Topic Law of

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

Figure 6.1: Elements that make consideration or object of an agreement unlawful

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.

6.1 CONTRACTS FORBIDDEN BY LAW AND IF

PERMITTED, DEFEAT THE LAW
Section 24(a) and (b), Contracts Act 1950.

Some statutes do not provide specific provisions concerning void or illegal

contract but some provide that failure to conform to any law provisions would
cause the contract to be void.

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.

Example of cases where contracts are prohibited by statute:

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.

In the case of Hee Cheng v. Krishnan [1955] MLJ 103,

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

In Tan Bing Hock v. Abu Samah [1968] 1 MLJ 221,

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.

The Court held that: The contract was illegal.

6.2 FRAUDULENT CONTRACTS

Section 24(c), Contracts Act 1950

Any contract which its consideration or object is fraudulent is void. An example

of a fraudulent contract is found in the following illustration.

Illustration (e), Section 24

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.

6.3 CONTRACTS INJURIOUS TO PERSON OR

PROPERTY OF ANOTHER
Section 24 (d), Contracts Act 1950

Any contract which its consideration or object causes injury to person or

property of another is void under the law.

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)

6.4 CONTRACTS IMMORAL OR AGAINST

PUBLIC POLICY
Section 24(e), Contracts Act 1950

Any contract which its consideration or object is regarded as immoral or

opposed to public policy is void under the law.

Immoral Contracts

Illustration (k), Section 24

A agrees to let her daughter be hired to B for concubinage. The agreement is

void, because it is immoral, though the letting may not be punishable under
the Penal Code.

Public Policy

(a) Contracts prejudicial to the public service

Illustration (f), Section 24

A promises to obtain for B an employment in the public service, and B

promises to pay RM1,000 to A in return. Such an agreement is void as
the consideration is unlawful.

In Aroomogum Chitty v. Lim Ah Hang (1894) 2 SSLR 80,

The plaintiff initiated a claim for the refund of money he lent to a

brothel business.

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

In the case of Parkinson v.College of Ambulance Ltd & Harrison

[1925] 2KB 1,

The secretary of the defendant charity promised to secure a

knighthood for the plaintiff if he would make an adequate donation.
He did with a promise of more should the knighthood be
forthcoming. He then sued for the return of the money when he did
not receive the honour.

(b) Contracts obstructing the course of justice

Illustration (h), Section 24

A promises B to drop a prosecution which he has instituted against B

for robbery, and B promises to restore the value of the things taken.
The agreement is void, as its object is unlawful.

(c) Contracts against the interests of the state

The kinds of contracts which are detrimental to the state and unlawful
include contracts to trade with the enemy of the state during war. The
reason for this is simply that it profits the enemy state and thus against
public policy.

In the case of Foster v. Driscoll [1929] 1 KB 470,

A partnership agreement between five persons with the intention to

smuggle whisky into the US was held as illegal.

(d) Contracts prejudicial to the freedom and stability of marriage

A contract is void if it restricts a persons ability to marry, or promotes any
act which weakens the stability of marriage. Also a contract between
spouses who are living together, that provides terms in the event of future
separation, is void because it encourages the parties to get into divorce.
Another kind of contract is a marriage brokerage contract to find a spouse
for a person in return for a fee; it is also void as against public policy.
88 TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT)

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

(a) Joey, a remisier, paid RM20,000 to Harry, the Director of a few

listed companies, for insider information which he intended to
use in determining how to invest his clients funds. Insider
trading is an offence under section 132A of the Companies Act,
1965. Harry has since failed to provide any information to Joey
and has indicated that he has no intention of ever doing so.
Advise Joey as to whether he could recover the RM20,000 paid to
Harry.

(b) Gesmar had brought into Malaysia certain jewellery which he

has failed to declare to the customs. He has also failed to pay
customs duty to the authority. Later, he filed a claim for
indemnity against the insurers for the loss of the jewellery at his
home through theft. Decide whether Gesmar could enforce the
contract of indemnity.

6.5 OTHER VOID CONTRACTS

The following provisions provide other kinds of contracts regarded as void:

(a) Section 25, Contracts Act 1950.

A contract is void if the consideration for one or more objects is in part
unlawful.
 TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT) ! 89

(b) Section 26, Contracts Act 1950.

A contract made without consideration is void except in the circumstances
provided.

(c) Section 27, Contracts Act 1950.

A contract in restraint of marriage of a person other than a minor is void.

(d) Section 28, Contracts Act 1950.

A contract in restraint of trade, profession or business is void except in
certain limited circumstances.

(e) Section 29, Contracts Act 1950.

A contract in restraint of legal proceedings is void except contracts to refer a
dispute to arbitration and certain written contracts relating to award of
scholarships by the Government.

(f) Section 30, Contracts Act 1950.

A contract that is uncertain is void.

(g) Section 31, Contracts Act 1950.

A contract by way of wager is void except a subscription or contribution
made in favour of certain prizes for horse-racing.

6.5.1 Contracts in Restraint of Trade

According to Section 28 of the Contracts Act 1950, every agreement by which
anyone is restrained from exercising a lawful profession, trade or business of any
kind, is to that extent void.

In the case of Wrigglesworth v. Anthony Wilson [1964] MLJ 269,

The plaintiff entered into an agreement to restrain the defendant from

practising as an advocate and solicitor within five miles of Kota Bharu
town for a period of two years after the termination of his service contract
with his employer. Later, the defendant left the employment and set up a
practice in Kota Bharu town. The plaintiff applied for an injunction to
restrain the defendant from practising, in breach of the promise.

The Court held that: The restraint void.

90 TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT)

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.

6.5.2 Contracts in Restraint of Legal Proceedings

According to Section 29 of the Contracts Act 1950, an agreement whereby a
person is restricted from enforcing his rights under or in respect of any contract,
by the usual legal proceedings in the ordinary tribunal, or which limits the time
within which he may thus enforce his rights, is void to that extent.
 TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT) ! 91

In the case of Corporation Royal Exchange v. Teck Guan (1912) 2 FMSLR 92,

There was a clause in a fire insurance policy which stated:

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.

There are three exceptions to the general rule, as follows:

(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.

6.5.3 Effect of Contracts under Section 28 and 29

Contracts in restraint of trade and in restraint of legal proceedings are not void in
toto but only void to the extent of the restraints. This means, only the invalid part
of the contract is unenforceable but the rest of the contract will be enforceable.
92 TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT)

6.6 CONSEQUENCES OF ILLEGALITY

The general rule at common law and under the Contracts Act 1950 is that the
courts will not enforce illegal contracts and assist the parties: ex turpi causa non
oritur actio (no action will arise from a wrong done). The consequences of
illegality do not apply to contracts in restraint of marriage, restraint of trade and
restraint of legal proceedings. Those contracts are void only to the extent of the
restraint.

In Seong Sam v. Goon Food On (1933-34) FMSLR 169,

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.

Under the Contracts Act 1950, Section 66 which is regarded as restitutionary

provision, may be applied. Once a contract becomes void, restitution is possible
provided the illegality is not known to the party seeking it.

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

Contracts severable and not severable

In cases where the contract is illegal in part, it is either possible or not possible to
sever the illegal part from the rest. According to Section 25 of the Contracts Act
1950,

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

A promises to supervise, on behalf of B, a legal manufacture of indigo and an

illegal traffic in other articles. For both jobs, A is promised a salary of $1,000 a
year. The agreement is void since the object of As promise and the
consideration for Bs promise being in part unlawful.

Accordingly, Section 58 provides,

where persons reciprocally promise, firstly, to do certain things which

are legal, and secondly, under specified circumstances, to do certain other
things which are illegal, the first set of promises is a contract, but the
second is a void agreement.

This provision applies to contracts which are severable. For example:

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

(a) Can a contract be made to restrain a person from marrying

another?
(b) What is the effect of an uncertain contract?
(c) Is contract in restraint of trade enforceable?
(d) What are the exceptions to contract in restraint of legal
proceedings?
(e) Will the court assist the parties to an illegal contract?
(f) Can a party to an illegal contract apply for restitution under
Section 66 of the Contracts Act 1950?

ACTIVITY 6.2
Discuss the following problems by applying the relevant principles
of law:

(a) Robin, a milk roundsman was employed by Mr White to

deliver milk to his customers. Robin agreed that for one year
after leaving his job, he would not serve or sell milk or dairy
produce to persons who (within 6 months before he left
employment) were customers of his employer. Later, Robin left
his employment with Mr White in order to work as a
roundsman for West Dairies. Robin then took the same milk
round as he had worked when he was with Mr White. Decide
whether there was a breach of contract by Robin.

(b) Nothern was a manufacturer of machine guns and other

military weapons. He sold the business to a company, giving
certain undertakings which restricted his business activities.
The company was amalgamated with another company and
Nothern was employed by the new entity as managing
director. In his contract, Nothern agreed that for 25 years he
would not manufacture guns or ammunition in any part of the
world, and would not compete with the company in any way.
Decide whether this covenant regarding the business sold was
valid and enforceable.
 TOPIC 6 LAW OF CONTRACT (VOID AND ILLEGAL CONTRACT) ! 95

An agreement not enforceable by law is said to be void.

Any contract which its consideration or object is fraudulent is void.
Contract injurious to person or property of another is void.
Immoral contracts and contracts opposed to public policy are void.
A contract made without consideration is void.
A contract in restraint of marriage of a person other than a minor is void.
A contract that is uncertain is void.
Contracts in restraint of trade and in restraint of legal proceedings are void to
the extent of the restraints.
The courts will not enforce illegal contracts and assist the parties to the
contract.
Restitution is possible provided the illegality is not known to the party
seeking it.

Illegal contracts Restraint of trade

Restitution Severable contracts
Restraint of legal proceeding Unlawful objects or considerations
Restraint of marriage Void contracts

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.