30 and 31 October 2001
Counsel: Mr S Gollin for Plaintiff
Mr R Smith / Ms Bloore for Defendant
Date: 30 April 2002


Solicitors: Minter Ellison Rudd Watts (Mr S Gollin) DX CP24061, Auckland
Brookfields (Mr DJ Neutz) DX CP24134, Auckland


[1] Mr Tilialo's brother, Mr Ena Poloa, is a problem gambler. Both Mr Tilialo and Polymer Developments Group Limited are victims of his addiction, Polymer because Mr Poloa stole money to feed his habit and Mr Tilialo because family pride and a misplaced faith in his brother led him, despite his relatively limited means, to agree to replace the misappropriated funds.

[2] Polymer claims the sum of $299,000 from Mr Tilialo, the amount remaining owing under a Deed of Acknowledgement of Debt dated 20 November 2000. The deed required Mr Tilialo to pay the sum of $60,000 immediately on signing the deed with the balance of $314,000 to be repaid by six monthly instalments of $15,000 and a final instalment of $14,000 to be paid by 30 June 2009. In consideration of the payments, Polymer agrees not to commence any legal proceedings whatsoever, either criminal or civil, against Mr Poloa in respect of the outstanding amount.

[3] The initial payment and the first six-monthly instalment were made, although the first instalment was late. It appears that Mr Tilialo unwisely gave the second instalment to Mr Poloa to hand to Polymer but Mr Poloa lost the money gambling. Eventually Polymer issued these proceedings to enforce the deed.

[4] Mr Tilialo alleges that the deed is illegal and unenforceable. He seeks a return of the $75,000 already paid. Polymer alleges that the deed is not illegal as being against public policy and that, even if it is, relief should be afforded Polymer under s7 of the Illegal Contracts Act 1970. The issues therefore are:

[a] Is the deed an illegal contract?

[b] If so, should Polymer or Mr Tilialo be afforded relief under s7 of the Illegal Contracts Act 1970 and what should that relief be?


Background Facts

[5] Some time in October 1998 Polymer became aware that there were some irregularities in its accounts. Mr Flannery, a specialist investigator, was called in as well as a forensic accountant. They came to the conclusion that Mr Poloa had misappropriated funds from Polymer, eventually quantified at $374,000.

[6] Mr Nicholson, the Managing Director of Polymer, wrote an internal memorandum to directors on 29 October 1998 informing them of the fraud. In that memorandum he indicated that an investigator had been retained with the primary aim of recovering as much of the money as possible. The memorandum stated that there had been a confrontation with Mr Poloa the day before, in the presence of his wife, and that Mr Poloa had confessed to the defalcation. It was stated that Mr Poloa was made aware that criminal offences of this nature result in people going to jail. It was then indicated that there had been a further meeting with Mrs Poloa that morning and she had advised that the family would be able to pay at least some of the money back.

[7] The memorandum went on to say that the police had not been called in. This was not because of reluctance to advise the police but because the investigator, Mr Flannery, had advised that, in the early stages, the priority should rather be recovery of the money. The memorandum then went on as follows:

However that does not mean, and it is my concern, that we do not in anyway [sic] prejudice our option to lay criminal proceedings against Mr Poloa.

[8] Mr Nicholson and Mr Flannery say that they met on the evening of 29 October with Mrs Poloa and Mr Tilialo. Mr Tilialo agrees there was a meeting but says it took place one morning. The timing of the meeting appears to me to be of little moment. Mr Tilialo says that pressure was put on him at the meeting to arrange compensation on behalf of the family or criminal proceedings would ensue. Mr Nicholson disputes that any pressure was brought to bear. Mr Flannery's evidence is to the same effect. Mr Flannery says that the suggestion that the family would endeavour to pay compensation came from Mr Tilialo.

[9] I accept Mr Nicholson's and Mr Flannery's evidence that the suggestion that the family could provide compensation came first from Mr Tilialo. The subsequent actions of Mr Tilialo, in preparing the successive proposals for compensation and the final deed, corroborates this finding. I also, however, accept that the proposals made were against a background of a possibility of criminal proceedings. This possibility was made known to Mrs Poloa and Mr Tilialo by Polymer - see, for example, Polymer's 2 November letter discussed below.

[10] On the other hand, Polymer's statements, that it could go to the police and further stating that (without reparation) a prison term was inevitable, were merely statements of fact and cannot in the circumstances be seen as amounting to any improper pressure. There was also evidence from Mr Flannery that he had transmitted concerns to Mr Nicholson about Mr Poloa's mental state and that he tried to arrange help for Mr Poloa. Mrs Poloa in evidence agreed this was the case.

[11] At a meeting on 2 November 1998 a letter was tabled by Mr Tilialo, annexing a repayment proposal. The letter purported to be "for and on behalf of the Poloa Family". It expressed apologies for Mr Poloa's actions and asked that Polymer consider the proposal attached to the letter so that Mr Poloa could be given a second chance to correct his life and find a solution to his addiction.

[12] Mr Tilialo says that the reference to the Poloa family was a reference to the Poloa nuclear family only and not a reference to the wider family (Notes of Evidence p15, lines 10-15). I do not consider that the reference can sensibly be read in that light. Clearly, because of Mr Poloa's gambling problem, the nuclear Poloa family was in no position to provide any financial reparation at all without the aid of the wider family.

[13] The attached proposal set out a payment plan for the repayment of the moneys. It stated that the proposal was to be treated in the strictest confidence and was a first draft, with a formal written agreement to be prepared in the presence of a lawyer. The money was to be paid on the basis that Polymer would not instigate legal proceedings against Mr Poloa. The relevant passage was as follows:

PDG [Polymer] will not instigate legal proceedings or engage another party to instigate legal proceedings against ENA POLOA, upon acceptance of this proposal, otherwise this proposal is null and void and no monies will be paid, as court proceedings will determine the outcome that will best be suited for both parties.

[14] Mr Nicholson replied on behalf of Polymer, also on 2 November. The offer was rejected on the basis that it extended over too long a period and that the initial payment was less than expected. Again there is some conflict of evidence as to whether or not this letter was tabled at a subsequent meeting but again this appears to me to be of no significance. The relevant passages of the letter are as follows:

I had the unpleasant experience last week of having to advise our Chinese investors of the situation and the additional offer we currently have from them is now in jeopardy as a result. They fail to understand why we have not referred the matter to the police immediately.

However we appreciate the responsible attitude exhibited by yourselves and we would hope that we can reach an equitable settlement for both parties and save the further embarrassment of police proceedings.

[15] Polymer received a further written proposal on 10 November from Mr Tilialo. The terms of the letter were similar but with the initial payment and the instalments increased. There is evidence that Mr Nicholson took some initial legal advice about enforceability around this time and it appears that this advice indicated possible difficulties with agreeing not to proceed with criminal sanctions. He was advised to show any written contract to his solicitor before signing.

[16] Mr Nicholson replied on behalf of Polymer on 13 November stating that the 10 November offer was disappointingly low and the repayment period very long. He expressed the hope that the matter could be brought to a conclusion no later than Monday as he needed an arrangement in place before he left for Australia on Tuesday. He also expressed the wish that Mr Poloa would take part in the discussions to "face up to his responsibilities both to us and to his family". Needless to say, this latter plea fell on deaf ears.

[17] No meeting took place before Mr Nicholson left for Australia. On 16 November 1998 a memorandum was sent by Mr Nicholson to the other directors of Polymer giving them signing authority in his absence. In that memorandum it was stated that Mr Flannery continued to chase Mr Tilialo for the payment of the initial sum of $70,000. It was also stated that any agreement should be checked out by Polymer's solicitors to ensure its enforceability:

It doesn't need to be complicated but caveats over property would be useful and enforceability essential, otherwise they can just walk away from the balance.

[18] On 17 November a letter was sent from Polymer's solicitors giving some preliminary advice on enforceability and stating that there could be problems with any provision in an agreement not to report misconduct where it ought, in the public interest, to be reported.

[19] Mr Flannery's evidence is that he was called to a meeting on 20 November by one of the other directors of Polymer, Mr Crowley, who told him he had been contacted by Mr Tilialo to say a settlement was imminent. Mr Tilialo's evidence is that the meeting was one arranged by Mr Flannery who had been putting pressure on him to settle and that he had never spoken to Mr Crowley. He says that he went to the meeting on 20 November expecting to see Mr Nicholson there.

[20] Mr Crowley was not called as a witness and so it is not possible to resolve the question of whether or not he had spoken to Mr Tilialo. On the question of who initiated the meeting, however, I prefer Mr Flannery's evidence that he did not call the meeting. Mr Flannery had been dealing all along with Mr Nicholson. He knew Mr Nicholson was in Australia. He also knew Mr Nicholson had strong views about enforceability and that he wanted any written agreement to be seen by Polymer's legal advisors. Mr Flannery would be unlikely to have insisted on a meeting to finalise arrangements in Mr Nicholson's absence.

[21] At the 20 November meeting Mr Tilialo tabled a letter, a cheque for $60,000 and a Deed of Acknowledgement of Debt which on its face showed that it had been prepared by Singhs, solicitors, Papatoetoe. The letter said that this was his final proposal and any action to process the cheque would be deemed acceptance of the terms set out in the accompanying deed. The fact that Mr Tilialo had the deed prepared in this manner also suggests that the meeting was at his instigation.

[22] The deed requires Mr Tilialo to make the payments set out in para 2 of this judgment. The deed, as first presented, had as clause 4 the following:

In consideration of payments made and received by PDG [Polymer], PDG agree not to commence any legal proceedings whatsoever either criminal or civil for the outstanding amount against Katuni Tilialo or Ena Poloa.

[23] At the request of Mr Flannery the words "Katuni Tilialo or" were deleted before signing. The deed also set out a confidentiality obligation in clause 6:

The parties agree that the contents of this agreement are confidential to the parties and their agents. The parties shall make all reasonable efforts to ensure that this agreement is used for its proper purpose only and that its use is not likely to cause unnecessary embarrassment, distress or inconvenience to another person's reputation, interest or occupation.

[24] Mr Flannery also asked that the following clause be added:

This deed of acknowledgement is accepted on the following proviso;

(i) It is checked as correct by our solicitors Hesketh Henry

(ii) That the provisions of para 4 are confirmed or otherwise.

[25] He also asked for a third sub-paragraph to be added, dealing with the ability of the parties to negotiate early repayment. The conditions relating to Hesketh Henry and early repayment were added to the deed but the second paragraph (ii), relating to "para [clause] 4", was deleted before signing. Mr Tilialo does not specifically recollect why that paragraph was deleted but, on a question from the Bench, said he would have insisted on the deletion as it would have negated the intention not to go to the police in the event compensation was paid (Notes of Evidence p.28 lines 34-29). Polymer made at least two attempts to have its solicitors check the agreement in accordance with para (i) but no reply was received.

[26] There is some conflict in the evidence as to whether or not Polymer in fact wished to retain its ability to report the matter to the Police. I have not felt it necessary to resolve this conflict as the written deed was entered into and it is that written deed that is in question and not any antecedent negotiations or subjective intentions (at least for the first issue of whether the contract is illegal). I do note that certainly Mr Nicholson appears to have been uncertain whether he wished the matter to be put before the Police, given he had regarded Mr Poloa as a personal friend. This ambivalence may account for what can be seen as inconsistencies in his position which carried through to his evidence (see, for example, his memorandum of 29 October 1998 as compared to the letter of 2 November - see paras 7 and 14 above).

[27] Finally I note that it was not suggested by Mr Tilialo that the misappropriations did not take place and no challenge has been made to the quantum alleged to have been misappropriated. Mr Flannery's report on the defalcations was placed in evidence but was not referred to extensively by either party. For the purposes of this case then these matters are taken as proved. It also appears common ground that the defalcation caused, and continues to cause, Polymer severe financial difficulties. Equally it appears clear from the affidavit of Mr Tilialo, dated 9 November 2001, that his financial position is poor, despite his relatively high salary.


Is the Deed an Illegal Contract?

[28] The first issue to be decided is whether the deed in question is an illegal contract. Mr Tilialo submits that it comes within one of the common law heads of illegality, being a contract that interferes with the course of justice. This category of illegality embraces contracts where mere entry amounts to the perversion of the course of justice such as contracts to give false evidence. It also, however, has traditionally been seen as embracing contracts which interfere with the course of public justice, such as contracts to stifle prosecutions. Mr Tilialo submits that the deed falls into that latter category as it purports to prevent a criminal prosecution of Mr Poloa in exchange for a payment of money by Mr Tilialo to Polymer.

[29] Polymer, on the other hand, submits that the deed is not an illegal contract to stifle a prosecution, first because the deed does not on its face prevent a prosecution and, secondly because, even if it does, the offence which would be the subject of any prosecution is not of a public nature.

[30] As to whether the deed does prevent a prosecution, Polymer relied heavily on the history of the negotiations between the parties and, in particular, the fact that the first time the word "criminal" was used was in clause 4 of the deed. Further it points to the fact that the deed was not drafted by Polymer but was drafted by Singh & Co on behalf of Mr Tilialo. It was presented at a meeting when Mr Tilialo must have known that Mr Nicholson would be absent and Mr Flannery's evidence was that it was presented on a "take it or leave it" basis.

[31] Polymer's approach is misconceived. In this case there is a written deed and antecedent negotiations cannot be used as an aid to interpretation of that deed. Few of the matters raised by Polymer could even be taken account in determining the factual matrix - see for example Boat Park Ltd v. Hutchinson [1999] 2 NZLR 74. I do note, however, in response to the suggestion that criminal proceedings were first mentioned in clause 4 of the deed, that Polymer's letter of 2 November did refer to the hope that an equitable settlement could be reached which would save the "further embarrassment of police proceedings".

[32] Polymer further submits that clause 4 of the deed on its face does not preclude Polymer from laying a complaint with the police regarding Mr Poloa's actions and clause 6 merely requires the parties to keep the contents of the agreement confidential and not the misappropriation itself. Clause 4 records Polymer's agreement not to commence any legal proceedings whatsoever either criminal or civil for the outstanding amount. Polymer first submits that the clause is meaningless as, except for private prosecutions, it is the Crown and not Polymer which would commence criminal proceedings. In addition, the relevant criminal prosecution would be in relation to the act of theft or misappropriation perpetrated by Mr Poloa. It would not be correct to speak of commencing criminal proceedings for the amount outstanding. Rather the use of such a term is more appropriate to a prohibition on Polymer seeking recovery of the debt from Mr Poloa, either through a civil claim or, in the context of a criminal prosecution, by claiming reparation.

[33] Such an interpretation, it was submitted, does not preclude Polymer from laying a complaint with the police or even from commencing a private criminal prosecution for the misappropriation perpetrated by Mr Poloa (as distinct from proceedings related to the loss arising as a consequence of that theft). In any event, it was submitted, the deed was a document prepared by Mr Tilialo's solicitors and thus the contra proferentem rule would apply against Mr Tilialo.

[34] The first point about Polymer's submissions is that the word "criminal" must be given some meaning. It could certainly be interpreted as applying to a private prosecution as, in the case of a private prosecution, Polymer would be commencing that private prosecution. Although it is not strictly correct to speak of commencing criminal proceedings "for the amount outstanding", nevertheless, in the context, it would not be straining the words to interpret that as applying to a prohibition of a private prosecution for the misappropriation. On the other hand it would be straining the words to suggest, as Polymer did, that they merely preclude Polymer seeking reparation. Seeking reparation in the context of a criminal prosecution brought by the Crown would not require Polymer to commence proceedings and indeed, under s11 of the Criminal Justice Act 1985, the Court is obliged to consider imposing a sentence of reparation in every case.

[35] There was also a submission by Polymer that clause 4, as originally drafted, included references to Mr Tilialo in addition to Mr Poloa and, during the course of negotiations and at Mr Flannery's request, Mr Tilialo's name was deleted. Polymer submits that the fact that Mr Tilialo's name was included suggests that, in drafting the clause, it was not intended that it record any restriction on Polymer laying a criminal complaint as one could not have been brought in relation to Mr Tilialo. This is a matter relating to prior negotiations and not a matter that can be taken into account in interpreting clause 4 of the deed.

[36] In respect of the submission that the clause does not specifically preclude Polymer from laying a complaint with the Police, it is certainly true that it does not do so explicitly. One possible argument is that a complaint to the police could be seen as "commencing" a prosecution. In the case of a prosecution taken by the Crown a complaint to the police would be the only act necessary on Polymer's part for proceedings to be commenced. This does, however, appear a very strained interpretation and would not be the one I would favour. On balance, I do not consider that clause 4 prohibits Polymer from informing the police about Mr Poloa's defalcations. The situation may have been different if Polymer rather than Mr Tilialo had drafted the deed, given the contra proferentem rule.

[37] The Courts have, however, not been averse to implying a term that prosecution would not ensue into arrangements entered into against the background of possible criminal proceedings, and sometimes in circumstances which would not normally appear to justify implying a term into a contract. For example in Mutual Finance v. John Wetton & Sons [1937] 2 KB 389, Parker J at 395 held that a term that there would be no prosecution was implied even though there was no direct threat of prosecution. It was enough, he said, if there was a desire to avoid a prosecution and that desire was known to the other party. That case, however, concerned a guarantee given by a family member to save a father (who was in a delicate state of health) from the shock of the prosecution of his son. It was also decided on the ground of undue influence which was not at issue here. Equally, in the case of Jones v. Merionethshire Permanent Benefit Building Society [1892] 1 Ch 173 the Court inquired into the arrangements between the parties and implied a term or condition that prosecution would not ensue. In that case promissory notes provided by relatives of an embezzler were accepted by the Building Society knowing they were tendered to avoid a prosecution but without informing the relatives they were accepted on any other basis.

[38] Given the public policy considerations involved it is probably appropriate to take a more liberal approach to implying terms into contracts made against a background of the possibility of criminal proceedings. I note, however, that such terms were not universally implied. In the case of McClathcie v. Haslam (1892) 65 LT 691 a wife did not succeed in her action to set aside a mortgage over her property to which she had agreed. The mortgage was to secure moneys which had been misappropriated by her husband while employed as secretary of a land society. The same judges who heard Jones (supra) upheld the security on the grounds that there was no agreement (either express or implied) not to prosecute. As that was the case and, in the absence of undue influence, the agreement could not be impeached. Fry L J said, even if the directors knew the husband may have been liable to prosecution and the wife the same, if she of her own will (and with appropriate advice) made a sacrifice for the protection of her husband that is not pressure and not a bargain. The other judges made similar points.

[39] The question therefore is whether a term prohibiting Polymer from reporting the misappropriations could be implied into the current deed. The facts in this case appear more aligned with the facts in McClathcie than with those in Mutual Finance and Jones. However, the explicit reference to "criminal" proceedings in the deed itself and possibly the reference to police proceedings in the letter of 2 November may provide an argument for implying in such a term. On balance I would not imply such a term into the deed. Again, the situation may have been different if Polymer had drafted the deed and Mr Tilialo had not had the opportunity to take legal advice.

[40] This judgment therefore proceeds on the basis that clause 4 purports to prevent Polymer from instituting a private criminal prosecution but does not prohibit Polymer from informing the police about Mr Poloa's misappropriations. This finding still means that Polymer's first submission - that the deed does not purport to stifle a prosecution - fails, as the deed contains an agreement not to institute a private prosecution.

[41] It is necessary, therefore, to examine whether a contract containing such a provision is illegal. This entails, in particular, an examination of Polymer's second submission that, even if the deed does prevent the prosecution of Mr Poloa, his offence was not of a public character and therefore a contract to stifle its prosecution is not illegal. In order to examine this submission I first examine the law as it developed in England and Scotland. I then discuss the caselaw in New Zealand and following this, discuss whether the deed is illegal in the light of the current law in New Zealand.


English and Scottish Caselaw

[42] Before the passage of the Criminal Law Act 1967 the law in the United Kingdom on agreements to stifle prosecutions was clear, even though it was not so easy to apply in practice. An agreement not to take criminal proceedings was illegal if the crime was either a misdemeanour of a public character or a felony (and indeed, if the crime were a felony, there would also be criminal liability for compounding a felony). If the crime were a misdemeanour of a private character, however, such a compromise could be valid.

[43] Defining what could be classified as a misdemeanour of a private character was more problematical. One test suggested was whether the wronged party could freely choose between taking civil or criminal proceedings. This would have meant a wide range of misdemeanours that could be the subject of compromise. It is likely, however, that the categories of misdemeanour able to be compromised in this manner were in fact much more restricted, including only very minor offences such as some minor non-aggravated assaults (see McGregor v. McGregor (1888) 21 QBD 424), trade mark offences (see Fisher v. Appollinaris Co (1875) 10 Ch App 297) or, in some circumstances, criminal libel (see Weld-Blundell v. Stephens [1919] 1 KB 520).

[44] Public nuisance, on the other hand, was held to be a misdemeanour of a public character in Windhill Local Board of Health v. Vint (1890) 45 ChD 351, as was obtaining money by false pretences in Clubb v. Hutson (1865) 18 CB (NS) 414. It seems likely that, even where a compromise was valid, it in most cases could only bind the party and could not prevent the police or anyone else from prosecuting - see the Australian case of Kerridge v. Simmonds (1906) 4 CLR 253.

[45] It is worth noting at this point that there was a further exception to the rule. A compromise whereby a party agreed not to prosecute a person could be valid where the purpose was to acquire information to prevent future offences being committed against that party. On the other hand, an agreement not to disclose information to a third party about offences committed against that third party (whatever the motive) was against public policy - see Howard v. Odhams Press Ltd [1938] 1 KB 1.

[46] A number of reasons have been put forward for the rule prohibiting most agreements to stifle prosecutions. One rationale for the prohibition was set out by Bowen LJ in Jones (supra) at 183-4 as being to ensure that decisions whether to prosecute were not influenced by an indirect motive. Reparation (whether by the offender or a relative) could well be a matter that could be taken into account in a decision not to prosecute but there must be no bargain made about it. He said:

The duty to prosecute, or not to prosecute, is a social and not a legal duty, which depends on the circumstances of each case. It cannot be said that it is a moral duty to prosecute in all cases. The matter depends on considerations, which vary according to each case. But the person who has to act is bound morally to be influenced by no indirect motive. He is morally bound to bring a fair and honest mind to the consideration and to exercise his decision from a sense of duty to himself and others.

What is it that the law requires about the exercise of this moral duty? It is that it shall not be made a matter of private bargain.

[47] In Keir v. Leeman (1844) 6 QB 308 (affirmed on appeal (1846) 9 QB 371), Denman CJ at 316 stated that a contract to stifle a prosecution where any public interest was involved was illegal, whether the party were innocent or guilty. His concern was that the innocent could be subject to extortion and the guilty screened from prosecution "for a bribe".

[48] In Windhill Local Board of Health v. Vint (1890) 45 ChD 351, Cotton J referred to the rationale of the rule as being to ensure that the administration of the law is not taken out of the hands of the Judges and put into the hands of a private individual.

[49] It has been suggested that the law in England developed in the manner it did because of the importance of private prosecutions at the time. This was in contrast to the situation in Scotland, perhaps explaining the differences that appear to have developed between Scottish and English law. In Scotland courts appear to have been more reluctant to hold agreements to stifle prosecutions illegal where no more than simple compensation was paid and no improper pressure brought to bear. Lord Salvesen for example in Lamson Paragon Supply Co v. McPhail [1914] SC 73 said that an employer could be seen as acting humanely in agreeing not to prosecute if the loss by an embezzling employee was made good. The crime had injured the employer alone and there was no duty to give information to the police. On the other hand any agreement not to give evidence, should such a prosecution be brought by the police, would be illegal.

[50] Since the passage of the Criminal Law Act 1967 there is a suggestion that the law in England may have changed. Section 5(1) of that Act abolished the offence of compounding a felony and replaced it with a new offence of concealing an arrestable offence. The section provides, however, that the new offence is only committed by a person who agrees not to disclose information for a consideration other than making good the loss or injury caused by the offence or the making of reasonable compensation for the loss or injury.

[51] Treitel on The Law of Contract (10th ed., 1999) suggests at 408-9 that, after the passage of the 1967 Act, there are now three views that can be taken on the law on agreements to stifle prosecutions. The first view is that such an agreement may still be illegal if the crime is not of a purely private character (as the law was before but presumably now extending to all offences). The second view is that, if the only consideration is the making good of any loss, then this type of agreement does not harm the public interest and should be upheld. The final view is that the legality of an agreement to stifle a prosecution should depend on whether it is in the public interest that the prosecution be brought. Treitel states at 409 that the third view is the best view.

[52] Views expressed in some other contract texts differ. For example Anson's Law of Contract (27th ed., 1998) at 354 suggests that the 1967 Act did not change the law at all as the rationale for the rule lies in public policy and was not dependent upon the fact that the agreement itself constituted the offence of compounding a felony. Cheshire, Fifoot & Furmston's Law of Contract (13th ed., 1996) at 382-383 tentatively suggests that, as a result of the Act, the public-private dichotomy which previously applied only to misdemeanours in theory may now be applied to all offences. On balance it is concluded that merely taking an agreement out of the ambit of the criminal law does not by itself indicate that it should be enforced.

[53] A J Hudson in 'Contractual Compromises of Criminal Liability' (1980) 43 MLR 532 at 542 suggests that it is time for the law to develop in this area and for agreements to stifle prosecutions to be regarded as valid unless some ground of public interest was shown for avoiding them, especially given the diminution of the importance of private prosecutions. He points out that in Victorian times the criminal law was little concerned either to mitigate the stigma of criminal proceedings or to compensate victims of crime. This has changed and the law in the area of contracts to stifle prosecutions should change accordingly. He does, however, suggest that such contracts should be subject to the scrutiny of the courts to avoid abuse. Chitty on Contracts (28th ed., 1999) at 855 puts forward a similar view and suggests the courts should only strike down these compromises which are manifestly contrary to the public interest.


New Zealand Caselaw

[54] There is case law in New Zealand holding that agreements to stifle prosecutions are illegal. The public/private distinction, discussed above, is also one that has been accepted by the Courts here. This case law is both before the passage of the Illegal Contracts Act, 1970 - see Banks v. The Cheltenham Co-operative Dairy Company (Limited) [1910] 29 NZLR 979 - and after - see the cases discussed below.

[55] In Slater v. Mall Finance & Investment Co Ltd [1976] 2 NZLR 1 White J stated that any contract having even a slight tendency to affect the administration of justice was illegal, but only where the offence is a matter of public concern being one which affects the interests of the public. He referred to s5 of the Criminal Law Act 1967 (UK) and appeared to assume that that section changed the law in the UK. However, he said at 5 that there is no similar provision in New Zealand and it is accordingly necessary to apply the earlier principles.

[56] The case concerned an application for a withdrawal of a caveat. The caveat related to a mortgage given by Ms Slater because of misappropriations committed by her de facto partner. White J referred with approval to the decisions in Clubb v. Hutson and in Jones (and in particular to the remarks of Bowen LJ). He held the transaction to be void and granted the application for withdrawal of the caveat.

[57] The case went on appeal and is reported as Mall Finance & Investment Co Ltd v. Slater [1976] 2 NZLR 685. The appeal was allowed on the basis that the removal of a caveat was only proper where it is patently clear it should be removed and it was not patently clear in this case. Richmond P at 686 left open for later consideration whether the judge was correct in holding that the mortgage was contrary to public policy and illegal as a matter of fact and law. It is not entirely clear whether he was leaving open the general question as to whether contracts to stifle prosecutions were illegal or the more limited question whether, as a matter of law and fact, the particular agreement was an agreement to stifle a prosecution. Woodhouse J indicated he was in general agreement with Richmond P.

[58] Cooke J also expressly agreed with Richmond P's judgment but it is clear that he considered it likely that, if the judge was correct and Ms Slater had entered into the agreement to mortgage the property so that her de facto partner was not prosecuted, then this would be founded on illegal consideration and therefore void. He doubted whether it was necessary for the Judge to decide whether in the particular circumstances the bargain did offend against public policy - i.e. the third of the alternatives set out by Treitel (supra). He added, at 689, that a Court would reach a view that a contract was illegal with less reluctance now because of the discretion to grant relief from the consequences of illegality conferred on the court by the Illegal Contracts Act 1970.

[59] The next case of note is Barsdell v. Kerr [1979] 2 NZLR 731 where the question was whether payment on a promissory note should be made by the executor of an estate. The note was given in relation to a debt that allegedly arose as a result of sums paid to procure the silence of the husbands of women who had been sexually assaulted by the deceased. Quilliam J said, at 737, that it is now well established that a contract to stifle a prosecution is void. The consideration for the note was thus an illegal consideration and the note was unenforceable.

[60] The cases in New Zealand at High Court level have, therefore, proceeded on the basis that the law is the same as it was in England before the passage of the Criminal Law Act 1967. There may, however, be some distinguishing features as set out below. The last one may point to there being a greater tendency in New Zealand than in England to find illegality and the first two to there being less reason to do so than in England. The first distinguishing feature is that the Crimes Act 1961 (and earlier Crimes Acts) have never contained a crime of compounding a felony, although in some instances an agreement to stifle a prosecution may fall foul of ss116 and 117 or their predecessors. Although it is true, as Anson's Law of Contract (supra) states, that the justification for the rule in England was not necessarily predicated on the fact that such an agreement constituted a crime, nevertheless it may be an indication that the legislature in New Zealand does not regard such agreements with the same opprobrium as used to be the case as in England. The next point of distinction from the situation, at least in nineteenth century England, is the very limited role of private prosecutions in New Zealand. The final point of distinction is the existence of the Illegal Contracts Act 1970 in New Zealand which may point to a greater tendency to hold contracts to be illegal because of the ability to give relief under s 7 - as suggested by Cooke J (as he then was) in Mall Finance v. Slater (supra).

[61] In order to examine what the law should be in New Zealand it may be helpful to return to first principles. The first point is that there are two types of illegality - illegality imposed by statute and common law illegality. In this case the question is one of common law illegality. Common law illegality is judge-made law and was imposed where it was considered that public policy considerations meant that the freedom to contract should be overridden - see Anson's Law of Contract at 348. This balance between the competing values of freedom to contract and the public interest may change over time.

[62] The Illegal Contracts Act 1970 was intended to cover both statutory and common law illegality - see para 6 of the Report of Contracts and Commercial Law Reform Committee on Illegal Contracts (1969). In addition the statute, by not defining the term "illegal contract", endorsed the matter as being subject to judge-made law. The legislature deliberately left the Act minimalist so that the courts could develop the law in response to changes in society - see Brian Coote, "The Illegal Contracts Act 1970", Law Commission Report No. 25 Contract Statutes Review, 173 at 174. This suggests that the exercise that needs to be performed is an analysis of the particular public policy issues relating to contracts to stifle prosecutions in the current New Zealand context and then a balancing against the principle of freedom to contract.

[63] Few would have any doubt that certain contracts to stifle prosecutions are clearly contrary to public policy. For example, most would agree, for a variety of reasons, that the situation in Callaghan v. O'Sullivan [1925] VLR 664, whereby money was paid by an alleged criminal to police officers so that they would not institute a prosecution, is against public policy. Even fewer would argue that the freedom to contract should override the public policy considerations in such a case. The question really is whether this extends to all contracts to stifle prosecutions.

[64] I look first at the line of authority, apparently accepted in New Zealand, that the rule does not extend to agreements to stifle prosecutions for "private" crimes. When the rule was developed in England it applied only to private misdemeanours. As indicated above, the categories of misdemeanour where compromise was available were likely to have been very limited. In addition, it is likely that public attitudes have changed to some of the crimes deemed susceptible of compromise, and in particular assault so that this would now be deemed clearly a public crime.

[65] It may even be that the exception made for minor assaults in England was rather the result of the legislative background where taking criminal proceedings for assault barred future civil proceedings. The courts, therefore, would not allow prosecution for assault without the agreement of the victim unless there were special circumstances to explain the lack of consent - see Hudson, (supra) at 534. The exclusion of assaults therefore may rather have been dictated by procedural as against policy questions.

[66] I must say that I have difficulty in seeing a sensible distinction that can be drawn between public and private crimes. The very fact that something is constituted an offence means that the legislature considers there is a public element involved. The term "private" crime therefore appears meaningless and I do not feel constrained by precedent in rejecting the distinction between private and public crimes (especially given its relatively limited currency in the English authority and despite it also being a distinction drawn in Australia and Canada). I note, however, that in the United States a contract to stifle a prosecution is seen in all cases as being contrary to public policy and illegal, even where the prosecution or proposed prosecution is a misdemeanour - see Corbin on Contracts, volume 6A, para 1421, p 355.

[67] In order to assess whether a different distinction can be drawn it is worth examining the reasons that have been given for the prohibition on contracts to shift prosecutions. There appear to be three main reasons put forward (see paras 46-48 above). These are:-

[a] That contracts to stifle prosecutions should not be subject to private bargains as any decision whether or not to prosecute should be made freely. Such a decision can take into account any reparation, but a person should not bind him or herself to do so - see Jones.

[b] In a related point, that decisions as to whether to prosecute or not should not be in private hands, thus removing large areas of the law from the Court system (and one may add only those cases where there is an ability to pay and a compliant victim) - see Windhill Local Board of Health.

[c] That the innocent should not be subject to extortion and nor should the guilty escape prosecution by means of a bribe - see Keir v. Leeman.

[68] Taking these points in reverse order, there is no doubt that, if an innocent person was being subjected to extortion or a guilty one escaping prosecution by means of a bribe, then such contracts would be contrary to public policy. Equally there is no doubt that the public policy concerns would usually outweigh the freedom to contract in such cases. If contracts were to be distinguished on this basis presumably this would first require the Court to undertake a mini trial process for the assessment of innocence or guilt. This appears inappropriate in a civil context and questions as to the standard and means of proof would clearly arise. In terms of whether a bribe has been paid by the guilty this may involve an easier assessment, at least in purely financial terms. Where, as in this case, the sums to be paid under the deed are significantly lower than the sums misappropriated (taking into account the time value of money) there can be no question of a bribe in the strict sense of the word.

[69] On the other hand, there is no doubt that Polymer, in the absence of the deed, would have had no claim against Mr Tilialo. White J in Slater v. Mill Finance (supra) referred with approval to the case of Williams v. Bayley (1866) LR 1 HL 200 and the remarks of Lord Westbury who suggested that, where a father came to the rescue of his son, the bankers in that case had obtained an unwarranted benefit out of the crime by getting the security of the father. The same could be said in this case. I would not, however, see voluntary payments of misappropriated sums by relatives as being akin to a bribe or as necessarily being contrary to public policy.

[70] Turning now to the second of the reasons given, there is no doubt that it would not be in the public interest for large numbers of cases to be removed from the public justice system. This applies in particular to those cases with a high public interest component - for example where an offender is likely to offend again or where a crime is particularly injurious to public safety. Many would not have the same concerns about offences that could be classified as relatively trivial property offences and one off.

[71] The difficulty in drawing a distinction between crimes based on seriousness is, however, similar to the difficulty in drawing a distinction between private and public crimes. Perceptions can change over time and, while it may be easy to set down cases most would agree to be on either side of the line - for example a violent home invasion case as against an uncharacteristic theft of a small food item by a person in financial difficulties - it is nevertheless very difficult to decide on the line that would be drawn in less obvious cases. This makes it unsatisfactory as a point of distinction.

[72] In any event Mr Poloa's crime can hardly be viewed as trivial. It involved large-scale defalcations by a person in a particular position of trust. There must be a public interest involved in such a case. Polymer suggested that, as it is a purely private company, it should be free to compromise in the manner it did and pointed out that Jones (supra) involved a building society where a more clear public element can be discerned. This does not appear a valid distinction (although it may be one when considering if relief should be granted). There is no guarantee that Mr Poloa would not in the future achieve employment in a more public role or that he would not be placed in charge of charitable or sporting funds (especially given his involvement in sport coaching).

[73] The first reason put forward for holding agreements to stifle prosecutions as illegal would probably, given I have rejected the distinction between public and private crimes and the one between serious and trivial crimes, lead to the conclusion that all such contracts should be illegal. As said by Bowen LJ in Jones (supra) the public interest requires a party's mind to be free to consider all relevant factors (including any reparation) in deciding whether or not to prosecute. If nothing else, it is unsatisfactory for a party to have bound him or herself to the course of action of not prosecuting on the basis of information held at the time of an agreement where that information is subsequently shown to be incorrect - for example a bargain made on the erroneous assumption that it is the offender's first offence. In addition, an aggrieved party required by an offender not to prosecute in order to receive reparation would not be able to take the wider public interest into account in weighing the decision whether or not to prosecute without risking losing that reparation. The guilty party, by making such agreement the subject of a bargain, could be seen as having achieved the result of not being prosecuted by pressure, even if only reparation is given.

[74] The conclusion, therefore, is that there are no really sensible distinctions that can be drawn between different types of contract to stifle prosecutions. There are some contracts to stifle prosecutions that are clearly contrary to public policy and it is difficult to see the freedom to contract could ever override the public interest involved in those cases. In other cases the public policy concerns may not be so strong but I agree with Hudson (see para 53 above) that all such contracts should at least be scrutinised by the courts. Holding them to be illegal allows this. There is much force in Cooke J's remarks in Mall Finance v. Slater (supra) to the effect that there may be less reason to make such distinctions given the existence of the relief provisions in the Illegal Contracts Act. The balancing of freedom to contract and the strength or otherwise of the public policy considerations in these cases can be done at the time of a decision about relief under s 7 of the Illegal Contracts Act 1970.

[75] It is true that in the New Zealand context there is a very limited role of private prosecutions and clause 4 of the deed only prohibits private prosecutions. There may in this context, however, still be public policy issues involved - for example a concern to protect the innocent from extortion and to ensure the guilty do not achieve this result by way of a bribe. Even contracts not to institute private prosecutions should still therefore, under the principles set out above, be deemed illegal so that they can be scrutinised by the Court and decisions as to relief can be made. It follows that Polymer's arguments fail on this head.

[76] It is worth mentioning at this point that clause 6, the confidentiality clause, relates solely to confidentiality as to the terms of the deed and Mr Tilialo's involvement. If that clause could have been interpreted as requiring confidentiality as to the crime itself (particularly if this extended to prohibiting Polymer answering inquiries by the police) it would clearly have been an illegal term as being against public policy.

[77] The deed is held to be an illegal contract as it contains an illegal term - that is it contains in clause 4 an agreement not to commence a private prosecution. This means that the deed, in accordance with s6(1) of the Illegal Contracts Act, is of no effect.


Should Section 7 Relief be granted?

[78] The next question is whether relief should be granted under s7 of the Illegal Contracts Act. The main submission for Mr Tilialo on this head is that the money he has already paid should be refunded and relief denied to Polymer. He submits further that the Court's discretion in terms of granting relief to Polymer is limited by the proviso to s7(3) which states that:-

A Court shall not grant relief if it considers that to do so would not be in the public interest.

[79] It was submitted that this proviso will nearly always prevent a contract from being enforced in a case of common law illegality and, in particular, where an agreement seeks to stifle a criminal prosecution. This approach has received some support at High Court level. White J in Slater v. Mall Finance (supra) refused relief under s7 of the Illegal Contracts Act 1990 on the basis of the proviso to s7. His view was (at 8) that, as he had found that the transaction was illegal on the grounds that it was against public policy, this was not a case where relief can be granted. Equally, Quilliam J in Barsdell v. Kerr (supra) stated (at 737-738) that he considered it would be wrong in principle to grant relief under s7 where a contract was illegal from the outset as being contrary to public policy.

[80] This approach has not found favour with some commentators - see for example, Brian Coote, "The Contracts and Commercial Law Reform Committee and the Contract Statutes" (1998) 13 NZULR 160, 163. Andrew Beck in his article "Illegality and the Courts' Discretion: The New Zealand Illegal Contracts Act in Action" (1989) 13 NZULR 389 is less clearly opposed. He suggests that, because of the drastic nature of the proviso, it should apply only in exceptional circumstances (at 397) but seems later to suggest that the public interest would tend to be against enforcing contracts which are contrary to public policy, even if technically relief can be granted in cases of common law illegality (at 399).

[81] White J's finding in relation to s7(3) of the Illegal Contracts Act in Slater v. Mall Finance (supra) also did not find favour in the Court of Appeal. Richmond P in Mall Finance v. Slater rejected the notion that a finding of illegality because of an agreement to stifle a prosecution automatically led to a finding that the granting of relief would not be in the public interest. He said, at 687, that the public interest referred to in s7(3) can only be determined by the court after considering the various matters referred to earlier in the same subsection, namely the conduct of the parties and such other matters as it thinks proper, as well as the general public policy recognised at common law.

[82] Equally, Quilliam J's finding in Barsdell v. Kerr was doubted in Phillips v. Foster [1991] 3 NZLR 263. In that case the Court of Appeal held that the contract at issue was not an illegal contract. Cooke J (as he then was), however, went on to observe that, if it had been, he would have validated it. He stated that Quilliam J's finding in relation to s7(3) went too far. At 265 he said that the jurisdiction in the Act is in terms wide enough to cover contracts that were illegal from the outset as being contrary to public policy and that the legislature would have intended the discretionary jurisdiction of the Court to extend to all kinds of illegal contracts. Indeed he pointed to the Report of the Contracts and Commercial Law Reform Committee on Illegal Contracts (1969) where it was concluded that contracts illegal at common law should not be excluded from the reforms proposed in the report. It follows that Polymer's arguments fail on this head and the deed is held to be an illegal contract as it contains an illegal term - that is it contains in clause 4 an agreement not to commence a private prosecution. Cooke J made it clear, however, that he did not differ from Quilliam J's findings on what he called the apparently gross case of illegality at issue in Bardell v. Kerr.

[83] Although the remarks of Richmond P in Mall Finance v. Slater and Cooke J (as he was then) in Phillips v. Foster were obiter, it is clear that they did not consider that the proviso to s7(3) would prevent relief being given in the case of common law illegality. In my view and, with respect, this must be correct. The Act does not distinguish between common law and statutory illegality. There is no reason why the Courts should read into the Act such a distinction. The proviso to s7(3) merely means that the public interest must be taken into account when deciding whether or not to grant relief.

[84] I note that in para 13 of the Report of the Contracts and Commercial Law Reform Committee on Illegal Contracts (1969) sets out the purpose of the proviso as being to ensure that the courts considered not only the situation inter partes but also the public interest. This may be why Richmond P in Mall Finance suggested that the public interest in this context can only be determined in the context of a consideration of all the matters as set out in s7(3).

[85] The drafting of the proviso, however, is worded as a total bar to relief with the overriding consideration being the public interest rather than requiring a balancing exercise. Any such balancing exercise would appear to come later when the court considers the specific factors in s7(3)(a) - (c). Nevertheless, consideration of the public interest in the context of the proviso is a different exercise from that of deciding whether a contract is illegal in the first place. While clearly, under common law heads of legality, public policy issues drive the decision as to whether a contract is illegal, when deciding whether to grant relief public policy can be rather a blunt instrument. The first part of the exercise is to decide whether particular categories of contract should be illegal on public policy grounds. It is not to decide whether an individual contract should be refused relief because it would be against public interest to grant relief.

[86] Some contracts designed to interfere with the course of justice in themselves could lead to criminal prosecution. In such cases it may be that relief would be against the public interest, except in exceptional circumstances. Other such contracts do not reach this degree of illegality and the current deed falls into this category. Indeed, in the case of contracts to stifle prosecutions, there is much force in the argument that one of the public policy reasons for making such contracts illegal is only to give the Courts supervisory jurisdiction over them, for example to ensure that the innocent are not exploited on the basis of trumped up charges or that the guilty do not escape prosecution through bribery and there is no suggestion that either applies in this case. In addition, the deed in this case only contains a prohibition on instituting a private prosecution. Given the very limited role of private prosecutions in New Zealand, this does not suggest strong public interest in denying relief. The submission of Mr Tilialo that relief cannot be granted to Polymer is therefore rejected.

[87] It remains now to consider whether relief should be granted. Under s7(1) a court can grant relief by way of restitution, compensation, variation or validation of the contract in whole or in part or in any other manner the court considers just. Under s7(3)(a)-(c) the court, in the case of common law illegality, must have regard to the conduct of the parties and such other matters as it thinks proper. At this stage I consider a court is able to balance the freedom to contract against the public policy concerns in the particular instance.

[88] In considering whether to grant relief to Polymer, the Court must first have regard to the conduct of the parties. Polymer's submission is that at all times it acted in good faith in the face of the agreement recorded in a document drawn up by a lawyer and presented to it by Mr Tilialo. It was submitted, therefore, that Mr Tilialo is more culpable than Polymer for the deed being unenforceable for illegality and that this should be a highly relevant factor in deciding whether to grant Polymer relief under s7 of the Act. If this is not accepted, Polymer argues at the least for a halfway house whereby it can keep the payments that have already been made to it on the basis that it acted in good faith and on the assumption that the document was enforceable.

[89] Deciding which party is more to blame for an arrangement may be an appropriate task. In Broadlands Rentals Ltd v. R O Bull Ltd [1976] 2 NZLR 595 it was made clear by the Court of Appeal, admittedly in the context of statutory illegality, that s7 was not designed to furnish an additional means of punishing parties where penalties were already imposed by statutes. Cooke and Woodhouse JJ at 600 did note, however, that inter partes it may well be reasonable to exercise the discretion under s7 to ensure that the party more culpable does not profit at the expense of the other.

[90] In this case the particular conduct I have had regard to is set out below and would favour relief being granted to Polymer. I note that, at this stage of the exercise, I consider I am able to have regard to the course of negotiation between the parties - indeed it would appear highly relevant. The relevant conduct is as follows:

[a] The deed, as with the two written proposals preceding it, were presented and prepared by Mr Tilialo and not Polymer.

[b] The deed was drafted by solicitors instructed by Mr Tilialo. He, therefore, had the opportunity to take appropriate legal advice on the deed and to have his interests protected. That Mr Tilialo chose rather to use Singhs as a typing service rather than utilising its legal services was his choice. On the face of the deed it would have appeared to Polymer that Mr Tilialo had taken legal advice. In addition, Mr Tilialo is a person who was very used to legal documentation and to consulting solicitors in the course of his work.

[c] Polymer signed the deed in the form presented under pressure from Mr Tilialo to do so at a meeting where Mr Nicholson was not present and at a time when Mr Tilialo would have been aware of that. He thus deprived Polymer of the opportunity to take legal advice on the final form of the deed before signing. It does appear, however, from the letter of 2 November that Polymer had, at least in some discussions with Mr Tilialo, suggested that a complaint would not be laid with the police should full reparation be made. The complaint by Polymer that the term criminal was slipped in at the last minute is therefore not sustainable.

[d] Polymer (through Mr Flannery) tried to protect itself by adding a clause that acceptance was on the proviso that it was checked as correct by Polymer's solicitors and that para [clause] 4 was confirmed or otherwise. The latter point was removed before signing but the proviso allowing Polymer to consult its solicitors was retained. Polymer never in fact received any advice from its solicitors. Of course, the fact that it did not receive any such advice and did not seek advice from other solicitors cannot be laid at Mr Tilialo's door. On the other hand it is very doubtful that the clause allowing the deed to be checked as correct by its solicitors would have enabled the offending portion of the deed to be removed.

[91] The above factors mean that the deed was freely entered into by Mr Tilialo. He at least had had the opportunity to take legal advice on it, an opportunity he contrived to deny to Polymer before it signed. In addition, the document was drafted by solicitors instructed by Mr Tilialo and he was the first to suggest that the family provide compensation.

[92] In relation to other matters to be taken into account I note there has never been a suggestion that Mr Poloa did not misappropriate the funds. For present purposes this can therefore be assumed. Neither is there a suggestion that the amounts to be paid under the deed were other than much less than the amounts misappropriated (taking into account the time value of money).

[93] A further relevant factor is that we are dealing with two innocent parties, both victims in their different ways of Mr Poloa's addiction. If Mr Tilialo had been the offender relief to Polymer would have been more likely. Offenders should not think they can, with impunity, offer reparation to avoid criminal prosecution in the belief they will never have to pay. Because Mr Tilialo is an innocent party (at least insofar as the defalcations are concerned) his poor financial circumstances will be given more weight than they otherwise might. It is noted, however, that he receives a relatively high salary and thus presumably has prospects of substantially improving on that financial position. Polymer's financial stability is also precarious as a direct result of Mr Poloa's actions.

[94] The final part of the exercise in this case must be to balance the principle of freedom of contract with the public policy issues involved. Under our current system of justice there is always a public interest in the prosecution of any crime. There is, however, no legal duty to bring a private prosecution or even to report a crime to the police. In this case there is no element of public money involved. Mr Poloa, in addition, is the victim of a gambling addiction. While the public interest may call for future employers or the public generally to be put on notice, it may equally be a case where the public would rather Mr Poloa received help (as indeed Mr Flannery attempted to arrange) rather than punishment. Proponents of restorative justice argue that our justice system puts too much emphasis on the view that crime is an offence against the State with the process of justice controlled by the State. It also emphasis retribution rather than seeing offending as a violation of people and relationships, creating an obligation to make things right - see e.g. Helen Bowen and Jim Consedine, Restorative Justice: Contemporary Themes and Practice, (1998), at 18-24, 36-44.

[95] On the other hand, Mr Poloa's offence was a serious one - the defalcation of large sums by a person in a position of trust. In addition, his gambling addiction could make future offending more likely. The justice system can facilitate the provision of help for offenders and is beginning to accommodate restorative justice principles. Restorative justice, to be successful, needs a properly controlled and structured process. It also requires involvement of the offender. In this case, Mr Poloa has taken no steps to make amends or even to meet with Polymer. His only contribution appears to have been to gamble away the second instalment under the deed. There are therefore in this case strong public policy reasons for Mr Poloa's offending to come to the attention of the police.

[96] Polymer has obviously decided not to inform the police up to now, even though it was not required by the deed to refrain from doing so. It can of course reconsider that decision at any point but it is under no legal obligation to inform the police. There is, however, a moral duty to report serious offences to the police. Employers who do not report cases of fraud to the police run the risk of releasing a dishonest person into the community potentially to harm other unsuspecting businesses or organisations who place that person in a position of trust (see for example the remarks in the KPMG Fraud Survey 2002, Executive Summary, ii). Employers should bear this potential harm to the community in mind when deciding whether or not to report offending. By accepting compromises of this sort they may be putting their interests, such as that of reparation and avoidance of bad publicity for example, over the interests of the public.

[97] In practical terms refusing relief may make Polymer more likely to report the matter to the police. On the other hand, the deed did not prevent Polymer informing the police of the defalcations. It hardly seems just to refuse relief to achieve a result that is not prohibited by the deed. Polymer, in the light of a reconsideration of its moral duty as described above, may decide to report the offending or indeed the offending may now in any event come to the attention of the police through these Court proceedings.

[98] The deed merely prohibits the bringing of a private prosecution. There is a very limited role for private prosecutions in New Zealand and the public interest involved in ensuring bargains are not made to prohibit private prosecutions is weak. It is true that Mr Tilialo is innocent of the defalcations but he entered into the bargain freely. In such circumstances the balance appears to be towards the upholding of the freedom to contract.

[99] Most of the factors set out above point to relief being granted to Polymer. The next question is the form that relief should take. Polymer submits that relief should be granted to it by severing the reference to criminal proceedings, leaving the bargain as one that is an agreement not to institute civil proceedings in return for a sum of money, an agreement that would be perfectly enforceable. It is clear that relief by way of severance from a contract of offending elements is available but it may not be appropriate if it means creating a one sided bargain - see Edwards v. O'Connor [1989] 3 NZLR 448 at 461.

[100] Mr Tilialo's submission is that granting severance would create a one-sided bargain as he never would have entered into the deed if it only covered civil proceedings because his primary aim was to help his brother and the family name by avoiding criminal proceedings. However, the only thing the deed prevents is a private prosecution. Polymer would presumably be much more likely to institute civil proceedings than it would be to embark on a private prosecution. I do not accept, therefore, the proposition that there would be a one sided bargain if severance is granted. It may be that Mr Tilialo thought the deed was wider than this but that is irrelevant for these purposes. Severance alone, however, may not be entirely appropriate after taking into account Mr Tilialo's poor financial circumstances.

[101] It seems to me, taking into account those poor financial circumstances and the fact that Mr Tilialo himself was not guilty of the defalcations, that some relief should be accorded to Mr Tilialo to reduce the payments he has to make and to give him time to recover financially before being required to make any further payment.


Summary, Result and Costs

[102] The deed at issue contains a term prohibiting Polymer from instituting a private prosecution. This is against public policy and is an illegal term. This makes the deed an illegal contract and of no effect.

[103] The finding above was that Mr Tilialo's conduct, in having the deed drafted by solicitors instructed by him and presenting it to Polymer in a manner that deprived it of an opportunity to take legal advice, pointed to relief being granted to Polymer as Mr Tilialo must bear primary responsibility for the illegality. The deed, however, only prevents a private prosecution being brought and there is no strong public interest in such prosecutions. Although there is a strong public interest in Mr Poloa's defalcations coming to the attention of the police, the deed does not prohibit Polymer from informing the police. In such circumstances the balancing of the freedom to contract against the public interest comes out in favour of the freedom to contract. This of course would not always be the case.

[104] Relief is granted to Polymer by way of severance of the reference to criminal proceedings in clause 4 of the deed and also by way of validation and variation of the deed. The deed is validated to the extent of the payments already made, meaning that Polymer does not have to repay those amounts.

[105] As Mr Tilialo's financial circumstances are not good and it was his brother and not he who was the offender, relief is also granted to Mr Tilialo. The further sum Mr Tilialo is required to pay under the deed is reduced to $50,000 (being three instalments plus an extra $5000 to provide some compensation for the delays in payment). This sum must be paid on or before 31 March 2003.

[106] There is one other amendment I would make to the deed and that is to make it clear that the confidentiality clause does not prevent Polymer from informing the police, and any other person having a legitimate interest, about Mr Poloa's defalcations. Any employer contemplating entering into a similar contract for reparation may be advised to include a similar clause. The deed is thus varied by adding to clause 6

For the avoidance of doubt this clause shall not restrict PDG [Polymer] from providing information to any law enforcement agency about Mr Poloa's misappropriations. In addition this clause shall not prevent PDG [Polymer] from informing any other person about Mr Poloa's misappropriations if it considers that person has a legitimate interest in such information.

[107] As the finding was that Mr Tilialo bore the greater responsibility for the illegality Polymer can be seen as having largely succeeded. Costs of 2B plus reasonable disbursements are therefore awarded in its favour.


Glazebrook J


Delivered at pm on 30 April 2002