Law of Contract Illegality

Illegality Contracts may held illegal because, 1.It was illegal when entered into i.e at time of formation of contract ; or 2.Becomes illegal because of the way it is performed.

Illegal at time of formation Contracts may be illegal from the beginning, ; at time of formation of contract e.g. 1.Breach of statute or common law 2.Breach of criminal law or tort 3.Contrary to public policy – restraint of trade etc. 4.Breach of specific legislation 5.Contracts promoting immoral conduct 6.Contracts prejudicial to status of marriage 7.Contracts prejudicial to public safety

Illegal at time of formation If a contract is found to be “illegal” at the time of formation, the contract would be held void and unenforceable by either party. Neither party can sue upon it.

Breach of statute Contracts may be illegal when entered into because they cannot be performed in accordance to the terms without the performance of an illegal act. Levy v Yates (1838) Facts : There was a statutory rule that a royal licence was required to perform a play within 20 miles of London. There was a contract for a performance of a play, where no royal licence had been obtained. Held : Contract was illegal and cannot be performed.

Breach of common law Everet v Williams (1725) Facts : Two highway men had agreed to share the spoils of their crime, and when one agreed to evade the agreement, the other sued for his share. Held : Needless to say he was unsuccessful.

Breach of common law Alexander v Rayson (1936) Facts : The parties entered into a contract to defraud the rating authority, (which decides the value of properties), by showing the value of the property at less than its actual value. Held : Contract was illegal and unenforceable

Breach of common law But if one of the parties contracting is unaware that he has entered into an illegal contract, the court may allow the party to benefit from it. Begbie v Phosphate Sewage (1875)

* Policy -Restraint of trade Restraint of trade concerns contracts that limits an individual’s right to use his or her skills for payment, or to trade freely. 1) Contracts for sale of business 2) Contracts by which prices or output are limited 3) Contracts by which employees agree to not set up or be employed in such a way as to compete with his previous employer. 4) Contracts where a person agrees to restrict their mode of trade with specific persons or with the other party. (solus agreements)

* Policy -Restraint of trade A general or partial restraint are both against public policy, prima facie void, unless, it can be shown that it is 1) reasonable as regards the parties, ie. Should serve to protect the legitimate interest of the party enforcing the restraint 2) not unreasonable with regard to public policy.

* Policy -Restraint of trade Nordenfelt v Maxim Nordenfelt Guns and Ammunitions Co (1894) Held : Court must be satisfied that the party making the restriction actually needs to protect their interests. ➢ to protect relationships with customers and their trade secrets Restrictions to prevent competition will be held “illegal”.

* Policy -Restraint of trade Nordenfelt v Maxim Nordenfelt Guns and Ammunitions Co (1894) Held : The court would also consider the following circumstances, when deciding if the restraint is reasonable : 1) Should not be wider then necessary to protect interests. 2) Scope of the restraint 3) area (geographical) and period (time) of restraint

* Policy -Restraint of trade Mason v Provident Clothing Co (1913) HL Facts : a restriction was placed in a contract which prevented an employee from working in the same trade within 25 miles of London, wider than was necessary to protect his former employer's business. Held : Terms in contract of employment held void, as scope in relation to area was held unreasonable.

* Policy -Restraint of trade Leng & Co v Andrews (1909) Facts : A reporter agreed never to work for any other paper for the rest of his life, within twenty miles. CA : Held unreasonable as time period, is unacceptable to protect the interest of the employer.

* Policy -Restraint of trade Office Angels v Rainer – Thomas (1991) Facts : D worked for an employement agency with 34 branches. Contract said that D cannot within 6 months after leaving the previous employer, solicit from any person who had been a client of the company. D was also stopped from running an employment agency within 1 km of her former branch. Held : (although it appears reasonable from the facts), the CA decided that excluding all the companys customers was unreasonable although 6 mnths was. Physical location of an agency has little relevance on the effect on the business thus 1k requirement was also held unreasonable.

* Policy -Restraint of trade Esso Petroleum Co Ltd v Harper's Garage (1968) Facts : The owner of two garages entered into a contract in which he agreed to sell only Esso petrol in return for a discount on the price per gallon. It was to last for about 4 years for one garage but for 21 years on the other. Held : The time period of 21 years was unreasonable just to protect the interest of Esso petroleum.

Public policy Public policy changes with time, as views and beliefs change. Cowan v Milbourn (1867) Facts : A contract for leasing a hall for a meeting of atheists was held to be illegal. Bowman v Secular Society (1917) On similar facts a contract to hold such a meeting was held not illegal.

Contracts promoting immorality Pearce v Brookes (1866) Facts : The P had hired a carriage to a prostitute so that she could use it to see her clients. He was unable to enforce the contract when she failed to pay the hire charge. Held : Contract held void as it promoted an immoral act

Contracts promoting immorality Armhouse Lee Ltd v Chappell (1996) Facts : D paid the plaintiffs to place adverts for telephone lines in magazines. When regulation of such publicity increased the defendants terminated the contracts. The plaintiffs brought an action, for monies and succeded. Held : contracts should be found immoral only if it was found harmful to society,...sex lines were generally accepted by society (although distasteful), so the contract was enforceable.

Contracts prejudicial to public safety Foster v Driscoll (1929) Facts : Where a contract has its object the doing of an act which is illegal because its prejudicial to public safety,..for e.g. Trading with the enemy. Held : Trading with the Enemy Act 1939, holds trading or attempt to trade with enemy an offence, thus contracts leading to it would be unenforceable.

Contracts prejudicial to justice R v Andrews (1973) Held : A contract to stifle the prosecution by giving false evidence is clearly unacceptable and any contract to perform this will not be enforceable.

Contracts prejudicial to status of marriage Lowe v Peers (1768) Held : a contract that attempts to restrain or prevent a party from marrying is void and against public policy.