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Putput Logging Pty Ltd v Ambalis [1992] PGNC 112; [1992] PNGLR 159; N1094 (18 June 1992)

N1094

PAPUA NEW GUINEA
[NATIONAL COURT OF JUSTICE]

PUTPUT LOGGING PTY LTD

V

PHILLIP AMBALIS

Lae
Sheehan J

18 June 1992

EQUITY - Statute not permitted to be used as cloak of fraud.

EQUITY - Unjust enrichment - Measurement of damages.

LEASE - Customary land - Agreement void pursuant to s 73 of Land Act - Provisions of the Act are for the protection of customary land owners - Contract performed - Unjust enrichment.

Facts

The appellant contracted with a land-owning company to log and market timber from the customary land of the owners. Contrary to his assumption, the area on the beach from which the logs were to be shipped was not included in the agreement. Appellant and respondent entered into a lease agreement for the former to use that portion of land as a log pond at a rental of K400 per month for a period of 10 years. The agreement was not stamped in accordance with s 19 of the Stamp Act and was, therefore, inadmissible in evidence. It was also void under s 73 of the Land Act which provided that:

"a native has no power to sell, lease or dispose of customary land otherwise than to natives in accordance with custom, and a contract or agreement made by him to do so is void."

The Minister of Forest revoked the Timber Rights Permit prematurely as a result the logging agreement was cancelled and the appellant paid rent to the respondent for only 9 of the 26 months of use. The respondent sued for the balance of the rent due and interest thereon. The District Court magistrate enforced the agreement and found in his favour. Appellant appealed against the decision.

Held

1. Failure to stamp the document does not affect its validity but renders it inadmissible or unenforceable in a court of law, until it is duly stamped.

2. The agreement was by s 73 of the Land Act void and, as such, the magistrate erred in enforcing it.

3. No enforceable rights can arise out of a void transaction.

4. If the parties to the agreement are not in pari delicto, the person for whose benefit the statute is made may recover monies due pursuant to the contract. Section 73 of the Land Act is intended to protect customary landowners and, therefore, in this particular illegality they are not in pari delicto.

5. Situations may arise where it would be unjust for courts to allow a party to take advantage of the illegality of an agreement by him hiding behind its unenforceability and, thereby, unjustly enriching himself. For the court to countenance such a fraud would be contrary to "natural justice".

6. Although the court will not enforce an agreement declared void by statute, it would award the respondent a reasonable sum as compensation for the use made of his land.

Cases Cited

Bowmaker Ltd v Barnet Instruments Ltd [1945] 1 KB 65.
Browning v Morris [1778] EngR 85; (1778) 2 Cowp 790, 98 ER 1364.
Chappel Pty Ltd v Pett Pty Ltd [1971] 1 SASR 188.
Kiriri Cotton Co Ltd v Dewani [1960] 1 All ER 177.
Moses v Macferlan [1760] EngR 713; (1760) 2 Burr 1005, 97 ER 676.

Counsel

R B L Barrell, for appellant.
Respondent in person.

18 June 1992

SHEEHAN J: This is an appeal against a decision of Lae District Court delivered on 8 November 1991, when it entered judgment for the respondent in respect of an agreement to lease customary land on Umboi Island in the Morobe Province.

In January 1988, the Putput Logging Pty Ltd contracted with a land-owner company, Umboi Timber Investment Pty Ltd, to log and market timber from customary land on Umboi Island. Umboi Timber Investment held a valid Timber Rights Permit issued by the Minister of Forests, which detailed the logging area.

Logging duly commenced that month, January 1988, with logs shipped off the island from the only beach access on that part of the coast. Unknown to the appellant at the time, the beach used as their assembly point for logs, that is the "log pond", was not land within the Timber Rights Permit, as it had supposed. It belonged, in fact, to the respondent, who was at that time also the manager of Umboi Timber Pty Ltd, the permit holder.

On 1 October 1988, as a result of negotiations the appellant and respondent entered into an agreement whereby the appellant leased the beach property of approximately 4.4 hectare for a period of ten years for use as a log pond. Commencement of the lease was stipulated to be from the commencement of logging operations in January of 1988. The lease agreement (which was drawn up by the appellant) expresses itself to be "subject to compliance with s 15 of the Land Act chapter 185 and other provisions of the Land Act".

In August 1989, however, the Minister of Forests revoked the Timber Rights Permit (TRP) and, as a result, the logging and marketing agreement between Umboi Timber and Putput was also cancelled. After a cleaning up period (moving fallen logs and cleaning up the logging sites), the appellant left Umboi in February of 1990.

The lease agreement between appellant and respondent provided for a rental of K400.00 per month, but the appellant paid only the equivalent of nine (9) months rent, that is K3,600.00, and as at February 1990, there remained seventeen (17) months rent (i.e. K6,800.00) outstanding. In January 1991, the respondent sued the appellant in the District Court at Lae for the balance due. Judgment was given for that sum together with interest and costs, resulting in a total judgment of K8,485.40.

The appellant maintains that the learned Magistrate erred in finding any enforceable contract between parties based on the supposed agreement of 1 October 1988. This is because the agreement was not admitted in evidence before him, as it had not been duly stamped in accordance with s 19 of the Stamp Duties Act.

It was also argued that, even if it had been admitted, it would nonetheless be unenforceable as none of the procedures prescribed under s 15 of the Land Act had been undertaken.

Other grounds cited were that the respondent, while acting as general manager of Umboi Timber, the holder of the Timber Rights Permit, had failed to disclose his interest in the beach property in due time, and his insistence on payment for use of it after operations commenced constituted duress and pressure on the appellant.

In answer, the respondent, who appeared in person, supported the findings and decisions of District Court.

In the hearing of the appeal, there was initially some difficulty in finding the judgment of the District Court, but there can be no doubt that the hand written decision eventually located on file (though unsigned) is the written decision of that Court and coincides exactly with the order recorded on 8 November 1991.

The facts as outlined above are, in fact, not disputed. There was some concern by the appellant as to whether the boundary of TRP might, in fact, have included the log pond area, but no evidence was offered of this to counter the respondent's assertion that the log pond area was his own property and outside the TRP.

Of course, the fact that the agreement to lease was prepared by the appellant company itself is also significant. That shows that the appellant was satisfied of the need for such an agreement. The preparation of the agreement by the appellant also contradicts any claim of duress or that it represented only a compensation claim.

These matters, raised in this Court were covered in the submissions of the appellant before the District Court. They can conveniently be quoted here:

"The complainant's claim is in contract seeking damages for breach of a purported contract of lease dated 1 October 1988. No such contract was produced in evidence. The complainant gave verbal evidence of the existence of such a contract and the defendant admitted it had entered into some sort of agreement with the complainant for the use of the complainant's land. The defendant introduced evidence of its manager, Mr Richard Kong that this agreement was entered into under a certain amount of duress when it became apparent that the land in question belonged to the complainant. The complainant insisted on this agreement nearly ten months after the defendant had got under way with its logging operations and was at a stage where it was deeply involved in the logging agreement with UTI. In this situation it is submitted that clearly the defendant was left with little choice but to comply with the complainant's demand for some sort of compensation for the use of his land which came as a considerable surprise to the defendant ... previously been under the impression that it formed part of the forestry land own by UTI."

There can be no doubt that the learned Magistrate did base his decision on the agreement. He concluded that it should be enforced even though the agreement was in fact ruled inadmissible and, therefore, did not form part of the evidence before him.

He states in the judgment that:

"I would say there was a written lease agreement which bound the parties. Although it was rejected for not being duly stamped the parties acted on it.... The defendant who benefited from use of the complainant's land and made four lots of rental payments to the complainant under the agreement cannot now go back and argue that there was no such agreement."

He considered that s 15 of the Land Act, dealing as it does with the acquisition of title to customary land, did not apply. He pointed out that s 15 only related to the disposition of customary land through the Minister and such was not relevant. In this case he considered the agreement between the parties was more akin to a licence and, therefore, not affected. Section 15 of the Land Act, as amended by Act No 23 of 1984 s 1, says:

"Acquisition of customary land

(1) Customary land shall be acquired in accordance with this section and Section 15A and shall be authenticated by such instruments and in such manner as are prescribed.

(2) Where the customary owners of land are willing to dispose of their land otherwise than to natives in accordance with custom, the Minister may purchase or lease it on such terms and conditions as are agreed on between him and the owners."

Sections 3 and 4 make provisions for necessary inquiries prior to acquisition.

The learned magistrate is plainly correct in his assessment of s 15. It is not a provision concerned with dealings of land inter parties. It is concerned solely with the disposal of customary land to the State. But the learned magistrate was in error in enforcing an agreement to lease which had not been proved before him.

The failure to stamp an agreement does not affect its validity, but it certainly is not admissible or enforceable in a Court of law until it is stamped. The learned magistrate could, therefore, not rely on it as evidence on which to base his decision, any more than the complainant could to establish his claim. The proper course would have been to adjourn proceedings to have the agreement duly stamped.

But there is, in fact, a more fundamental reason why the agreement to lease was not enforceable, and that is because the whole of that agreement was rendered void by virtue of s 73 of the Land Act. That section, as amended by Act No 23 of 1984 s 2, provides:

"Disposal of customary land

Subject to Sections 15 and 15A, a native has no power to sell, lease or dispose of customary land otherwise than to natives in accordance with custom, and a contract or agreement made by him to do so is void."

Though not cited in the District Court proceedings, that section plainly governs contracts such as the agreement of 1 October 1988. The provision in that agreement that it was subject to compliance with "provisions of the Land Act" will not save it. Any such dealings, other than between customary land owners, are void.

When statutes expressly declare a particular class of contract to be unlawful, the Court must obviously obey such a legislative direction. It is nothing to the point that neither party knew the state of the law and that neither intended any infraction of it. The consequence of a void contract is simply that no rights arise out of it and, thus, no rights are enforceable.

A succinct summary of the effect of illegal contracts is set out by Sangster J in Chappel Pty Ltd v DK Pett Pty Ltd [1971] 1 SASR 188, where he said that from decided cases two principles emerge:

"The first is that a contract which is entered into with the object of committing an illegal act is unenforceable, the second is that the Court will not enforce a contract which is expressly or impliedly prohibited by statutes ... (but in) considering implied prohibitions a Court ought to be very slow to hold that a statute intends to interfere with the rights and remedies given by the ordinary law of contract".

In this case it is plain that neither the complainant respondent or the appellant could enforce the agreement to lease or any provisions of it since it is void by statute. No rights or obligations, therefore, arise under that agreement. But this matter does not necessarily end there.

The law as to the consequences of illegal contracts has long been clear. Void contracts or unenforceable contracts are governed by the maxim ex turpi causa non oritur actio. That simply means, no rights can arise out of an illegal contract. But the courts have long recognised two situations. The first is that very often one or other party may be less at fault than another; the second is that situations arise where it would be unjust for the courts to allow a party to take advantage of illegality by hiding behind the unenforceability of a contract and, thereby, unjustly enrich himself.

Turning first to inequality of responsibility for the illegality; this may arise in many contractual situations, but it often occurs through statutes where it is clear that the prohibitions against making certain contracts are for the protection of a particular class of people, e.g. persons suffering an incapacity such as minors, or as here - customary landowners.

Thus, as Lord Mansfield said in Browning v Morris [1778] EngR 85; (1778) 2 Cowp 790, 98 ER 1364:

"where contracts or transactions are prohibited by positive statutes, for the sake of protecting one set of men from another set of men; the one, from their situation and condition, being liable to be oppressed or imposed upon by the other; there the parties are not in pari delicto; and in furtherance of these statutes, the person injured, after the transaction is finished and completed, may bring his action and defeat the contract."

This principle still holds. Lord Denning, in Kiriri Cotton Co Ltd v Dewani [1960] 1 All ER 177, gives a clear exposition of those situations where monies or property had in pursuant of an illegal contract may be recovered. He says at p 180 G:

"so long as the illegal transaction has not been fully executed and carried out, the courts have in many cases shown themselves ready to entertain a suit for recovery of the money paid or property transferred. These were cases in which it appeared to the court that, even though the transaction was illegal, nevertheless it was better to allow the plaintiff to resile from it before it was completed, and to award restitution to him rather than to allow the defendant to remain in possession of his illegal gains.... But so soon as the illegal transaction has been fully executed and carried out, the courts will not entertain a suit for recovery unless it appears that the parties were not in pari delicto."

In pari delicto may be translated as describing a situation where the parties are equally at fault. If that is the case, the parties are stuck with their agreement and no rights or obligations can be enforced. But where they are not equally at fault (where there may have been duress, a mistake of fact, or where the duty of observing the law in the field where the contract arose is placed on one rather than the other; that is, where the law is plainly intended for the protection of a class of persons) parties are not in pari delicto and monies can be recovered.

Lord Denning also states that even in the case of mistake of law, if as between the parties there is more than simply the mistake of law such that it can be said that it is not the claimant's conduct that brought about the mistake but rather that of the defendant, then in such case, recovery or restitution may be possible.

As for unjust enrichment, it is hardly surprising that the courts will not give any support to the enforcement of contracts plainly prohibited by law. But in situations where it is just and equitable to do so, the courts will make an award by way of restitution, rather than leave a party to hide behind a prohibited contract and retain monies paid under it.

It is important to note that liability to make restitution of monies or economic advantage on property wrongfully received is not based on any action prohibited in contract, the law of contract generally, or implied contract. It is, in fact, largely based on the principle that no one should be unjustly enriched. Lord Mansfield in Moses v Macferlan in 1760 says in a passage which has stood the test of time:

"This kind of equitable action, to recover back money, which ought not in justice to be kept, is very beneficial, and therefore much encouraged. It lies (only) for money which, ex aiquo et bono, the defendant ought to refund; it does not lie for money paid by the plaintiff, which ... by positive law he was debarred from recovering. But it lies for money paid by mistake; or upon a consideration which happens to fail; or for money got through (duress) or an undue advantage taken of the plaintiffs situation, contrary to the laws made for the protection of persons under those circumstances. In one word, the gist of this kind of action is that the defendant upon the circumstances of the case, is obliged by the ties of natural justice and equity to refund the money."

To afford relief in such situations, the court will supply a remedy provided that the plaintiff seeking relief is not forced to found his claim for that relief on the illegal contract or plead the illegal contract in order to support his claim. (See Bowmakers Ltd v Barnet Instruments Ltd [1945] 1 KB 65.) In other words, if a plaintiff can establish a claim which does not rely on the contract prohibited by statute, or result in a remedy which is, in effect, the enforcement of that illegal contract, then the court will afford a remedy.

All that need be added to this is to emphasise that, while the path to restitution under prohibited or illegal contracts is strictly confined, where restitution may be obtained, no limit should be implied that would restrict the courts administering natural justice as required by the Constitution.

In this appeal, both the appellant and respondent have entered a contract clearly void by statute; one from which no rights or obligations can arise or be enforced. It was, in fact, pleaded and enforced in the lower Court and as such that judgment cannot stand. It is set aside. But all appeals from the District Court coming before the National Court are dealt with by way of re-hearing. Under such circumstances and with the same facts before this Court as were established in the lower Court, the parties' positions and the appeal remain to be reconsidered.

The plain and obvious fact situation is that the appellant Putput Logging found itself obliged to negotiate with Mr Ambalis, the respondent, when it became obvious that the only way it could carry out its shipping of logs was to negotiate for the use of his land. The company met the respondent's demands in the sum of K400.00 a month but drew up a lease agreement in endeavour to ensure that it was, thereafter, protected. It added an intention to comply with the provisions of the Land Act. A certain portion of the agreed rental was paid. Most of it was not. No reason is given for that failure and, therefore, it must be taken as being a deliberate decision to avoid payment.

The lease agreement between the parties has been fully executed. It has been wholly performed except for the payment of all the rental due under it. It was, despite the intention of parties, wholly void. The only question remaining is whether the complainant respondent can obtain any restitution under the principles discussed above.

It would be possible to say that s 73 of the Land Act is intended to protect customary landowners from contracts which may be to their disadvantage, and that, therefore, in this particular illegality, the parties are not in pari delicto.

That could well be the case in many or the majority of such contracts entered into with customary landowners. However, in this particular case the respondent Mr Ambalis was not really at any particular disadvantage. He was the general manager of the land-owning company doing logging business with the appellant, negotiating and dealing with the appellant in the normal course of business. Though, in fact, ignorant of the law regarding s 73 contracts, he was well able to look after his own interests to bargain for and obtain the contract that he wanted. I do not believe that he was under any disability or disadvantage and, thus, party to an unsatisfactory contract. He got the contract he wanted.

But the facts do show that the appellant company has had the advantage of use of the respondent's land. It had undertaken to pay for that use. In my view, it would be fraudulent for the appellant to plead the illegality and hide behind the unenforceability of a lease it prepared itself to the detriment of the respondent. It would clearly be unjustly enriched. For this Court to countenance such a fraud would be contrary to natural justice.

This Court will not enforce the contract declared void by statutes. It will, however, ensure that the appellant takes no advantage of a fraud on the respondent. Accordingly, there will be judgment for the respondent.

The simplest measure of damages is, indeed, the sum bargained for and not paid, but to award the sum of K6,800 would in my view be tantamount to enforcing the lease. In the circumstances of this case, I consider the sum of K5,000 a reasonable sum for the appellant to meet and adequate compensation to the respondent. Accordingly, judgment is entered for the respondent in this sum.

There will be no interest allowed and each party will bear its own costs.

______________

Lawyer for the appellant: Henao Priestley.