Malaysia - Illegality: Does The Loss Always Lie Where It Falls?
Legal News & Analysis - Asia Pacific - Malaysia - Dispute Resolution
21 August, 2018
It is often said that no court will lend its aid to a man who files a claim based on an illegal act. Simply put, what this means is that the law will not afford relief to those who claim entitlements from an illegal act.
When it comes to “illegal” contracts, the general position has always been that the “loss will lie where it falls”, meaning that if a party that suffers loss due to an illegal contract, he cannot sue the other contracting party to recover such losses.
Recently, in Pang Mun Chung & Anor v Cheong Huey Charn (2018) MLRAU, the Court of Appeal re-examined the application of the illegality doctrine. Briefly, the facts are:
Pang (a non-citizen) applied for a loan to finance his family’s business but was not able to secure one from the bank for various reasons, one of which was the bank’s internal policy of not lending to non-citizen.
To work around this restriction, Pang involved the defendant, Cheong, a Malaysian citizen and his then-romantic interest in a plan to transfer his house to her name, which she agreed to hold on trust for his family.
With the house registered in Cheong’s name, Cheong applied for a loan from the bank on behalf of Pang’s family and a charge was registered on the house as security for the loan.
After 15 years of repayments by the family, Pang fell into financial difficulty. The bank then sold the house at a public auction, and from it there was a surplus of funds.
Since the house was still registered in the name of Cheong, Pang sought to enforce the trust previously agreed with her to entitle him to the surplus.
In the proceedings, Cheong invoked the illegality doctrine in counter-claiming her entitlement. She argued that the transaction between Pang and herself was a sham or so-called ‘illegal’ agreement, created to circumvent the bank’s policy of lending to non-citizens. She argued that as a consequence of this deception and the true nature of the proprietary transfer, he could not be entitled to the surplus and the sum should belong to her.
The High Court found in favour of Cheong.
What were the findings of the Court of Appeal?
The Court of Appeal allowed Pang’s appeal. In so ruling, the Court of Appeal found no illegality in Pang’s conduct and ordered that the surplus be released to him. The Court of Appeal found the Bank’s condition on lending was merely an internal policy without force of law, and Pang’s attempt to circumvent it cannot amount to an “illegal” act.
However, the Court of Appeal went further to consider that even if Pang and Cheong’s actions were illegal, the illegality defence would not be sustainable since It would result in an outcome that was disproportionate and potentially unjust for one party. It was difficult to see why Cheong should keep the money to herself when she was similarly involved in the “sham arrangement” with Pang. To allow Cheong’s entitlement would confer an unjust windfall.
The Court of Appeal therefore weighed two public policy issues: (1) the need to discourage unlawful acts and refusing them judicial approval; and (2) preventing injustice and the enrichment of one party at the expense of the other. Otherwise, a strict application of the illegality doctrine would result in a self-defeating principle of law.
The Court of Appeal’s recent judgment demonstrates a willingness of the Court to shift away from strict applications of legal maxims. Therefore, it is not always the case that the Court will refuse to grant relief to a party to an illegal contract/act. On the contrary, the Court may still enforce an “illegal” contract, but the essential consideration is the public interest in the integrity of the legal system and proportionality of the outcome.
This is similar to the approach taken in the Norman Disney case (Haji Afifi Haji Hassan v Norman Disney & Young Sdn Bhd & Ors), where the Court proceeded to grant the relief sought by the Petitioner, even though the Petitioner was privy to illegal acts.
Parties who knowingly enter into “sham agreements” to circumvent certain requirements (legal or otherwise) do so at their own risk.
For further information, please contact:
Donovan Cheah, Partner, Donovan & Ho