Blog

What happens when a contract is based on something illegal? Can you still enforce it? This question often confuses many people, especially when money or property is involved. In this blog post, we’ll break down the key legal principles from the famous UK case of Patel v Mirza and how Malaysian courts have applied these ideas in recent cases.

 

The Story Behind Patel v Mirza

Let’s start with the facts. In this case, Mr. Patel gave Mr. Mirza £620,000 to invest based on insider information from the Royal Bank of Scotland (RBS). This was illegal because insider trading—using confidential information to make a profit—was against the UK’s Criminal Justice Act 1993. However, the planned investment never happened, and when Mr. Mirza refused to return the money, Mr. Patel took him to court.

The legal question was simple but tricky: Could Mr. Patel recover his money, even though the agreement itself was illegal?

Traditionally, the answer would have been no. Courts followed a strict rule that said, “If your claim is based on illegal activity, the court will not help you.” This principle comes from an old English case, Holman v Johnson (1775).

At first, the lower courts rejected Mr. Patel’s claim because he was relying on an illegal agreement. But the UK Supreme Court took a different view—they decided that Mr. Patel should get his money back.

 

What Changed? The New Legal Approach

The UK Supreme Court’s decision in Patel v Mirza introduced a new, more flexible way of dealing with illegal contracts. Instead of automatically refusing to help, the court said judges should ask three key questions:

1.Why is the law being broken? Would allowing the claim go against the purpose of the law?

2.Public Interest: Would enforcing the claim harm other important legal policies?

3.Fairness: Is it fair to deny the claim, or would it create an unjust result?

The court’s goal was to prevent one party from unfairly benefiting from illegal activities while still considering fairness and public interest.

 

What Does Malaysian Law Say About Illegal Contracts?

In Malaysia, the law on contracts is governed by the Contracts Act 1950. According to Section 10(1), a contract is valid only if it has a lawful purpose. Section 24 explains that a contract is unlawful if it:

•Is prohibited by law

•Defeats the purpose of the law

•Involves fraud

•Causes harm to someone

•Is immoral or against public policy

If a contract is found to be illegal, Section 66 requires that any benefits obtained under it must be returned. This means you may still recover money or property if the court finds it fair to do so.

 

How Malaysian Courts Apply Patel v Mirza

Malaysian courts have started applying the Patel v Mirza approach, focusing on fairness and public interest rather than automatically rejecting claims linked to illegal contracts. Here are two recent examples:

1.Tan Keen Keong v Tan Eng Hong Paper & Stationery Sdn Bhd (2021):

This case involved a “family fund” set up to avoid paying taxes—an illegal purpose. However, the court used the Patel v Mirza test and focused on whether enforcing the agreement would harm public policy. The court decided that fairness should guide their decision.

2.Public Bank Bhd v Ria Realiti Sdn Bhd (2021):

Public Bank provided a loan to finance land purchases in Sabah, but the transaction was illegal under the Sabah Land Ordinance. Despite this, the Court of Appeal ruled in favor of the bank, applying the Patel v Mirza approach:

•Allowing the bank’s claim would not violate the purpose of the land law.

•Denying the claim would create problems for banking operations.

•The bank was innocent, while the borrowers acted dishonestly.

The court decided that it would be unfair to deny the bank’s right to recover its money.

 

Why This Matters

The Patel v Mirza case has changed how courts handle illegal contracts. Instead of a strict “no help for illegal deals” approach, courts now look at the bigger picture—what is fair and what best protects public interest.

For Malaysians, this means that even if an agreement involves some illegality, you may still have legal options. If you are in a situation involving an illegal contract, seek legal advice to understand your rights and how the courts might view your case.

 

Conclusion

The law on illegal contracts is no longer black and white. The Malaysian courts’ adoption of the Patel v Mirza test means that fairness, public interest, and the purpose of the law now play a big role in deciding whether to enforce a contract. This flexible approach aims to balance justice with legal integrity, ensuring that no one unfairly benefits from illegal activities.

If you have questions or are dealing with an issue related to an illegal contract, feel free to reach out—I’m here to help you navigate the complexities of the law.

Stay informed, know your rights, and protect your interests.

MK