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Unlawful contracts including illegal contracts, void contracts and restraint of trade Law of Contract LW1154 BCL 2005-2006 1.

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Presentation on theme: "Unlawful contracts including illegal contracts, void contracts and restraint of trade Law of Contract LW1154 BCL 2005-2006 1."— Presentation transcript:

1 Unlawful contracts including illegal contracts, void contracts and restraint of trade Law of Contract LW1154 BCL

2 Reading Text Clark chapters Reference McD chapters

3 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 3

4 Who makes the objection? If there is a clear illegality, the court itself must raise the point … … even if neither party wants this to happen But usually one party is raising the point tactically … … as an excuse to escape the contract 4

5 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 5

6 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 6

7 Which contracts are illegal? The list is long and disordered Different writers organise it all differently Not everyone agrees on how to structure the cases Basic distinction: illegality by statute and at common law 7

8 By statute / At common law Statutory illegality is very wide- spread … … and I can only deal with general principles Common law illegality is more manageable … … but also more antiquated 8

9 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 9

10 Scheme of the lectures Illegality at common law (with specific examples) Illegality by statute (mostly general principles) Effect: contractual remedies Effect: non-contractual remedies 10

11 Common law illegality 11

12 Types of illegality Commission of wrongs Corruption and tax evasion Trading with the enemy Interference with the administration of justice Encouraging sexual immorality Restraint of trade 12

13 Common law illegality 1. Contracts to commit wrongs 13

14 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) 14

15 Common law illegality 2. Corruption and tax evasion 15

16 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) 16

17 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 17

18 Example 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 18

19 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) 19

20 Common law illegality 3. Trading with the enemy 20

21 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) 21

22 Common law illegality 4. Interference with the administration of justice 22

23 Interference with the administration of justice Essentially two categories: Preventing court actions which should occur eg by corruptly abandoning a prosecution Encouraging court actions which shouldn t occur eg by paying another s costs 23

24 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 24

25 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 25

26 3. Unfair advantage in bankruptcy If a trader is bankrupt, their assets are to be divided equally between their creditors An agreement treating one creditor more favourably than the others is illegal Wrongly preventing actions 26

27 Example 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 27

28 Wrongly encouraging actions Traditionally, two overlapping concepts: Maintenance = improperly helping another to litigate Champerty = improperly making a profit from another s litigation 28

29 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) Wrongly encouraging actions 29

30 The modern law 4 main areas of concern today: Contingency fees Fee sharing agreements Assignment of rights to litigate Heir-locator agreements 30

31 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 11) 31

32 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 1. Contingency fees 32

33 2. Fee sharing agreements An agreement by a solicitor to share fees with a non-lawyer is professional misconduct … … and the agreement cannot be enforced eg Mohamed v. Alaga [1999] EWCA Civ

34 3. Assignment of a right to litigate At common law, someone with a right to litigate may not transfer that right to another 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 34

35 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 35

36 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 Ireland ( Fraser v. Buckle [1996] 2 IRLM 34, discussed by Capper (1997) 60 MLR 286) 36

37 Example 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 37

38 Common law illegality 5. Encouraging sexual immorality 38

39 Encouraging sexual immorality The case law is antique … … and some of it is overtaken by modern developments ( eg the 15 th amendment to the constitution, 1996) How much of it is still good law is very speculative 39

40 4 basic areas of concern:- Prostitution Contracts affecting the decision to marry Contracts modifying obligations deriving from marriage Cohabitation and sex outside marriage Encouraging sexual immorality 40

41 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) 41

42 The Oireachtas has specified in legislation which aspects of prostitution are illegal (Criminal Law (Sexual Offences) Act 1993) Arguably, the courts should go no further than the statute 1. Prostitution 42

43 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 husband 43

44 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) 44

45 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 45

46 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 3. Contracts modifying the marriage obligations 46

47 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) 47

48 Example 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

49 Common law illegality 6. Restraint of trade 49

50 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 contracts (see Competition Act 1991) 50

51 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 51

52 When does the doctrine apply? 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? 52

53 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 co- ops 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? 53

54 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 Kerry Co-Op v. An Bord Bainne [1991] IRLM

55 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) 55

56 What does the doctrine require? 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 56

57 Example 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 horses The plaintiff, a show-jumper, complained that this was an unreasonable restriction But was there restraint of trade? 57

58 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 minor Example Macken v. O Reilly [1979] IRLM 79 58

59 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 59

60 Restraint of trade - examples 3 major examples of the doctrine at work: Employment Sale of business Exclusive dealing contracts 60

61 1. Employment Any substantial interference with freedom to work or freedom to trade may be within the doctrine In these cases, most of the attention is on reasonableness as between the parties themselves Appeals to the public interest are rarely successful 61

62 Example 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 advanced 62

63 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 63

64 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 64

65 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 65

66 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 failures 66

67 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 67

68 Knowledge gained from employment So a contract clause cannot forbid ex- employees from using knowledge gained during employment unless the clause protects legitimate employer interests eg trade secrets eg customer lists 68

69 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 customers) … but the issue will often be how broad such clauses can be 69

70 Example 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 70

71 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 71

72 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) 72

73 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 73

74 Example 1 Lemenda Trading v. African Petroleum [1988] QB 448 Contract to pay commissions to certain intermediaries involved in an oil supply contract 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 74

75 Example 2 Stanhope v. Hospitals Trust (1936) Ir Jur Rep 25 Sale of lottery tickets Tickets were sold in Natal and sent on to Dublin 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 75

76 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 76

77 Illegality by statute 77

78 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 78

79 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 79

80 Example 1 Namlooze Venootschap v. Dorset Manufacturing [1949] IR 203 Action for the price of goods sold and delivered 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 unenforceable 80

81 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 81

82 Examples of statutory illegality Wagering, gaming and lotteries (see especially Gaming and Lotteries Acts ) Unfair Competition (see especially Treaty of Rome article 81) 82

83 The effect of illegality on contracts 83

84 Effect of illegality - general A contract illegal on its face is completely unenforceable 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 84

85 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 required ( ignorance of the law is no excuse ) 85

86 Example Gray v. Cathcart (1899) 33 ILTR 35 A landlord leased a house in poor condition When the rent was not paid, the landlord sued But letting unsanitary premises was contrary to statute... … so the contract was illegal on its face, and the rent not recoverable 86

87 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 87

88 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 available The hauliers cannot enforce Whether the engineers can enforce depends on their knowledge 88

89 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 dodge But it could not be shown that P knew of any illegality Therefore P could enforce against D 89

90 Example 3 Whitecross Potatoes v. Coyle [1978] IRLM 31 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 90

91 Example 3 Whitecross Potatoes v. Coyle [1978] IRLM 31 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 (unlawful) Therefore the buyer could enforce but the seller could not 91

92 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 92

93 Separation – two distinct ideas Two distinct notions seem to be involved: 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 93

94 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 jurisdiction eg terms in restraint of trade 94

95 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 unenforceable 95

96 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 96

97 The effect of illegality on contracts – other heads of the law 97

98 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 98

99 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 99

100 Example 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 100

101 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) 101

102 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) 102

103 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 103

104 Other principles: 3. Restitution The basic principle is:- In pari delicto, potior est conditio defendentis = When both sides are equally guilty, the defendant s case is the stronger of the two But when are both parties equally guilty ? 104

105 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 105

106 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 106

107 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 107

108 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 108

109 Example 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 creditors The father made a satisfactory arrangement with his creditors … … and successfully claimed the shares back 109

110 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 482) 110

111 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 remedy The statute is to be read in the light of its objects 111

112 Example 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 112

113 That s all on illegality 113


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