Illegal contracts

Law of Contract
Unlawful contracts
including illegal contracts, void contracts
and restraint of trade
BCL 2005-2006
• Text
Clark chapters 14-15
• Reference
McD chapters 15-16
Unlawfulness - definition
• If a contract conflicts with the criminal
law …
• … or with other important legal
principles …
• … then the court may not give full effect
to the contract …
• … or may even give it no effect at all
Who makes the objection?
• If there is a clear illegality, the court itself
must raise the point …
 …even if neither party wants this to
• But usually one party is raising the point
tactically …
 … as an excuse to escape the
A matter of balance
• “Unlawfulness” is an objection based
on public policy
• But upholding commercial contracts is
also a goal of policy
• So the court is often engaged in
balancing different policies …
• … especially where the illegality is
relatively trivial
Effect of illegality?
“Balancing” can be complex
Possibilities solutions are:
• All remedies denied
• Some are denied, eg severance of
the illegal part
• Remedies on the contract are
denied, but non-contractual
remedies are allowed
Which contracts are illegal?
• The list is long and disordered
• Different writers organise it all
• Not everyone agrees on how to
structure the cases
• Basic distinction: illegality by
statute and at common law
By statute / At common law
• Statutory illegality is very widespread …
• … and I can only deal with
general principles
• Common law illegality is more
manageable …
• … but also more antiquated
“Illegal” or “void” ??
• Some writers distinguish “illegal
contracts” from “void contracts”
• But the distinction is not awfully
clear …
• … and relates mostly to the finer
points of the effects of illegality
• I will refer to it briefly later
Scheme of the lectures
Illegality at common law
(with specific examples)
Illegality by statute
(mostly general principles)
Effect: contractual remedies
Effect: non-contractual remedies
Common law
Types of illegality
Commission of wrongs
Corruption and tax evasion
Trading with the enemy
Interference with the administration of
Encouraging sexual immorality
Restraint of trade
Common law
1. Contracts to commit
Commission of wrongs
• Contracts to commit crimes or other
wrongs are illegal
• Contractual rights cannot be acquired by
unlawful acts
 eg Arsonists cannot claim on their
insurance (Gray v. Hibernian Insc
(HC, 27/5/93)
Common law
2. Corruption and tax
Corruption and tax evasion
• Contracts involving fraud or corrupt
payments are illegal
• eg Procuring election as City Marshall,
by promising to hand over some of the
fees a Marshall can collect
(Mayor of Dublin v. Hayes (1876) 10
IRCL 226)
Corruption: tax evasion
• Many taxes are defined so as to catch
certain types of contract
 eg Income tax (employment)
 eg VAT (sale of goods)
 eg Stamp duty (sale of land)
• If the parties agree to mislead the tax
authorities …
• … then the contract is illegal
Lewis v. Squash Ireland [1983] ILRM 363
• Managing director of company
• Part of his salary was officially
recorded as “expenses”
• He later claimed for unfair
dismissal from the company
• But as his employment contract
was illegal, he had no rights
Statutory exception
• Lewis was thought too harsh
• Statute now provides that the
employment tribunal will itself ignore the
illegality …
• … but must inform the tax authorities of
the true facts
(Unfair Dismissal (Amendment) Act 1993
s 7)
Common law
3. Trading with the enemy
Trading with the enemy
• Where the country is at war …
• … contracts with those voluntarily living
in enemy territory are illegal
• eg Ross v. Shaw [1917] 2 IR 367
(contract with nationals of areas overrun
by the enemy)
Common law
4. Interference with the
administration of justice
Interference with the
administration of justice
Essentially two categories:
• Preventing court actions which should
 eg by corruptly abandoning a
• Encouraging court actions which
shouldn’t occur
 eg by paying another’s costs
Wrongly preventing actions
1. Compromising crime
• Dropping a prosecution in return for
money is illegal
• Ditto hiding evidence, or agreeing not to
disclose it
• But the victim of a crime may accept
“reasonable compensation” (Criminal
Law Act 1997 s 8(1))
Wrongly preventing actions
2. Ousting the courts’ jurisdiction
• The contract cannot bar access to the
courts, or establish another tribunal
• Provision for arbitration is valid …
• … but an appeal will lie from the
arbitrator to the courts (Scott v. Avery
(1856) 10 ER 1121)
Wrongly preventing actions
3. Unfair advantage in bankruptcy
• If a trader is bankrupt, their assets are to
be divided equally between their
• An agreement treating one creditor more
favourably than the others is illegal
Daly v. Daly (1870) IR 5 CL 197
• The debtor concealed assets, and
obtained a discharge from his debts
• One creditor discovered the truth,
threatened legal proceedings unless
paid in full
• The debtor paid him
• This was held to be illegal
Wrongly encouraging
Traditionally, two overlapping concepts:
• Maintenance
= improperly helping another to litigate
• Champerty
= improperly making a profit from
another’s litigation
Wrongly encouraging
• However, these objections are today
less urgent
• “No foal no fee” is not seen as
intrinsically objectionable
• People should be allowed to litigate
“reasonably stateable claims”
(O’Keefe v. Scales [1998] 1 IRLM 393)
The modern law
4 main areas of concern today:
Contingency fees
Fee sharing agreements
Assignment of rights to litigate
Heir-locator agreements
1. Contingency fees
• Legislation prohibits lawyers from acting
in return for a percentage of the
damages won (Solicitors (Amendment)
Act 1994 s 68(2))
• An agreement for payment only if the
action is won makes the contract invalid
(Attorneys’ and Solicitors’ Act 1870 s
1. Contingency fees
• However, an agreement to work
“no win no fee” does not have
criminal consequences, it simply
renders the agreement invalid
• In practice, much legal work
(especially for personal injury
litigation) is done that way
2. Fee sharing agreements
• An agreement by a solicitor to share
fees with a non-lawyer is professional
misconduct …
• … and the agreement cannot be
• eg Mohamed v. Alaga
[1999] EWCA Civ 1716
3. Assignment of a right
to litigate
At common law, someone with a right to
litigate may not transfer that right to
2 exceptions are now recognised:
• If you sell property and include
connected rights to litigate;
• If the assignee has a legitimate
commercial interest in the right
4. Heir-locator agreements
• Where one party offers to help
another to make a claim from a
deceased person’s estate …
• … and contracts for payment out
of the proceeds of the claim …
• … then the contract is unlawful
and unenforceable
Survival of the doctrine
• The doctrine is an antique one
• But the Supreme Court have confirmed
that it still applies today …
• … even if the estate claimed is outside
(Fraser v. Buckle [1996] 2 IRLM 34,
discussed by Capper (1997) 60 MLR
McElroy v. Flynn [1991] IRLM 294
• Offer to act for particular claimants in
return for 25% of the proceeds
• Costello J held this to be caught by the
heir-locator doctrine …
• … as the help went beyond mere sale of
information relating to the claim
Common law
5. Encouraging sexual
Encouraging sexual
• The case law is antique …
• … and some of it is overtaken by
modern developments
(eg the 15th amendment to the
constitution, 1996)
• How much of it is still good law is very
Encouraging sexual
4 basic areas of concern:• Prostitution
• Contracts affecting the
decision to marry
• Contracts modifying obligations
deriving from marriage
• Cohabitation and sex outside marriage
1. Prostitution
• The older cases invalidate any contract
concerning or encouraging prostitution
• eg A contract to hire a carriage to a
prostitute for use in her trade (Pearce v.
Brooks (1866) LR 1 Ex 213)
1. Prostitution
• The Oireachtas has specified in
legislation which aspects of prostitution
are illegal
(Criminal Law (Sexual Offences) Act
• Arguably, the courts should go no further
than the statute
2. Decisions to marry
• At common law, any contract intended to
influence or restrict choice of marriage
was invalid
 eg A contract not to marry anyone
but the other party
 eg A contract to find the other party a
2. Decisions to marry
Exception at common law:
• An agreement by two parties to marry
one another was valid …
• … provided both were at that point free
to marry
• However, this action was abolished by
statute (Family Law Act 1981 s 2)
3. Contracts modifying
the marriage obligations
• Contracts encouraging separation in the
future are invalid
• So a contract by a married couple
providing for a possible future separation
is invalid …
• … but an agreement reached on an
actual separation is valid
3. Contracts modifying
the marriage obligations
• It has been held that a contract to secure
a (foreign) divorce is unlawful (Dalton v.
Dalton [1982] ILRM 418) …
• … but it is an open question what the
courts would do today
4. Cohabitation and sex
outside marriage
• Traditionally, a contract was invalid if it
encouraged sex outside marriage …
• … though not if it merely followed a
period of cohabitation
(eg man making provision for his
illegitimate children, Reade v. Adams
(1855) 2 Ir Jur NS 197)
Ennis v. Butterly [1997] 1 ILRM 28
• Cohabitation agreement
• Kelly J held this unenforceable
• He could not square legal enforcement
with the status granted to marriage
under the constitution
• For discussion see: Mee (1997) 19
DULJ 149
Common law
6. Restraint of trade
Restraint of trade
• Again, the common law rules are antique
• Nonetheless, the common law rules
remain in full force …
• … though there is also statutory
provision against anti-competitive
(see Competition Act 1991)
What is the doctrine?
• The doctrine invalidates contracts not to
engage in trade
• Exceptions are allowed when a
particular contract can be shown to be
reasonable both from the parties’ point
of view …
• … and from the public point of view
When does the doctrine
• The usual case is of an express contract
not to trade
 eg A contract by an apprentice not to
compete with his/her master
• But some contracts only indirectly
restrict trade
• Does the doctrine apply to them?
Kerry Co-Op v. An Bord Bainne [1991]
IRLM 851
• An Bord Bainne was a trade association for
farming co-ops
• There was no effective sanction to force coops to remain part of An Bord
• A proposed rule change would penalise any
co-ops who left it
• Was this change subject to the doctrine of
restraint of trade?
Kerry Co-Op v. An Bord Bainne [1991]
IRLM 851
The Supreme Court disagreed whether the
doctrine applied: • McCarthy J said it did, but that the
proposed rule change was reasonable
• O’Flaherty J said that the doctrine did
not apply
• Finlay CJ expressed no opinion
So the law is unclear
But it seems that the doctrine will not be
applied to:• Minor exclusive dealing arrangements
(Murphy v. O’Donovan [1939] IR 455)
• Promises by buyers of land not to trade
on that land (Sibra Building v. Ladgrove
[1998] 2 IR 589)
What does the doctrine
All restraints within the doctrine are invalid
unless it can be shown that:• The restraint is reasonable as between
the parties, and
• The restraint was reasonable from the
point of view of the public
Macken v. O’Reilly [1979] IRLM 79
• The Equestrian Federation of Ireland
changed its rules …
• … so that all their Irish members who
competed abroad had to do so on Irish-bred
• The plaintiff, a show-jumper, complained that
this was an unreasonable restriction
• But was there restraint of trade?
Macken v. O’Reilly [1979] IRLM 79
The Supreme Court thought this was
reasonable:• As to the public interest, the Federation were
legitimately seeking to protect the position of
Irish horse breeders
• As to the position between the parties, the
plaintiff's sacrifice was considered relatively
Burden of proof
• Reasonableness as between the parties
must be affirmatively proved
(John Orr Ltd v. Orr [1987] IRLM 702)
• But (probably) the burden is reversed as
to the public’s interest
Restraint of trade - examples
3 major examples of the doctrine at work:
• Employment
• Sale of business
• Exclusive dealing contracts
1. Employment
• Any substantial interference with freedom to
work or freedom to trade may be within the
• In these cases, most of the attention is on
reasonableness as between the parties
• Appeals to the public interest are rarely
Johnston v. Cliftonville FC [1984] NI 9
• A part-time professional footballer sought
higher pay than was permitted under Irish
League rules
• Murray J held that restrictions on pay were
an interference with a basic liberty …
• … without any plausible justification being
Music cases
• A string of cases on pop stars illustrate the
concentration on reasonableness as between
the parties
• The public interest is largely irrelevant …
• … and the emphasis is on the legitimate
interests of both parties
Example 1
Silverstone Records v. Mountfield [1993]
EMLR 152
• Contract which absolutely restrained the
group from performing for any other
employer for 7 years
• Various other clauses were unusually harsh
• Neither the group nor their manager had
much experience with contracts
• Restraint of trade found
Example 2
Panayiotou v. Sony [1994] EMLR 229
• The singer was obliged to produce 8 albums
over a 15-year period
• But the court emphasised that the length of
the contract was a function of success
• The singer was well advised throughout, and
had negotiated actively
• No restraint found
Music cases
• All the cases emphasise that
inexperienced performers are
entitled to protection of their
interests …
• … but also that, from the record
company's point of view, the rare
success has to pay for the many
Ordinary employment cases
• Again, in more ordinary cases,
the court tries to identity the
legitimate interests of employer
and employee …
• … in order to balance the parties’
interests against each other
Knowledge gained from
• So a contract clause cannot forbid exemployees from using knowledge gained
during employment ...
• ... unless the clause protects legitimate
employer interests
 eg trade secrets
 eg customer lists
2. Sale of a business
• Again, the court must balance the interests of
the parties against each another
• Some restrictions on the seller’s business
activities will be necessary
 (eg prohibitions on approaching former
• … but the issue will often be how broad such
clauses can be
John Orr Ltd v. Orr [1987] IRLM 702
• Sale of a fabrics business
• Clause forbidding the seller from competing
anywhere in the world
• This was held by Costello J to be
unjustifiably broad …
• … but he restrained the seller from dealing
with anyone who was already a customer of
the buyer
3. Exclusive dealing contracts
• Under these contracts, one party agrees to
buy all their requirements for certain types of
products from the other party (or to sell only
to them)
• The courts have never been very ready to
strike such agreements down …
• … and today tend to defer to competition law
in the matter
Length of the tie
• The main consideration today is the length of
the tie
• So an obligation on a petrol station to buy
petrol only from one firm is valid if for 5 years
(Continental Oil v. Moyhihan (1977) 111 ILTR
5) …
• … but not if for 21 years (Esso v. Harpers
Garage [1968] AC 269)
Foreign illegality
What if there is illegality under foreign law but
not Irish law?
• Much depends on whether the contract was
to be performed here or abroad
• Another question is whether the foreign law
can be seen as analogous to Irish laws
Example 1
Lemenda Trading v. African Petroleum
[1988] QB 448
• Contract to pay commissions to certain
intermediaries involved in an oil supply
• The commissions were not illegal by English
law …
• … but were forbidden by Qatar in an attempt
to curb corruption
• The right to the commissions was not
enforceable in England
Example 2
Stanhope v. Hospitals Trust (1936) Ir Jur
Rep 25
• Sale of lottery tickets
• Tickets were sold in Natal and sent on to
• However, when the organisers were told that
lotteries were illegal in Natal, they refused to
include the Natal tickets in the draw
• A ticket-seller from Durban sued
Example 2
Stanhope v. Hospitals Trust (1936) Ir Jur
Rep 25
Fitzgibbon J held that:• The non-inclusion was wrong, as the lottery
was to be held in Dublin, and was legal by
Irish law
• However, the damages could not include
damages for injury to the ticket-seller’s
business, as that business was illegal
Illegality by statute
Express prohibition
• Some types of transaction are specifically
stated by statute to be illegal
 eg legislation on shop hours
• Contracts in contravention of such laws are
always illegal …
• … unless the legislation states that they
should not be so treated
Implied prohibition
• Where a contract necessarily involves an
act which statute has declared illegal …
• … then the contract is itself illegal
• However, the courts are reluctant to apply
this where no illegal intent is proved
Example 1
Namlooze Venootschap v. Dorset
Manufacturing [1949] IR 203
• Action for the price of goods sold and
• The price was payable in guilders …
• … but no official permission from the
Minister for Finance had been sought, as
statute then required
• The contract was held illegal and
Example 2
Gavin Low Ltd v. Field [1942] IR 86
• Contract for sale of a cow carcass
• After delivery, the seller claimed the price
• But the carcass had already been condemned
as unfit for human consumption
• It is illegal to offer such goods for sale
• But the contract was still enforceable
Examples of statutory illegality
• Wagering, gaming and lotteries
(see especially Gaming and Lotteries
Acts 1956-1986)
• Unfair Competition
(see especially Treaty of Rome article
The effect of illegality on
Effect of illegality - general
• A contract illegal on its face is completely
• If one party has an illegal intent, they may be
refused remedies
• An illegal provision may be cut out of an
otherwise lawful contract
• We also need to ask whether other heads of
the law (eg property, tort) can be relevant
Illegality on the face of
the contract
• A contract which is expressly for a
purpose which is illegal cannot be
enforced by either party
• Knowledge of the relevant law is not
(‘ignorance of the law is no excuse’)
Gray v. Cathcart (1899) 33 ILTR 35
• A landlord leased a house in poor condition
• When the rent was not paid, the landlord
• But letting unsanitary premises was contrary
to statute ...
• … so the contract was illegal on its face, and
the rent not recoverable
Illegal intent or performance
If a contract is legal on its face, but
 one or both sides intends to perform in
an illegal way,
 or does in fact perform in an illegal way
then any party who acted or intended
illegally is barred from remedies
Example 1
Ashmore v. Dawson [1973] 1 WLR 828
• An engineering firm contracts with hauliers to
move some heavy equipment
• As the hauliers know, the law requires the
use of a more powerful lorry than they have
• The hauliers cannot enforce
• Whether the engineers can enforce depends
on their knowledge
Example 2
Kavanagh v. Caulfield [2002] IEHC 67
• P agreed to buy premises from D
• As part of the price, P was to pay £7,500 to
“The Marion Work of Atonement”, said to be
a charity
• In fact, this additional payment was a tax
• But it could not be shown that P knew of any
• Therefore P could enforce against D
Example 3
Whitecross Potatoes v. Coyle [1978] IRLM
• A farmer in Meath contracts to sell potatoes
to an English firm
• They suspect that the UK government may
soon introduce import restrictions
• They agree that if this happens, a higher
price will be payable
• The new restrictions are indeed introduced
Example 3
Whitecross Potatoes v. Coyle [1978] IRLM
• What was intended by the parties?
 The buyer intended that the seller would
supply from NI (lawful)
 The seller intended to smuggle his own
potatoes into NI and supply them
• Therefore the buyer could enforce but the
seller could not
Separation of legal from illegal parts
of the agreement
• A possible response to illegality is not to
declare the entire arrangement illegal …
• … but simply to strike out the part which is
illegal and leave the rest
• The law is confused and controversial
Separation – two distinct ideas
Two distinct notions seem to be
If an agreement naturally falls into two
or more parts, only one of which is
illegal, there is no reason why the rest
should not be enforceable
Separation – two distinct ideas
Some types of illegality are inherently
trivial, and so should not result in the
illegality of the entire contract …
… so the contract is valid, but the
objectionable term is “void”
 eg terms ousting the courts’
 eg terms in restraint of trade
Example 1
Murphy v. Crean [1915] 1 IR 111
• Lease of pub premises
• Illegal term (that the tenant would transfer the
licence as directed by the landlord)
• The landlord tried to enforce other clauses of
the lease
• But the entire contract was held
Example 2
McIlvenna v. Ferris [1955] IR 318
• Contract for building work
• Under Emergency Powers legislation, such
work could not be done without a licence
• The contract was accordingly held illegal …
• … except for part of the work done after the
legislation was revoked
The effect of illegality on
contracts – other heads of
the law
Other principles of law
• Where a claim on an illegal contract is not
permitted …
• … the plaintiff may consider invoking some
other head of the law
• But the court will need to ask whether the
illegality equally bars action under that other
head of the law
Other principles: 1. Property
• Plaintiff are entitled to claim
property belonging to them, even
if there is evidence of illegality
connected with it
• Perhaps surprisingly, an illegal
contract may still pass ownership
just as if it were valid
Bowmakers v. Barnet Instruments [1945]
KB 65
• Sale of machine tools on H-P terms
• The contracts infringed anti-inflation
legislation, and so could not be enforced
• When buyers defaulted, sellers claimed the
tools back
• Ownership was determined by reference to
the illegal contracts
An exception?
• Bowmakers involved a rather technical type
of illegality
• Perhaps a different attitude will be taken to
more flagrant illegality
 eg ownership of goods it is illegal for
anyone to own
 eg ownership of bribe money (Brady v.
Flood (1841) 6 Ct Rep Ir 309)
Other principles: 2. Fraud
• Where one party to the contract has
committed fraud on the other, an action may
lie in deceit …
• … even if the contract is illegal
• This approach will only succeed if the
illegality seems relatively trivial (eg Saunders
v. Edwards [1987] 2 AER 651)
Other principles: 3. Restitution
• Suppose one side transfers money or other
property to the other under the contract …
• … but later seeks to recover it
• This would involve the court helping a party
to an illegal contract …
• … but helping them to unravel the contract,
not to perform it
Other principles: 3. Restitution
The basic principle is:• “In pari delicto, potior est conditio
• =“When both sides are equally guilty, the
defendant’s case is the stronger of the two”
But when are both parties “equally guilty”?
The guiltless plaintiff
• A plaintiff is not caught by this rule if s/he is
entirely innocent of any illegality …
• … or has repented of any illegality …
• … or was the victim of fraud or oppression
by the other party …
• … or was one of a class that the legislation
was meant to protect
The innocent plaintiff
• A plaintiff who does not know the facts
rendering the transaction illegal may be able
to recover money paid
• eg Insuring an enemy cargo in ignorance of
the declaration of war (Oom v. Bruce (1810)
12 East 225)
• The other party’s guilt or innocence appears
to be irrelevant
The repentant plaintiff
• Where the plaintiff transfers money or
property with unlawful intent …
• … but the plaintiff thinks better of the
scheme before anything illegal is done …
• … then the plaintiff may recover back the
money or property
The repentant plaintiff
• At one time, the courts required genuine
penitence …
• … and would refuse a remedy if no remorse
was shown
• Today, the approach is more pragmatic
• Recovery is permitted so that there is an
incentive to withdraw before any crime is
actually committed
Tribe v. Tribe [1995] 4 AER 236
• A father transferred shares to his son,
apparently on sale
• In fact, the purpose was to prevent the
shares falling into the hands of the father’s
• The father made a satisfactory arrangement
with his creditors …
• … and successfully claimed the shares back
Fraud or oppression
• Where money or property was obtained by
fraud …
• … the defrauded party may recover it back
despite any illegality
• eg where P is tricked into entering an illegal
insurance contract
(Hughes v. Liverpool Victoria [1916] 2 KB
Protected class
• Where the object of legislation is to protect
people in P’s position …
• … then the courts will be slow to say that
breach of the legislation bars P from a
• The statute is to be read in the light of its
Kiriri Cotton v. Dewani [1960] AC 192
• Legislation made it illegal for a landlord to
demand “key money” from tenants
• A tenant nonetheless paid this money on
taking a lease
• Because the object of the legislation was to
protect tenants …
• … the tenant was able to claim the money
back from the landlord
That’s all
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