Void and Illegal Contracts

Sec. 2(g): an agreement not enforceable by law is said to be void.

Illegal contracts: void or unlawful and will not be enforced by the courts.

Section 24 is the primary source of illegality in Malaysia.

Section 24: The consideration or object of an agreement is lawful, unless –

(a) It is forbidden by a law

(b) It is of such a nature that, if permitted, it would defeat any law
(c) It is fraudulent
(d) It involves or implies injury to the person or property of another
(e) The court regards it as immoral, or opposed to public policy

Where the consideration of the agreement is unlawful:

- Illustration (f)

Where the object of the agreement is unlawful:

- Illustration (e) & (h)

- Arumugam v Somasundram (employment contract): The defendant employed the

plaintiff to drive his car for him for private use or for hire. Both knew that the car
was licensed for private use only, but used it for hire contrary to the Motor
Vehicles Enactment. When the defendant failed to pay his wages, the plaintiff
claimed for his money. Held: There is nothing illegal in agreeing to drive a car for
hire. However, if the object was to drive an unlicensed car for hire, then the object
of the agreement was unlawful. The plaintiff failed in his claim for his wages.

- Aroomoogum Chitty v Lim Ah Hang (loan agreement): The plaintiff lent money to
the defendant for the purpose of running a brothel. The object of the contract was
therefore immoral. The plaintiff then sued for payment. Held: The plaintiff could
not recover his money as no action will arise from a wrong done (from an illegal
act).

Sec. 24(a): Agreements forbidden by law

- Refers to express contraventions of the law, most commonly provided in statutes.

- The contract is said to be illegal and unenforceable under Sec. 24(a) because it
involves consent by both parties to do an act prohibited by the statute.
- It must be ascertained if the statute prohibits/forbids the act which the
parties have contracted to do NOT whether the statute prohibits the
contract or the making of the contract.
 - Haji Hamid Ariffin v Ahmad Mahmud (Sale of Malay Reserve Land): A Malay
person sold his Malay Reservation land to a Siamese lady. She took possession of
the land and the title deed, which was still registered in the name of the original
vendor, was given to her. Subsequently, she sold the land to the appellants who
were Malays. The original vendor and the Siamese lady died and the appellants
were appointed as administrators of her estate. The appellant then sued the
administrators of the original vendor’s estate for specific performance. Held: The
sale to the Siamese lady was void ab initio as sec. 6(1) of the Kedah Malay
Reservation Enactment provides that where any Reservation land is held under a
document of title by a Malay, no right or interest therein shall vest, whether by
transfer or otherwise, in any person who is not a Malay. By sec. 6(2), any
document or agreement purporting to vest in any person any right or interest
contrary to the above provisions shall be void. Thus, neither could the Siamese
lady enforce the sale nor can she pass a good title to another even if the other is
Malay, as no one can give that which he has not.

- Yeep Mooi v Chu Chin Chua & Ors (Requirement of license): The appellant
deposited a sum of $5000 with a pawnbroker bearing interest at the rate of 14.4%
per annum. Upon the death of the pawnbroker, the appellant commenced
proceedings for the recovery of the sum. The Sessions Court held that the deposit
was a void agreement under the Moneylenders Ordinance 1951 as the appellant
was held to be an unlicensed moneylender who had lent money to the pawnbroker
despite her knowledge that she was not licensed to act as a moneylender.Held:
The appellant had not acted as a moneylender, as her main profession was a
seamstress and she had deposited the sum with the pawnbroker as a means of
saving. However, it was found that the deceased pawnbroker was prohibited from
accepting such deposits by the Borrowing Companies Act 1969, rendering the
transaction between him and the appellant void and unenforceable. Thus, the
appellant was entitled to restitution under Sec. 66.
- Govindji v Soon Hin Huat: Where the plaintiff did not have a license to buy
copra (dried meat/kernel of coconuts) in accordance with the Coconut
Marketing Scheme 1973, the court held that the contracts were clearly in
contravention of the law and that it was a direct violation of legal
prohibition.

Sec. 24(b): Agreements to defeat the law.

- Where there is no direct contravention, but the consideration or object would, if

permitted, have the effect of defeating the law.
- E.g: Illustration (i)
 - Hee Cheng v Krishnan: The plaintiff in this case claimed for specific performance
or alternatively for damages for a breach of contract entered into between him
and the defendant for the purchase of a house built upon a piece of land in respect
of which a Temporary Occupation Licence was issued. Held: The alleged contract
was in fact an attempt to sell and to purchase the defendant's rights under the
Temporary Occupation Licence, and therefore void under Sec. 24 as, if it were
allowed, it would frustrate the law.

TEST: For a contract to be illegal for contravening a statutory provision there must be a
sufficient nexus (link or connection) between the statutory requirement and the contract.

- The statutory prohibition or requirement must be sufficiently linked to the

contract for questions to arise of the illegality of any contract made in breach of
the statutory requirement.
- The following issues have to be considered:
- Whether the statute prohibits the making of a contract of the type in
question.
- Whether the statute provides that one of the parties must satisfy certain
requirements before making such a contract.

- Hopewell Construction Co Ltd v Eastern & Oriental Hotel Sdn Bhd: On May 11th
1982, the plaintiff, a company in Hong Kong, entered into a contract with the
defendant for the construction of a building in Penang and carried out certain
works. On the plaintiff’s claim for works carried out, the defendant argued that
the contract was void because the plaintiff, being a foreign company, was not
registered as a foreign company pursuant to the Companies Act 1965. Held: There
is nothing in the Companies Act which prohibits the making of the said contract in
question. The Act also does not lay down any requirement which a foreign
company must comply with before entering into such a contract. Thus, as there is
no sufficient nexus between the Act and the contract, the contract is valid.

Maria Tunku Sabri v Datuk Wan Johani Wan Hussin (Breach of promise to marry): The
settlement agreement entered into by the parties was a result of the defendant's alleged
breach of promise to marry the plaintiff who was at that material time, a married Muslim
woman. There was an earlier agreement ('the first agreement') between the parties wherein
the defendant agreed to marry the plaintiff. The issue is whether the settlement agreement
is enforceable. Held: The plaintiff, who was married, had no capacity to enter into the
agreement to marry in the first place. The agreement to marry was forbidden by law under
sec. 24(a), Contracts Act, by virtue of sec. 14(1) of the Islamic Family Law (Federal Territories)
Act, which provides that “no woman shall, during the subsistence of her marriage to a man,
be married to any other man.” The provision expressly forbids the plaintiff from entering into
such an agreement. Therefore, if the settlement agreement were to be enforced, it would
defeat the objective of sec. 14(1), IFLA, thus rendering it void under
sec. 24(b), CA.

Sec. 24(c): Agreement is fraudulent.

- Illustration (g)

Sec. 24(d): Agreement involves or implies injury to the person or property of another.

- Syed Ahamed Mohamed Alhabshee v Puteh Satu

Where the case involved the sale of land belonging to a minor at an undervalue,
the court held that the agreement was to the detriment of the minor as it appears
to be an agreement involving an injury to the property of another, and is therefore,
void.

Sec. 24(e): Agreements regarded as immoral or opposed to public policy.

Where agreements are immoral:

- Illustration (j)
- Illustration (k)

Where agreements oppose public policy:

- Contracts that tend to bring about a state of affairs regarded by law as harmful to
society.

- Chitty on Contracts, 24th Edition

- The scope of public policy can be classified into five grounds:
i) The objects are illegal by common law or legislation
ii) The objects are injurious to good government
iii) The objects interfere with the proper working of the machinery
of justice
iv) The objects are injurious to family life
v) The objects are economically against the public policy

- Theresa Chong v Kin Khoon & Co: “No court can invent a new head of public policy.”
Malaysian courts are bound by the English tradition classification of public policy.
Agreements which fall outside of the traditional heads will not be considered as
objects falling within Sec. 24(e).
1. The objects are illegal by common law or legislation
- Where the object contravenes any statute or subsidiary legislation, the
agreement is void and unenforceable.
- Covered under Sections 24(a) and (b)

2. The objects are injurious to good government

- Datuk Ong Kee Hui v Sinyium Anak Mutit: The respondent, a member of
the Sarawak United People’s Party (SUPP) entered into an agreement with
the party that in consideration of the party adopting him as a party
candidate and bearing all expenses for his election, he promised that, in
the event of his being successfully elected, he would give all his
parliamentary remuneration to the party. Further, should he do any act
which would be contrary to the interest of the party, he would forfeit his
seat in the Dewan Rakyat. Held: The agreement was illegal as it was an
agreement tending to injure the public service. Electors must be free to
choose a representative in the legislature, and those elected must be free
to act in accordance with his independent judgment. The law frowns upon
any arrangement that deprives him of this independence and regards it as
violating public policy.

3. The objects interfere with the proper working of the machinery of justice.
- Ooi Kiah Inn Charles v Kukuh Maju Industries Sdn Bhd: The defendants,
directors of Moveland Properties Sdn Bhd, entered into a contract with the
plaintiff for the construction of certain buildings. In the contract, the
company’s name was stated as ‘Moveland Sdn Bhd’. When the plaintiff
claimed against the company for arrears of payment, he discovered that
there was no company registered as such. The plaintiff lodged a police
report against the defendants for cheating. Later, the parties entered into
an agreement to settle the matter which stated that the defendants would
pay the RM1.9m sum owed upon the plaintiff withdrawing his charges
against the defendants. The defendants paid only RM140, 000 and the
plaintiff commenced an action to recover the balance sum. The defendants
argued that the letter of guarantee was void for illegality because it was an
agreement to stifle prosecution. Held: The agreement and the letter of
guarantee, which had to be read together, stated that one of the
considerations for the defendants to admit liability and to undertake to pay
off indebtedness was that the plaintiff should withdraw the charges against
the defendants. This tainted the whole agreement and the letter of
guarantee as it was clearly a promise not to prosecute. To stifle prosecution
for cheating therefore is certainly an act within the ambit of the second
limb of Sec. 24(e).
 - If the courts enforce agreements to stifle prosecution, it could mean that
the law of freedom to contract had been abused for extortion where the
accused was innocent, or where he was guilty, it had been abused for
making a trade of crime.
- Only when the stifling of prosecution relates to non-compoundable
offences specified in the Penal Code would the agreements be void
under Sec. 24.

4. The object is injurious to family life.

- Nafsiah v Abdul Majid: The plaintiff took action against the defendant for
breach of promise to marry. Both parties professed the Muslim religion.
The defendant argued that it is against public policy to enforce the promise
to marry, especially when the plaintiff knew that the defendant was
already married. Held: The plaintiff’s knowledge that the defendant was
already married did not invalidate the promise as the defendant was,
under his own personal law, entitled to more than one wife.

5. The object is economically against the public interest.

- Lim Kar Bee v Duofortis Properties Sdn Bhd: A scheme was devised whereby
the appellant, the registered owner of some land in Penang agreed to sell
the land to a company and also executed a trust deed declaring that he
held the land in trust for the company. The said company was incorporated
together with the holding company in pursuance of a scheme devised by a
tax consultant to avoid payment of estate duty payable in respect of the
said land if the appellant died. Held: The agreement was void and
unenforceable as the primary purpose of the scheme was to avoid paying
estate duty, making it illegal.

- Harun Taib v Khor Peng Song: The plaintiff had instructed his solicitor to
insert RM330,000 as consideration in an agreement for the sale and
purchase of a piece of land when the price he had actually agreed to pay
was RM497,000. Held: The insertion of a false figure for the consideration
was intended and calculated to mislead the stamp duty authority and
resulted in the evasion of the payment of a higher duty. Thus, the
agreement which is opposed to public policy is void and unenforceable.

Sec 28: Agreements in restraint of trade

- An agreement where a person’s liberty to carry on a profession, trade or business

is restricted.
- May exist in:
- Contracts of employment between employer and employee
 - Contracts between vendor and purchases for the sale of the
goodwill of a business
- Contracts between partners prior to dissolution of the partnership
and during its continuance
- Other commercial contracts

- Common law position:

- All contracts in restraint of trade, business or profession are prima facie
void, but valid if reasonable in the interest of the parties and the public.

- Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co.: The plaintiff

agreed not to engage in the manufacturing of guns, ammunition or in any
business competing with the defendant for 25 years. Held: The general
restraint not to engage in manufacturing guns and ammunitions was valid
since the business of the defendant extended to all parts of the world.
However, the provision prohibiting competition in any way was an
unreasonable restraint of trade and therefore void.
- HOL: ‘Reasonable’ in this context means “in the interest of the
parties concerned and the public, so framed and so guarded to
afford adequate protection to the party in whose favour it is
imposed, while at the same time, it is in no way injurious to the
public.”

- Fitch v Dewes: Where the covenant in restraint of trade was for the interest
of the employer, the court found that although it was unlimited in time, it
was reasonable for the protection of the employer and was not against
public interest.

- Thomas Cowan & Co Ltd v Orme: Although the covenant in restraint of

trade was reasonable between the parties, it was void on the ground that
it was unreasonable in the interest of the public.

- Esso Petroleum Co Ltd v Harper’s George: Where the covenant in restraint

of trade was for the period of 21 years, the court held that it was
unreasonable in the interest of the public.

- Malaysian position:
- Sec 28 generally prohibits any restraint of trade.
- The phrase ‘is to that extend void’ in the provision means that the
contract remains valid, but the clause in restraint of trade is void.
 - It renders all covenants in restraint of trade void even if it is
reasonable.
- EXCEPTION: There are three exceptions under this
provision. If the covenant in restraint of trade falls under
either one of these exceptions, the covenant is valid.

- Employment contracts:
- Where the employee has covenanted with his employer to not
compete with his employer by:
- Setting up his own business OR
- Entering into the service of a rival trader
- Employment contracts do not fall under any of the three exceptions.
- Any covenant in restraint of profession against an employee is void.

- Wrigglesworth v Wilson Anthony: An employer restrained an advocate and

solicitor from practising his profession within 5 miles of Kota Bharu for a
period of two years after the termination of his employment. Held: The
covenant in restraint was void, and the distance and place in respect of the
restraint was irrelevant.

- Stamford College Group Sdn Bhd v Raja Abdullah Raja Othman: The
defendant entered into a contract of service with the plaintiff as a lecturer
in Hotel Management. It was a term of the contract that if the defendant’s
service was terminated, he should not, within 2 years from the
termination, become employed by any company or institution as a lecturer
without the consent of the plaintiff. The defendant later terminated his
employment with the plaintiff and became employed by Syarikat PDC Sdn
Bhd where he gave courses in Hotel Management. Held: The clause was
held void. If the defendant was not allowed to be a lecturer elsewhere, his
livelihood would be affected.

- Polygram Records Sdn Bhd v The Search: The clause prohibiting the Search
group from making any recordings after the expiry of their contract with
the plaintiffs was void as it was a covenant in restraint of trade. However,
the covenant whereby the group undertook to provide exclusive recording
rights to the plaintiff during the currency of their recording contract was
not a covenant in restraint of trade.
- Visu Sinnadurai J: Sec 28 is only applicable to cases where a person
is restrained from carrying on his trade or profession during the
post-contract period, not during the currency of the contract.
- Contracts between vendor and purchaser:
- Where the vendor of the goodwill of a business enters into a
covenant not to carry on a similar business in competition with the
purchaser.

- Exception 1 of Sec. 28:

One who sells the goodwill of a business may agree with the buyer
to refrain from carrying on a similar business, within specified local
limits, so long as the buyer, or any person deriving title to the
goodwill from him, carries on a like business therein: Provided that
such limits appear to the court reasonable, regard being had to the
nature of the business.

- TEST of reasonableness:
The covenant against the vendor will not be in restraint of trade if
it satisfies the following conditions:
- It prohibits the vendor from carrying on a similar business
- The area of restraint is within specified local limits
- The buyer or his successors carries on the same business
- Such limits are reasonable regard being had to the nature
of the business

- It is unclear whether Malaysian courts will interpret the word

‘reasonable’ in the same way as in the Common law position, that
is to take into account the interest of the parties to the contract and
the public.

- Where the exception has expressly provided that the restraint must
be ‘within specified local limits’, any restraint beyond such limits
would be unreasonable and void.

- Contracts between partners

- Exception 2: Partners may, upon or in anticipation of dissolution of
the partnership, agree that some or all of them will not carry on a
business similar to that of the partnership within such local limits
as are referred to in Exception 1.
- Under Exception 2, the same TEST of reasonableness as in
Exception 1 applies.

- Wrigglesworth v Wilson Anthony: The plaintiff contended that

Exception 2 of Sec. 28 applied because Clause 9 of the agreement
 intended to make the defendant a partner in the plaintiff’s firm.
Held: Exception 2 did not apply as at the time of the execution of
the agreement, the defendant was not then a partner of the
plaintiff’s firm. Exception 2 refers to an agreement between
partners prior to dissolution.

- Exception 3: Partners may agree that someone or all of them will

not carry on any business, other than that of the partnership, during
the continuance of the partnership.
- This is to ensure that the partners devote their time and
skills into the business of that partnership only.

- Other commercial agreements

- The Hua Khiow Steamship Co Ltd v Chop Guan Hin: The contract between
the plaintiff and the defendant contains a covenant that if the defendant
transported their goods through another company, they would be
disentitled to claim a rebate and would also be liable to pay the plaintiff
three times the cost of freight shipped by them in breach of agreement.
Held: The agreement was not void for being in restraint of trade within the
meaning of Sec. 28. The agreement only limits the manner in which trade
shall be carried out in that it merely provides that the defendant should
exercise the trade in a particular manner.

- A distinction had been drawn between a clause in restraint of trade and a

clause which limits trade. A clause which limits trade is allowed as it only
limits or restricts how a business is conducted.

Sec 31: Gaming and wagering (betting) agreements

- Agreements by way of wager are void.

- No action can be brought for the recovery of anything alleged to be won
on any wager.
- Also provided for under Sec 26, Civil Law Act 1956.

- EXCEPTION: Sec 27A, Common Gaming Houses Act 1953: Allows a company
registered under the Companies Act to promote and organize gaming (betting or
lotteries) provided that the company (operator) is in possession of a valid licence.

- Pet Far Eastern Sdn Bhd v Tay Young Huat & Ors: The first defendant embezzled
the plaintiff’s bank account by arranging for the issue of bankers’ drafts which
were subsequently deposited in Malaysia for the second defendant in
 consideration of gambling activities, which the second defendant had provided on
board the MV Amusement World, in which the first defendant participated. The
issue was whether the monies paid to the second defendant was made in
pursuance of an illegal contract. Held: The gambling at the casino of MV
Amusement World by the first defendant using the bankers’ drafts lodged with the
second defendant’s account was not only illegal, but void, since Malaysian law
does not recognise a gambling contract. Thus, there was no contract at all.

- The Aspinall Curzon Ltd v Khoo Teng Hock: The plaintiff, a licensed gambling casino,
obtained a judgment against the defendant in the High Court of England, and later
obtained an order from the High Court in Kuala Lumpur to have the judgment
registered under sec. 4 of the Reciprocal Enforcement of Judgments Act. The
defendant appealed and argued that the judgment had been obtained for a
gambling debt, and should not be enforced as it would be against the country’s
public policy. However, the High Court dismissed the defendant’s appeal.

- The Ritz Hotel Casino Ltd & Anor v Datuk Seri Osu Haji Sukam: In disagreeing with
the decision in Aspinall Curzon, the court held that the registration of a foreign
judgment for a gambling debt contradicted Malaysian public policy. Although an
action for a gambling debt is held lawful in another country, the enforcement of
such judgment would be unlawful in Malaysia.
- Ian Chin J: Gambling is allowed under licence in Malaysia to prevent it from
being run by the underworld and it was not that it was something that was
good.

- Jupiters Ltd v Lim Kin Tong: Local courts should not, as a matter of principle and
public policy, act as gambling debt collectors for foreign casinos particularly when
there are express provisions such as Sec 26, CLA and Sec 31, Contracts Act.

Effect and relief of void or illegal agreements:

- Where the consideration or object of an agreement is unlawful, the agreement is

void ab initio and it is unenforceable by law.
- Parties have no rights to enforce the contract.
- The innocent party cannot apply for specific performance of the contract.

- Relief under Sec. 66

- Two requirements:
- Person seeking relief must not be a party to the illegality (in pari
delicto)
- The agreement is one that is discovered to be void.
 - The party seeking relief must not be aware of the illegality
at the time the contract was entered into and the illegality
was only discovered subsequently.

- Ng Siew San v Menaka (appealed as Menaka v Lum Kum Chum): The

respondent, Menaka, was a registered moneylender under the name “AR
PR M Firm”. The respondent had lent money to the appellant, Ng Siew San,
on the security of a charge of certain lands belonging to the appellant. On
the respondent’s application for an order for the sale of the land to satisfy
the principal sum and interest, the appellant objected to the application on
the ground that the loan was not in the registered name of the
moneylender and contravened sub-sections 8(b) and (c) of the
Moneylenders Ordinance 1951. Held: The said agreement was void as it
was forbidden by sub-sections 8(b) and (c) of the Ordinance. However,
since the respondent was not aware of the illegality of the transaction at
the time they executed the agreement, Sec. 66 was applicable and the High
Court was right to order the return of $19,400 to the respondent.
- Federal Court: The invalidity of the contract or agreement should
be discovered subsequent to the making of it… It only applies to a
case where one of the parties enters into an agreement under the
belief that it was a legal agreement; that is without the knowledge
that the agreement is illegal.
- The Privy Could upheld the Federal Court decision and dismissed
the appeal: The contract was “discovered” to be void only after
these proceedings (loan transaction and executing of documents)
had been started.

- Federal Court in Yeep Mooi v Chu Chin Chua & Ors: 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 void-ness.

- Ahmad Udoh v Ng Aik Chong: The parties entered into an agreement which
was in contravention of the Padi Cultivators Ordinance 1955. However, as
the plaintiff and respondent were ignorant of the illegality, Sec. 66 applied
and the respondent was entitled to the return of the deposit which he had
paid.