Beruflich Dokumente
Kultur Dokumente
Contract (Void
6 and Illegal
Contract)
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Explain the status of contracts with unlawful consideration or
object;
2. Identify several kinds of void contracts;
3. Describe the importance of reasonable restraint in contracts;
4. Explain the effect of contracts in restraint; and
5. Discuss the consequence of illegal contracts.
G
INTRODUCTION
Section 2(g) of the Contracts Act 1950 provides that an agreement not
enforceable by law is said to be void. Under Section 24, the consideration or
object of the agreement is unlawful (Refer to Figure 6.1) when it: -
(a) Is forbidden by law;
(b) Defeats the provisions of any law;
(c) Is fraudulent;
(d) Implies injury to person or property of others; or
(e) Is regarded as immoral or opposed to public policy.
TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT) ! 83
Whereas Section 27 of the Contracts Act considers an agreement which affects the
freedom and stability of marriage of any person as void. Section 28 makes an
agreement that restrains trade transaction as void agreement. The same also
applies to an agreement that restricts a person from enforcing his absolute rights
under any law or limits the time for a person to enforce his rights. These kinds of
agreements are regarded as void according to Section 29 of the Contracts Act,
1950.
An example of this is Section 31 of the Contracts Act 1950 which states that any
wager contract is void and no legal action can be taken to recover money won
out of such wager. The same is also stressed out in Section 26 of Civil Law Act
1956. It provides that all agreements either made orally or written, by way of
gaming or wagering shall be null and void. No legal action can be taken to
recover money or valuable thing won out of the same.
84 TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT)
In the case of Rasiah Munusamy v. Lim Tan & Sons Sdn Bhd [1985] 2 MLJ 291,
the respondent orally agreed to sell and transfer a house to the appellant,
which the respondent undertook to build. However, the agreement
contravened rule 12(1) of the Housing Developers (Control and Licensing)
Rule, 1970, which requires every contract of sale to be in writing.
The Court held that: There was nothing in the rules which provided that
verbal agreement was invalid. The court further held that although the oral
agreement contravened rule 12(1), the appellant-purchaser clearly belonged to
a class for whose protection the statutory prohibition was imposed. Therefore,
he could enforce it.
Chung Khiaw Bank Ltd. v. Hotel Rasa Sayang Sdn. Bhd. & Anor [1990] 1 MLJ
356.
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. This act contravened Section 67 of the
Companies Act 1965.
The Court held that: The transactions were tainted with illegality.
The plaintiff entered into an agreement with the defendant for a purchase of a
piece of land held under Temporary Occupational License (TOL). The
defendant breached the contract and the plaintiff claimed for specific
performance of the agreement. The agreement, however, was in contravention
of rule 41 of the Land Rules 1930 which provides that a licence for temporary
occupation of a state land shall not be transferable.
The Court held that: The agreement was an attempt to sell a land under the
TOL. Such an attempt if allowed would frustrate the law. Therefore, it was
unlawful by reason of Section 24 of the Contracts Act.
TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT) ! 85
The defendant held a logging licence in Pahang under the Forest Rules 1935
which prohibited transfer without written approval from the District Forest
Officer. The defendant agreed to assign his rights under the licence (to extract
timber) to the plaintiff.
A, B and C enter into an agreement for the division among them of gains
acquired, or to be acquired, by them by fraud. The agreement is void, as its
object is unlawful.
In the case of Syed Ahamed Alhabsyee v. Puteh bt Sabtu (1922) 5 FMSLR 243),
The defendant, who was a trustee of a piece of land belonging to a minor, had
agreed to sell it to the plaintiff. Since the sale of the land if allowed would
affect the interest of the minor, the Court held that the transaction was void.
86 TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT)
Immoral Contracts
Public Policy
The Court held that: The money lent for the purpose of brothel business
was not recoverable for illegality. The object of the agreement was
clearly immoral.
TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT) ! 87
SELF-CHECK 6.1
(a) When does the consideration or object of an agreement become
unlawful?
(b) What are the kinds of contracts regarded as opposed to public
policy?
(c) What is the status of a contract with unlawful object or
consideration?
ACTIVITY 6.1
Under common law, any contract that prevents a person from practising a
profession, trade or any lawful business is enforceable provided the restraint is
reasonable. In other words, English common law only invalidates contracts with
unreasonable restraint. However, in Malaysia, Section 28 clearly provides that a
contract which prevents a person from exercising lawful profession, trade or any
kind of business is void.
There are three exceptions under Section 28. Those exceptions are as follows:
(a) Exception 1
One who sells the goodwill of a business may agree with the buyer to
refrain 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.
(b) 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.
(c) Exception 3
Partners may agree that some one or all of them will not carry on any
business, other than that of the partnership, during the continuance of the
partnership.
In the case of Corporation Royal Exchange v. Teck Guan (1912) 2 FMSLR 92,
If the claim be made and rejected, and an action or suit be not commenced
within three months after such rejection, all benefit under this policy shall be
forfeited.
The Court held: This clause reduced the period within which an assured
might bring a suit for compensation to a period less than that sanctioned by
the limitation statute. Thus, the clause infringed section 28 of the Contracts
Enactment (now section 29, Contracts Act) and was to that extent, void.
(a) Exception 1
This section shall not render illegal a contract by which two or more
persons agree that any dispute which may arise between them in respect of
any subject or class of subjects shall be referred to arbitration, and that only
the amount awarded in the arbitration shall be recoverable in respect of the
dispute so referred.
(b) Exception 2
Nor shall this section render illegal any contract in writing, by which two or
more persons agree to refer to arbitration on any question between them
which has already arisen, or affect any law as to references to arbitration.
(c) Exception 3
Nor shall this section render illegal any contract in writing between the
Government and any person with respect to an award of a scholarship by
the Government wherein it is provided that the discretion exercised by the
Government under that contract shall be final and conclusive and shall not
be questioned by any court.
The plaintiff bought a share in three tickets from the defendant. One of the
tickets won a prize which was not paid in full by the defendant. The plaintiff
sued for the balance but the defendant claimed illegality of the contract,
being a wager.
The Court held that: An agreement for the purchase of a share in a ticket in a
public lottery was illegal and not merely void. Therefore, the plaintiff was a
party to an illegal agreement and she could not maintain an action based on
the agreement.
In Ahmad bin Udoh & Anor v. Ng Aik Chong [1970] 1 MLJ 82,
The respondent and the appellants entered into an agreement for a lease of
paddy field for a period of six years and $1500 was paid pursuant to the
agreement. The agreement was illegal, contravening section 3(1) of the
Paddy Cultivators Ordinance. Subsequently, the appellants refused to allow
the respondent to till the land. The respondent took a legal action to recover
the sum paid to the appellants and the appellants claimed illegality of the
agreement.
The Federal Court held that: The parties were ignorant of the fact that they
were executing an illegal agreement. Hence, Section 66 would apply and the
respondent was entitled to recover the deposit paid.
TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT) ! 93
if any part of a single consideration for one or more objects, or any one
or any part of any one of several considerations for a single object, is
unlawful, the agreement is void.
That means, if the considerations of the contract are partly lawful and partly
unlawful, the whole agreement is void if it is not possible to sever the
considerations. For example:
Illustration
Illustration
A agrees to sell a house to B and B agrees to buy it for $10,000. But if B uses it
as a gambling house, he will instead pay $50,000. The first set of reciprocal
promises for sale of the house at $10,000 is a contract while the second set is
void.
94 TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT)
SELF-CHECK 6.2
ACTIVITY 6.2
Discuss the following problems by applying the relevant principles
of law:
Text Books:
Guest, A. G. (1988). Ansons Law of Contract (26th ed.). Singapore: Oxford
University Press.
Harlina Mohamed On & Rozanah Ab. Rahman. (2007). Undang-Undang
Perniagaan Malaysia. Selangor: Kumpulan Usahawan Muslim Sdn. Bhd.
96 TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT)
Keenan, D. (2006). Smith and Keenans Law for Business (13th ed.). UK:
Pearson and Longman.
Wu, M. A. & Vohrah, B. (2000). The Commercial Law of Malaysia (2nd ed.).
Selangor: Pearson and Longman.
Cases:
Ahmad bin Udoh & Anor v. Ng Aik Chong [1970] 1 MLJ 82.
Aroomogum Chitty v. Lim Ah Hang (1894) 2 SSLR 80.
Chung Khiaw Bank Ltd. v. Hotel Rasa Sayang Sdn. Bhd. & Anor [1990] 1 MLJ
356.
Corporation Royal Exchange v. Teck Guan (1912) 2 FMSLR 92.
Foster v. Driscoll [1929] 1 KB 470.
Hee Cheng v. Krishnan [1955] MLJ 103.
Parkinson v.College of Ambulance Ltd & Harrison [1925] 2KB 1.
Rasiah Munusamy v. Lim Tan & Sons Sdn Bhd [1985] 2 MLJ 291.
Seong Sam v. Goon Food On (1933-34) FMSLR 169.
Syed Ahamed Alhabsyee v. Puteh bt Sabtu (1922) 5 FMSLR 243).
Tan Bing Hock v. Abu Samah [1968] 1 MLJ 221.
Wrigglesworth v. Anthony Wilson [1964] MLJ 269.