Law of Contract
Illegality 2
Illegality
Academic argument :
Courts will not enforce a contract, which is illegal or
which is otherwise contrary to public policy. Why?
1.
2.
3.
Court cannot aid although parties willing.
Justice would be tainted and dignity of court
offended.
Refusal to grant relief would deter parties from
making contracts.
Illegality at common law
Academic argument :
Public Policy ?
Richardson v Mellish (1824)
as per Burroughs J,
“public policy is a very unruly horse, and when
once you get astride it you never know where it will carry you”
Enderby Town Football Club v The Football Association (1971)
As per Lord Denning,
“with a good man in the saddle, the unruly horse can be kept in
control. It can jump over obstacles”.
Illegality
Academic argument :
But argument may not be persuasive for courts not to
act, under every scenario, where parties contract
illegally or immorally.
1. What if a party enters into a illegal/immoral contract
“innocently” ?
2. There is a vast difference between enforcing a
grossly immoral act, and enforcing an illegal act that
is merely breaking a summary offence.
3. The third wrong assumption is that everyone knows
the law and should be aware that contracting for
something illegal and immoral would be
unenforceable.
Illegality
Academic argument :
Other policies to consider when court decides if contract
should be void ab intitio.
1. Parties should be allowed to contract and regulate
their own affairs as far as possible.
2. A party should not be allowed to go back on his
agreement and thus unjustly enrich himself as a
result of the court finding the contract void ab initio.
Pearce v Brooks (1866)
Illegality in performance
In the case of contracts performed illegally, the contract
is valid during formation but gets infected with illegality
when it occurs during the performance of the contract.
St John Shipping Corpn v Joseph Rank (1957)
As per Devlin J, who gave an example of a speed
violation in the performance of an otherwise valid
contract.
“violation of a speed limit during the performance of the
contract, will not render the contract unenforceable by
the party guilty of the offence”
Illegality in performance
St John Shipping Corpn v Joseph Rank (1957)
Facts : A ship owner committed a statutory offence
when he overloaded his ship in the performance of
certain contracts for the carriage of goods.
Held : The ship owner was held to be entitled to recover
the freight despite the illegality, during performance.
Logic : The purpose behind the statute was to
penalise the conduct which it contravenes and not to
prohibit the contract itself.
Illegality in performance
Shaw v Groom (1970)
Facts : a landlord committed an offence by failing to
give his tenant a rent-book.
Held : it was held nevertheless that the landlord was
entitled to sue for the rent due, because the purpose of
the legislation was to punish his failure to issue a rent
Book, but not to invalidate the contract.
Illegality in performance
Shaw v Groom (1970)
Question to ask ?
Was it the purpose of the statute or common law, that a
breach committed in the course of the performance of
contract should invalidate the contract?
Contrary to good morals
Franco v Bolton (1797)
Held :
A promise by a man to pay a woman if she will become his
mistress, is illegal.
Tinsley v Milligan (1994) :
But co-habiting and the resultant contracts are not held illegal as
the views towards this has changed.
Illegality in performance/ innocent party
A claim by an innocent party to enforce a contract would
be even stronger, where he does not know or did not
consent to the illegality.
Archbolds v Spangletts Ltd (1961)
Facts : a contract was made for the carriage of whiskey,
and party promising to transport the whiskey used a
vehicle that was not allowed to transport 3rd party
goods.
Held : Claimant could sue for breach as he was not
aware of the “illegal” performance.
Illegality in performance/ innocent party
Knowledge of illegality by “innocent” party is relevant in
situations where illegality occurs during performance.
Ashmore, Benson, Peace & co v Dawson 1973)
Facts : Ds agreed to transport two boilers belonging to the
plaintiffs and did so by carrying them in lorries that were
not allowed legally to carry the load. The plaintiffs were
aware of this infringement, and participated in it.
Held : Claimant was aware of the illegality during
performance and sanctioned it.
Thus he was not “innocent”, and thus cannot enforce his
claim.
Statute prohibiting formation
A contract is illegal if its formation is expressly or impliedly
prohibited, by statute. If it is expressly Prohibited, there are no
difficulties.
The problem is when it is argued that it is impliedly Prohibited.
The court will then interpret the intention of parliament.
Re Mahmoud and Ispahani (1921)
Facts :
The buying and selling of linseed oil, without a licence, was
prohibited by a statute. The defendant refused to accept delivery of
the order and the claimant sued for damages.
Held :
The claim cannot be enforced as it would go against the intention
of parliament and undermine the purpose behind the statute.
(Is the court right?…….what was the intention of parliament.)
Effect of illegality
The effect of an illegal contract would depend on
whether it is illegal due to a statute or common law.
Statutory breach :
1. If illegal due to a statutory breach, we would have to
see if statute provides expressly or impliedly the effect
of the breach.
2. If it is implied (not express), common law would have
to be used to determine, intention of parliament and the
effect that should arise as a result.
See Re Mahmoud & Ispahani (1921)
Effect of illegality
If illegality was due to common law breach,
The general rule is that the contract would not be
enforced.
But if there is an “innocent” party in a contract that
becomes illegal during performance, the court can
award some other remedy to the party.
Strongman v Sincock (1955)
Held : allowed to recover monies for the value of work
done although not for the whole “illegal” building
contract done without licence.
Exceptions - where contract can be
enforced
There are two main exceptions to the general rule that
holds that illegal contracts, (breaching common
law rules), may not be enforced.
1. Where the cause of action lies in some other area of
law and not in the illegal contract.
2. The parties are not “pari delicto”,..ie. Where parties
are not at equal fault,..where one is less guilty then the
other over the illegal transaction.
Exceptions - where contract can be
enforced
Bowmaker v Barnet Instruments (1945)
Facts : Bowmakers supplied certain machine tools to Barnet
(defendants) under three hire purchase agreements, which were
against the War time regulations against certain contracts.
After Barnet obtained the tools they refused to complete payment
arguing that the contract was illegal.
Held : The claimant’s were allowed to proceed under the tort of
conversion (where a party takes someone else’s property as if their
own), although not under the contract.
Note : The D was not allowed to benefit or enrich himself unjustly,
by claiming the contract illegal and thus void.
Severance of offending clause
In some cases it is possible to remove the illegal clause
from an otherwise legal contract (e.g. restraint of trade
clauses)
The court will be willing to remove the illegal part of the
contract and enforce the rest, if
1) if it was relatively unimportant
2) does not affect the validity and nature of the rest of
the contract.
Goldsoll v Goldman (1915)
Criticism
The law commission has criticized this area of law for its
complexity, its potential to give rise to unjust decisions
and its lack of certainty.
Law commission paper :“Illegal transactions : the effect
of illegality on contracts and trusts (2000)”
Criticism
The law commission said :
1) The law in this area too complex and uncertain.
2) The principles applied were draconian.
3) Many exceptions to the rule were made to overcome
“injustice”
Holman v Johnson (1775)
as per Lord Mansfield
“an unmeritorious defendant could raise the illegality defence
against the plaintiff’s claim, despite the defendant’s involvement in
the illegal act, and leaving the defendant with an unearned
windfall”
Criticism/reform recommendations
The law commission has proposed:
The court should be allowed to use discretion on whether the
contract, despite being illegal, should be allowed to be enforced.
In applying discretion the following considerations to apply:
1) the seriousness of the illegality
2) the knowledge and intention of the party seeking to enforce the
transaction.
3) whether refusing to allow, further the purpose of the rule.
4) whether refusing to allow, would be proportionate to the
illegality.