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Contract law update 2022

Contract law update 2022: illegality

Restitutionary claim to recover money paid under an illegal contract

Can a person bring a restitutionary claim to recover money paid under an illegal contract? To quote the High Court: 'There is no one-size-fits-all answer to the question of recoverability', but the 'central policy consideration at stake … is the coherence of the law'.1 This passage was cited by the NSW Court of Appeal in Li v Liu2, in which the court identified the relevant factors to include:

  • the policy behind any legislation making the contract unlawful and, in particular, whether it was designed to protect a class of persons;
  • whether it would be unjust for the recipient to retain their benefit; and
  • whether the statutory scheme would be 'stultified' if restitution were allowed.

There is sufficient flexibility in these factors to enable courts to achieve the outcome they consider most just. In this case, prohibitions in the Migration Act 1958 (Cth) on certain agreements were, at least to an extent, designed to protect people who offered benefits (as distinct from those who received them). A restitutionary award therefore would 'not stultify the purpose of the statutory scheme but instead uphold it'.3

Li v Liu [2022] NSWCA 67

Illegal contracts: recovery of money through restitution or under statute.

In this case, the NSW Court of Appeal considered whether, in relation to a contract rendered unenforceable due to illegality, a monetary amount paid in the form of consideration could be recovered on a restitutionary basis and/or under the Australian Consumer Law (the ACL) .

The court relevantly held that:

  • the primary judge did not err in finding that monies paid were recoverable on a restitutionary basis (as this would not result in incoherence in the law or stultify the purpose of the relevant statutory scheme); and
  • had there been a representation that the appellants would obtain the result of the services rendered, recovery would not have been precluded under the ACL.

This case is an instructive example of how courts decide a party can recover amounts paid under an illegal contract.

Facts

The first appellant (Kun Li) entered into various agreements with T & S Investment Group Pty Ltd. The primary judge found that these agreements constituted a 'Main Contract' to obtain visas for Ms Li and her parents (with the second appellant, Zhi Hong, being the mother of Kun Li)

In April 2017, the first and second appellants transferred A$500,000 into the bank account of the first respondent, Yang Liu. Liu was a director of, and held 99% of the shares in, T & S Investment Group Pty Ltd. The other director (and managing director) of T & S Investment Group Pty Ltd was the second respondent, Junyi Wang (Mr Wang).

One of the arrangements under the main contract was the 'investment' of $1,000,000 with T & S Investment Group Pty Ltd by or on behalf of Ms Li, and the employment of Ms Li by T & S Investment Group Pty Ltd.

Upon failing to obtain a visa, Li and Hong launched proceedings against the appellants and T & S Investment Group Pty Ltd in the District Court of NSW in order to recover the amounts paid. It was held that the arrangements breached provisions of the Migration Act 1958 (Cth) that prevented the offering or receiving of a benefit in exchange for a 'sponsorship-related event', including 'employing or engaging … a person to work in an occupation or position in relation to which a sponsored visa has been granted, has been applied for or is to be applied for' and a 'grant of a sponsored visa'.

Accordingly, the District Court held that Ms Li and Ms Hong were entitled through restitution to recover the amounts paid from T & S Investment Group Pty Ltd, but not Ms Liu and Mr Wang.

The issues on appeal were:

  • if the primary judge found that the representation was made, whether her Honour erred in doing so;
  • if the representation was made, whether the primary judge erred in denying recovery against Mr Wang under ss 18 and 236 of the ACL for his alleged knowing involvement in a false and misleading representation that the appellants would obtain visas;
  • whether the primary judge erred in concluding that the monies paid were recoverable on a restitutionary basis by the appellants, even though the main contract and collateral agreements were rendered illegal and unenforceable by ss 245R and 245S of the Migration Act;
  • whether the primary judge erred in refusing to allow recovery from Ms Liu on a restitutionary basis in circumstances where she did not expressly plead that she had paid the monies over to T & S Investment Group Pty Ltd without notice of any illegality; and
  • whether the primary judge erred in refusing to allow recovery from Ms Liu on a restitutionary basis in circumstances where her Honour did not expressly find that Ms Liu paid the funds over to T & S Investment Group Pty Ltd without notice of any illegality.
Judgment

The Court of Appeal held that:

  • it was not shown that the representation was made;
  • if the representation were made, the primary judge erred in concluding that the illegality of the main contract precluded recovery under the ACL or meant that the representation was not made in trade or commerce. It was held that the making of representations about the prospects of obtaining visas is not illegal by virtue of the Migration Act, and that the recovery of the investments was not based on any illegal action;
  • the primary judge did not err in concluding that monies paid under the main contract and the various collateral contracts were recoverable on a restitutionary basis; and
  • the primary judge did not err in refusing to allow recovery from Ms Liu on a restitutionary basis. The court held it is not sufficient to establish that an agent has knowledge of the facts that give rise to the illegality. In such cases where illegality is a vitiating factor, only actual knowledge of the illegality will suffice, given the wide range of circumstances giving rise to illegality. It was held that Ms Liu believed T & S Investment Group Pty was entitled to the funds under the various arrangements with the appellants.

Importantly, as to recovery under the ACL, the Court of Appeal held that '[w]hether some form of illegality affecting the relevant conduct inhibits or precludes recovery under s 18 of the ACL turns upon the form of illegality in question and its relationship to the action brought by the affected party'. The court held that 'the consequences of illegality for a claim under the ACL are resolved by considering and, to the extent necessary, reconciling the ACL and the statutory provisions that create the illegality in the same or similar way that occurs with illegal contracts'.

In regards to the restitutionary basis for recovery, the court held that allowing recovery in these circumstances would not result in incoherence in the law or stultify the purpose of the statutory schema. In this case, the 'integrity of the migration system' was the objective of the statutory scheme and that restitution would uphold, rather than stultify, the purpose of the statutory scheme. This is because '[t]he differential treatment of those who offer a benefit in return for the occurrence of a sponsorship‑related event compared with those who receive the benefit suggests that, at least to some extent, the former are sought to be protected by the statutory scheme'.

Footnotes

  1. Equuscorp Pty Ltd v Haxton (2012) 246 CLR 498; [2012] HCA 7 at [34].

  2. [2022] NSWCA 67.

  3. At [43].