A case considering whether a breach of a regulation formulated by a state institution affects the validity of a contract with a third party. The Court also provided guidance regarding the presumption of bad faith of a contractual party.
- Mohamed Zahir (the “Appellant” or “Mr Zahir”) was an employee at the Elections Commission (the “Commission”). He sent a letter to the Commission informing that he was selected to enrol in a PhD programme in Thailand and requested for a paid leave under a bond.
- The Human Resource panel of the Commission deliberated on the request submitted by Mr Zahir and concluded that the programme was beneficial to the institution as it was relevant to the work within the Commission’s mandate. It was the unanimous decision of 3 members of the Commission to approve Mr Zahir’s request in an unofficial meeting. It should be noted that Section 47 (a) of the Commission’s Regulation provides that decisions of the Commission must be approved at official meetings of the Commission.
- The Commission agreed to provide financial aid equivalent to Mr Zahir’s salary for 4 years and 4 months. Accordingly, a contract was signed between the Commission and Mr Zahir on 4 August 2014.
- On 29 October 2015, the Commission informed him that the contract was terminated as of 20 October 2015 and ordered Mr Zahir to return the money that the Commission had previously paid to him.
- Mr Zahir filed a claim at the Civil Court requesting the Court to determine that the decision taken by the Commission to terminate the contract between the parties is invalid and as such, to find that the contract is still valid and therefore, to order the Commission to fulfill their contractual obligations accordingly. He further requested the Court to order the Commission to pay the full amount owed to him for the discontinued period of the contract.
- The Civil Court held in favour of Mr Zahir ruling that the letter sent by the Commission terminating the contract is invalid and ordered the Commission to fulfill their contractual obligations 1. The Court ordered the Commission to pay the money owed to Mr Zahir for the discontinued period.
- According to the Civil Court, unless the circumstances in Section 11 (a) and (b), Section 12 and Section 13 of the Law of Contract 2 arise, the parties must uphold the contract and fulfill their legal obligations3. They further held that the parties cannot relinquish what was agreed upon without the consent of the other party. As Mr Zahir was fulfilling his obligations under the contract, there are no grounds to declare the contract void. [3(b) and (c)]
- The decision was appealed at the High Court by the Commission. The High Court upheld the Civil Court’s decision and observed that there were no disagreements on the substance of the contract but the dispute has arisen due to an internal procedural contention where the Commission alleges that the contract was signed with undue influence by a Commission member4.
- The High Court highlighted that the procedural contention relates to the Commission’s Regulation which provides that such contracts shall be approved in an official meeting of the members. Furthermore, the Court highlights that the Anti-Corruption Commission’s investigation conducted upon the Court’s request found no evidence of procuring unjust benefits to Mr Zahir, despite the lack of official endorsement in the meeting.
- The Commission appealed the High Court’s decision at the Supreme Court.
Does the breach of theCommission’s Regulation render the contract with a third party void?
Supreme Court unanimously dismissed the appeal and held that the contract has not been void despite the apparent breach of the Regulation. The Court further held that there was no evidence of bad faith of the third party.
Presumption of bad faith
- There may be a presumption of bad faith if it is believed that a party had full knowledge of the procedural impropriety and breach of regulation. Further, the extent of the breach has to be considered in drawing a conclusion.
- It was found that the Appellant had not relied on the contract in bad faith and with the knowledge of procedural impropriety resulting from a breach of the regulations. In contrast, the Court opined that the Appellant had entered into the contract with the Commission upon fulfilling all his duties and with the presumption that the contract would be considered to be valid.
- It was further observed that it was not apparent that the Appellant had any involvement either in the administrative affairs of the meetings of the Commission or in the human resource panel. The Court further noted that the Appellant did not have access to meeting minutes or to information regarding procedural matters of such meetings.
- All the formalities that would have been observed by an ordinary person in the Appellant’s position had been fulfilled and a minor procedural impropriety by the Commission Members and the relevant section’s staff is not a valid legal reason to burden or punish the innocent third party.
Effect of a breach of Regulation on the contract with third party
- The Court found that the letter sent to the Appellant terminating the contract was void and cited the reason as internal irregularities and it is clear that the Appellant had violated the contract.
- The Commission had followed all the other internal administrative procedures in granting the paid leave and the only missing procedure was the lack of endorsement in an official meeting.
- The Supreme Court noted that the Regulation provides that the decisions of the Commission must be approved at an official meeting with the agenda provided to the members in advance and that the purpose of such a procedure is to prevent members from making abrupt decisions without giving sufficient time to other members to deliberate.
- The Court further noted that the paid leave to Zahir was granted at an unofficial meeting attended by 3 members of the Commission but they were the only appointed members at the time and there had been no complaints from the 3 members.
- As such, the Court found that there was evidence that this was not an abrupt decision taken by the members as 1 month had passed since the request was sent to the Commission and all the members of the Commission had been involved in the decision making.
- The Supreme Court also dismissed the Commission’s argument that allowing such a breach of regulations would open the floodgates for abuse of the regulations. The Court held that it was not sufficient legal reason to burden an innocent third party. The Court opined that on the other hand, allowing the appeal may open floodgates for new leaderships to render contracts entered into by the earlier leadership and relied on by innocent third parties.
- Act No. 4/91
- Section 11 (a) and (b) of the Contract Act provides that a contract shall be void for mistake of facts. Section 12 states that if a party is induced to enter into a contract due to duress, misrepresentation or undue influence, such a contract would lack voluntary consent and Section 13 provides that such contracts are void.