Illegal and void contracts
1
Teresa Clyne
Lecturer in law and forensic psychology
Civil Law
Course notes
Void and Illegal contracts
Void Contracts
There are certain types of contract that will be classed as void on the basis that they are
contrary to public policy. In terms of effect, there are few differences between illegal
contracts
and
those
declared
void
on
the
grounds
of
public
policy.
One distinction that does apply, however, is that damages will generally be available in the
case of void contracts; there is no such availability in the case of illegal contracts.
Goodison v Goodison [1954: Findings in previous cases found that if a contract is illegal then
no part of it can be saved. The distinction was summarised by Somervell L.J. as follows:
There are two kinds of illegality of differing effect. The first is where the
illegality is criminal ... and in those cases ... such a provision, if an
ingredient in a contract, will invalidate the whole, although there may be
many provisions in it. There is a second kind of illegality which has no such
taint; the other terms in the contract stand if the illegal portion can be
severed.
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There are three kinds of contract that fall within in this category:
(1) Contracts excluding the jurisdiction of the courts.
(2) Contracts that undermine the sanctity of marriage.
(3) Contracts restraining trade
1. Contracts excluding the jurisdiction of the courts
Lee v Showman's Guild of GB [1952): Romer L.J:
The proper tribunals for the determination of legal disputes in this country
are the courts, and they are the only tribunals which, by training and
experience, and assisted by properly qualified advocates, are fitted for the
task. The courts jealously uphold and safeguard the prima facie privilege of
every man to resort to them for the determination of enforcement of his
legal rights.
Scott v Avery (1856): The court held that an exclusion clause to exclude litigation
until after arbitration was deemed valid.
2. Contracts that undermine the sanctity of marriage
Due to the Family Law Act of 1996 and the constitutional guarantees associated
with marriage, any contract that can be determined as undermining the marriage
contract will be deemed void. Therefore pre-nuptial agreements providing how the
assets of the marriage are to be divided upon the dissolution of the marriage are
treated as void; by preparing for the marriage break-up at the outset of the marriage,
these contracts are essentially undermining the entire institution of marriage.
3. Contracts restraining trade
The courts are reluctant to enforce any contract or clause which has at its core any
constraint on trade; therefore all contracts in restraint of trade are prima facie void.
Public policy includes the right of an employee to open a new business or trade in
competition to any other business should not be unduly interfered with. However, an
employer is entitled to act in a reasonable manner to protect his business and if the
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contract is deemed necessary to protect the business, it may be enforceable against
the employee. Such contracts/clauses usually provide that the employee cannot
work in the same business for a period of years or within a number of miles of the
employer after leaving his employment.
These contracts are normally used where the employee has gotten the information
to the new contract by virtue of having being employed by the employer in question
in the first place. Fitch v Dewes [1921] A solicitor entered a clause in their clerks
employment contract that they would not compete. SW Strange Ltd v Mann [1965]
However, a bookies assistant’s contract was deemed void as the assistant had not
personal relationship with the customers.
Illegal Contracts
Contracts can be deemed illegal if they go directly against (or fly in the face) of
public policy. Public policy cannot be used to as a catch all definition, therefore
public policy has a strict definition and the courts have introduced the following
conditions when defining illegality.
The following make contracts illegal under the common law, they are contracts:

to commit a crime or tort Everet v Williams (1893) An agreement between
two highwaymen to share the spoils of their illegal activities was found to be
unenforceable.

tending to prejudice the administration of justice Nolan v Shiels (1926)
An agreement to pay £50 in return for a promise to end criminal proceedings
was deemed to be illegal and unenforceable.

promoting immorality. Pearce –v- Brooks

trading with enemies of the State. Ross –v- Shaw

which breach a foreign law.

to defraud the Revenue.

that attempt to corrupt public officials.
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Champerty
When a person agree to undertake work for another with no personal interest in the
proceedings can be champertous i.e. if a solicitor agrees to take on a case for a
share of the compensation (Contingency fee) this is also champerty, as he should
ensure there is a fee not a percentage of the proceedings. Fraser v Buckle [1996]
Heir hunters offering a service for a share of the inheritance.
Effects of Illegality
The courts will not enforce an illegal contract– void ab initio Grey –v- Cathcart
A contract that is struck down as being illegal will be unenforceable. The general
rule regarding property is that the loss lies where it falls.
Collins v Blanton: Wilmot C.J. in [1767]:
No polluted hand shall touch the pure fountains of justice. Whoever is a party to an
unlawful contract, if he hath once paid the money stipulated to be paid shall not
have the help of a court to fetch it back again.
Severance
John Orr Ltd –v- Orr Main distinction between illegal and void contracts, the latter
may be saved by severing the repugnant part out – the so-called ‘blue pencil’ test –
leaving the rest enforceable.
Mason –v- Provident Clothing and Supply Company Ltd Cannot be used to rewrite
the contract, used only where a line can be drawn, without changing the overall
agreement substantially.
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Repentance
Where an illegal contract has been entered into but has not yet been executed, a
party may recover any property passing on foot of the agreement by withdrawing
from the contract and repudiating the contract before the transaction is carried out.
Tribe v Tnbe [1995] The transaction involved a fraudulent sale by a father to his
son. Later, the father sought recovery of the property from his son, who relied on the
illegal nature of the contract as his defence. HELD: father could recovery the
property.