid as well as RM141,024 that he had paid for the purchase of two pieces of land. This was because there were facts to show that the transaction was designed to evade the provisions of the Stamp Act 1948 and the RPTGA 1967 where the purchaser who sought to rely on S66 was represented by and advised by solicitors who had deliberately structured the transaction in the manner. It will therefore be seen that the knowledge and state of mind of the parties when they enter into a contract is regarded as being relevant when section 66 of the Contract Act 1950 is to be evoked.