Gago Teine and Gute Security Service Ltd v The University of Goroka (2019) SC1881

• Jurisdiction: Papua New Guinea
• Judge: Cannings J, Tamate J, Dingake J
• Judgment Date: 28 November 2019
• Citation: (2019) SC1881
• Docket Number: SCA No 18 of 2019
• Court: Supreme Court
• Year: 2019
• Judgement Number: SC1881

Full Title: SCA No 18 of 2019; Gago Teine and Gute Security Service Ltd v The University of Goroka (2019) SC1881

Supreme Court: Cannings J, Tamate J, Dingake J

Judgment Delivered: 28 November 2019

SC1881

PAPUA NEW GUINEA

[IN THE SUPREME COURT OF JUSTICE]

SCA NO 18 OF 2019

GAGO TEINE

First Appellant

GUTE SECURITY SERVICE LIMITED

Second Appellant

V

THE UNIVERSITY OF GOROKA

Respondent

Waigani: Cannings J, Tamate J, Dingake J

2019: 27th August, 28th November

CONTRACTS – illegal contracts– consequences of illegality – whether party to illegal contract can recover money paid under contract to other party – whether parties are in pari delicto – quantum meruit

The second appellant, a company owned and controlled by the first appellant, entered into a three-year contract with the respondent, a university, to provide security services. The appellants performed services under the contract, evidently to the satisfaction of the respondent, but before the end of the first year of the contract, the respondent terminated it on the ground that it had been entered into by an unauthorised person and contrary to legislation governing the financial affairs of the respondent. The respondent commenced proceedings in the National Court against the appellants, seeking recovery of all monies paid under the contract. The National Court upheld the respondent’s claim and ordered the second appellant to repay the respondent K418,120.00 paid under the contract, which was ruled to be an illegal contract. The appellants were deemed to have knowledge of the illegality. A cross-claim by the appellants was dismissed. The appellants appealed on various grounds including that the trial Judge erred by not recognising that the appellants had satisfactorily performed services under the contract and were entitled under quantum meruit principles to retain the money paid to the second appellant for those services. The appellants did not argue that the contract was not illegal. The appeal was centred on the issue of whether money paid under an illegal contract could be recovered.

Held:

(1) The question whether one party to an illegal contract can recover money paid to the other party is governed by the maxim in pari delicto(a situation in which the parties are equally at fault).

(2) If the parties are equally at fault, money paid under the illegal contract is not recoverable.

(3) If one party can be described as innocent, in comparison with the other party, money paid by the innocent party to the other party is recoverable.

(4) Here, the evidence suggested that the appellants entered into the contract without actual knowledge of its illegality, in good faith, and performed services under the contract satisfactorily without complaint and would in all likelihood have been able to sustain a quantum meruit claim if they had not been paid anything by the respondent, and the respondent also entered into the contract without knowledge of the illegality and paid money to the appellants in good faith for services actually rendered. The parties were in pari delicto. The money paid by the respondent was not recoverable.

(5) The trial Judge erred by labelling the appellants’ conduct as not innocent and by deeming them to have knowledge of the illegality and by ordering them to repay to the respondent the money under the illegal contract.

(6) The appeal was substantially upheld and the parts of the National Court’s order requiring the appellants to repay the respondent K418,120.00 plus interest and costs were quashed.

Cases Cited

The following cases are cited in the judgment:

Delphi Corporate Investigations Ltd v Bernard Kipit (2003) N2480

Fly River Provincial Government v Pioneer Health Services Ltd (2003) SC705

Kiriri Cotton Co Ltd v Dewani [1960] 1 All ER 177

Leontine Ofoi v Kris Bongare (2007) N3248

Putput Logging Pty Ltd v Ambalis [1992] PNGLR 159

Steven Turik v Mathew Gubag (2013) N5132

The State v Barclay Bros (PNG) Ltd (2004) N2507

APPEAL

This was an appeal against a decision of the National Court that ordered the second appellant to repay money paid to it by the respondent under an illegal contract.

Counsel

A Waira, for the Appellants

T C Waisi, for the Respondent

28th November, 2019

1. BY THE COURT: Gago Teine and Gute Security Service Ltd appeal against the decision of the National Court which, amongst other things, ordered Gute Security Service Ltd (“Gute”) to repay the University of Goroka (the respondent) the sum of K418,120.00 which the University had paid to Gute under a security service contract.

2. In January 2015, Gute (a company owned and controlled by Mr Teine) entered into a three-year contract with the University to provide security services at its Goroka campus. Gute performed services under the contract, evidently to the satisfaction of the University, but before the end of the first year of the contract, in October 2015, the University terminated the contract on the ground that it had been entered into by the then Vice-Chancellor, Dr Gairo Onagi, without the authority of the Council of the University, contrary to the University of Goroka Act, University Statutes and the public tender requirements of the Public Finances (Management) Act.

3. The University commenced two separate proceedings in the National Court against the appellants(WS No 243 of 2016) and Dr Onagi (WS No 312 of 2017), seeking recovery of all monies paid under the contract. After a joint trial of the two proceedings the National Court upheld the University’s claim in WS No 243 of 2016 and ordered Gute to repay K418,120.00 it received from the University under the contract, which was ruled by the trial judge to be an illegal contract, plus interest and costs. Mr Teine and Gute were deemed to have knowledge of the illegality. A cross-claim by them was dismissed. The order, made at Goroka on 22 February 2019, stated:

[Re WS 243 of 2016:]

1. Judgment for the plaintiff [the University] against the first and second defendants [Mr Teine and Gute]. The cross-claim [by Mr Teine and Gute] is dismissed.

2. The second defendant is to pay the plaintiff K418,120.00 together with interest at the rate of 8% yearly calculated from 12 October 2015 [date of termination of the contract] to date of judgment.

3. The first and the second defendants jointly and severally to pay the costs of the plaintiff on a solicitor and client basis.

4. Interest in accordance with the Judicial Proceedings (Interest on Debt and Damages) Act will accrue on the sum of K418,120.00 from the date of judgment but not on the previous interest accrued.

5. The action against the third defendant [Dr Onagi] is dismissed. The third defendant is to pay his own costs.

6. Time abridged to the date of settlement by the Registrar, forthwith.

[Re WS 312 of 2017:]

7. The claim against the defendant [Dr Onagi] is dismissed. The defendant will bear his own costs. The plaintiff is not awarded further costs.

8. Time abridged to the date of settlement by the Registrar, forthwith.

APPEAL

4. Mr Teine and Gute appeal against orders 1 to 4. They seek an order quashing those orders and in their place an order that the University pay them K214,932.42, being the amount they say they are entitled to under their cross-claim (a quantum meruit claim based on the argument that Gute was underpaid that amount for security services actually performed under the contract).

5. The primary ground of appeal is that the trial Judge erred in law by treating Gute as not an innocent party to the illegal contract and by not recognising that Gute had satisfactorily performed services under the contract and was entitled under quantum meruit principles to retain the money paid to it for those services.

6. The appellants do not argue that the contract was not illegal. Its illegality is accepted. The appeal is centred on the issue of whether money paid under the illegal contract should be recovered.

DID THE TRIAL JUDGE ERR IN TREATING GUTE AS ‘NOT INNOCENT’?

7. In forming the view that Gute was not innocent, his Honour applied what he treated as one of the principles regarding illegal contracts arising from the decision of the Supreme Court in the leading case, Fly River Provincial Government v Pioneer Health Services Ltd (2003) SC705 (‘Fly River v Pioneer’): that a person dealing with a public institution is deemed to be aware of the public tender requirements of the Public Finances (Management) Act. As Gute was deemed to have knowledge of the illegalities, it followed that it was not innocent. Therefore it had to repay all money paid to it under the illegal contract.

8. We uphold the submissions of Mr Waira for the appellants that the learned trial judge, with respect, erred in law in adopting that process of reasoning.

9. We do not consider that the Supreme Court in Fly River v Pioneer laid down a hard-and-fast rule that all persons dealing with public institutions will be deemed to be aware of the public tender requirements of the Public Finances (Management) Act, so that in each and every instance of an illegal contract, the parties to the contract will be deemed to have knowledge...