ILLEGAL CONTRACTs ❤

Table of Contents
No Content Remarks
1.0 Introduction
2.0 Agreements affected by Illegality
a) Agreements forbidden by law
b) Agreements that defeat the law
c) Contracts involving fraud
d) and causing injury
e) Agreements that are immoral and
Opposed to public policy
3.0 Consequences of illegality
4.0 Contracts not affected by illegality
1.0 Introduction
• Illegal contract
Definition: Illegal contract is a promise that is prohibited
due to its very nature. Such contracts are prohibited since
the performance, formation, or object of the
agreement is against the law.

• An illegal agreement, is one that the courts will not
enforce because the purpose of the agreement is to
achieve an illegal end.
• EXAMPLE: A contract for murder.
• Section 10 CA 1950 provides that for an agreement to
be a contract, it must be made by the free consent of the
parties competent to the contract and the consideration
and object of the agreement must be lawful and are not
expressly declared to be VOID.

• Q: What agreements are affected by illegality ?

S24 spells out the situations wherein the consideration or
object of an agreement is unlawful.
Agreements forbidden by law
s.24 (a) CA 1950
Agreements that defeat the law
s.24 (b) CA 1950
Contracts involving fraud and causing injury
s.24 (c) & (d) CA 1950
Agreements that are immoral & opposed to public
policy
s.24 (e) CA 1950
Agreements
affected by
illegality
s.24(a) –
(e) CA
1950
• In cases of (a) –(e)of s.24 CA 1950 ,
the consideration and object of the agreement is said to
be unlawful.

• Every agreement of which the object or consideration is
unlawful is VOID.

• Section 2 (g) provides that a VOID agreement is an
agreement not enforceable by law.

2.0 AGREEMENTS AFFECTED BY ILLEGALITY

1. Agreements forbidden by LAW:
• S.24 (a) – (b) refers to agreements that are illegal for expressly
contravening a statute or any subsidiary legislation.
• Case: Sababumi (Sandakan) Sdn Bhd v Datuk Yap Pak Leong
, clarified that an agreement is only void for illegality if the statute
prohibits the act.

• Cases for sub-sec 24 (a) : An agreement made in contravention
of a statute for an illegal consideration is therefore a void contract.
• Case: Manang Lim Native Sdn Bhd v Manang
Selaman
The Resp entered an agreement to transfer land classified as Native
Area Land in Bintawa, Kuching to the App. The App lodged a caveat in
respect of the said land and it was duly registered in the Land Registry.
Later, the Resp successfully sought an order from court to remove the
said caveat.
Held: A non-native sought to deal in native area land; and this was
against the S8 of Sarawak Land Code unless the dealing was
authorised by the Yang di-Pertua Negeri, Sarawak.


2. Agreements that defeat the law (s.24 (b) CA)
• Case: Hee Cheng v Krishnan
By a sale purchase agreement, the P sold his house built
upon a piece of land in respect of which he was the
holder of a Temporary Occupation Licence (TOL) to the D.
The D refused to perform the agreement & P claimed
specific performance of the agreement or alternatively,
damages for the D‟s breach of contract.
Held: that the agreement entered into was an attempt to
sell & to purchase the P‟s right under TOL. This is
contrary to rule 41 of the Land Rules 1930 which
states: “No licence for the temporary occupation of
the State land shall be transferable.”

3. Contracts involving fraud and causing injury
(s.24 (c) & (d) CA)

• s. 24 (c) of the Act covers agreements that are
fraudulent.
• Example: ILLUSTRATION (e) and (g) to s. 24 are
examples of considerations or objects of an agreement
being fraudulent.

• Case: Datuk Jagindar Singh v Tara Rajaratnam
The respondent who was the registered proprietor of land,
claimed that she was induced by the fraud and under
influence of the 1
st
and 2
nd
appellant to transfer her land to
the 2
nd
appellant.


• Held: The appellants and respondent were in a
solicitor-client relationships, the transaction was
unconscionable, the burden was on the appellants to
rebut the presumption of undue influence. Since they
had not discharged that burden, the transaction was set
aside. In addition to undue influence, the trail court also
found that the appellants conduct had been fraudulent
and exercised its discretion in awarding damages which
was upheld by the appellate court.
The App were guilty of fraud, breach of agreement and
undue influence and awarded damages to the
respondent.
(d) Contracts involving fraud and CAUSING INJURY

• Case : Syed Ahmad Alhabshee v Puteh bt Sabtu
Trustee of the land belonging to a child has agreed to
sell the land to the plaintiff.
• Held: If the purchase is allowed, it would be
detrimental to the interests of the children and
therefore, the court ruled that the transaction is void.
The dealing was detrimental to the infant‟s interest &
was struck down by the court.
4. Agreements that are immoral s.24 (e) CA

• s. 24 (e) of the Act covers agreements that the court would
regard as immoral or opposed to public policy.
• Example: ILLUSTRATION (j) and (k) to s. 24 are examples of
considerations or objects of an immoral agreement.
• Case: Oh Theresa v Sia Hok Chai
The P sued the D summarily for damages for breach of promise
to marry the P. The D denied that he had promised to marry the P
and even if he had, she knew that he was a married man and
thus the agreement was immoral and against the public policy.

Held: that the status of such a promise has not been fully settled
in law and that the D should not have adopted the summary
procedure and should have gone for a full trial.


5. Agreements that opposed public policy s.24 (e) CA
• s. 24 (e) of the Act covers agreements that the court would
regard as opposed to public policy.
• The principle of public policy is that no man can lawfully do that
which has a tendency to be injurious to the public welfare.
• The origin of public policy is said to be obscure & its
boundaries vague.

• There are 5 groups of agreements that the COMMON LAW
generally classified as void on grounds of public policy; where
the consideration or object is:-
a) Illegal by common law or legislation
b) Injurious to good governance, either in the field of domestic
or foreign affairs
c) Interfere with proper working of the machinery of justice
d) Injurious to family life
e) Economically against the public policy


A. ILLEGAL BY COMMON LAW OR LEGISLATION

• where the object contravenes any statute or
subsidiary legislation, it is unlawful & the agreement
void & unenforceable.
• S.24(a) and (b) CA covers this category.

B. INJURIOUS TO GOOD GOVERNANCE, EITHER IN
THE FIELD OF DOMESTIC OR FOREIGN AFFAIRS

• Case: Datuk Ong Kee Hui v Sinyium Anak Mutti
Resp was a member of the Sarawak United People‟s
Party (SUPP). He entered into an agreement with the
party that in consideration of the party adopting him as a
party candidate & 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 and to forfeit his seat in the Dewan Rakyat
should he do any act which would be contrary to the
interest of the party.

Held: that the arrangement was illegal. It was an
agreement tending to injure the public service.

C. INTERFERE WITH PROPER WORKING OF THE
MACHINERY OF JUSTICE
• these include agreements to contract out of statutory
provisions, agreements to stifle prosecution and
maintenance of law suit.
• Case: Engku Leh bin Engku Dris v Che Wok bt Awang
Mat
The App faced a charge for criminal breach of trust of
certain jewellery entrusted by the Resp to him. He then
gave a guarantee (in consideration of not to prosecute him)
to the Resp who sued him on it.
HELD: The App gave the guarantee to stifle the criminal
prosecution & that the agreement of guarantee was void as
being opposed to public policy.
D. INJURIOUS TO FAMILY LIFE

• Case: Hamzah b. Musa v Fatimah Zaharah bt Mohamed
Jalal
Hamzah was a man from Kelantan who married 9 times & had
divorced his wives of nine times. He had agreed at the time of his
marriage to the Fatimah, one of his ex-wives, to pay her the sum
of RM5,000 if he were to divorce her. He did & she sued him for
the said sum. H argued that the object of the agreement was
immoral or opposed to public policy.


HELD: this case was considered under the category that it may
be injurious to family life & held that since the agreement is not
against Muslim law, it is NOT immoral or opposed to public
policy.
E. Economically against the public policy

• these are agreements to defeat the revenue laws of the country; example
such as an agreement to avoid tax payable under Real Property Gains Tax Act
1976.
• Case : Thong Foo Ching v Shigenori Ono
The Resp agreed to buy two pieces of land together with a
double-storey shop house erected thereon from the App for
RM6.5m. Since the sale of the property was over RM5 in value,
the Resp needed to obtain the prior approval of the Foreign
Investment Committee (FIC) under the guidelines issued by the
government. These guidelines are meant for the general well
being of the Malaysian citizen. It protects the general public
interest and safe guard the public welfare.
Held: Since the App bought the property in 1985 and sold it to the
Resp in 1990, they were selling the property during the fifth year
of acquisition and this attracted 5% tax under the Real Property
Gains Tax Act 1976. With the reduction in the purchase price from
RM6.5m to RM4.9m, the Government of Malaysia lost RM80,000
by way of real property gains tax payable by the App and
RM27,000 by way of stamp duty under the Stamp Act 1949
payable by the Resp. The transaction was unlawful and VOID
because clearly contrary to the public policy under S.24(e).
CONSEQUENCES
OF ILLEGAL
CONTRACTS
ANY ADVANTAGE
RECEIVED MUST
BE RESTORED OR
COMPENSATED
THE CONTRACT IS
UNENFORCEABLE
CONSEQUENCES OF ILLEGALITY:-

A. The contract is unenforceable
• Under the CA 1950 & English law – the court will not lend its
assistance to enforce an illegal contract.
• No person can claim any right or remedy whatsoever under an illegal
transaction in which he has participated-- no action will arise from a
wrong done (the ex turpi causa non oritur actio rule applies), i.e. no
action may be founded on illegal or immoral conduct.

• Case: Chung Khiaw Bank Ltd v Hotel Rasa Sayang Sdn Bhd
The appellants extended loans to the respondents and the loan was
secured by documents and guarantees. The documents evidencing the
loans showed that the hotel whose shares were being purchased by a
company had given financial assistance to that company for the
purpose of purchasing the share equity of the Hotel. By securing this
loan, the hotel is assisting the company in purchasing the Hotel‟s
shares.
Held: This act contravened Section 67 of the Companies Act 1965. that
the bank with the benefit of legal advice had knowledge of and was
clearly implicated in the illegality. The bank was indeed a party to an
agreement to defeat the object of a statute. Accordingly, the bank
should be precluded from suing upon it.

B. Any advantage received must be restored or compensated
• S.66 CA 1950 provides the remedy of restitution to parties that
“discovered” the agreement to be VOID and had given an
advantage to the another.
That the party seeking restitution under s. 66 must have given an
advantage under the void agreement to the other party. Once
proved, the other party must restore the advantage received or
compensate it to the party from whom he received it.

• 2 conditions for the availability of the remedy of restitution:
(a) The agreement is discovered to be VOID and
• Ahmad bin Udoh v Ng Aik Chong (pg450)
(a) The other party has received an advantage
• Ng Siew San v Menaka (pg453)
CONTRACTS WHICH ARE NOT AFFECTED BY ILLEGALITY:
I. The statute itself saves the contract – A Contract that is prohibited by
statute does not become void & unenforceable if the statute itself
saves the contract.
• Case : Foo Say Lee v Ooi Heng Wai
The D agreed to sell a piece of land in Kota Bharu to the P.
The P paid $1500 upon signing the agreement and the
balance $3500 was payable to the D upon the transfer of the
land to the P. At the date of the agreement the land belongs to
a Malay person. The agreement provided that the sale was
subject to the approval of the Kelantan government and the
Ruler-in-Council. S13 A (i) of the Enactment gives the power
of the Ruler-in-Council in his discretion to approve a transfer
of Reservation Land from a Malay person to a non-Malay
person.
Held: that the Enactment itself provides a method of
executing a transfer of a Reservation land from a Malay
person to a non-Malay person. A transfer by such method so
provided by the Enactment itself cannot be said to be null and
void.

2. Claims wholly independent of the alleged illegal
contract
Case: Sajan Singh v Sardara Ali
SA entered into an agreement with the SS, whereby SS
was to acquire a lorry, register it in his own name &
obtain a haulage permit for its operation. But it was
intended that the lorry should in fact be purchased by SA
& used on his own account. A document of sale was
effected & SA paid RM5,000.00 for the lorry. The scheme
contravened certain regulation governing the transfer &
use of motor vehicles & in particular, the conditions of
haulage permit which was personal to permit holder.
SA used the lorry as his own & operated it under the
name of SS who had the haulage licence. Later, they
quarreled & SS removed the lorry from the possession of
SA without his permission. SA brought an action to
recover the lorry for trespass.

HELD: Although the agreement between SS and SA
was illegal, it was fully executed and carried out. that
where the P „s claim is wholly independent of the alleged
contract, the contract is lawful and thus enforceable. SA
could recover damages for trespass as he did not seek
to base his claim on the illegal transaction. SA could
succeed on detinue as well as on trespass, he was
entitled to rely on his possession.