This case illustrates that courts will not necessarily void a contract for statutory illegality merely because it is ‘associated with or in the furtherance of illegal purposes’ but is not otherwise expressly or impliedly prohibited by the relevant statute. Rather, the Court will look at a range of other factors including how essential the illegality is to the agreement, whether the parties were aware of the illegality, whether the illegality is in fact carried into effect and also how the interests of the parties may be affected if the contract is unenforceable.
A contract dated 13 December 2013 for the sale of land from REW08 Projects Pty Ltd (REW08) to PNC Lifestyle Investments Pty Ltd (PNC) contained a provision which allowed PNC to rescind the contract and re-enter into a new contract every 3 months until the plan of subdivision was finalised. The contract also provided for the price to be reduced by $235,000 if REW08 performed all of its obligations under the contract.
After disagreement between the parties, PNC sought specific performance of a contract dated 13 June 2014 (following 2 purported rescissions since the date of the original contract). After REW08 filed a defence, PNC paid the full amount of stamp duty payable on the transactions the subject of the contract (together with interest calculated from 13 December 2013).
REW08 submitted that the trial judge erred in not finding that the relevant contracts for sale and deeds of rescission were not ‘unenforceable for illegality’. REW08 argued that the purpose of entry into the contract was to commit an unlawful act (delaying stamp duty) and the contract dated 13 June 2014 (and those dated 13 December 2013 and 13 March 2014) were therefore unenforceable under the general law for public policy reasons.
Macfarlan JA (with Beazley P and Gleeson JA agreeing) in the New South Wales Court of Appeal started with the general rule that a contract may be unenforceable for statutory illegality even where not expressly or impliedly prohibited by the relevant statute if it is a ‘contract associated with or in the furtherance of illegal purposes’. However, a Court should not refuse to enforce contractual rights merely because this is the case.
In dismissing the appeal by REW08 (and therefore enforcing the contractual rights of PNC), the Court pointed to the following factors:
- the legislative regime for the payment and collection of stamp duty does not expressly render an agreement made for the purpose of avoiding duty unenforceable;
- PNC was not conscious that the proposed arrangements to delay paying stamp duty would not be legally effective i.e. it did not knowingly break the law;
- delaying the payment of stamp duty was not essential to the parties’ bargain for the purchase and sale of land (it was only an incidental consequence);
- the supposed illegal purpose had not been carried into effect because the stamp duty had been paid;
- to deprive PNC of the benefit of the contract would impose a penalty upon it disproportionate to its assumed wrong (particularly bearing in mind that it had now paid the stamp duty and interest); and
- to free REW08 of the obligation to perform the contract when it has suffered no loss by reason of PNC’s alleged impropriety would likely confer a windfall on REW08 (who could then re-sell at a higher price).
On the issue of PNC’s alleged lack of ‘clean hands’ (which would mean it was not entitled to equitable relief), the Court held that PNC’s alleged impropriety did not have ‘an immediate and necessary relation to the equity sued for’ because it:
- was incidental or collateral to the contract (and did not taint the whole transaction); and
- ceased when PNC paid stamp duty and interest.