© griffith college professional law school chapter 15 illegality and void contracts

© GRIFFITH COLLEGE PROFESSIONAL LAW SCHOOL

Chapter 15

Illegality and Void Contracts


Examiners Terminology• In her textbook (with Robert Clark) the chapter of

illegality is said to cover areas where the courts have said contracts are denied enforceability on overt public policy grounds.

• The textbook then goes on to describe common law illegality and statutory illegality in precisely the same structure we will use.

• However, the textbook also includes the notion of “contracts void at common law” under the heading of illegality (i.e. a contract denied enforceability on overt public policy grounds) and deals with– Agreements ousting jurisdiction of court– Agreements subverting sanctity of marriage

• A whole separate chapter is given to “Restraint of Trade”


Role of Policy

• It’s a given that the reasons for denying enforceability are found in public policy

• It’s a given that the reasons for voiding contracts are found in public policy

• But there is still an important difference to bear in mind……


Why does this matter?

• A void contract is something very particular• An contract unenforceable by reason of illegality

is different• As Robert Clark says after noting the two types:-

…void contracts, do not produce the cataclysmic effects that attend illegal contracts.

• The main difference is that where part of a contact is void by reason of public policy it can be severed (depending on the case)


Why does this matter?• October 2005, Question 6

• Discuss the circumstances in which a contract will be deemed to be illegal at common law.

• “This question was very well answered. Students considered the following types of contract: contracts the purpose of which are to commit a crime, a tort or a fraud contracts the enforcement of which require the defendant to do something illegal, contracts the creation of which are prohibited, contracts to be performed in an unlawful manner, contracts prejudicial to the administration of justice, contracts to defraud the revenue, contracts to oust the jurisdiction of the courts, agreements to defraud public offices, contracts prejudicial to the status of marriage and the family, sexually immoral contracts, contracts to trade with enemies of the state contracts that breach foreign law and contracts in restraint of trade. Students displayed an excellent knowledge of the relevant caselaw.”


Illegality

• Contracts tainted by illegality

• Generally means they are unenforceable

• Some nuance to this though

• Lots, and lots of lots of types


Illegality at Common LawLook at 7 types

• 1. Contracts to Commit a Crime or Tort– Not always obviously illegal– Namlooze v Dorset Manufacturing

• Payment in Dutch guilders required – such would need Ministerial permission – did not have it

• HC held not necessarily illegal – would be if X was compelled to pay in guilders without consent

• Compulsion to commit unlawful act is key


• Westpac Banking v Dempsey– K potentially flouting exch controls again– Same logic applied by Morris P – not

necessarily illegal and noted that exchange controls were being dismantled in UK


• 2. K facilitating the commission of a crime or tort or allowing a wrongdoer to benefit from his wrong– Beresford v Royal Insurance Co

• Killed himself – K of insurance did not say no claim could be made for suicide – question of interpretation of K - Ct held it would be unlawful if K was read to allow one to benefit from suicide

– Gray v Barr• Insurance in place which, read in one way, could cover

damages that D would owe the widow of a man he killed when sued in civil law

• Ct would not let it cover it – could not insure against the “cost” of a criminal act


• 3. Contracts Promoting Immorality

• Prostitution – don’t pay them, they can’t sue you

• Ancillary K’s too– Pearce v Brooks

• Carriage let to Prost in full knowledge – she damaged it – he could not sue in K – facilitating immoral acts


• Cohabiting?– Once – was very naughty (inference is that there is

sex outside marriage) – Andrews v Parker indicates position is different in Queensland

– Sometimes arises in trial relationships – i.e. will marry, we buy a house together in interim with some agreement inter se, then split…will our agreement be enforceable?

– Seidler v Schallhofer – NSW – couple k’d to buy house together – enforceable


• 4. Contracts Tending to Prejudice Admin of J

• Criminal Settlements?• Nolan v Sheils (1926)– P sued on cheque he got

for not going on with a prosecution – TJ held K was not unenforceable.

• Rourke v Mealy (1879) suggests agreement not to pros (as distinct from abandoning existing proceedings) was enforceable – but see Nolan above

• Civil Settlements• Perfectly ok (even if arise from “criminal” facts)


• Litigation stirringMaintenance – K to provide $$$ for legal proceedings – Can not stir up litigation “without just cause or action”

– Re Trepca Mines• “Just cause” is the key

– Martell v Consett Iron Co – • not maintenance for a group to support anglers action

against a polluting company

Champetry – K granting share in outcome• Fraser v Buckle – firm would look for those dying intestate,

locate heirs, tell them and sell info for a share• Costello J – champetry – rationale against it – creates risk of

abuse – inflame damages, suppress evidence etc

– Lawyers costs?


• 5. Contracts which breach foreign law– Stanhope v Hospitals Trust

• Distrib of sweepstakes tickets – claimed operators did not include his counterfoils (sold in Natal) but draw took place in Dublin

• Sweepstakes illegal in Natal…D argued that contract unenforceable

• Argument was that K was made in Ireland and could be performed in Ireland – i.e. draw here, pay here etc

• Therefore not unenforceable – really need to lead to an unavoidable breach of foreign law

– Foster v Driscoll• K to smuggle whiskey to US in prohibition – clearly required

breach of US law


• 6. K trading with enemies of the state– Furtado v Rogers (para 15-26)– Ross v Shaw

• K to buy yarn from Belgian mill• German occupy Belgium• Becomes a K with the enemy• From then on its illegal


• 7. Contracts to Defraud Revenue

• Payment under table? Taints – Starling Securities v Wood (1977)– What happens if pay like this, then get sacked

– can any claim in UD be defended on basis that K was illlegal?

• UK – Tomlinson v Dick Evans – illegality bars action

• Ireland – different in UD – s.7 of UD (Am) Act, 1993 – no bar to UD action but EAT has to refer the matter to Revenue etc should it arise


• 8. Contracts Corrupting Public Officials– Can be seen as facilitating crime in certain

cases (Ethics in Public Office Act, 1995)– Lord Mayor of Dublin v Hayes

• D “bought” his position in a particular post – bribery really of another city official


Illegality Under Statute

• Lots egs – Family Home Protection Act, 1976 – conveyance w/o consent

• Sometimes q arises as to whether leg actually makes K illegal or just to impose liability on those entering K


Example

• Regulations say Potato sellers need be licensed.

• I buy one ton of what turn out to be defective potatoes from what turns out to be an unlicensed seller

• Is my contract unenforceable (i.e. so I can’t take advantage of the Sale of Goods Act, 1893)????


Archbolds Ltd v Spanglett Ltd

• P employed D (who had no licence) to transport goods. Of course, the goods are stolen and when D is sued, he claims contract unenforceable

• The Ct scrutinised the relevant Regs took view that they did not say K’s were illegal, just that licences were needed – purpose to primarily regulate the haulier, not the contracts between hirer and haulier


• Pearce LJ’s logic– taxi-driver leaves you stranded and you are

without legal remedy because he was (unknown to you) unlicenced…cannot be the position.

• Remember the public policy basis. Here those policy reasons would be usurped by holding the contract to be unenforceable.


Re Mahmoud & Hispani (1921)

• Could not trade in linseed oil without a licence

• P was licensed, D was not

• Ct held unenforceable

• Specifically held that that the public interest required this conclusion


Hortensius & Durack v TSB

• Trustees of the TSB used deposited sums to purchase investments from P. The Trustee Acts 1863-1979 did not permit this.

• P used this to argue that certain contracts were illegal

• Costello J used the same interpretative approach – the legislation he said, only made it a breach of trust for the Trustee’s to do this – it didn’t make their contracts unenforceable as illegal


• Some statutes may expressly declare certain types of contract to be void and unenforceable (without declaring them to be illegal) as does section 18 of the Gaming Act, 1845 which provides that all agreements by way of wagering shall be null and void and which prohibits any action brought to recover a sum alleged to have been won on a wager. Others may prohibit the making of certain contracts and impose penalties for doing so but remain silent as to the civil rights of the parties to them; it is then a question of the construction of the statute as to whether the contract entered into between the parties is to be regarded as an illegal one. But in this case the 1863 Act did not make illegal contracts for the purchase of loans, - it prohibited the trustees from entering into such contracts…


Consequences of Illegality


Unlawful on its face – unlawful from the outset

– Neither party can enforce – Murphy & Co v Crean – lease of licenced premises

had clause requiring transfer of licence on demand of brewer – unlawful from the outset as licence is personal to publican – neither could enforce

– K governed other issues such as not selling other beers – could not enforce that – whole K gone…..

• Rule applies even where one party is minimally at fault ( i.e. see para 7-60)


• Where K not Inherently Unlawful

– I.e. one party intends to carry it out in an unlawful manner – that party cannot sue on it – the other may be able to if ignorant of intention

– Whitecross Potatoes v Coyle• K for sale of Potatoes from D’s farm in Meath to P’s company

in England – it was likely that import restrictions were on the way –

• Parties agreed a higher price to kick in if that occurred – • P said this higher price was because Coyle was going to buy

potatoes in the North and deliver to England – thereby getting around restrictions, but costing more

• Coyle said this was to pay for smuggling Irish potatoes into the North and then to England!

• Finlay P held that the contract was not inherently illegal – only Coyle could not sue

• Other side – did not know of his intention – could sue for non-delivery


Practical point

• Whitecross

• Contract was undoubtedly been broken by the defendant without any justification and unless it was, as he asserted, an illegal contract there must be damages for its breach.

• He lost on that point – hence damages for breach!


Consequences of Not Being Able to Enforce

• You can’t sue on it – no contractual remedy

• So, illegal contract with a bookermaker – you pay a debt by cheque and then dishonour it – bookmaker cannot sue on it!

• Restitutionary Relief – i.e. you pay over money – other side refuses to perform and then pleads illegality – can you get it back?


In Pari Delicto Potior Est Conditio Possidentis

• In equal fault, the strong position is possession

• Brady v Flood – – drop criminal charges for $$$ - money paid

over– Unenf. contract– Brady CB would not allow return of money

paid


Exceptions

• If one party is not culpable– Deutsche Re v Walbrook Insurance

• Reinsurance K entered without stat. authorisation as required

• CA allowed insured to enforce it


• If one repents – repudiates the illegal transTribe v Tribe– Father transferred land to son to avoid

creditors– Tried to get it back – was allowed because no

creditors had yet been defrauded and court viewed his attempt to get it back as repudiating the illegal transaction


• Can also avoid full hit of illegality if there are incidental benefits from the K unconnected to illegality– Singh v Ali

• P could not get a hauliers permit – bought lorry in D’s name etc - D then went and took the lorry and would not give it back

• Could P sue? All illlegal!!!• But it was illegal, but P had still gained ownership

and could sue and enforce them independently of the illegality – rights were just created by reference to illegal contract


Euro Diam v Bathurst

• P sold diamonds to German company misstating the price (i.e. lower import tax)

• P’s insurance contract, however, was based on true value

• There were clear issues here, but the misstatement really had nothing to do with the insurance contract and so the insurance contract was fine


Void Contracts

• Contracts in Restraint of Trade

• Ousting Jurisdiction of Courts

• Subverting Sanctity of Marriage


Void Contracts – Contracts in Restraint of Trade

Overview

• Examples include:-– No compete clauses– Non-solicititation clauses– Restrictions when sell business / leave

employment– Exclusive management arrangements– Exclusive recording contracts


• John Orr Ltd v John Orr– All restraints of trade in the absence of special

justifying circumstances are contrary to public policy and are therefore void.

– A restraint may be justified if it is reasonable in the interests of the contracting parties and in the interests of the public.

– The onus of showing that a restraint is reasonable between the parties rests on the person alleging that it is so.

– The courts may in certain circumstances enforce a covenant in restraint of trade even though taken as a whole the covenant exceeds what is reasonable, by the severance of the void parts from the valid parts.


• Costello J also set out the general leanings of the law in this respect:-

– Greater freedom of contract is allowable in a covenant entered into between the buyer and seller of a business that in the case of one entered into between an employer and employee. A covenant against competition entered into by the seller of a business which is reasonably necessary to protect the business sold is valid and enforceable. A covenant by an employee not to compete may also be valid and enforceable if it is reasonably necessary to protect some proprietory interest of the covenantee such as may exist in a trade connection or trade secrets.


• Certain restrictive contracts do not fall to be considered under this doctrine such as:-– Restrictive covenants on the user of land are

also outside the doctrine of restraint of trade.– Whereas covenants which restrict an

employee once he leaves employment are dealt with under the doctrine, restrictions on the employee during employment are not. Exclusive service contracts raise special questions which we will look at separately.


John Orr - Facts

• D built up a biz sold it on to one of the P’s – stayed on as director and entered no-compete agreement (not work for competitors, not set up biz manuf competing products, not solicit customers etc) for one year

• Established similar biz in the UK• Non-solicit – reasonable – limited to existing customers

and limited in time (a bit more complicated than this)• Other two – unlimited geographically – went beyond that

necessary to protect legitimate business needs• Those parts could be severed and thus he was still

prevented from soliciting customers for a year


• Office Angels v Rainer Thomas– Clause in the city preventing working within

1km was too wide

• BUT

• Nordenfelt v Maxim Nordenfelt– Worldwide limitation in arms dealing was ok– I.e. was a small worldwide market (selling

arms to monarchs and states here) so it was reasonable


Franklin Steam Laundry v Anderson (1903)

• Forewoman in laundry

• Not allowed carry on business of laundry or any connected business for 3 years from leaving within 50 miles of Belfast

• P successfully enforced it when D left and joined rival laundry


• Lennon v. Doran (2001)

– Contract for the sale of a business that sold remote control vehicles and quads included a two-year non-compete clause.

– From a geographical perspective the clause was open-ended.

– However Carroll J held that in order to give the clause business efficacy the territory should be interpreted as the area in which the business was being carried on at the time of the share transfer.

– According to Carroll J, in order to protect the purchaser’s investment, two years was excessive. One year would have been more acceptable.


Employee Leaving

• Concepts First• Protection Otherwise Than By Express Contract

– It is an implied term of an employment contract that the employee will serve the employer faithfully.

– the law may determine that a confidential relationship exists between employer and employee creating an obligation on both parties not to abuse the relationship to the detriment or prejudice of the other.


House of Spring Gardens v Point Blank Ltd

• Costello J in HC• Here the licensee of bullet proof vests breached an

agreement by manufacturing a similar product violating the copyright held by the Plaintiff. The High Court held that an abuse of confidential information had took place.

– If we have to decide if the information is to be protected….– Q does a confidential relationship exist?– Is the information confidential?– Will consider the degree of skill, time, labour and effort involved

in compiling the information in deciding this point


But

• Can Also Have Express Covenants

• In all cases, still have to satisfy test:-– The clause needs to be reasonably necessary

to protect some proprietory interest of the covenantee such as may exist in a trade connection or trade secrets. Thus, we need to identify such an interest and show that the means used to protect it go no further than necessary.


• Key is really to show a commercial interest (i.e. taking connections, knowledge, secrets) etc and do what is proportionate

• Sometimes the interest is not there

• Arthur Murray Dance Studios v Witter– Dancer trained and left for other studio– Claimed she was giving away trade secrets– Held none had been imparted


Meadox Medicals v VIP Ltd (1982)

• Specialised knowledge of medical products was capable of being restrained – i.e. could not use it for a year.


Facenda Chickens v Fowler

• Ex employees uses information on delivery routes, pricing etc obtained during employment to under-cut ex employer

• Court held that this was not a “trade secret” and referred to distinction between that and knowledge of processes (i.e. what you learned)

• So that isn’t something which can be protected – i.e. your processes / methods of manufacture


• Really needs be akin to specialised methods – patents, formulae etc

• Reasonableness may be variable – 15.65– Same restraint on CEO and post room

worker?– Dosser v Monaghan (1932)

• Members of band agreed not to play for other bands within 50 miles – lesser members breached

• CA in NI said was a restraint of trade – would be different had the members been famous!


• Schroeder Music Publishing v Maccauley– One sided exclusive services contract with

music publisher– See Para 15-67– HL held it totally imbalanced– Would be acceptable if reasonable to protect

interests of publish commensurate with benefit the writer was getting.

Some “Exclusivity” cases


• Silverton Records v Mountfield– In about 1985 the Stone Roses formed and signed a deal with

Zomba Productions Limited which was assigned to the plaintiff in April/May 1998.

– The recording and publishing agreements were a joint package. D were advised but manager and lawyer had little music experience.

– Query over contracts, Humphries J held that clauses could be reviewed as a restraint of trade.

– Contracts allowed the company sole use of all master recordings in perpetuity and included the right to commence or discontinue production of records.

– Meant the company did not have any positive obligation to release or distribute any records at all throughout the territory covered by the agreement – encompassing “the world and its solar system”.


– Additionally, the re-recording clause prevented the group from re-recording any musical works embodied on masters owned by the company and also performing them live when performance might be recorded “in any form”.

– It was said that the contract was able to effectively sterilize the output of the group and so Humphries J held that the judge found the recording contract operated in restraint of trade and would therefore be considered by the court.

– Once it was so held, the contract was held to be unreasonable – as the Court pointed out “suffice to say in almost every clause it is the name of Zomba which is being provided for”.


• Lots of high profile cases deal with exclusivity – i.e. I’m your manager forever, you can never work for anyone else when this contract ends or during this contract and so on.

• Generally exclusivity during contract is fine, but preventing working for others for periods after (e.g. band not allowed get new manager) would be void


VOID CONTRACTS

• Contracts Ousting the Jurisdiction of the Courts– Lee v Showmans Guild

• Union attempted to argue that decisions of union committee’s could not be questioned in court – rejected!

– General rule – you can oust, but not entirely– Arbitration can be binding etc.


VOID CONTRACTS

• Contracts Subverting the Sanctity of Marriage

Used to be relevant viz matchmaker contracts (fee paid to find a spouse for someone) or to void contracts not to marry

Now relevant to separation / pre nup


• Agreements relating to future separations– Void – undermines the vows

• Marquess of Westmeath v Marquess of Salisbury

• Does not apply to contracts dealing with present separations – only future separations

• Nor where parties separate, but then get back together – might agree that if it breaks down again, certain consequences will follow

• Treated as encouraging reconciliation – MacMahon v MacMahon (para 7-89)


– Cohabitation – Ennis v Butterly• K here for F to move in with M and would marry

when in a position to do so…

• Kelly J held K to cohabit was void…cohabitation must have a lower status than marriage (Article 41)

• True scope? Only a problem where cohabitation is the consideration or wider?


Effects of Voidness

• Illegal terms pollute whole contract• Void can be severed• Cts will not re-write, but will delete if possible –

blue pencil test• Will not always work• Attwood v Lamont

– RoT clause – restricted many professions for 10 miles – First inst ct – struck out one profession – CA said – all were together – i.e. protection for the several businesses of the previous employer.


Skerry’s College Ireland v Moyles

• Teacher of short-hand course – agreed not to teach within 7 miles of Belfast, Dublin and Cork for three years after leaving

• Barton J deleted Dublin and Cork.


• General rule is that court will interpret wide clauses to fit what is truly needed

• Marion White v Francis– Hairdresser RoT clause – said could not work

as servant, agent or assistant “in” a hairdressers.

– She claimed it meant she could not even be a director or book-keeper

– Court rejected – held it to cover active participation in business only

© griffith college professional law school chapter 15 illegality and void contracts

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