Law of Contract Illegality 2. Illegality Academic argument : Courts will not enforce a contract, which is illegal or which is otherwise contrary to public.

Law of Contract

Illegality 2

IllegalityAcademic argument :Courts will not enforce a contract, which is illegal or

which is otherwise contrary to public policy. Why?

1. Court cannot aid although parties willing.

2. Justice would be tainted and dignity of court offended.

3. Refusal to grant relief would deter parties from making contracts.

Illegality at common lawAcademic 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”.

IllegalityAcademic 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.

IllegalityAcademic 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 performanceIn 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 performanceSt 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 recoverthe 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 performanceShaw 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 performanceShaw 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 partyA 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 partyKnowledge 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 formationA 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 illegalityThe 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 illegalityIf 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 clauseIn 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.