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Contracts - Illegality and Severance (2). Scott v. Golden Oaks Enterprises Inc.
In Scott v. Golden Oaks Enterprises Inc. (SCC, 2024) the Supreme Court of Canada dismissed a civil litigation appeal, here where the main question was "how the common law doctrine of corporate attribution should be applied to a “one-person” corporation controlled by its sole officer, shareholder, and directing mind".
Here the SCC usefully reviews 'illegality' in contract law:(a) General Principles of Contractual Illegality
[108] A contract may be unenforceable because of illegality if it is contrary to statute (statutory illegality) or void at common law on grounds of public policy (common law illegality) (S. M. Waddams, The Law of Contracts (8th ed. 2022), at p. 393; G. H. L. Fridman, The Law of Contract in Canada (6th ed. 2011), at p. 361; J. D. McCamus, The Law of Contracts (3rd ed. 2020), at pp. 500-502 and 544-46; A. Swan, J. Adamski and A. Y. Na, Canadian Contract Law (4th ed. 2018), at pp. 1079 and 1112; G. R. Hall, Canadian Contractual Interpretation Law (4th ed. 2020), at pp. 171-72).
[109] The doctrine of illegality is sometimes expressed in the Latin maxim ex turpi causa non oritur actio, which means that “from an immoral consideration an action does not arise” (Black’s Law Dictionary (11th ed. 2019), at p. 732; A. Mayrand, Dictionnaire de maximes et locutions latines utilisées en droit (4th ed. 2007), at pp. 173-74; Holman v. Johnson (1775), 1 Cowp. 341, 98 E.R. 1120, at p. 1121; Hall v. Hebert, 1993 CanLII 141 (SCC), [1993] 2 S.C.R. 159, at p. 175 (“a plaintiff will not be allowed to profit from his or her wrongdoing”)). This doctrine seeks to maintain the “integrity of the legal system” by ensuring that illegal conduct is treated consistently across the justice system, so that courts do not “punish conduct with the one hand while rewarding it with the other” (Hall, at p. 176, per McLachlin J., as she then was).
[110] A contract may be found illegal in one of two ways. First, a contract may be illegal per se if the “performance of the contract violates a statutory or common law prohibition” (Youyi Group Holdings (Canada) Ltd. v. Brentwood Lanes Canada Ltd., 2020 BCCA 130, 35 B.C.L.R. (6th) 326, at para. 47; see also Zimmermann v. Letkeman, 1977 CanLII 196 (SCC), [1978] 1 S.C.R. 1097, at p. 1101, citing Alexander v. Rayson, [1936] 1 K.B. 169 (C.A.), at p. 182). For example, a contract may be illegal per se if it contains an agreement to do an act or for a consideration that is illegal, immoral, or contrary to public policy (Zimmermann, at p. 1101).
[111] Second, even if a contract is not illegal per se, it may still be unenforceable if it “was entered into, at least in part, with the object of committing an illegal act. Enforcement of such a contract may be so tainted with illegality that a court is entitled to refuse to enforce it” (Youyi Group, at para. 48; see also Zimmermann, at p. 1101). Whether a contract was entered into with the object of committing an illegal act is a question of contractual interpretation that is evaluated objectively from the perspective of a reasonable person (Hall, at pp. 57-63; P. Benson, Justice in Transactions: A Theory of Contract Law (2019), at pp. 112-17).
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[116] As part of the illegality doctrine, the Latin maxim in pari delicto, potior est conditio defendentis (“in a case of equal fault, the position of the defending party is the better one”) addresses the allocation of fault between parties and provides that, in a case of equal fault, the defendant’s position is stronger (Mayrand, at pp. 240-41; Hydro Electric Commission of Nepean v. Ontario Hydro, 1982 CanLII 42 (SCC), [1982] 1 S.C.R. 347, at pp. 410-11; Canada Cement LaFarge Ltd. v. British Columbia Lightweight Aggregate Ltd., 1983 CanLII 23 (SCC), [1983] 1 S.C.R. 452, at pp. 475-77; Waddams, at pp. 408-11; Fridman, at p. 414; McCamus, at pp. 546-56; Swan, Adamski and Na, at pp. 1102-3; L. Caylor and M. S. Kenney, “In Pari Delicto and Ex Turpi Causa: The Defence of Illegality — Approaches Taken in England and Wales, Canada and the US” (2017), 18 B.L.I. 259, at p. 260).
[117] The law also recognizes that a plaintiff may recover, notwithstanding illegality, if the plaintiff is less blameworthy than the defendant (or not in pari delicto) (M. McInnes, The Canadian Law of Unjust Enrichment and Restitution (2nd ed. 2022), at p. 1152). The purpose of this rule is to avoid the injustice of allowing a defendant to be unjustly enriched by their wrongful conduct when they are more blameworthy than the plaintiff (pp. 1150 and 2257; McCamus, at pp. 546-47 and 552-54; Waddams, at p. 408). . Golden Oaks Enterprises Inc. v. Scott
In Golden Oaks Enterprises Inc. v. Scott (Ont CA, 2022) the Court of Appeal considered the elements of contract illegality, drawing a distinction between common law and statutory illegality:[80] The trial judge did not address the Trustee’s argument that the referral agreements were illegal contracts at common law (as opposed to breaching the Securities Act). Contracts will be considered illegal where they are either criminal on their face or, while facially legitimate, are entered into for the purpose of perpetrating a criminal act: Youyi Group Holdings (Canada) Ltd. v. Brentwood Lanes Canada Ltd., 2020 BCCA 130, 35 B.C.L.R. (6th) 326, at paras. 47-48. The Trustee alleged the referral agreements were illegal in this latter sense.
[81] The appellants as respondents in the cross-appeal argue that the Trustee’s claims alleged only that the referral agreements breached the Securities Act and not that the referral agreements were unlawful at common law, and it is for this reason that the trial judge canvassed only whether the agreements breached the Securities Act.
[82] While the Trustee’s claims did not expressly plead that the agreements were unlawful at common law, they did allege that the agreements were unlawful and contrary to the Securities Act: see the description of the pleadings by this court in Salewski v. Lalonde, 2017 ONCA 515, 137 O.R. (3d) 750, at para. 8. The allegation that the referral agreements were unlawful in addition to constituting a breach of the Act was sufficient to encompass the claim that the agreements were illegal at common law.
[83] I agree with the Trustee (as cross-appellant) that the trial judge erred in considering only one basis on which the referral agreements could be treated as unlawful for the purposes of unjust enrichment and that, based on her other findings regarding the conduct of the defendants, the referral contracts were illegal contracts at common law and could not be the basis of a juristic reason for payments enriching the defendants. . Kirloskar Technologies (P) Ltd. v. Best Theratronics Ltd.
In Kirloskar Technologies (P) Ltd. v. Best Theratronics Ltd. (Ont CA, 2022) the Court of Appeal considered, but denied, the possibility that foreign criminality might exonerate a defendant from contractual liability:[11] BTL argues that the trial judge erred by:(1) ordering a Canadian business to pay an agent in a foreign jurisdiction where there are “red flags” of potentially corrupt practices on the part of the agent (such as the Charge Sheet);
(2) declining to take judicial notice of the high level of corruption in India; and
(3) failing to find that the contract clauses that required KTPL to comply with the domestic laws of India and indemnify BTL for any malfeasance strengthened the policy argument against ordering payment, or provided an independent contractual basis to delay payment until and if KTPL is exonerated. [12] BTL argues that this court should recognize a principle, as a matter of public policy, that contract payments do not need to be paid to agents who are under a “cloud of suspicion for corrupt practices.”
[13] BTL’s submissions flounder on the state of the evidentiary record that was before the trial judge. At para. 32 of her reasons for decision, the trial judge wrote:From a review of the Charge Sheet, the prosecution in India appears to relate to the alleged bribery of government officials in India, but it is far from clear. BTL did not produce an expert in Indian law to provide the court guidance on the significance of the Charge Sheet or what charges are presently before the court in India. The parties do agree that the charges relate to allegations against KTPL that are unproven. The parties further agree that the transaction involved in the Indian criminal prosecution is unrelated to the sales for which KTPL is claiming outstanding commissions are owing from BTL in this lawsuit. [14] There simply was no evidence to ground BTL’s submission that the parties’ agreement was tainted by criminality or that BTL’s obligation to pay its debt was unenforceable.
[15] Moreover, the Supreme Court has emphasized that public policy considerations should be relied on “sparingly” and has cautioned against expanding the heads of public policy for setting aside contractual provisions: Uber Technologies Inc. v. Heller, 2020 SCC 16, at para. 109, per Brown J. (concurring).
[16] The trial judge stated, at para. 36, “I reject BTL’s argument that a perceived risk of prosecution under the CFPOA absolves BTL from paying the legitimate outstanding debt owed to KTPL or delays payment of that debt.” We see no error in the trial judge’s rejection of BTL’s argument that it should be relieved of paying its acknowledged debt to KTPL. In addition, even if judicial notice as requested had been taken, it would have had no impact on the outcome of this case.
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