Contract held valid despite foreign currency payment clause; illegality plea rejected under Exchange Control Law.

[*384] 1978 January 27

(PIKIS,P.D.C.)

IN THE DISTRICT COURT OF LARNACA

Andreas Charalambous Mosfilioti,

Plaintiff,

and

Nicolaos Panayi and Another,

Defendants.

(Action No. 255/76)

Contract - Illegality - Sale of land

- Stipulation that part of purchase price would be paid in sterling in London - Whether contract void for illegality, in the sense of section 23 of the Contract Law, Cap. 149, as prohibited by sections 3, 9 and 24 of the Exchange Control Law, Cap. 199 - Section 35(1) of the latter law and rule 4(1) of the Schedule thereto.

A. Koukounis, for Defendants- Applicants.

A. Kramvis, for Respondent-Plaintiff.

DECISION

The following decision was delivered by:-

PIKIS, P.D.C.:- This is an action for damages [*385] for breach of the terms of a written agreement whereby the plaintiff sold to the defendant for an amount of C£8,000 a piece of immovable property situate at Larnaca, described in the statement of claim. It was stipulated that the balance of the purchase price, after an initial payment of £200, would be paid in sterling in London at the rate of exchange prevailing on the date of payment. In the defence it is alleged that the aforesaid agreement is illegal on the ground that it contravenes the the provisions of the Foreign Exchange Law, Cap. 199. This point of law was set down for determination preliminary to the hearing of the action following a ruling of the Court dated 17th September 1977; and what I must resolve is whether the stipulation providing for the payment of part of the purchase price in sterling renders the contract illegal.

It has been argued on behalf of the defendant that the provisions of the Exchange Control Law, Cap. 199, notably the provisions of sections 3, 9 and 24 prohibit the transaction under consideration and invited me to hold that the agreement is illegal in the sense of section 23 of the Contract Law, Cap. 199 and therefore void. The submission, as I comprehend it, is to the effect that the agreement is forbidden by the law or it is of such a nature that if permitted it would defeat the provisions of the Exchange Control Law. Section 3(2) prohibits, inter alia, acts preparatory to buying and selling of foreign currency whereas section 9(1) of the same law equally prohibits transactions concluded in Cyprus involving [*386] payment outside the country. In my judgment the combined effect of the aforesaid provisions prohibits dealings in the country designed directly or indirectly to result in the payment of the whole or part of the consideration in foreign exchange or out of the scheduled territories. I therefore incline to the view that the stipulation in the contract under consideration provided for the payment of part of the purchase price in foreign exchange viz. the United Kingdom it is contrary to the provisions of the law and could not be achieved save with the permission of the Central Bank.

For the plaintiff it was, contended that the provisions of section 35 offer a conclusive answer to the plea of illegality because (a) by virtue of the provisions of section 35(1) a term must be implied in the aforesaid agreement that the consent of the Central Bank would be sought before payment in the United Kingdom was effected hence the agreement cannot be regarded as offending ab initio the provisions of the law and more important (b) the law itself lays doen that violations of the several provisions of the Exchange Control Law leave unaffected the validity of an agreement by virtue of the provisions of rule 4 of the fourth schedule enacted pursuant to the provisions of section 35 intended to regulate legal proceedings. Rule 4(1) lays down:-

"In any proceedings in a prescribed Court and in any arbitration proceedings, a claim for the recovery of any debt shall not be defeated by reason [*387] only of the debt not being payable without the permission of the Financial Secretary and of that permission not having been given or having been revoked. "

By virtue of the Exchange Control (Prescribed Courts Order) - see Subsidiary Legislation of Cyprus, Volume 2, p. 420 - a District Court is declared to be a prescribed Court. It is a fairly plain legislative provision and no attempt should be made to paraphrase it. To my understanding it lays down that stipulations for the payment of money in contravention to the provisions of the law do not invalidate an otherwise lawful agreement and therefore the law itself excludes the defence of illegality. Elsewhere provision is made regulating the process of execution of a judgment that may necessitate the permission of the Central Bank.

For the aforesaid reasons I find that the plea of illegality cannot be sustained. In substance the law itself declares that an agreement executed in a manner obviating the need to secure the permission of the Central Bank, where necessary under the law, is not illegal and a debt owning under such an agreement may form the subject matter of a Court judgment. Of course a person violating the provisions of the law may suffer penal sanctions but that is of no concern to us in the present proceedings.

I need not pursue the subject any further and decide what the fate of this plea would be had it not been for the provisions of section 35. A series of English [*388] decisions and a number of decisions of the Supreme Court on

the subject of illegal contracts illuminate the ground. (See Vita Food Products Inc. v. Unus Shipping Company (1939) A.C. 277 - St. John Shipping

Corporation v. Joseph Rank Limited (1957) 1 Q.B. 267 - Costas Mavromoustaki v. Iacovos

N. Yeroudes as executor of the will of the deceased Spyros Michaelides (1965) 1 C.L.R. 176 - Andriani A. Iosifakis v. Mohammad Abdul Ghani (1967) 1 C.L.R.

190 - Loizos Chr. Kanaris v. Osman Tosoun (1969) 1 C.L.R.637 - Ailion v. Spiekermann and another (1976) 1 All E.R. 497 - London and Harrogate Securities v. Pitts (1976) 2 All E.R. 184.)

I had myself on at least two previous occasions the opportunity to reflect on the subject of illegality and discuss its implications. (See Stavrou v. Ttoouli and Another (1973) 8 J.S.C. 1019 and Panayi v. Arptemiou and Others

(1976) 3 J.S.C. 510.) It emerges that agreements capable of being legally performed will not be declared as void ab initio unless it appears that it was within the contemplation of the parties at the inception of the contract to violate the law in the course of its performance. On the authority of Iosifakis (supra) the absence of the requisite consent at the time of the conclusion of an agreement does not vitiate the agreement so long as it is feasible under the law to secure such consent at a subsequent stage. And this reasoning would apply with the same force to an agreement of the kind under consideration given that the agreement is otherwise legal and the consent of the Central Bank could validate the mode of [*389] performance envisaged therein. But I need not canvass the matter any further for the reasons already given.

The action will proceed to hearing. The costs incidental to the determination of the preliminary point will be borne by the defendant.

Preliminary point overruled.

Order for costs as above.