Illegal purpose

This article examines a specific situation in common law jurisdictions where an agreement may be invalid on the basis of an illegal purpose: Where the agreement is entered into in order to stifle a criminal prosecution. A common example arises where one party, in return for being paid a sum of money by the other party, agrees not to pursue or co-operate with a criminal prosecution against the other party. The article first outlines the rule against such agreements in common law jurisdictions – commonly known as agreements to stifle a prosecution – and then considers whether a similar position exists under Chinese law.

Common law jurisdictions

Under the contract law in common law jurisdictions, there are several reasons why an agreement might be invalid and unenforceable (for a discussion about the difference between valid and enforceable, see China Business Law Journal volume 4, issue 3: Binding and enforceable). One possible reason is the failure to satisfy the applicable legal formalities, such as the requirement for certain agreements to be in writing (for a discussion about the difference between “agreement” and “contract”, see China Business Law Journal volume 2, issue 2: Contract or agreement – which is correct?).

Another possible reason is that the necessary elements for contract formation have not been satisfied, such as the requirement for consideration (for a discussion about this element in common law jurisdictions, see China Business Law Journal volume 5, issue 1: Consideration). A third possible reason is that one of the parties committed fraud when inducing the other part to enter into the contract.

A fourth possible reason is that the purpose of the agreement is illegal, or against public policy (for a discussion of the meaning of “illegal”, see China Business Law Journal volume 1, issue 10: Illegal or unlawful?). The rule against an agreement to stifle a prosecution falls into this category, and has been primarily established and developed by judges in case law, instead of by statute (for a discussion about the difference between case law and statute, see China Business Law Journal volume 3, issue 2: Binding or persuasive?).

An old statement of the rule appeared in the English case of Lound v Grimwade (1886), where the High Court judge observed that, “it has been repeatedly held that agreements tending to affect the course of legal proceedings are illegal, even although those proceedings may not be strictly criminal in their nature”.

Most subsequent cases have limited the application of the rule to criminal prosecution. In the Australian case of Kerridge v Simmonds (1904), the High Court of Australia referred to one of the policy reasons behind the rule as follows:

The courts are jealous to prevent their supervision over the interests of the public in criminal prosecutions from being flouted by secret agreements.

The rule was recently considered in 2017, by the Supreme Court of New Zealand, in the case of Osborne v Worksafe New Zealand. This case involved criminal proceedings against a company and one of its directors after an accident in a coal mine caused the deaths of 29 miners. The company was prosecuted and convicted under legislation governing health and safety in employment, and was ordered to pay NZ$3.41 million (US$ 2.39 million) in compensation to the survivors and families of the miners.

The company, however, was placed in receivership and was unable to pay the compensation. The director offered to pay the compensation if the prosecuting agency, Worksafe, agreed not to proceed with the charges against the director. Worksafe accepted the agreement. Two family members of the disaster victims subsequently sought judicial review of Worksafe’s decision, and argued that it was an invalid agreement to stifle a prosecution.

In its decision, the New Zealand’s Supreme Court outlined the rationale behind the rule against agreements to stifle prosecutions:

Because of the public interest in prosecution of offences, it has long been held that private bargains to avoid prosecution through payment or provision of other benefit are unlawful. An unlawful bargain not to prosecute arises where there is an understanding or promise, express or implied, that a public offence (as opposed to a civil wrong) will not be prosecuted on condition of the receipt of money, or other valuable consideration. The policy of the law is that a defendant who commits what is a public wrong cannot, by settling the private injury, be “entirely freed from the punishment due to a violation of public law”.

The court noted that the principle is one of general application and applies to prosecutions by both private and public prosecutors. A private prosecution occurs where the victim of an offence, rather than the state, prosecutes the alleged offender. Private prosecutions often occur when the prosecuting authorities have chosen not to prosecute an alleged offender after receiving a complaint.

A former partner of Linklaters Shanghai, Andrew Godwin teaches law at Melbourne Law School in Australia, where he is an associate director of its Asian Law Centre. Andrew’s new book is a compilation of China Business Law Journal’s popular Lexicon series, entitled China Lexicon: Defining and translating legal terms. The book is published by Vantage Asia and available at www.vantageasia.com