CONTRACTUAL ILLEGALITY AND CONFLICT OF LAWS

• Published date: 01 December 1995
• Date: 01 December 1995
• Author: DAVID CHONG GEK SIAN

The subject of illegality in contract law is difficult and complex. With the interplay of principles of conflict of laws, illegality as a defence in contractual claims becomes an area of the law which is fraught with difficulties. In this article, an attempt is made to consider the various connecting factors in conflict of laws which bear on illegality as a defence in contractual claims.

I. INTRODUCTION

Illegality has often been pleaded as a defence to defeat actions for enforcement of contractual rights. Given that contracts in the modern age invariably involve contacts with different legal systems, it is imperative that legal advisers appreciate the various ways in which illegality may affect contractual rights. To this end, an understanding of the relationship between the defence of contractual illegality and conflict of laws is especially important. This article* examines the various aspects of contractual illegality in relation to the situations where the illegality arises by reason of the proper law of the contract, the law of the forum, the law of the place of contractual performance and the law of the place where the contract is made. Illegality in this context refers to statutory illegality1 and common law illegality2 and includes both existing or initial illegality and supervening illegality.

While contracting parties may attempt to reduce the instances where illegality defeats contractual rights by stipulating a law to govern their contractual relationship, illegality may arise independently of the parties’ choice of law to govern their contractual relationship. The illegality may arise from contravention of a positive law (in the sense of a written law)

of the forum. In addition, a contract may be illegal by reason of public policy considerations of the law of the forum (lex fori). Illegality may also defeat contractual rights where the contract, legal by its proper law, is illegal by the law of the place where the contract is to be performed.3

As every legal practitioner knows, the general rule is that a party relying on illegality as a defence must specifically plead illegality. However, it is also clear from Sim Tony v. Lim Ah Ghee (t/a Phil Real Estate & Building Services)4 that a court has the duty to take cognisance of the illegality of a contract where the contract is ex facie illegal or when it so appears from the evidence adduced before the court notwithstanding the failure to plead illegality.5 As Lindley L.J. (as he then was) stated in Scott v. Brown, Doering, McNab & Co.6

“No court ought to enforce an illegal contract or allow itself to be made the instrument of enforcing obligations alleged to arise out of a contract or transaction which is illegal, if the illegality is duly brought to the notice of the court, and if the person invoking the aid of the court is himself implicated in the illegality. It matters not whether the defendant had pleaded the illegality or whether he has not.”7

Having said that, it must be pointed out that the Federal Court, sitting as the appellate court of Singapore, in Seven Seas Supply Co. v. Rajoo8 emphasised that where the defence of illegality has not been pleaded and not all the relevant facts on the issue of illegality are before the court, the court ought not on its own initiative refuse to enforce contractual rights on the ground of illegality.

However, where foreign illegality is relied on, the foreign law which is alleged to give rise to the illegality must be pleaded and proved as foreign law is a question of fact.9 Where foreign law is not proved, then the Singapore court as the lex fori will assume that the foreign law is the same

as the law of the forum.10 In the words of Willes J. in Lloyd v. Guibert,11 where one party to a contract relies on a right or an exemption by foreign law excusing him from liability, he must “bring such law properly before the court and to establish it in proof … Otherwise the court is not entitled to notice such law without judicial proof and the court must proceed according to the law of England.”12

Moreover, where one party alleges that the contract is illegal by a law (statutory or otherwise) other than the lex fori, the foreign law would be relevant only if it is the governing law of the contract (i.e., the proper law) or the law of the place of contractual performance (the lex loci solutionis).13

It is also clear from section 94(a) of the Evidence Act14 that the prohibition against the admission of oral evidence for the purpose of contradicting, varying to or subtracting from the expressed terms of a contract does not apply where it is sought to show by parol evidence that the contract in writing was really made for objects forbidden either by statute or common law.15 As matters of procedure are governed by the lex fori,16 the provisions of the Evidence Act are relevant in any case involving foreign illegality.

In the field of conflict of laws, the identification of the connecting factor or factors relevant to the legal topic under consideration is of prime importance. Staughton J. (as he then was) in Euro-Diam Ltd. v. Bathurst17 put it in the following terms:

“in every case involving a foreign element it is necessary to consider three preliminary matters. First, what is the legal topic with which the claim is concerned? Secondly, what is the connecting factor prescribed by the rules of conflict of laws, for assigning cases on that topic to a particular system of law? Thirdly, what system of law does the connecting factor point to in the case before the court?”18

With regard to the legality of a contractual claim, the proper law of the contract, the law of the place of contractual performance and the law of the forum where the claim is being adjudicated are the various connecting factors which may be applicable.19 It suffices to say that it is the element of foreign law in a contract which calls into play the relevant rules of conflict of laws applicable to the resolution of the issue of illegality of the contract.

With those preliminary points out of the way, the discussion proper of contractual illegality in the conflict of laws shall proceed under four heads viz., illegality and the proper law of the contract, illegality and the lex fori, illegality and the lex loci solutionis, illegality and the lex loci contractus and illegality by tainting,

II. ILLEGALITY AND THE PROPER LAW

It is hornbook law that the material or essential validity of a contract is governed by the proper law of the contract.20 In the succinct words of Lord Halsbury L.C.,

“… there may be stipulations [in a contract] which one country may enforce and which another country may not enforce, and that in order to determine whether they are enforceable or not you must have regard to the law of the contract, by which I mean the law which the contract itself imports is to be the law governing the contract.”21

Where the contract, by its proper law,22 is illegal in the sense that it is made in contravention of a written law or the public policy of Singapore, the result is clear — the Singapore court will not enforce such a contract.

The proper law of the contract may be expressly provided for by the contracting parties. Where the contracting parties have not expressly provided for the proper law to apply to their contract, their intention is to be inferred or “presumed by the court from the terms of the contract and the relevant surrounding circumstances.”23 As was pointed out by Lai Kew Chai J. in Hang Lung Bank Ltd. v. Datuk Tan Kim Chua,24 the intention of the contracting parties may be inferred in one of two ways, viz.,

1. “(a) by looking at the terms of the contract to see if taken as a whole they by necessary implication led to the inevitable conclusion that it was the parties’ intention that their mutual rights and obligations under it should be governed by a particular system of law … or

2. (b) by objectively determining whether a contract had its closest and most real connection with a particular system of law ….”25

It is pertinent to state that every contract must have a proper law as “contracts are incapable of existing in a legal vacuum.”26 As Lord Lloyd of Berwick (as he now is) recently observed in The Star Texas,27“A contract without a proper law cannot exist. It is … no more than an abstraction or a piece of paper.”28 The idea that every contract must, from the time that it is effective as a contract, have a proper law explains the negative attitude of both the English and Singapore courts towards the concept of a “floating proper law”.29 In the felicitous words of Bingham J. (as he then was):

“The proper law is something so fundamental to questions relating to the formation, validity, interpretation and performance of a contract that it must … be built into the fabric of the contract from the start and cannot float in an indeterminate way until finally determined at the option of one party.”30

The proper law governing a contractual relationship is that law administered as “a living and changing body of law”31 and effect is given to any changes

taking place in the law prior to the date of contractual performance.32 Thus, a contract which is lawful by its proper law at the time of the making of the contract may be rendered illegal by subsequent statutory amendments in the proper law. In fact, such a situation occurred in the two cases of Zivnostenska Banka National Corporation v. Frankman33 and Kahler v. Midland Bank Ltd.34 where the House of Lords held in each case that the contract was unlawful by its proper law by reason of the change in the proper law since the time the contract was concluded.

Illegality by the proper law may consist of statutory illegality35 or common law illegality.36 As the late Winslow J. observed in Raymond Banham & Anor. v. Consolidated Hotels Ltd.37“In deciding whether a contract is illegal in itself a distinction must be made between contracts...