The facts of this case are long and many aspects have been contentious.
The second and third plaintiffs were said
to have first come as
representatives of a business entity called API. They discussed with
Sitai and Morean,
doing together in Solomon Islands, the business of
harvesting logs for timber, the business locally known as logging. They
agreed on some arrangements. As the result, the second and third
plaintiffs went to Hong Kong, they said, to
incorporate a company that
would be the business entity to do the logging business with TFR. The
plaintiffs have
not explained why it was necessary to go and incorporate
in Hong Kong. No adverse inference is drawn from that. They returned
to
trade by the name of Ampo Company Limited referred to simply as Ampo.
The second plaintiff, Amoretti, witness
No. PW1 for the plaintiffs, said
that the company had existed in Hordes Along, and that they simply
acquired
it. It is now the first plaintiff.
The defendant's witness, Henry Sitai DW1, that on 12.8.1993 Ampo
and TFR signed agreement headed, "OPERATIONAL
AND MANAGEMENT AGREEMENT",
now exhibit No. DWHS9. Together Ampo and TFR commenced logging business
on Haununu
customary land, Makira Island. TFR had negotiated with land
owners who granted to it the right to harvest trees and timber
from the
customary land. The process is commonly referred to as acquisition of
timber right. The expression timber
right is now a composite legal
expression defined in section 5A of the Forests Resources and Timber
Utilisation
Act Cap 90. It includes inspecting, cutting, removing trees
and related operations such as constructing roads, camps and
wharfs. A
provided machinery and paid the expenses. They extracted sufficient
timber logs and about late July
or early August 1994, Ampo marketed logs
said to be the first shipment of the venture.
As a foreign investor in Solomon Islands, Ampo was required under
sections 5 and 6 of the Investment Act, No. 14 of 1990, of Solomon
Islands, to apply for and obtain approval and registration from
Investment Board.
Ampo and TFR agree that it was the duty of TFR to
apply for and obtain the approval and registration, and to obtain any
licence that was required. TFR applied to the Board, first as early as
July 1993, but result was not forthcoming.
In the mean time it obtained
work permits for personnel from Ampo to work as employees of TFR so that
they could
come and attend to the business of the agreed venture. Gerald
Amoretti, Pisani, Serge Berges and Patrick Ifra, the second
witness for
the plaintiffs all came over one time or another. They visited the site
of logging on Makira and
attended to business in Honiara.
In 1994 TFR lodged a new application for approval and registration of
the foreign investor, Ampo. The application
was accompanied by another
agreement dated 31 May 1994, which the plaintiffs and TFR agree were
signed by them.
It was rejected. The letter of the Secretary of the
Board dated 18.7.1994, informed TFR that the Board at its meeting held
on 5.7.1994 had rejected the application. Nonetheless business between
Ampo and TFR proceeded. In July or August
1994, the first shipment of
logs of 2,415 cubic metres, was made. Ampo marketed the shipment
overseas. The logs
were said to have sold for US$350,013. According to
Amoretti, the money was received not into the account of TFR, but into
Ampo's bank account in New Zealand. Amoretti drew from the account and
paid for machinery, other expenses and
to Sitai and Morea, each Solomon
$12,000. It did not come out in evidence that any payment was made to
TFR, the
business. From the evidence it may be concluded that Amoretti
also paid himself and the other plaintiffs.
Disagreement arose following the receipt of the proceeds of the first
shipment. On the part of the defendant,
it did not like the fact that
the proceeds of the shipment was received into Ampo's bank account and
outside
Solomon Islands, contrary to what TFR said was in the agreement,
exhibit No.DWHS9. Its directors also complained that Ampo
did not pay to
TFR US$57 per cubic metre of logs exported as agreed, they say, at
obligation No.1 of Ampo in
the second agreement. The plaintiffs have
denied the agreement. The defendant's witness also complained in court
that Ampo under - reported the price that the logs were sold at by US$40
per cubic metre. The counter claim stated
it to be US$20 per cubic
metre. For the plaintiffs, Amoretti complained that the directors of TFR
Ltd did not
use money intended for business expenses for the purpose,
and that TFR had not got approval of Investment Board for Ampo's
investment; Ampo remained not registered for foreign investment purposes
for a long time. Despite the discontent
logging went on and enough logs
were available for shipment. TFR Limited wanted to ship that second
consignment
and market it by itself without Ampo participating in the
marketing. Ampo of course did not accept that. The argument climaxed
in
Sitai and Morea obtaining a letter from Immigration Office of Solomon
Islands, stopping personnel of Ampo
including Amoretti, from coming to
Solomon Islands from Vanuatu. They alleged that Ampo was negotiating
alternative
business arrangement with the same landowners to exclude TFR.
Despite matters coming to a head, the parties needed to work
together,
possibly so as to be able to ship out the logs already cut. Mr. Sitai
asked Amoretti to send money
to pay wages, and for other expenses.
Amoretti agreed, but said that he asked Sites to write a letter of
guarantee,
now exhibit No. PWHS5, and sign, guaranteeing payment to him,
Amoretti of the money he would send to meet the business
expenses. Mr.
Sitai said that the letter was intended for Amoretti to show a bank in
New Caledonia so as to obtain
money and send to Solomon Islands.
Amoretti went on to say that as the result of his demand, Sitai signed
three
cheques, for $38,000 each, now exhibits Nos: PWHS6A, 6B and 6C in
court, amounting to $114,000.00. The sum was in fact
not sent to Sitai
and Morea in cash; instead Amoretti sent it with Patrick Ifra to
personally pay for the expenses
and wages required. Ifra did that. The
plaintiffs now claim these sums together with another $200,000 referred
to in the letter exhibit No. PWGA5, said to be a letter of guarantee.
Despite the difficulty Amoretti had with Immigration Office on e on or about
17.1.1995 when he was stopped in
Vanuatu not to come to Salerooms, he
arrived in Honiara at the beginning of February 1995. On that visit it
was
apparent that Amoretti and therefore Ampo, had decided to abandon
doing business with TFR. Ampo started to do business
with a splinter
group of the same landowners. Eventually it was Ampo that shipped out
the second consignment,
through Soma, another company. TFR was not in
the picture at all and it did not get paid any part of the proceeds of
the second shipment. It has, however, not sufficiently pleaded that in
its counter claim and so I have not considered
it an issue in the case.
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Proof of the Agreements
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It is appropriate at this point to make findings of facts about bout the
agreement between the parties. There
are three documents of agreements
in evidence; exhibits Nos. DWHS8, DWHS9 and DWHS10 all said to be
agreements
in the business arrangements. On behalf of the defendant
Sitai said that they signed all the three. The first one exhibit,
No.DWHS8, on 3.8.1993 when Amoretti, Pisani and Giovani came to do
business as representatives of API. Mr. Amoretti
was evasive about it,
although he mentioned that on the first occasion of meeting, they signed
a memorandum,
"to work on". In cross-examination, he admitted that when
they came, they signed a memorandum of understanding.
He hurried to
explain that they could not use the name API so they had to go to Hong
Kong to form a company.
He appeared anxious to lead the court quickly
away from the issue. I find that the individuals then, Amoretti and
Pisani of the one part, and Morea and Sitai of the other, signed the
agreement dated 3.8.1993, intending it to be
agreement of terms until
reviewed as stated in the second last paragraph of that agreement,
exhibit No DWHS8.
As regards the third agreement, exhibit No. PWGA1, all parties agreed
that they signed the agreement. It is dated
31.5.1994, and described as
Technology Transfer Agreement. Even that agreement is largely the same
as the first
two. There are only two noticeable differences. Firstly is
that at page 3, at obligation 5, payments to Ampo were set out
in
details, adding to 30%, and secondly, the paragraph that TFR would be
paid US$57 per cubic metre of logs exported
was not included in the
third agreement. It probably gave TFR better income since the effect of
the agreement
was that the revenue from the business was regarded as
belonging to TFR, and it would retain whatever balance after paying
for
obligations under the contract. On the other hand, it could also lead to
TFR receiving nothing if income
was less than the total sum required to
pay for the obligations.
Approach
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This case will be decided through thpproaches. The first approapproach
is to determine whether there was illegality
in the contract that
outlined the duties and benefits of the parties in the business venture.
If so, then whether
it was the sort of illegality that would render the
contract void and therefore of no effect and cannot be enforced. If
court found no illegality then the second approach would be to determine
whether the letter, exhibit No. PWGA5
disclosed a contract of guarantee,
and thereafter, the terms thereof. The third approach is merely a stage
to
determine the rights of the defendants in the counter-claims if their
contract is found not to have been tainted with illegality.
Illegality
<
The question of illegality was not pleaded by the defendant or by the
plaintiffs in defence of the counter claims,
but evidence of it
maintained presence all through the case so much that I deemed it
appropriate to take judicial
notice of, and to act on suo motu. I
am persuaded by case authorities in other countries in so doing - see
Edler v. Auerbach [1950] 1 KB 359. There are circumstances in
which even appellate court can act on evidence of illegality even if
illegality had
not been pleaded, and had not been raised in the trial
court - Snell v. Unity Finance Company [1964] 29 B 203 also
[1963] 3 All ER 50.
The general rule about illegality in contract is genergenerally stated to be
that an agreement to do an act that is
illegal, immoral or contrary to
public policy or to do any act for a consideration that is illegal,
immoral or
contrary to public policy, is unlawful. Contracts that can be
identified to have any of those characteristics are regarded
as void or
unenforceable. See the appeal judgment of Homer L.J. in Alexander v.
Rayson [1936] 1 KB 169, at page 182. In the case, the defence
of a tenant that the agreement to pay £750 annually in addition to
annual
rental of £450 was illegal and void succeeded. The plaintiff
landlord had two agreements with the defendant; one was a
lease under
which the tenant was to pay £450 annually, the other was for services
for which she was to pay £750
annually. The landlord never provided any
services. He deliberately presented only the lease and therefore only
the £450 to the City Council for assessment of rate (tax) and was
assessed only on the smaller sum of £450 and not on
the real rental
value which was £450 plus £750. The court decided that the contract for
service was made by the
landlord to defraud the City Council and was
therefore illegal, it could not be enforced.
Not all cases in whiestions of illegality arisearise do fit exactly in
the above general statement of the law.
Often a contract is not in
itself Illegal, Immoral or contrary to public policy, but extraneous
factor renders
its legality questionable. It is in such a case that
great difficulty arises in the determination of illegality of the
contract, and as to whether the contract should not be enforced at the
suit of either party or should be enforced
at the suit of only one
party.
A contto engage in felling trees and removing timber from Makira,kira,
or from anywhere else in Solomon Islands,
for sale, is not ex facie
illegal. There is no legislation that prohibits it as unlawful
transaction, so that the whole venture between Ampo and TFR
would be
void and of no consequence. The contract is not immoral and it is not
ex facie contrary to public policy. In doing the business, however,
a licence would have to be obtained under section 5 of the Forest
and
Timber Utilisation Act, for felling trees and removing them as timber
for sale, or at least under section
7, to install and operate timber
mill and to draw unmilled timber from specified area. It was the
practice of
the Commissioner of Forests to endorse milling licence
issued under section 7, with authority to export round logs. The
correctness of that practice is debateable - see Judgment of Palmer J in
Forest and Another v. MahIon Ali and Attorney General, Civil Case
No. 1 of 1994. It however, would exonerate a person who would have
obtained the endorsement. TFR
had milling licence No. TIM3/1 40, issued
under section 7 on 27.7.1993 and that would be before TFR signed any
contract with API or Ampo. The licence was renewed on 27.7.1994. It is
now exhibit No. DWHS12. It was endorsed with permission
to export 60,000
cubic metres of round logs. So as far as harvesting timber logs and
exporting them in the latter
part of 1993 and in 1994 was concerned, TFR
would commence to do its logging business in a lawful way because it was
authorised by its licence No. TIM3/140, notwithstanding reservation that
licence to export round logs was issued
under debateable section. There
was no illegality for which TFR could be criminally liable because the
Commissioner
had authorised TFR to harvest and export unto 60,000 cubic
metres. TFR's contracts with other people when it had that licence
No.
TIM3/140 could not be denied enforceability until 27.3.1995. On that
date TFR was informed that by directive
of the Prime Minister, through
the Minister of Forest, Environment and Conservation, its licence had
been cancelled.
No reason was apparent from the evidence, but it was
clear that the directive had nothing to do with the technicalities
of
sections 5 and 7 of the Forest and Timber Utilisation Act.
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In addition to the requirement of licence to extract and export lort logs
there were requirements of law that
Ampo had to comply with. Ampo, being
a foreign investor, was required to apply for and obtain approval by the
Investment Board of Solomon Islands, be issued with a certificate and be
registered. The requirements are in section 6
of the Investment Act,
1990. The procedure is in section 5. The Act has been amended by the
Investment (Amendment) Act No. 10 of 1996. The amendment
introduced
penalty for breach. The sections, before amendment read:
(1) On receipt of an investnvestment application from a foreign investor,
the Board shall give notice of the application
to the appropriate
Ministries, the relevant Provincial Governments or the Honiara Town
Council, as the case may
be, and seek their approval in respect of the
investment application.
(2) On receipt of confirmation from the appropriate Ministries, the
relevant Provincial Governments or the Honiara
Town Council, as the case
may be, that the investment proposal complies with the requirements of
the relevant
or qualifying laws, the Board may approve such investment
proposal as an approved enterprise and grant the investor a certificate
of approval.
6. Subject to the provisif section 20, from and afte after the
commencement of this Act no foreign investor shall
engage in any
investment in Solomon Islands, unless the foreign investor is registered
with the Board and is
in possession of a certificate of approval in
terms of this Act.
In 1993 and 1994, the period during which events of this case occurred,
there was no penalty for violation
of the two sections. By Act No. 10 of
1996, amendment was effected that introduced the following penalty:
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6. (1)
(2)
(3)
(4)
(5) Any foreign investor who is in breach of the
provisions of this section shall be liable on conviction to a fine not
exceeding fifty thousand dollars or in default of payment to
imprisonment for two years.
It was agreed between Ampo and TFR, wr one goes by the operationation
agreement dated 12.8.1993, denied by the plaintiffs, or by the
technology agreement dated 31.5.1994, accepted by the plaintiffs, or by
conduct
of parties, that it was the responsibility of TFR to apply for
and obtain the approval by the Investment Board and to have
Ampo
registered as a foreign investor. That was common ground in testimonies
in court for all the parties. When
business started in August 1993, Ampo
was well aware that approval and registration were yet to be obtained.
From the testimony of Amoretti, it was also clear that unto and beyond
July or August 1994 when Ampo exported the first
shipment, approval and
registration had not been obtained and Ampo and Amoretti were aware of
that fact. Amoretti's
testimony was all along punctuated by the mention
that TFR could not produce FIB, meaning Foreign Investment Board's
approval and registration. He categorically stated in cross examination
nation that from September 1993 to December
1994 they were asking TFR
for Foreign Investment Board approval. In January and February 1995
business relation
between the parties was breaking up and Ampo knew that
not only had TFR not obtained Investment Board approval, but had
also
cancelled work permit of a personnel, arranged through TFR. When the
letter of guarantee was signed on 27.1.1995
there was no doubt in Ampo's
mind that Investment Board approval had not been obtained. TFR was well
aware of
course. So, the involvement of Ampo in the logging business
right from August 1993 up to at least February 1995 was contrary
to
sections 5 and 6 of the Investment Act and therefore illegal. When
Amoretti on behalf of all the plaintiffs asked for a letter, they said,
of guarantee,
all the plaintiffs were aware of the illegality in the
business, arising from there being no approval and registration
of them
or Ampo.
Can Ampo and the other two plaintiffs or TFR sue for breach of the
contract by which they engaged in the business
that involved foreign
investment when approval of the Board required under the Investment Act,
had not been obtained before the business transactions took place?
I have not been able to find a single decidse, from courts in
Solomon Islands, in which illegality generally
in contract and
illegality arising from absence of licence has been considered. That is
not unusual though because
not many cases in which those issues would be
relevant might have been filed at court. There are however, many cases
in which illegality has been considered in England, Australia and New
Zealand. Generally those courts are agreed
on the rule that when both
parties are aware of the illegality they are said to be in pari
delicto and court should not aid them by enforcing their contract at
the suit of either party. The rule of no enforcement is expressed
in the
dictum, ex turpi causa non oritur actio. An example is the
English case of Shaw v. Shaw [1965] 1 All ER 638. The plaintiff
sued his brother for £4,000 that the plaintiff had paid for the transfer
of a flat in Majorca in
Spain from the brother to him. Under Exchange
Control Act in England at the time, consent of the Treasury (Ministry of
Finance) was required for such payment and therefore for such
contract;
the consent had not been obtained. Appeal Court decided that the
plaintiff could not obtain court judgment
for the recovery of the money
due under a cause of action, the contract, founded on illegality.
There are, however, cases in which courts have regarded the legislatiolation
that have been violated as having
been intended for the protection of
one of the parties, and have enforced contracts at the suit of the
parties
regarded as protected, despite illegality. A case in point is
the decision of the Privy Council in England in a case from
Uganda,
namely, Kiriri Cotton Company Limited v. Dewani [1960] AC 195.
A contract tainted with illegality under the Uganda Rent Ordinance
then, because the landlord had charged premium, was enforced
against the
landlord; the plaintiff recovered the premium illegally charged and
paid. According to that approach
a plaintiff owner of goods who hands
over his goods to unlicensed carrier is likely to succeed in a suit for
the refund of freight he has paid - see the case of Archbold
(Freightage) Limited v. Spanglett Limited [1961] 1 QB 374 also
[1961] 1 All ER 417.
In the present case, it cannot be said with confidence that the purpopurpose
of the Investment Act is to protect a local business partner or
associate of a foreign investor or to protect the foreign investor who
will have chosen to bring his investment into Solomon Islands. It seems
to me that the Act is aimed at the wider economic
interest of the
country as a whole. In my view neither party can be regarded as a
protected party and be allowed
the benefit of enforcement of their
contract by court.
In some cases courts have enforced contracts despite illegality on the
basis that a distinct cause of action from
the illegal contract or
contract tainted with illegality exists in the case. Cases involving
transfer of ownership
or interests are examples. Two such cases from
England are Sajan Singh v. Sardana Ali [1960] AC 167 and
Bowmakers Limited v- Barnet Instruments Limited [1945] KB 65
or [1944] 2 All ER 579. The first is an interesting case from
Malay (now Malaysia) that went to the Privy Council in England. The
Malay
Court of Appeal held for the plaintiff on the ground of trespass,
the Privy Council held for the plaintiff on the ground
of detinue.
In this case, approval by the Investment Board is really lice licensing by
another name so cases in which licences
or permits were required but
were not obtained provide good guidance.
Courts in Australia tend to approach the question of illegality in
contracts by looking at the contract together
with the legislation and
deciding whether the contract is illegal as to formation or illegal as
to performance.
It will not be enforced if it is illegal as to the
formation, but it may be enforced at the suit of the innocent party
if
the contract is illegal as to the performance intended by the guilty
party or performance he has procured
the innocent party to carry out.
See the case of T.P. Rich Investment Pty Ltd v. Calderon
[1964] NSWR 709. Applying that approach seems to render many contracts
in business where licences or permits are required but not obtained,
unenforceable because of illegality. One example is the case of
Haddin v. Le Feuvre [1969] 2 NSWR 32.
The New South Wales Court of Appeal held that claim
based on a deed for carrying on the business of dairyman or milk vendor
when not registered under the state's Milk Act was illegal as formed and
therefore unenforceable. There are several
licence or permit cases in
Australia decided similarly.
The approach favoured in England is to interpret the legislation by
deciding what the purpose and therefore the
intention of the legislation
is. If the interpretation is that the legislation is aimed at
prohibiting all together
the type of transaction, the subject of the
contract, then the contract is unenforceable. If on the other hand the
purpose is merely to impose some regulatory measures for the orderly
conduct of the business or simply to raise revenue,
then the contract
may be enforced at the suit of the innocent party, despite the breach of
the legislation. The
other aspect is that which I have already stated
above, namely, if the legislation is aimed at protecting a category of
persons such as tenants, passengers, patients and others, the contract
may be enforced by a person in the category
protected. The judgment of
Devlin J in, St. John Shipping Corporation v. Joseph Rank Ltd
[1957] 1 QB 267 and [1956] 3 All ER 683 gives many illustrations as to
applicability of the rule of interpreting the intention of the
legislation so
as to decide whether the contract may or may not be
enforced because of illegality. In the judgment Devlin J, also cited
cases in which protected persons recovered reliefs and owners recovered
property because of causes of action
independent of the contract tainted
with illegality.
In many New Zealand cases courts there tended to follow the approach of the courts in England. In many many, intention of the
legislation has been stressed. See for example the New Zealand Court of
Appeal judgment in Joe v. Young [1964] NZLR 24 where a landlord
in illegal lease recovered his farm land because the legislation
provided that the, "transaction
shall be deemed to be unlawful and shall
have no effect." The court decided that the provision meant that the
lease had no effect at all, the lessee could not remain on the farm
because there was no lease.
The results of the intention and protection approaches may not
necessarily be different from the result of categorising
contracts
according to it being void as to formation or as to performance. After
all every legislation is aimed
at addressing a particular need and not
necessarily to provide general rules from which to theorise and arrive
at mathematical conclusions and therefore answers. In my view the
ascertainment of the intention in the legislation should
be emphasised,
and I shall add that there are several ways by which intention in a
legislation may be determined.
In determining the intention in a legislation, circumstances prevailing
at the time are usually important considerations.
Circumstances
prevailing at the time the legislation was made have been in many cases
determinant in courts deciding
the effect of contracts made in the face
of illegality. An example is in the English case of Mahmond v.
Ispahani [1921] 2 KB 716. During war time, specific licence was
required for the sale of linseed oil. The plaintiff having inquired of
the defendant who said he had licence to buy linseed oil, sold 150 tons
of linseed oil to the defendant. The defendant
refused to accept
delivery and when sued for damages, raised the defence that the contract
was illegal because
he, the defendant did not have licence. He lost the
case. On appeal he succeeded. Bankes L.J. said at page 724:
"The order is a clear and unequivocal declaration by
the Legislature that this kind of contract shall not be entered
into
it
is open to a party, however shabby it may appear to be, to say that the
Legislature has prohibited this
contract and therefore it is a case in
which the court will not lend its aid to the enforcement of the
contract".
[1955] 2 QB 525 and [1955] 2 All ER 90. In the latter case
the Court of Appeal decided that a builder who did work without permit
could recover the sum
agreed from an architect who promised to obtain
the permit or stop the work. The court said that the claim was based on
a collateral contract, a warranty that the architect would obtain the
permit or stop the work. One might think
that was a way out of the
harshness of the general rule in the particular facts of the case.
Birkett L J's judgment
stressed the particular facts of the case.
Courts in South Africa have been more direct in statementements about what
the counts will do to alleviate the harshness
of the general rule in
circumstances where the general rule works unfairly. An innocent
plaintiff will be able
to recover his property or damages if the
contract is illegal only in form. He will also recover if he did not
know of the illegality in the performance because the turpitude in the
contract is not on his side. Emphasis is laid
on the maxim, in pari
delicto potior est conditio defendentis seu possidentis. Cases that
illustrate are Jajbhay v. Cassim 1939 AD 548 and Pietzch v.
Thompson 1972 (4) SA. 122. In South Africa a contract is illegal if:
1. the making of it and 2. the performance agreed or contemplated is
illegal and 3. if the ultimate purpose is contrary to statute or public
policy or contrary to moral - contra bono mores. The leading
South African case on illegality is Conradie v. Rossouw 1919 AD.
314.
I think the consequence of sections 5 and 6 of the
Investment Act, 1990, to contracts with unregistered foreign investor
should be determined by taking into account the public interest in
Solomon Islands, intended to be protected by the Act. The purpose is no
doubt to enable policy makers in Solomon
Islands, a country in its very
early stage of development, to have control over investments and
therefore in
the direction of its development. In my view, sections 5
and 6 were enacted with the intention of prohibiting a foreign
investor
from engaging in business before the country's authorities have obtained
information about the foreigner
and have admitted the foreigner to do
business in Solomon Islands in accordance with the policy in Solomon
Islands.
Violation of sections 5 and 6 defeats the public interest
intended to be protected. It should result in the court declining
to
enforce a contract entered into by the violator, an unapproved and
unregistered foreign investor. If the contract
is with a Solomon
Islander who was aware of the illegality and encouraged it by taking it
upon himself the responsibility
of obtaining the approval as it is in
this case, he too should be denied relief by court. It is my decision
therefore
that in this case, the claim of the three plaintiffs based on
contracts tainted with illegality and on a letter of guarantee
issued in
contracts tainted with illegality cannot be enforced. The claims of the
plaintiffs, based on any of
the three contracts or oral one, are
unenforceable because of illegality and are dismissed. Likewise the
counter-claims
of the defendant are unenforceable for the same reason;
counter-claims of the defendant are unenforceable for the same
reason;
the counter-claims are also dismissed.
Letter of Guarantee
Illegality aside, I have considered the letter, dated 27.1.1995, exhibit
No.PWGA5, written to Amoretti by Sitai
and Morea as directors of TFR.
They stated therein that they guaranteed the payment to Amoretti of the
sums of
$144,000 and $200,000 " being advance to Tropical Forest
Resources by Mr. D. F. Pisani and Mr. G. Amoretti".
The plaintiffs have
claimed on the letter on the grounds that it is a contract of guarantee.
I set out here the
letter in full:
"Exhibit No.PWGA5"
27th January 1995
"M.r Gerad Amoretti
Ampo Company Ltd
Noumea. N. C
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Dear Sir
RE. LETTER OF GUARANTEE
class="Mss="MsoNormal" style="margin-left: 36.0pt; margin-top: 1; margin-bottom: 1">
This letter is to guarantee paye payment to Mr G. Amoretti the total sum of
SI$114,000 and the sum of SI$200,000.00
being advance to tropical Forest
Resources Ltd by Mr D. F. Pisani and Mr G. Amoretti.
We the Directors of Tropical Forest ResouResources Ltd hereby declare that
this letter is made out of trust and
goodwill and the transaction of the
above will take place after shipment of round logs from Makira.
Expected date about the mid of February 1ary 1995.
p class="Mss="MsoNormal" style="margin-left: 36.0pt; margin-top: 1; margin-bottom: 1">
Signatures:
Henry Sitai
DIRECTOR/TFR"
.
James Morea
DIRECTOR/TFR
las class="MsoNormal" style="margin-top: 1; margin-bottom: 1">
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The wording of the letter cannot, for a moment be mistaken for a
contract of guarantee. In law a contract of guarantee
is defined as
correctly stated by Mr. Nori on page 8 of his written submission, to be
a collateral promise to
answer for the debt or default of another. I
shall only add by verbalising the condition precedent, namely, in the
event of default by that other. The definition is considered in the
Australian case of Sunbird Plaza Pty Ltd.v Maloney [1988] 16b CLR
245. In that case Mason CJ summarised the nature of the
undertaking in a guarantee as "a promise to answer for the debt
or
default of another." He doubted the dictum of a judge in England, Lord
Diplock, in the important case of Moschi v. Liep Air Service
Limited [1973] AC, 331 at page 348, that the guarantors'
obligation was, "to see to it that the debtor performed his own
obligation to the creditor".
I think Lord Diplock's statement recalls
the history of guarantee. Contracts of guarantee up to now can still be
described correctly in England as surety. His dictum, in my view,
correctly reflects the history of the purpose of
the contract of
guarantee without subtracting or adding obligations to present day
practice. The purpose is still
the same in modern time, but changes have
evolved in where to lay emphasis in practice. The status or eminance
of the guarantor, the surety, may well have been emphasised in England
in the past, today the manager of a
bank or financial company will only
accept guarantors who have the means or capacity to pay on the contract
of
guarantee in the event of default. The emphasis is now on whether a
guarantor would have the capacity to answer, not by
the high status or
eminence of the guarantor, but by his capacity to produce readily
available cash or realisable
property. In my view the different
expressions of the two eminent judges from more substantial and
important
jurisdictions are not real differences in the application of
contract of guarantee.
So in a contract of guarantee there must first be the principal contract
or obligation in which there is a creditor
and a debtor, described as
the principal debtor. It is the principal debt or obligation of the
principal debtor
(nowadays referred to simply as the debtor) that the
guarantor promises to the creditor that the guarantor will discharge
in
the event of default by the debtor. The contract of guarantee is
collateral to the principal contract.
<
In this case is the letter, exhibit No. PWGA5, said to d to be a letter of
guarantee a collateral contract? It
is not; it is simply a promise
between principals, Ampo, Amoretti and Pisani of the one part and TFR of
the other.
Sitai and Morea signed as directors and affixed the stamp of
TFR to their signatures so they were not making undertaking
in their own
names collaterally to another contract. They did not state in the letter
that they would pay the
debt of TFR should TFR fail. Moreover, the sums
to be paid, $114,000 and $200,000 were, in fact, never paid to TFR or
for the exclusive business of TFR. They were handed to Ifra, a
representative of Ampo who came and used the $114,000
to pay off
liabilities of the joint venture of TFR and Ampo. The $200,000 was in
fact what had already been spent
by both TFR and Ampo in their joint
business up to 27.1.1995. Part of the benefit accruing from the
expenditure
had already been enjoyed by Ampo and the other plaintiffs,
and by Sitai and Morea, though not by TFR - Tropical Forest
Resources
Limited, when the first shipment was sold. Mr. Nori's submission about
lack of consideration would
be relevant if the claim had been grounded
purely on a simple contract.
The letter saibe a letter of guarantee was in fact a business
l letter of comfort. The second paragraph can
only mean that payment would
come from a particular source, seen as a sure source. That source was
the sale of
logs that were at Makira at that time and were expected to
be shipped in February 1995. The promise in the letter was conditional
upon money coming from that specified source, and not a promise to pay
if someone defaulted. For the reason of
it being conditional, the letter
would even fail as a binding contract. There was a condition precedent,
namely
that certain logs would be shipped by TFR. It was in evidence
that it was Ampo that arranged for the shipment and sale
of the logs
through Soma, another company and the proceeds were not paid to TFR, so
the condition precedent did
not materialise so as to bring the contract
into operation.
The Written Contracts
<
Both counsel submitted at length about which of thef the three written
contracts was binding, and whether none
of them was binding, but an
unwritten one to be gathered from conducts of the parties. I have
already decided
that any contract with Ampo, a foreign investor, before
it was approved and registered by Investment Board, was illegal.
I have
also already decided that all the 3 contracts were agreed and signed by
the plaintiffs of the one part
and by Sitai and Morea of the other. But
for the illegality, the answer as to which of the contracts would be
binding or as to whether none would be binding would be in the documents
themselves. The first, described as memorandum
of understanding, exhibit
No. DWH58, signed on 3.8.1993, provided for it to remain in force until
reviewed or
for ten years. So when on 12.8.1994, Ampo and TFR partners
signed the second agreement, exhibit No. DWHS 9, the first must
be taken
to have been reviewed and replaced by the second. The second agreement
also had provision for it to
remain in force until reviewed or for ten
years. So again when the third agreement, the Technology Transfer
Agreement,
exhibit PWGA1, was signed on 31.5.1994, the second agreement
was reviewed by the parties who replaced it with the third
agreement.
That third agreement would be the one binding between TFR, partners and
Ampo at least up to the time
that the first shipment was made, were it
not for the illegality. TFR Limited had not been incorporated. Mr.
Radclyffe submitted that the third contract would be the binding one. I
agree with him to that extent. The fact that the
Technology Transfer
Agreement was rejected by the Investment Board would not per se
invalidate the contract as between the parties if it were not for the
unenforceability arising from non registration
of Ampo. The contract was
simply declared not good enough for the purposes of the Investment Board
approval.
Refusal by the Board to accept the contract would, however,
most likely frustrate the contract. Parties would be unable
to act on
the terms without breaching condition of approval certificate under the
Act. Had the Board not rejected
the contract, Ampo, in 1994, would have
been in breach of paragraph 4 (k) and 6 (iii), which required that
letters
of credit be opened and received in the bank account of TFR. TFR
partners (TFR Limited had not been informed) might have
been entitled to
claim damages arising from the receipt of revenue into Ampo's account in
New Zealand in 1994,
and possibly for the US$40 per cubic metre by which
they said Ampo understated the price at which logs in the first shipment
were sold. An important point would be for TFR to prove whether TFR
signed as a firm or as persons intending
to promote a corporation. The
limited company had not come into being. In Company Law, a subsequently
incorporated
limited company cannot claim adoption of contracts entered
into by promoters. The claim for US$57 per cubic metre would
fail
because that was a term in the first agreement which had been replaced
by the second and finally, by the
third agreement by the time the first
shipment of logs was sold. A claim for accounts to be rendered by Ampo
to show income and expenditure would seem sustainable.
An impt point was raised in evidence although not sufficiently
ly
pleaded. After the contract between Ampo and
TFR partners had come to an
end in February 1995, there were logs ready for shipment. Ampo arranged
for its sale
and got US$150,000. Ampo did not pay TFR or Sitai and Morea,
any part of the proceeds. It was mentioned in evidence that
Sitai and
Morea had control of the logs until Ampo got control by court
injunction. The details of the court
case was not led in evidence. May
be the right to the logs was determined in that case or there may have
been
settlement.
Summary of Ordepan>
<
In the end it is my jud that the claims of the plae plaintiffs are
dismissed because they are founded on illegal
contract, alternatively
the claims would also be dismissed because they are based on a letter
which cannot qualify
as a contract of guarantee. The counter-claims of
the defendant are dismissed because of the illegality regarding the
contract and transactions.
Counsel are aso file written submission about costs, after which
order for costs will be filed.
Dated this 25th day of March 1997
Sam LungoLungole-Awich
JUDGE
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