Zimmermann v. Letkeman, [1978] 1 SCR 1097

Supreme Court of Canada

Zimmermann v. Letkeman, [1978] 1 S.C.R. 1097

Date: 1977-09-30

Heinsz D. Zimmermann (Defendant) Appellant;

and

Ben Letkeman (Plaintiff) Respondent.

1977: May 17; 1977: September 30.

Present: Martland, Judson, Spence, Dickson and Beetz JJ.

ON APPEAL FROM THE COURT OF APPEAL FOR SASKATCHEWAN

Contracts—Action to enforce contract of sale and purchase of land—Documents intended to be used for unlawful purpose—Action dismissed on ground contract illegal—Doctrine of locus poenitentiae not applicable.

The respondent wished to purchase the appellant’s apartment block and on December 4, 1973, the parties signed two documents. The first was an offer to purchase and an acceptance of the offer. The price stipulated was $135,000. The second document, also signed by both parties read as follows: “Agreement between Ben Letkeman and H. Zimmermann. This agreement between the above partners is to certify that Mr. Letkeman is purchasing the above property for a price of $117,500.00. This agreement makes the signed offer to purchase null and void pertaining to purchase price.”

The reason for the two documents showing different prices was that the respondent intended to rely on the first document in order to obtain a larger loan from a mortgage company. On December 15, 1973, the appellant inquired of the respondent if he had sought a mortgage loan from the mortgage company on the basis of a purchase price of $135,000. The respondent confirmed that he had. The appellant informed the respondent that he considered this to be a fraud on the company and that he was not going to proceed with the transaction. He returned the respondent’s deposit cheque and refused to have anything further to do with the transaction.

It appeared that there was in fact no misrepresentation of the actual agreement to the mortgage company, as it was aware of the actual price of $117,500 from the time the transaction was first proposed to it, and it considered that a fair market value for the premises was about $135,000.

The respondent sued the appellant for specific performance of the agreement for sale. The trial judge dismissed the action on the ground that the contract sought to be enforced was illegal. His judgment was

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reversed on appeal by the majority of the Court of Appeal on the grounds that 1) the case was within the principles enunciated by Anglin J., as he then was, in Elford v. Elford (1922), 64 S.C.R. 125; 2) as the respondent had abandoned his intention of relying upon the first document in order to obtain a larger loan, the law would allow him a locus poenitentiae.

Held: The appeal should be allowed.

The grounds relied upon by the majority of the Court of Appeal were insufficient to justify their allowing the appeal from the judgment at trial. In the present case, in order to succeed in his suit for specific performance, the respondent had to rely upon an illegal contract. In the Elford case, an action between a husband and wife, the wife sued to have title to certain land which her husband had initially transferred to her re-transferred to her. She was seeking to set aside a conveyance of her land by her husband founded on an improper purported exercise of his power of attorney. Prima facie she was entitled to have her husband declared a trustee for her. He could not displace that right by alleging that her title was acquired in pursuance of his unlawful design to defeat his creditors. She did not have to rely upon an illegal contract.

The rule as to locus poenitentiae is applicable to enable a party to an illegal contract, which is still executory, to recover what he has paid or transferred to his co-contractor, pursuant to the contract, provided he repents in time before the illegal purpose has been substantially performed. The only payment made by the respondent to the appellant was the deposit of $1,000, which the appellant returned to the respondent. The respondent in these proceedings was not seeking from the appellant the return of anything. He was seeking to enforce a contract of sale and purchase, tainted with illegality, on the basis that the intended deception of the mortgage company was not carried through. The doctrine of locus poenitentiae had no application in favour of the respondent in the circumstances of this case. In fact, it was the appellant who repented of the transaction, returned the respondent’s deposit and refused to proceed with the transaction.

Alexander v. Rayson, [1936] 1 K.B. 169; Mason v. Clarke, [1955] A.C. 778, approved; Elford v. Elford (1922), 64 S.C.R. 125, distinguished; Taylor v. Bowers (1876), 1 Q.B.D. 291, referred to.

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APPEAL from a judgment of the Court of Appeal for Saskatchewan[1], allowing an appeal from a judgment of MacPherson J., dismissing the respondent’s action for specific performance of a contract of sale. Appeal allowed.

G.A. Maurice and G.T. Wilson, for the defendant, appellant.

Mrs. B. Mclsaac, for the plaintiff, respondent.

The judgment of the Court was delivered by

MARTLAND J.—The respondent in this action sued the appellant for specific performance of an agreement for the sale by the appellant to the respondent of an apartment block in Swift Current, Saskatchewan. The substantial defence to the action was that the agreement was illegal. The trial judge dismissed the action on this ground. His reasons are reported in [1975] 4 W.W.R. 216. His judgment was reversed on appeal by the majority of the Court of Appeal, Bayda J.A., dissenting. The reasons of the Court of Appeal are reported in [1977] 1 W.W.R. 408. The present appeal is from that judgment.

On December 4, 1973, the parties signed two documents, entered at the trial as exhibits P1 and P2. The first was an offer to purchase the land on a form provided by Keith Realty Ltd., by which company the respondent was employed as a salesman, which was signed by the respondent. The appellant signed the acceptance of the offer. The price stipulated was $135,000.

The second document, also signed by both parties, read as follows:

Agreement between Ben Letkeman and H. Zimmermann. This agreement between the above partners is to certify that Mr. Letkeman is purchasing the above property for a price of $117,500.00. This agreement makes the signed offer to purchase null and void pertaining to purchase price.

The trial judge made the following findings of fact:

There is no doubt why the Plaintiff wanted the offer and acceptance to show $135,000.00. The reason was that the plaintiff proposed to apply to Credit Foncier for a first mortgage and he knew that Credit Foncier makes its loans on the basis of 80% of the purchase price which

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is, according to Mr. Mebs of Credit Foncier, generally the fair market value. Therefore, on the basis of a selling price of $135,000.00, the plaintiff could expect to get a larger mortgage than he could on a selling price of $117,500.00.

There is no evidence of any further communication between the parties until a telephone conversation on the 15th December 1973, eleven days later. The defendant telephoned to the plaintiff. The defendant asked the plaintiff if he had made application for a mortgage on the basis of the $135,000.00 figure. The plaintiff answered that he had so applied and that the loan was passed and approved by the mortgage company. The defendant then said that he didn’t feel that he wanted to go through with the transaction, that he had discussed the matter with his lawyer who had advised him that the existence of the two documents showing different prices created for the purpose of getting a larger mortgage could constitute fraud upon the mortgage company and the defendant said that he did not want to end up in a court case. The Defendant returned to the Plaintiff the deposit of $1,000.00, a cheque which the Defendant had not negotiated, and thereafter the defendant refused to have anything more to do with the transaction.

…

It appears that there was no misrepresentation of the actual agreement to Credit Foncier. Although the application for loan showed a purchase price of $135,000.00, Mr. Mebs testified that he was aware of the actual price of $117,500.00 from the moment the transaction was first proposed to him. He saw both P1 and P2. Mr. Mebs further testified that he was of opinion that a fair market value for the premises was about $135,000.00.

Up to 15 December 1973, the date of his renunciation, the defendant had no reason to believe other than the plaintiff was proceeding to apply for a mortgage on the basis of the false purchase price in P1. I will go farther and say that there is nothing in the evidence to indicate that the plaintiff knew that there was in fact no misrepresentation to Credit Foncier until after this action was commenced.

The action was dismissed on the ground that the contract sought to be enforced was illegal. The trial judge relied upon the judgment of the Court of Appeal in Alexander v. Rayson[2]. The facts of that case were as follows:

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The plaintiff agreed to let a service flat to the defendant at an annual rent of £1,200. This transaction was expressed in two documents, one a lease of the premises at a rent of £450 a year, the other an agreement by the plaintiff to render certain specified services for an annual sum of £750. It was alleged that his object was to produce only the lease to the Westminster Assessment Committee, and by persuading this body that the premises were worth only £450 a year, to obtain a reduction of their rateable value. The defendant was ignorant of this alleged purpose. The plaintiff ultimately failed to accomplish his fraudulent object. He sued the defendant for the recovery of £300, being a quarter’s instalment due under both documents.

The Court of Appeal held that, if the documents were to be used for this fraudulent purpose, the plaintiff was not entitled to the assistance of the law in enforcing either the lease or the agreement.

Romer L.J., who wrote the reasons of the Court, said at p. 182:

It is settled law that an agreement to do an act that is illegal or immoral or contrary to public policy, or to do any act for a consideration that is illegal, immoral or contrary to public policy, is unlawful and therefore void. But it often happens that an agreement which in itself is not unlawful is made with the intention of one or both parties to make use of the subject matter for an unlawful purpose, that is to say a purpose that is illegal, immoral or contrary to public policy. The most common instance of this is an agreement for the sale or letting of an object, where the agreement is unobjectionable on the face of it, but where the intention of both or one of the parties is that the object shall be used by the purchaser or hirer for an unlawful purpose. In such a case any party to the agreement who had the unlawful intention is precluded from suing upon it. Ex turpi causa non oritur actio. The action does not lie because the Court will not lend its help to such a plaintiff. Many instances of this are to be found in the books.

At p. 187, he added this:

…But, if the plaintiff has by his conduct placed himself in the same position in law as though he had let the flat with the intention of its being used for an illegal purpose, he has no one but himself to thank for any loss that he may suffer in consequence.

That brings us to the real crux of this case. Has the plaintiff placed himself in that position? Now, in the cases to which we have referred, there was an intention

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to use the subject-matter of the agreement for an unlawful purpose. In the present case, on the other hand, the plaintiff's intention was merely to make use of the lease and agreement, that is the documents themselves, for an unlawful purpose. Does that make any difference? In our opinion it does not. It seems to us, and it is here that we respectfully disagree with du Parcq J. that the principles applicable to the two cases are identical.

This view was confirmed by Viscount Simonds in Mason v. Clarke[3], at p. 793:

…In Alexander v. Rayson, [1936] 1 K.B. 169, it was treated as settled law—and it could not be otherwise—that a plaintiff having intention to use the subject-matter of an agreement for an unlawful purpose cannot sue upon it, and the only relevant question was whether a plaintiff having a similar intention in regard to the documents evidencing an agreement is similarly debarred. And it was held, I do not doubt correctly, that he was. But it was not suggested there that an innocent party is debarred by the other party’s fraudulent intention from enforcing an agreement which is not itself illegal.

The judgment at trial in the present case concluded as follows:

On the basis of the present facts, there is no doubt in my mind that on 4 December 1973 the plaintiff intended to use the false purchase price shown in exhibit P1 for the purpose of getting a larger mortgage than he would otherwise have been able to justify. This in my view brings the facts squarely within Alexander v. Rayson. The fact that there was, eventually, no fraud does not change the result. The maxim ex turpi causa non oritur actio applies. An action cannot be based on an immoral transaction. See also Campbell River Lumber Company v. McKinnon, (1922) 64 S.C.R. 396. The plaintiff’s action is dismissed with costs. There will be an order removing the plaintiff’s caveat from the land in question.

The majority of the Court of Appeal held that the appeal of the respondent should be allowed on two grounds. The first ground was that the case was within the principles enunciated by Anglin J., as he then was, in Elford v. Elford[4].

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In that case a husband had put land into his wife’s name, with her knowledge, for the purpose of defeating his creditors. He held a general power of attorney from her. A quarrel having occurred between them, the husband registered the power of attorney and proceeded to transfer title to the land into his own name. The wife sued to have the title re-transferred into her name.

It was held that the wife was entitled to have the transfer set aside. The wide general authority conferred by the power of attorney did not embrace the power to execute a conveyance in favour of the agent himself. Prima facie, the wife was entitled to have the husband declared a trustee for her. The husband could not display that right by alleging that her title was acquired in pursuance of his unlawful design to defeat his creditors.

The passage from the judgment of Anglin J., relied upon by the majority of the Court of Appeal, appears at p. 129, as follows:

In order to succeed the plaintiff merely requires to establish that in executing the transfer to himself of the property in question, which stood registered in her name, her husband committed a fraud on the power of attorney from her under which he professed to act. She does not have to disclose the alleged intent to defraud her husband’s creditors in which her own title to the land is said to have originated, or to invoke any of the transactions tainted by that fraud. Simpson v. Bloss (1816) 7 Taunt, 246; Taylor v. Chester (1869) L.R. 4 Q.B. 309, at p. 314; Clark v. Hagar (1893) 22 Can. S.C.R. 510, at p. 525; 20 Ont. App. R. 198, at pp. 221-2. It is the defendant who brings that aspect of the matter before the court in his effort to retain the fruits of his abuse of his position as his wife’s attorney; and to him the maxim applies memo allegans turpitudinem suam est audiendus. Montefiori v. Montefiori (1762) 1 W. Bl. 363.

After citing this passage, the Court of Appeal went on to say:

In order to succeed here the plaintiff was merely required to establish that the documents executed by the parties constituted the contract between the parties. In order to do so he needed only to produce such documents and prove the execution thereof by himself and the defendant. In the present case this presented no difficulty as the defendant admitted in his statement of defence the execution of the documents and did not

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suggest that they did not constitute the contract between the parties. It is apparent that the defendant alone invoked the suggestion of illegality in order to avoid his obligation under the contract.

With respect, this statement fails to take account of the fact that in the present case it is the respondent purchaser who is seeking to enforce the contract which is tainted with illegality. His position is akin to the position, not of the wife, but of the husband in the Elford case.

The fact that the documents on their face did not disclose the respondent’s unlawful purpose, which was disclosed by the evidence, does not improve his position. He is still in the position of seeking to enforce an illegal contract. This point is well made by Gwynne J. in the case of Clark v. Hagar, supra, mentioned by Anglin J. At p. 525 Gwynne J. said this:

What is meant in this case, and in all cases as to the application of the test is, that in every case, whether in indebitatus assumpsit or in an action upon a bond, note or other instrument, it appears either by admission on the pleadings, or in the evidence given upon the issues joined upon the pleadings in the case, that the action is connected with an illegal transaction to which the plaintiff was a party, the question arises whether he can or cannot succeed in his action without relying upon the illegal transaction. If he cannot, the action fails; if he can, it prevails. But it never has been held, nor so far as I have been able to find hitherto contended, that in an action upon a note or other instrument in security for money requiring prima facie no evidence of consideration the plaintiff is entitled to recover upon the mere production of the instrument, notwithstanding that the defence is that the instrument sued upon was executed for an illegal consideration in respect of a transaction to which the defendant was himself a party. Such a proposition could not be maintained without reversing a legion of cases from Guichard v. Roberts, 1 Wm. Black, 445, down to Windhill Board of Health v. Vint, 45 Ch. D. 351, which establish that illegality in the consideration of an instrument, whether under seal or not, to enforce which an action is brought, not only may be pleaded, but if it does not appear upon the plaintiff’s own pleading must be pleaded.

In the present case, in order to succeed in his suit for specific performance, the respondent had to rely upon the illegal contract. The wife, in the Elford case, had acquired title to the land. She

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was seeking to set aside a conveyance of her land by her husband founded on an improper purported exercise of his power of attorney. She did not have to rely upon an illegal contract.

The second ground stated by the majority of the Court of Appeal was that as the respondent had abandoned his intention of relying upon the first document in order to obtain a larger loan, the law would allow him a locus poenitentiae. Reliance was placed on the statement of Mellish L.J., in Taylor v. Bowers[5], at p. 300:

…If money is paid or goods delivered for an illegal purpose, the person who had so paid the money or delivered goods may recover them back before the illegal purpose is carried out; but if he waits till the illegal purpose is carried out, or if he seeks to enforce the illegal transaction, in neither case can he maintain an action; the law will not allow that to be done.

As this passage indicates, the rule as to locus poenitentiae is applicable to enable a party to an illegal contract, which is still executory, to recover what he has paid or transferred to his co-contractor, pursuant to the contract, provided he repents in time before the illegal purpose has been substantially performed. The only payment made by the respondent to the appellant was the deposit of $1,000, which the appellant returned to the respondent. The respondent in these proceedings is not seeking from the appellant the return of anything. He is seeking to enforce a contract of sale and purchase, tainted with illegality, on the basis that the intended deception of Credit Foncier was not carried through. In my opinion the doctrine of locus poenitentiae has no application in favour of the respondent in the circumstances of this case. In fact it was the appellant who repented of the transaction, returned the respondent’s deposit and refused to proceed with the transaction.

In my opinion the grounds relied upon by the majority of the Court of Appeal were insufficient to justify their allowing the appeal from the judgment at trial. I agree with the dissenting reasons of Bayda J.A., that the trial judge correctly applied the principle stated in Alexander v. Rayson in the circumstances of this case.

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I would allow the appeal, set aside the judgment of the Court of Appeal, and restore the judgment at trial, with costs in this Court and in the Court of Appeal.

Appeal allowed with costs.

Solicitors for the defendant, appellant: Wilson, MacBean, Maurice & McIntosh, Swift Current.

Solicitors for the plaintiff respondent: Donnelly, Polley, Krueger, McLaughlin & Wiensz, Swift Current.