THE RULE IN FOSTER V DRISCOLL AND THE OCHROID FRAMEWORK FOR CONTRACT ILLEGALITY
In the recent Court of Appeal decision of Ang Jian Sheng Jonathan v Lyu Yan [2021] SGCA 12, the Court of Appeal made some observations (albeit obiter) on the interactions between the application of the rule in Foster v Driscoll [1929] 1 KB 470, and the framework set out in Ochroid Trading Ltd v Chua Siok Lui (trading as VIE Import & Export) [2018] 1 SLR 363.
Facts. Lyu Yan (the respondent) was a private bank customer of BNP Paribas Singapore (“BNP”) who wanted to remit money from her China bank accounts to her Singapore bank accounts. Her BNP relationship manager referred her to Joseph (the first defendant in the suit below) to help with the remittance (at [1]).
The First Transaction. For the First Transaction in September 2018, Lyu Yan transferred money from her China bank accounts to other China bank accounts nominated by Joseph, who, in turn, obtained them from a licensed Indonesian remittance company. She received the equivalent amount in her Singapore bank account with Credit Suisse from a Hong Kong bank account (at [2]).
The Second Transaction. This appeal is concerned with the Second Transaction in October 2018 where Lyu Yan agreed to engage Joseph’s services for another remittance (“the Agreement”). However, instead of the licensed Indonesian remittance company, Joseph enlisted the help of Jonathan and Derek (the second and third defendants in the suit below respectively, who are the first and second appellants in this appeal) (at [3]). The money from Lyu Yan’s China bank accounts was then transferred to various China bank accounts nominated by Joseph, who, in turn, obtained the accounts from Jonathan and Derek (at [4]).
Jonathan and Derek transferred all the money away and the money disappeared. Lyu Yan chased Joseph for the money, who in turn chased Jonathan and Derek. Derek eventually told Joseph on 18 October 2018 that his counterparty was one “Allan”, and added Joseph to a WhatsApp group with himself, Allan and Jonathan, where Allan purported to give various assurances that he would make the transfers, until he stopped replying on 22 October 2018 (at [4]).
The decision below. Lyu Yan commenced proceedings against Joseph, Jonathan and Derek, and succeeded in her claims against Jonathan and Derek based on the torts of conspiracy, negligence and unjust enrichment (at [5]). As for Joseph, he was held liable for breach of contract (pursuant to the Agreement), negligence, and unjust enrichment (at [7]).
Only Jonathan and Derek appealed against the decision below.
Issues on appeal. The Court of Appeal observed that they were making substantially the same arguments as those made before the Judge: (at [8])
First, that Allan existed, and it was Allan who defrauded Lyu Yan of her money instead of them; and
Second, that the rule in Foster v Driscoll was engaged to defeat all of Lyu Yan’s non-contractual claims against them.
These arguments failed before the Court of Appeal.
Whether Allan exists. The Court of Appeal held that it was Jonathan and Derek who bore the burden of proving that Allan exists for two reasons: (at [10])
Allan’s existence was a material fact pleaded by Jonathan and Derek in order to establish their defence that they did not in fact misappropriate the money; and
If the burden of proof was on Lyu Yan, she would have “the unenviable (if not nearly impossible task) of proving a negative” that Allan did not exist.
The burden of proof was not discharged due of lack of positive evidence of Allan’s existence (at [11]). The Court was also not persuaded by their explanations for the lack of evidence (at [12]).
As Allan was found to be fictitious, Lyu Yan’s claim in conspiracy (at [13]) and unjust enrichment succeeded (at [14]), although the Court of Appeal found that the claim in negligence should not be allowed together with the claims in conspiracy and unjust enrichment (at [15]).
Whether the rule in Foster v Driscoll applies. The Court of Appeal agreed with the decision below that the rule in Foster v Driscoll did not apply because Jonathan and Derek could not show that Lyu Yan intended, or at the very least knew, that the Second Transaction violated Chinese law (at [16]).
Among other factors, Lyu Yan had repeatedly asked Joseph if the First Transaction was safe and was expressly assured by Joseph many times that it was (at [19]). Therefore, at the material time when the Agreement was entered into for the Second Transaction to be carried out, evidence showed that Lyu Yan thought that the First and Second Transactions, as structured, were legitimate under Chinese law (at [20]).
As such, since Lyu Yan did not know that the Second Transaction violated Chinese Law, and as Joseph himself did not appeal against the Judge’s decision that Lyu Yan thought that the Second Transaction was legitimate, the rule in Foster v Driscoll was not engaged (at [21]).
The scope of the rule in Foster v Driscoll. While the above sufficed to dispose of this appeal, the Court of Appeal made some observations on Jonathan’s and Derek’s argument on the interface between the rule in Foster v Driscoll and the framework dealing with contractual illegality laid down in Ochroid Trading (at [22] – [34]).
In particular, the Court of Appeal highlighted that a potential anomaly arises if the rule in Foster v Driscoll is read together with the Ochroid Trading framework as between contracts governed by Singapore law and those not governed by Singapore law (at [32]).
Giving the example of a situation where A and B enter into a contract governed by the law of Country X with the intention of violating the laws of Country Z, the Court of Appeal observed if there is a breach of contract by B and A sues B in a Singapore Court, the Singapore Court will find that the contract is void and unenforceable pursuant to the rule in Foster v Driscoll, but A will generally be allowed to recover from B in respect of non-contractual causes of action (at [33]).
But if the contract between A and B is governed by Singapore law, A may not be allowed to recover from B in respect of non-contractual causes of action if the Ochroid Trading framework also applies and where the principle of stultification is found to apply (at [33]).
The Court of Appeal was concerned with the above, as it would lead to a result where recovery via non-contractual means would be narrower for A where the contract is governed by Singapore law than when the contract is governed by foreign law (at [34]).
Nonetheless, the Court of Appeal left this issue open as it did not arise for the Court’s determination on the case before it.
Conclusion. While we await to see further developments in this area of law, the Court of Appeal made clear that it is necessary to tread carefully on the interaction between the rule in Foster v Driscoll and the Ochroid Trading framework. Reading them together would cause a possible anomaly where different results ensued depending on the governing law of the contract. Any distinction between the position of a claimant in a contract governed by Singapore law (being disadvantaged in recovery via non-contractual means) compared to a claimant in a contract governed by foreign law should be reasoned and principled.
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