BACKDATED PROPERTY OPTION HELD TO BE UNENFORCEABLE

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1 MAY BACKDATED PROPERTY OPTION HELD TO BE UNENFORCEABLE The Singapore Court of Appeal recently held that an option to purchase a landed property was void and unenforceable on grounds of illegality and public policy. The respondent buyers had backdated the option to avoid the application of more stringent loan-to-value ratios imposed by the Monetary Authority of Singapore ( MAS ) on 5 October Although the High Court had found that the option was valid, its decision was overturned by the Court of Appeal in Ting Siew May v Boon Lay Choo & Anor [2014] SGCA 28. The Court of Appeal decision makes clear how the court will deal with contracts entered into with an illegal or unlawful object. This Update takes a look at the decision. WongPartnership represented the successful appellant in the appeal. Facts MAS revised MAS Notice 632 on 5 October 2012 Option to purchase agreed on 12 October 2012 The buyers had in July 2012 obtained in-principle approval from their bank to finance the purchase of a property. The maximum quantum of the loan was to be capped at a loan-to-value ( LTV ) ratio of 80%, being the prevailing LTV ratio under MAS Notice 632 for purchasers in the buyers position. On 5 October 2012, the MAS issued an amendment to MAS Notice 632 ( 5 October Notice ). The effect of the 5 October Notice on the buyers was that they could now only obtain a loan at a lower LTV ratio of 60%. On 12 October 2012, the buyers and the seller reached an agreement for the sale of the seller s property at S$3.68 million. The buyers alleged that they were advised by their banker to ask the property agent to check whether the seller was willing to date the option to purchase as 4 October 2012, so that the buyers could obtain financing at 80% LTV. The buyers further alleged that their banker had told them that a lot of buyers were backdating their purchases to dates prior to 5 October 2012 for that reason and that this was simply common practice. On 13 October 2012, the seller signed an option to purchase dated 4 October 2012 and the option fee was paid by the buyers. Seller learnt of 5 October Notice On 19 October 2012, the seller learnt about the 5 October Notice and was then advised not to proceed with the sale of the property. The seller therefore sought to withdraw the offer. The buyers disputed the seller s right to do so and on 25 October 2012 unsuccessfully sought to exercise the option. A series of

2 MAY correspondence between the parties solicitors ensued but no resolution was reached. Seller refuses to proceed with sale The buyers then applied in January 2013 for a declaration that the option was valid and binding and for an order for specific performance. The seller relied on the defence of illegality and public policy to assert that the option was void and unenforceable. The buyers succeeded at the High Court which ordered the sale of the property and the seller appealed. Decision Defence of illegality and public policy Types of contracts covered by the defence The Singapore Court of Appeal had to consider how the defence of illegality and public policy applied to the facts before it. It noted that under this defence, contracts could be void and unenforceable because they were statutorily prohibited or because they were illegal and contrary to public policy under common law. While it held that the option was not statutorily prohibited, the backdated option had been entered into with the object of committing an illegal act (i.e., getting around the 5 October Notice) and was hence void and unenforceable under common law. We will focus on the Court s basis for finding the option illegal and contrary to public policy under common law. The Court reviewed in detail the law relating to illegality and public policy, which it characterised as generally confused and confusing. Its conclusions, as summarised, were: Under common law, the defence of illegality and public policy applies to two categories of contract: o Contracts to do acts that are illegal or contrary to public policy; and o Contracts entered into with an illegal or unlawful object. The category of contracts to do acts that are illegal or contrary to public policy would cover, for example, contracts to commit a crime, tort, or fraud. Such contracts are generally void and unenforceable. The category of contracts entered into with an illegal or unlawful object would include: o contracts entered into with the object of using the subjectmatter of the contract for an illegal purpose; o contracts entered into with the intention of using the contractual documentation for an illegal purpose; and o contracts which are intended to be performed in an illegal manner. Contracts entered into with an illegal or unlawful object may still be enforced if the court decides that to render the

3 MAY contract void and unenforceable would produce a disproportionate result. In determining proportionality, the relevant factors for consideration are: o whether allowing the claim would undermine the purpose of the prohibiting rule; o the nature and gravity of the illegality; o the remoteness or centrality of the illegality to the contract; o the object, intent, and conduct of the parties; and o the consequences of denying the claim. Illegality in this case was intended contravention of the 5 October Notice Not disproportionate to refuse enforcement of the option The Court then applied the law to the facts before it. Observing that the buyers had intentionally requested that the option be backdated for the purposes of obtaining a bank loan on the more favourable terms allowed prior to the 5 October Notice, it held that the illegality in the present case was the intended contravention of the 5 October Notice. The illegality, therefore, lay in the buyers intention (which was not apparent on the face of the option) to use the option itself (i.e., its documentation) to circumvent and contravene the 5 October Notice. The option therefore fell under the head of illegality concerning contracts entered into with the object of committing an illegal act. The Court then had to consider whether it would be a disproportionate result to refuse to allow the buyers to enforce the option. In its view, it would not be disproportionate for the reasons summarised below: The buyers object and intent from the outset was to use the false date stated in the option for a purpose which they knew was prohibited. The nature of the illegal act which the buyers set out to commit was not trivial. The main policy objective of the 5 October Notice was to limit the quantum of residential property loans so as to foster stability in the property market. That part of the 5 October Notice which the buyers sought to contravene was directly related to this policy objective and was not merely trivial or administrative in nature. Allowing the buyers claim would undermine the purpose of the 5 October Notice. The buyers illegal purpose was not too remote from the option. In this regard, a key factor to take into account was that there was indeed an overt and integral step in carrying out the buyers unlawful intention taken in the option itself: the stating of the false date in the option. The objectionable part of the transaction resided within the option itself and not outside it.

4 MAY Irrelevant that buyers no longer intended to proceed with illegality Irrelevant that buyers did not need to rely on the illegality to make their claim The Court further found irrelevant the buyers assertion that they had abandoned their original unlawful intention by not drawing down on the loan from the bank and undertaking to obtain financing in compliance with the 5 October Notice. It was similarly irrelevant that the bank had not been deceived nor suffered any damage from their action. The contract was illegal from its very formation. Once an illegal object of the contract had been established, that object tainted the contract itself and it was no answer to say that the illegal object had not been carried out. Finally, the Court rejected the buyers argument that they did not need to rely on the illegal backdating to found their claim against the seller. The buyers were seeking to enforce an illegal contract. Once the court has concluded that it is contrary to public policy at common law to uphold such a contract, it was no longer relevant whether or not a party needs to rely on the specific illegality (in this case, the date of the option) in its claim. As the Court had held that it was contrary to public policy at common law to uphold the option, it was not necessary for it to decide on whether the backdated option had been statutorily prohibited by the 5 October Notice. However, it did go on to consider the issue. Option not prohibited by 5 October Notice As regards the question of determining whether a contract has been prohibited by a statutory provision, the Court noted that courts should be reluctant to find that contracts are impliedly prohibited by statute. In this connection, any concern that contracts involving statutory contraventions (especially intentional ones) might go unpunished will be addressed by the common law. The Court examined sections 55 and 71 of the Banking Act, as well as the 5 October Notice and observed that none of these contained an express or implied prohibition of the option. On the contrary, the indicia pointed the other way: The parliamentary intention behind the 5 October Notice was to regulate and control the financial institutions responsible for granting credit facilities for the purchase of residential property, and not to interfere with private transactions relating to residential property. This was not a situation where there was a clear implication or necessary inference that the statute intended to prohibit contracts such as the option.

5 MAY Our Analysis / Comments The Court of Appeal s decision provides clarity in this area of law relating to contracts entered into with an illegal or unlawful object. While the application of the defence of illegality and public policy remains very fact-centric, the proportionality principle enunciated by the Court gives useful guidance on the factors that the Court will look at in such cases. If you would like information on this or any other area of law, you may wish to contact the partner at WongPartnership that you normally deal with or contact the following partner: Alvin Yeo, Senior Counsel Senior Partner DID: Click here to see Alvin s CV.

6 MAY CONTACT DETAILS Singapore 12 Marina Boulevard Level 28 Marina Bay Financial Centre Tower 3 Singapore Tel: Fax: /5722 China Beijing Representative Office Unit 3111 China World Office 2 1 Jianguomenwai Avenue, Chaoyang District Beijing , PRC Tel: Fax: Malaysia Foong & Partners (an associate firm) Advocates & Solicitors 13-1, Menara 1MK, Kompleks 1 Mont Kiara No 1 Jalan Kiara, Mont Kiara Kuala Lumpur Malaysia Tel: Fax: Website: foongpartners.com Middle East Abu Dhabi Branch Al Bateen Towers Building C3 Office (P1) P.O. Box No Abu Dhabi, UAE Tel: Fax: contactus@wongpartnership.com Shanghai Representative Office Unit 5006 Raffles City Office Tower 268 Xizang Road Central Shanghai , PRC Tel: Fax: Licensed by the QFCA Office Amwal Tower, West Bay P.O. Box No Doha, Qatar Tel: Fax: wongpartnership.com