The plaintiff company had contracted to make and export to the defendant an aluminium extrusion press. The defendant re-assured the plaintiff that it would be lawful for him to import the plant, but asked that the plant be described falsely on the invoice as ‘parts for rolling mill’. Payment was made by promissory notes. After the first two promissory notes had not been met, the plaintiff ceased production, and sued on the notes and succeeded summarily. The defendant appealed.
Held: The plaintiff was entitled to payment under the first note, because it had performed its obligations under the contract, and there was no failure of consideration. However there was no such completed consideration for the second promissory note, and the defendant should be allowed to defend.
The request to mis-invoice the goods, if illegal, was severable, and did not undermine the contract as a whole. To succeed in their defence of illegality, the defendant had to show that the plaintiff was aware that performance by importing the plant would be illegal, and had agreed to go ahead notwithstanding that illegality. That had not been demonstrated in this case.
An innocent party who is ignorant of the facts or circumstances that would make performance of a contract illegal may be allowed to recover money paid by him under the illegal contract.
Only in exceptional circumstances should a court deprive a claimant of judgment on a claim based on a promissory note.
Lord Denning MR said: ‘The plaintiffs, Fielding and Platt Ltd are manufacturers of machinery. Their business is in Gloucester. In the middle of 1965 they entered into a contract with a Lebanese company called SCIALE Aluminium of Lebanon. They agreed to make and sell to the Lebanese company an aluminium extrusion press for a total sum of andpound;235,000. The plant and equipment was to be delivered free on board at a British port. The time for delivery was 10 1/2 months from 19 June 1965. Payment was to be made by six promissory notes given by the defendant, the managing director of the Lebanese company, Mr Selim Najjar, personally; and he deposited shares, of his own, as security for the due payment of the promissory notes. The promissory notes were payable at intervals during the progress of the work. The first four were payable whilst the plaintiffs were making the machinery in England. Thus the first note was payable on 4 October 1965, for andpound;23,500; the second on 4 December 1965, for andpound;47,000, the third on 4 February 1966, for andpound;47,000; and the fourth on 4 April 1966, for another andpound;47,000. The fifth note was payable on 4 June 1966, for andpound;47,000, which was just about the time when the machinery was to be delivered to the port. The sixth note, the final one, for andpound;23,500, was payable on 4 August 1966.
On 4 October 1965, the first promissory note, for andpound;23,500, fell due. It was not paid. The defendant apologised for not paying it. He asked for a few days’ grace. He said that had been agreed. So be it. He was given a few days-indeed more than a few days. Still he did not pay. When the note was a fortnight overdue he wrote on 18 October 1965: ‘It is my estimate that by the middle of next month all will be arranged and I will be able to proceed with the payments.’ He realised that his non-payment might result in delays on the English side, for he added: ‘Please remember that any delays on your part due to delayed payments will be acceptable.’ When the note was more than three weeks overdue, the plaintiffs decided to suspend work on the contract. On 27 October 1965, they cabled to the Lebanese company:
‘We have today suspended all work on your contract with us and this includes notification to all our material suppliers that they must do no further work on this contract. We have been forced to take this action to comply with the requirements of our authorities. Our current financial commitment to material and equipment suppliers plus design and stock material and labour charges, is extremely heavy. We trust you appreciate that this is your liability. As a result of suspending all work you will appreciate that our delivery date will be considerably extended and the amount of the delay will depend on the time taken for you to resolve your difficulties.’
The defendant never paid the first promissory note or any of the others. He never paid anything. In consequence, the plaintiffs suspended work on the contract, and it remained suspended. No further work was done on it. There were negotiations for a revival of the contract, but they came to nothing.
Stopping there, it is quite plain to me that the defendant was liable to pay the first of the promissory notes. We have repeatedly said in this court that a bill of exchange or a promissory note is to be treated as cash. It is to be honoured unless there is some good reason to the contrary. It is suggested that, on the first note, there was a failure of consideration. That suggestion is quite unfounded. The plaintiffs were getting on with their part of the contract. They were, they say, ordering goods from their suppliers and getting on with the work. At any rate, there is no evidence to the contrary; and, unless they were themselves in default, they were clearly entitled to payment of the first note. The position as to the second note is different. Before it fell due, the defendant said: ‘I cannot pay’; and the plaintiffs replied: ‘We, therefore, suspend work.’ Seeing that the plaintiffs had suspended work, they could not claim payment in full, but at most damages. They could not sue on each note as it fell due-each of the six-when they had suspended all work on the contract. So there is an available defence on the second note. But not on the first note.
This brings me to the second point. In answer to the claim in both notes, the defendant raises a defence of illegality. He says that it was his intention to break the laws of the Lebanon and that the plaintiffs were parties to it. In order to import the extrusion press into the Lebanon, he had to get an import licence from the Lebanon authorities. He had already got a licence to import a two million pound rolling mill, but he had not got a licence to bring in an extrusion press. His intention was to import it without a licence, and he says that the plaintiffs agreed to help him to do so. The plaintiffs agreed, he says, to put in a false invoice. He says: ‘I asked you to invoice the press as part of a rolling mill, and you agreed to it, and, therefore, you cannot recover anything.’ That defence does not commend itself to me. Here is a man who prays in aid his own illegality-he admits he was trying to evade the laws of his own country-and he seeks to implicate the plaintiffs in it.
In order for this to be any kind of defence, he must show first of all that the contract contained a term that the plaintiffs were to give a false invoice; so that it could not lawfully be performed. For if it would be lawfully performed (by giving a correct invoice) the plaintiffs can certainly sue on it. I do not think there was any such term. During the negotiations the Lebanese company did ask the plaintiffs to invoice the press as ‘parts for rolling mill’. But this request did not, as I read the correspondence, become a term of the contract. The contract was concluded on 13 July 1965. And the only subsequent reference was contained later in the confirmation which the plaintiffs sent to the Lebanese company. There was a long detailed description of the goods covering many pages and then, in brackets, were the words (‘to be invoiced as ‘parts for rolling mill”). That was a mere notification by the Lebanese company of the way they wanted an invoice made out. It was not a term of the contract itself. The plaintiffs would therefore quite justifiably refuse to give such invoice, and insist on the contract being lawfully performed.
In the second place, even if it were a term, the defendant would have to show that the plaintiffs were implicated in this illegality, that is that they had knowledge of it and were actively participating in it, see Foster v Driscoll, Lindsay v Attfield, Lindsay v Driscoll ( 1 KB 470 at p 518;  All ER Rep 130 at pp 146, 147) per Sankey LJ. I can see no evidence worthy of the name to suggest that the plaintiffs knew of this illegality. The only evidence is contained in a cable about the import licence. On 16 June 19658 the plaintiffs stated that they were agreeable to the proposed contract ‘subject to evidence of satisfactory importing licence arrangements’. The Lebanese company replied:
‘Concerning our import licence, we have a regular import licence for a total amount of two million sterling, for a complete aluminium plant. This licence is more than what we require for an extrusion press, and since we don’t want to lose our right for the remaining amount, we want the material to be invoiced as ‘parts for rolling mill’. This of course is for local consumption. We discussed these details with your representative here, and will make sure that you do the correct thing when the time comes. Please bear in mind that few items (just any thing) of the total order should be in Beirut the first week of October the latest, because our licence is valid until October 24, 1965, and before that date something should have arrived.’
I do not think that cable was enough to give the plaintiffs knowledge of the illegality. It only shows that the Lebanese company thought it convenient, for local consumption, to have the machines invoiced as parts for a rolling mill, instead of the more accurate description of an aluminium extrusion press.
I cannot help remarking that the defendant seems to have a special fondness for false invoices. At a later stage he suggested that the plaintiffs should give an invoice for only half the cost, instead of the whole; so as to save customs duties. He also suggested that the plaintiffs should write a false letter (which he drafted) to show the Lebanese customs authorities. The plaintiffs very properly did not agree to those suggestions. And when the matter finally came to a head, the plaintiffs firmly said: ‘We must invoice the goods correctly.’ I know there is a suggestion in the affidavit of the defendant that the plaintiffs were implicated, but, in the face of the documents, I see no substance in this suggestion.
There is another point: even if there was a term that these goods should be invoiced falsely in order to deceive the Lebanese authorities, I do not think it would render the whole contract void. That term would be void for illegality. But it can clearly be severed from the rest of the contract. It can be rejected, leaving the rest of the contract good and enforceable. The plaintiffs would be entitled, despite the illegal term, to deliver the goods FOB English port, and send a true and accurate invoice to the Lebanese buyer. The Lebanese buyer could not refuse the goods by saying ‘I stipulated for a false invoice’. He could not rely on his own iniquity so as to refuse payment.
In my opinion, therefore, the defence of illegality is clearly bad. I would allow judgment to be entered on the first note and for the interest thereon; and give leave to defend as to the second.’
Davies LJ said: ‘I agree with the result reached by Lord Denning MR and I do not propose to add anything.’
Widgery LJ said: ‘I also agree. I find each of the main issues in this case one of some difficulty and I am much indebted to counsel for the defendant for his argument; but in the end I have concluded that they are sufficiently determined to justify judgment under RSC, Ord 14 in respect of the amount of the earlier promissory note. So far as the allegation of illegality is concerned, there are I think two independent and sufficient answers to it. First, in order to succeed on this question, the defendant must show that the plaintiffs were aware of the illegal purpose in the falsification of the invoice and that they agreed actively to participate in that purpose so that goods could be illegally imported into the Lebanon which would not otherwise be allowed to enter. The only basis on which it is said that the plaintiffs at any material time had knowledge of that illegal purpose is the telex message of 18 June from the Lebanese company, to which Lord Denning MR has referred. If I may just repeat again the essential words, they were replying to an enquiry from the plaintiffs as to their import licence, and they stated:
‘We have a regular import licence for a total amount of two million sterling, and for a complete aluminium plant. This licence is more than what we require for an extrusion press and since we don’t want to lose our right for the remaining amount, we want the material to be invoiced as’ parts for rolling mill’. This, of course, is for local consumption . . ‘
When that was first read to us, for my part I found it quite incomprehensible, and it is not until one gets further in the correspondence that the real point of it becomes clear. The plaintiffs, of course, had to judge the legality or illegality of what was proposed, without the benefit of the correspondence which developed months later as to the terms of that telex message. I can see no reason whatever to suppose that the plaintiffs should see more in that message than that the invoice was to indicate that the goods were part of a larger matter, which in itself would not involve any illegality that I can see. It is only later that one appreciates that the character of the goods may be of some relevance, and if the plaintiffs did agree to invoice the goods as part of a larger whole, I cannot for my part see that that would involve them in any illegality sufficient to excuse the defendant from liability in this case. Alternatively, as Lord Denning MR has said, I am of the opinion that there was no term in this contract requiring the plaintiffs to invoice the goods as part of a rolling mill. The chief contractual document is a formal and lengthy quotation which the plaintiffs submitted to the defendant setting out details of the machine to be supplied; and on 13 July the Lebanese company accepted that quotation in these words:
‘please consider this letter as an official order based on your quotation of July 5, 1965 and our different telexes to which you have given your agreement.’
At that point there was nothing in the contractual documents to imply an obligation on the plaintiffs to invoice the goods as part of a rolling mill. Counsel for the defendant has referred to the telexes mentioned in that letter, but there was no agreement by the plaintiffs to any telex involving a special form of invoicing. When the plaintiffs received that acceptance of their offer, they sent a formal and detailed confirmation; and it is to be observed that under the terms of their agreement no contract was to be binding on them until that confirmation had been given. In my judgment, that was no more than a confirmation of that which was already agreed, and it would be quite unreal to regard it as a counter-offer containing a new term whereby the goods were to be invoiced as part of a rolling mill.
On the second issue, namely, the failure of consideration, for which the notes were given, my opinion is that these notes were given by the defendant in consideration of the plaintiffs entering into the agreement with the Lebanese company and carrying out that agreement. It is arguable that if counsel for the defendant can sustain his contention that the plaintiffs repudiated the contract in November and that that repudiation was accepted by the Lebanese company, then perhaps it can be shown that liability on bills maturing after the date of the repudiation had itself been determined; but, like Lord Denning MR I can see no possible ground on which it can be said that the consideration for the first bill, which would mature in October 1965, at a time when the plaintiffs were in no way in default, can have been rendered wholly ineffective by virtue of that which followed.
I also would accordingly allow the appeal to the extent that judgment should be entered only in respect of the amount of the first bill and interest thereon.’
Lord Denning MR, Davies, Widgery LJJ
(1969) 113 Sol Jo 160,  1 WLR 357,  2 All ER 150
England and Wales
Cited – Scott v Gillmore 6-Jul-1810
A bill of exchange, part of the consideration for which is spirituous liquor sold in less quantities than of 20s. value, is totally void, though part of the consideration was money lent -The statute 24 G. 2, c. 40, s. 12, making illegal the sale of . .
Cited – Regazzoni v KC Sethia (1994) Ltd CA 1956
The rule against enforcing foreign political laws did not require it to enforce a contract that violated Indian laws against export to South Africa. The court permitted recognition but not enforcement of foreign revenue laws.
Denning LJ said: . .
Lists of cited by and citing cases may be incomplete.
Updated: 23 November 2021; Ref: scu.459793