SC1881
PAPUA NEW GUINEA
[IN THE SUPREME COURT OF JUSTICE]

SCA NO 18 OF 2019

GAGO TEINE
First Appellant

GUTE SECURITY SERVICE LIMITED
Second Appellant

V

THE UNIVERSITY OF GOROKA
Respondent

Waigani: Cannings J, Tamate J, Dingake J
2019: 27th August, 28th November

CONTRACTS – illegal contracts– consequences of illegality – whether party to illegal contract can recover money paid under contract to other party – whether parties are in pari delicto – quantum meruit

The second appellant, a company owned and controlled by the first appellant, entered into a three-year contract with the respondent, a university, to provide security services. The appellants performed services under the contract, evidently to the satisfaction of the respondent, but before the end of the first year of the contract, the respondent terminated it on the ground that it had been entered into by an unauthorised person and contrary to legislation governing the financial affairs of the respondent. The respondent commenced proceedings in the National Court against the appellants, seeking recovery of all monies paid under the contract. The National Court upheld the respondent’s claim and ordered the second appellant to repay the respondent K418,120.00 paid under the contract, which was ruled to be an illegal contract. The appellants were deemed to have knowledge of the illegality. A cross-claim by the appellants was dismissed. The appellants appealed on various grounds including that the trial Judge erred by not recognising that the appellants had satisfactorily performed services under the contract and were entitled under quantum meruit principles to retain the money paid to the second appellant for those services. The appellants did not argue that the contract was not illegal. The appeal was centred on the issue of whether money paid under an illegal contract could be recovered. 

Held:

(1)	The question whether one party to an illegal contract can recover money paid to the other party is governed by the maxim in pari delicto(a situation in which the parties are equally at fault).

(2)	If the parties are equally at fault, money paid under the illegal contract is not recoverable.

(3)	If one party can be described as innocent, in comparison with the other party, money paid by the innocent party to the other party is recoverable.

(4)	Here, the evidence suggested that the appellants entered into the contract without actual knowledge of its illegality, in good faith, and performed services under the contract satisfactorily without complaint and would in all likelihood have been able to sustain a quantum meruit claim if they had not been paid anything by the respondent, and the respondent also entered into the contract without knowledge of the illegality and paid money to the appellants in good faith for services actually rendered. The parties were in pari delicto. The money paid by the respondent was not recoverable.

(5)	The trial Judge erred by labelling the appellants’ conduct as not innocent and by deeming them to have knowledge of the illegality and by ordering them to repay to the respondent the money under the illegal contract. 

(6)	The appeal was substantially upheld and the parts of the National Court’s order requiring the appellants to repay the respondent K418,120.00 plus interest and costs were quashed. 

Cases Cited

The following cases are cited in the judgment:

Delphi Corporate Investigations Ltd v Bernard Kipit (2003) N2480
Fly River Provincial Government v Pioneer Health Services Ltd (2003) SC705
Kiriri Cotton Co Ltd v Dewani [1960] 1 All ER 177
Leontine Ofoi v Kris Bongare (2007) N3248
Putput Logging Pty Ltd v Ambalis [1992] PNGLR 159
Steven Turik v Mathew Gubag (2013) N5132
The State v Barclay Bros (PNG) Ltd (2004) N2507

APPEAL

This was an appeal against a decision of the National Court that ordered the second appellant to repay money paid to it by the respondent under an illegal contract.

Counsel

A Waira, for the Appellants
T C Waisi, for the Respondent

28th November, 2019 

1.      BY THE COURT: Gago Teine and Gute Security Service Ltd appeal against the decision of the National Court which, amongst other things, ordered Gute Security Service Ltd (“Gute”) to repay the University of Goroka (the respondent) the sum of K418,120.00 which the University had paid to Gute under a security service contract.

2.     In January 2015, Gute (a company owned and controlled by Mr Teine) entered into a three-year contract with the University to provide security services at its Goroka campus. Gute performed services under the contract, evidently to the satisfaction of the University, but before the end of the first year of the contract, in October 2015, the University terminated the contract on the ground that it had been entered into by the then Vice-Chancellor, Dr Gairo Onagi, without the authority of the Council of the University, contrary to the University of Goroka Act, University Statutes and the public tender requirements of the Public Finances (Management) Act. 

3.     The University commenced two separate proceedings in the National Court against the appellants(WS No 243 of 2016) and Dr Onagi (WS No 312 of 2017), seeking recovery of all monies paid under the contract. After a joint trial of the two proceedings the National Court upheld the University’s claim in WS No 243 of 2016 and ordered Gute to repay K418,120.00 it received from the University under the contract, which was ruled by the trial judge to be an illegal contract, plus interest and costs. Mr Teine and Gute were deemed to have knowledge of the illegality. A cross-claim by them was dismissed. The order, made at Goroka on 22 February 2019, stated:

[Re WS 243 of 2016:]

1.	Judgment for the plaintiff [the University] against the first and second defendants [Mr Teine and Gute]. The cross-claim [by Mr Teine and Gute] is dismissed.

2.	The second defendant is to pay the plaintiff K418,120.00 together with interest at the rate of 8% yearly calculated from 12 October 2015 [date of termination of the contract] to date of judgment.

3.	The first and the second defendants jointly and severally to pay the costs of the plaintiff on a solicitor and client basis.

4.	Interest in accordance with the Judicial Proceedings (Interest on Debt and Damages) Act will accrue on the sum of K418,120.00 from the date of judgment but not on the previous interest accrued. 

5.	The action against the third defendant [Dr Onagi] is dismissed. The third defendant is to pay his own costs. 

6.	Time abridged to the date of settlement by the Registrar, forthwith. 

[Re WS 312 of 2017:]

7.	The claim against the defendant [Dr Onagi] is dismissed. The defendant will bear his own costs. The plaintiff is not awarded further costs.

8.	Time abridged to the date of settlement by the Registrar, forthwith.

APPEAL

4.     Mr Teine and Gute appeal against orders 1 to 4. They seek an order quashing those orders and in their place an order that the University pay them K214,932.42, being the amount they say they are entitled to under their cross-claim (a quantum meruit claim based on the argument that Gute was underpaid that amount for security services actually performed under the contract). 

5.     The primary ground of appeal is that the trial Judge erred in law by treating Gute as not an innocent party to the illegal contract and by not recognising that Gute had satisfactorily performed services under the contract and was entitled under quantum meruit principles to retain the money paid to it for those services. 

6.     The appellants do not argue that the contract was not illegal. Its illegality is accepted. The appeal is centred on the issue of whether money paid under the illegal contract should be recovered. 

DID THE TRIAL JUDGE ERR IN TREATING GUTE AS ‘NOT INNOCENT’?

7.     In forming the view that Gute was not innocent, his Honour applied what he treated as one of the principles regarding illegal contracts arising from the decision of the Supreme Court in the leading case, Fly River Provincial Government v Pioneer Health Services Ltd (2003) SC705 (‘Fly River v Pioneer’): that a person dealing with a public institution is deemed to be aware of the public tender requirements of the Public Finances (Management) Act. As Gute was deemed to have knowledge of the illegalities, it followed that it was not innocent. Therefore it had to repay all money paid to it under the illegal contract. 

8.      We uphold the submissions of Mr Waira for the appellants that the learned trial judge, with respect, erred in law in adopting that process of reasoning.

9.     We do not consider that the Supreme Court in Fly River v Pioneer laid down a hard-and-fast rule that all persons dealing with public institutions will be deemed to be aware of the public tender requirements of the Public Finances (Management) Act, so that in each and every instance of an illegal contract, the parties to the contract will be deemed to have knowledge of its illegality. The better view is that any dicta to that effect is confined to the facts of that particular case. It remains important that the evidence in each case be assessed on its merits. Though it might be appropriate to presume knowledge of illegalities, such a presumption can on a proper assessment of the evidence be rebutted. We consider that the trial judge erred by regarding dicta of the Supreme Court in the Fly River Provincial Government case about the parties being deemed to have knowledge of an illegality as a hard-and-fast rule and applying it against the appellants without adequate assessment of the evidence, leading to them being labelled without justification as ‘not innocent’. 

10.      His Honour was led into error by the failure of counsel to draw attention to the proper approach to apply to the scenario presented at the trial, where money was paid by one party to another party under an illegal contract. The proper approach was explained by Sheehan J in the National Court in the leading PNG case, Putput Logging Pty Ltd v Ambalis [1992] PNGLR 159. His Honour, relying on dicta of Lord Denning in Kiriri Cotton Co Ltd v Dewani [1960] 1 All ER 177, emphasised the significance of the inpari delicto maxim in determining whether money paid under an illegal contract is recoverable. Sheehan J stated:

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.

11.     The proper approach can be summarised in these terms: 

•	the question whether one party to an illegal contract can recover money paid to the other party to the illegal contract is governed by the maxim in pari delicto (a situation in which the parties are equally at fault); 

•	if the parties are in pari delicto, money paid under the illegal contract is not recoverable;

•	if one party can be described as innocent, in comparison with the other party, money paid by the innocent party to the other party is recoverable.

12.      If that approach had been taken, the evidence adequately demonstrated that the appellants entered into the contract without actual knowledge of its illegality, in good faith, and performed services under it satisfactorily without complaint and would in all likelihood have been able to sustain a quantum meruit claim if they had not been paid anything by the University. The University also entered into the contract without knowledge of its illegality and paid the money to Gute in good faith for services actually rendered. The parties were in pari delicto. The money paid by the University to Gute was therefore not recoverable. 

13.     If the approach in Putput Logging is not taken, it would be necessary to apply quantum meruit principles to the facts of this case. Quantum meruit is an identifiable cause of action applied in cases such as The State v Barclay Bros (PNG) Ltd (2004) N2507, Delphi Corporate Investigations Ltd v Bernard Kipit (2003) N2480 and Leontine Ofoi v Kris Bongare (2007) N3248. We adopt the elements of a cause of action in quantum meruit set out by Cannings J in Steven Turik v Mathew Gubag (2013) N5132:

•	A has done something of benefit for B;
•	the thing done by A relates to an arrangement of some sort with B (the arrangement might be but is not necessarily a contract, and might be an illegal contract);
•	it would be unjust to allow B to retain the benefit without some remuneration or reward for A.

14.     In this case, the appellants are party A. They did something of benefit (provided security services) to party B (the University). The thing done by the appellants related to an arrangement with the University (the illegal contract). It would be unjust to allow the University to retain the benefit without some remuneration to the appellants. If this analysis were adopted it would have been seen as unjust to order the appellants to repay what had been paid to them in good faith by the University, as what was paid to them was reasonable remuneration for the services that they performed for the University. 

15.      We find that the learned trial Judge erred by deeming the appellants to have knowledge of the illegalities in the contract and labelling them as not innocent and by ordering them to repay to the University the money paid to them under the illegal contract. 

CONCLUSION 

16.     We will allow the appeal and quash most parts of orders 1 to 4 in the National Court. We decline, however, to make all the declarations and orders sought by the appellants, including an order upholding their cross-claim. We consider that the cross-claim was properly dismissed due to lack of credible evidence that the appellants were underpaid for the security services performed. As the appellants have not obtained all relief they sought, it is appropriate that the parties bear their own costs.  

ORDER 

(1)	The appeal is substantially allowed.

(2)	The parts of the order of the National Court of 22 February 2019 in WS No 243 of 2016 under which judgment was entered for the plaintiff and the second defendant was ordered to pay the plaintiff K418,120.00 together with 8% interest and the defendants were ordered to pay the plaintiff’s costs and interest, are quashed.

(3)	Other parts of the order of the National Court of 22 February 2019 in WS No 243 of 2016, including the part under which the cross-claim was dismissed, are affirmed.

(4)	The parties shall bear their own costs of the appeal. 
__________________________________________________________________
Waira Lawyers: Lawyers for the Appellant
Waisi Lawyers: Lawyers for the Respondents