Not for Sale!
31 December 2015
Yap Yeong Hui explains the Federal Court’s landmark decision on influence peddling.
In Merong Mahawangsa Sdn Bhd & Anor v Dato’ Shazryl Eskay Abdullah  8 CLJ 212, the apex court of Malaysia was called upon to consider the enforceability of a contract to use influence in procuring a government contract.
The Respondent entered into a letter of undertaking with the Appellants whereby the Respondent agreed to provide services to procure a project to replace the Johor-Singapore Causeway (“Project”) for a company (“Consortium”) in which the second Appellant was a shareholder. The Respondent was to be paid a sum of RM20 million for his services.
The Project was initially awarded to the Consortium but was subsequently cancelled. The Respondent commenced proceedings against the Appellants for payment of the sum of RM20 million under the letter of undertaking.
The Appellants pleaded two main defences, namely that (i) the procurement of the Project on account of the Respondent’s close relationship with the Malaysian Government was against public policy and that the letter of undertaking was illegal and void pursuant to section 24(e) of the Contracts Act 1950 (“Act”); and (ii) the letter of undertaking could not be put into effect as the Project did not materialise.
DECISIONS OF THE HIGH COURT AND THE COURT OF APPEAL
With regard to the first defence, the High Court held that the Appellants had failed to produce any evidence to support their assertion that the nature of the services rendered by the Respondent had a tendency to be injurious to the public interest. The High Court further found that the letter of undertaking was not tainted with illegality as the Project, if it had proceeded, would have been beneficial to the public.
Notwithstanding that, the High Court accepted the Appellants’ second defence that as the Project had been terminated, the Respondent was not entitled to payment under the letter of undertaking. The Court rejected the Respondent’s argument that he was still entitled to be paid under the letter of undertaking because it was the ‘Project’ and not the ‘award’ that had been withdrawn.
On appeal, the Respondent’s argument that there was a difference between ‘award’ and ‘Project’ was accepted by the Court of Appeal. In reaching its decision, the Court of Appeal looked at the wording of the letter of undertaking and concluded that the parties did not intend to make reference to the Project. Accordingly, as there was an award in favour of the Consortium, the Court ordered the Appellants to pay the Respondent the said RM20 million. The Appellants appealed to the Federal Court.
DECISION OF THE FEDERAL COURT
The Appellants were granted leave to appeal the following question to the Federal Court:
“Whether an agreement to provide services to influence the decision of a public decision maker to award a contract is a contract opposed to public policy as defined under section 24(e) of the Contracts Act 1950 and [is] therefore void?”
The Federal Court answered the leave question in the affirmative and allowed the Appellants’ appeal. The Federal Court was of the view that there were two components to the leave question, namely, (a) the scope of the term “public policy” under section 24 of the Act, and (b) the legal position of the provision of the service of influencing the decision of a public decision maker in awarding a contract for consideration.
Public Policy as a Ground to Invalidate a Contract
In relation to the first component, the five member Federal Court was of the view that invalidating a contract on the ground of public policy is separate from the invalidation of a contract that is forbidden by any law or which if permitted would defeat any law. The Court cited paragraph 430 of Halsbury’s Laws of England, 5th Edition, Volume 22 and held that whether a contract is contrary to public policy is a question of law. The Court further observed that public policy is not static and may vary from time to time and that the courts would be guided by public opinion in deciding what constitutes public policy.
Influence Peddling is Contrary to Public Policy
As for the second component, the Federal Court first referred to various English authorities, including Montefiore v Menday Motor Components Company Ltd  2 KB 241, Lemenda Trading Co Ltd v African Middle East Petroleum Co Ltd  QB 488 and Omega Group Holdings Ltd and others v Kozeny and others  EWHC 872 (Comm) which held that influence peddling is contrary to public policy in England.
The Court then said that section 24 of the Act is a codification of the common law and it is therefore contrary to Malaysian public policy that a person be hired for money or valuable consideration to use his position and interest to procure a benefit from the Government. This is because the sale of influence engenders corruption and undermines public confidence in the Government, which is inimical to public interest.
The Court also referred to Mulla Indian Contract and Specific Relief Acts, 13th Edition, Volume 1 at 702-703 which categorically states that “An agreement, the object of which is to use influence with Ministers of government to obtain a favourable decision, is destructive of sound and good administration. It showed a tendency to corrupt or influence public servants to give favourable decisions other than on their own merits. Such an agreement is contrary to public policy. It is immaterial, if the persons intended to be influenced are not amenable to such recommendations.”
In this case, the RM20 million claimed by the Respondent was intended as payment for services rendered by the Respondent to secure the Project. The Respondent himself pleaded the service rendered by him, which was that he had “used his influence and good relationship with the Government of Malaysia” to procure the Project for the Consortium. The Respondent also particularised his close relationship with specific Federal Ministers and his dealings with Federal Ministers with respect to the Project. Further, the Respondent provided details of his influence and the manner in which he exerted his influence and convinced those Federal Ministers. The Court concluded on these facts and on the face of it, that it was plain and obvious that the consideration was unlawful, and that the letter of undertaking was void.
The Court rejected, as preposterous, the Respondent’s submission that an agreement to use a person’s contacts with certain government officials in order to procure contracts could not be against public policy in Malaysia in view of the widespread practice where government officials had no qualms of awarding contracts or projects to their cronies.
The Federal Court also took the opportunity to overrule two earlier cases of Wong Hon Leong David v Noorazman bin Adnan  4 CLJ 155 and Ahmad Zaini Japar v TL Offshore Sdn Bhd  5 CLJ 201. These two cases involved plaintiffs who were suing for their fees for securing contracts in favour of the defendants allegedly by using their influences. The Federal Court in Merong Mahawangsa was of the view that once the illegality of a contract is raised or becomes apparent, the court is duty bound to consider the allegation by reference to section 24 of the Act and pertinent case law, which the courts in the two earlier cases had failed to do.
Finally, the Federal Court commented, albeit obiter, that as the award and the Project were intrinsically linked, the award was automatically retracted when the Project was withdrawn. As such, the RM20 million was not payable when the Project was withdrawn.
This decision of the Federal Court brings Malaysia in line with the position of many other countries. Contracts should be granted on the merits and not based on extraneous reasons such as the influence exercised over the party granting the contract.
In light of this decision, those who offer services of procuring contracts through the exercise of influence are forewarned that the courts will not assist them in recovering payment of their fees.