High Court voids ‘Ali Baba’ scheme, throws out RM538,000 claim

 Judge says loss must lie where it falls, as the court will not enforce an illegal contract.

The High Court has allowed Alor Setar Development Corporation Sdn Bhd’s appeal and set aside judgment for RM538,000 entered in favour of EE Engineering Sdn Bhd. (File pic)

PETALING JAYA:

The High Court in Alor Setar has overturned a sessions court ruling requiring a Bumiputera contractor to pay its subcontractor RM538,000, after holding that their contract involved an unlawful “Ali Baba” arrangement.

Justice Johan Lee also ruled that the agreement between Alor Setar Development Corporation Sdn Bhd (ASDC) and EE Engineering (Malaysia) Sdn Bhd for the construction of a school was contrary to public policy, and therefore void under Section 24 of the Contracts Act 1950.

He said the trial court had fundamentally erred in both fact and law.

“The objective evidence plainly demonstrates that the sub-contract arrangement was an illegal ‘Ali Baba’ scheme designed to circumvent government procurement policies,” he said.

The judge also held that EE Engineering could not succeed on the premise of unjust enrichment or quantum meruit as the two causes of action were not raised in its pleadings.

“In the absence of such pleadings, the traditional strict rule of illegality embodied in the maxim ex turpi causa non oritur actio must apply. The court will not lend its aid to enforce an illegal contract, and the loss must lie where it falls,” he said in a recent 28-page judgment.

EE Engineering has filed an appeal to the Court of Appeal.

The dispute arose after ASDC, the holder of a CIDB G5 licence, was awarded a school construction project, and engaged EE Engineering to carry out the work.

EE Engineering sued ASDC to recover payment of the outstanding balance due after completing the project.

ASDC resisted the claim, contending that the arrangement was an illegal “Ali Baba” scheme pursuant to which it merely lent its Bumiputera licence for a fixed 2% commission.

It argued that EE Engineering funded, controlled and carried out the entire project.

The sessions court rejected the defence and entered judgment for EE Engineering.

Allowing the appeal, the High Court found that the documentary evidence and witness testimony showed that EE Engineering had determined the tender price, executed the works, and paid the appellant a fixed 2% commission solely for the use of its licence.

The court held that the arrangement was designed to circumvent Bumiputera procurement policies which contained a prohibition against wholesale subcontracting.

The decision meant that EE Engineering could not recover payment for work done.

Lawyers Faiz Fadzil and Faizal Abdullah represented ASDC, while R. Megalai appeared for EE Engineering. - FMT