A REFRESHER ON SHAM DOCUMENTS AND ILLEGALITY
In this week’s blog, we refresh ourselves on the legal principles for determining whether a document is a sham and whether a party can rely on an unpleaded issue of illegality with reference to the case of Siraj Ansari bin Mohamed Shariff v Juliana binte Bahadin & Anor [2022] SGHC 186 (“Siraj v Juliana”).
Unpleaded issue of illegality. In Siraj v Juliana, the plaintiff relied on a ground that was not pleaded, and it formed the thrust of the plaintiff’s case at trial and in the plaintiff’s closing submissions ([16]).
At the expense of oversimplification, this unpleaded ground was that the trust deed in question (which was executed by the plaintiff and the first defendant) was a “sham instrument” entered into for an illegal purpose (at [16]).
So, can a party rely on an unpleaded ground of illegality?
Referring to the Court of Appeal decision of Fan Ren Ray and others v Toh Fong Peng and others [2020] SGCA 117, and its endorsement of Edler v Auerbach [1950] 1 KB 359, the court accepted at [17] that in “certain very specific and limited circumstances, the court would be bound to consider the issue of illegality”, such as:
Where the contract itself is ex facie illegal, i.e., on the face of the contract itself, the contract is illegal; and
More relevantly in the context of a party seeking to rely on an unpleaded ground, “… where the court is satisfied that all the relevant facts are before it and can see clearly from them that the contract had an illegal object, it may not enforce the contract, whether the facts were pleaded or not.”
Therefore, the court held that there was no procedural impediment to the court considering the issue of illegality “if it is apparent from the relevant facts that the Trust Deed had an illegal object” (at [17]).
It must be emphasized that this does not, and should not, be taken as suggesting that a party can simply choose not to plead illegality in the first place, and to simply spring it upon the opposing party during the hearing. This simply means that sometimes, the court may allow a party to rely on an unpleaded ground of illegality, if certain specific conditions are met.
In this regard, as set out in [18] of the judgment, the court noted that the defendants “do not take the position that the court should not consider this issue because it has not been pleaded” and in fact acknowledged that “… the issue of illegality was “evident from the [p]laintiff’s AEIC and [p]laintiff’s counsel’s cross-examination of the [d]efendants’ witnesses”.”
Hence, the court held that the defendants could not, and did not, say that they were taken by surprise or had been irreparably prejudiced by the plaintiff’s failure to specifically plead the issue of illegality.
Therefore, it is likely that if, on the facts on the case, the defendants were in fact taken by surprise and irreparable prejudice would have been caused to the defendants, the court would not have allowed the plaintiff to rely on the unpleaded ground of illegality.
Sham document. Returning to the case, what, then, is the test for finding that a document is a sham?
At [39], the court referred to the case of Chng Bee Kheng and another (executrixes and trustees of the estate of Fock Poh Kum, deceased) v Chng Eng Chye [2013] 2 SLR 715 (“Chng Bee Kheng”) at [50] – [51] as setting out the applicable legal principles, which we duplicate below:
“50 The basic idea of a sham can be found in Lord Diplock’s statement in Snook v London and West Riding Investments Ltd [1967] 2 QB 786 at 802:
As regards the contention of the plaintiff that the transactions between himself, Auto Finance and the defendants were a ‘sham,’ it is, I think, necessary to consider what, if any, legal concept is involved in the use of this popular and pejorative word. I apprehend that, if it has any meaning in law, it means acts done or documents executed by the parties to the ‘sham’ which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create. But one thing, I think, is clear in legal principle, morality and the authorities … that for acts or documents to be a ‘sham,’ with whatever legal consequences follow from this, all the parties thereto must have a common intention that the acts or documents are not to create the legal rights and obligations which they give the appearance of creating.
51 There are two important general points to note in relation to the Sham Argument raised by the Defendant. First, the person alleging that a document is a sham has the burden of proving that the parties intended the document to be a pretence: National Westminster Bank plc v Rosemary Doreen Jones [2001] 1 BCLC 98 (“National Westminster Bank”) at [68]. Second, there is a very strong presumption that parties intend to be bound by the provisions of agreements which they enter into. As Neuberger J (as he then was) explained in the same case (at [59]):
… Because a finding of sham carries with it a finding of dishonesty, because innocent third parties may often rely upon the genuineness of a provision or an agreement, and because the court places great weight on the existence and provisions of a formally signed document, there is a strong and natural presumption against holding a provision or document a sham.
[emphasis in original in italics and bold italics]”
In other words, for a document to be a sham document:
The parties to the document must have a common intention for it to be a “sham”; and
It would be a “sham” if the document does not create the legal rights / obligations which it appears to create; but
There is a strong presumption against holding a document to be a sham.
The court also referred Chng Bee Kheng at [50] and [55], holding that the inquiry is “one into the subjective intentions of the party” and therefore the court may have regard to a wider range of evidence, such as the parties’ subsequent actions to determine if there was in fact a “sham”.
Takeaway. In Siraj v Juliana, the court held that the Trust Deed in question was not a sham. Among others, the court found that the parties had a consistent pattern of behaviour showing that they were acting as though they were trustees under the Trust Deed (at [47]) and their interaction with third parties were also consistent with the Trust Deed being a bona fide instrument (at [48] – [52]).
What this shows is that while a party may be able to raise an unpleaded ground of illegality, such as, e.g., that the document in question is a “sham” document entered into for an illegal object, the party seeking to claim that the document is a “sham” would bear the burden of proving that it is a sham. And in general, it would not be easy to prove that a document is a “sham” document unless there are cogent evidence.
Further, as made clear by the judgment, while a party may be able to rely on illegality even though the illegality has not been pleaded, it also means that a party may not be able to do so. It all depends on the facts of the case in question, and in general, the court will only permit a party to rely on an unpleaded ground in very narrow and specific situations. Therefore, if you wish to advance a case based on illegality, you should plead it specifically where possible.
This publication is not intended to be, nor should it be taken as, legal advice; it is not a substitute for specific legal advice for specific circumstances. You should not take, nor refrain from taking, actions based on this publication. Chancery Law Corporation is not responsible for, and does not accept any responsibility for, any loss or damage that may arise from any reliance based on this publication.