A.5.IV. Vitiating Factors - Illegality

Question 1

Levy v Yates

Answer 1

Contract illegal at formation. If a contract cannot be performed without an illegal act, it will be illegal from the beginning. This includes crimes, committing a tort, or a breach of any statue. Here, there was a statue forbidding plays in London without a royal license. This contract was for such a play, but there was no license. This made it illegal from the time of formation.

Question 2

21st Century Logistics v Madysen

Answer 2

Contract illegal at formation. If the contract is entered into with the intention of using it to achieve an illegal purpose, but that illegal purpose is remote from the contract, the contract will not be tainted. Here, the parties made a contract for the sale of goods, and the purchaser intended to defraud VAT. The court held this was not enough to make the contract illegal, it just provided the opportunity to create an illegal act.

Question 3

Anderson v Daniel

Answer 3

Illegal due to mode of performance. A contract may be perfectly legal when made, but may be carried out in an illegal manner. Here there was a statute whereby the sale of fertilizers must come with a notice of the chemicals. Not illegal to sell the fertilizer, but it became illegal when the notice was not given. Couldn’t claim the money when he wasn’t paid.

Question 4

Types of Illegality

Answer 4

Breach of Common Law
Breach of Legislation
-Contracts which discriminate
-Competition Law
-Gambling
Contracts against public policy
-Contracts promoting sexual immorality
-Contracts prejudicial to the status of marriage
-Contracts prejudicial to public safety
-Contracts prejudicial to the administration of justice
-Contracts to oust the jurisdiction of the courts
-Contracts tending to encourage corruption in public life

Question 5

Everet v Williams

Answer 5

Breach of common law. Two highwaymen agreed to share the spoils of their crime and when one tried to evade the agreement, the other sued for his share. Needless to say, he was unsuccessful.

Question 6

Les Laboratoires v Apotex

Answer 6

Breach of common law. Where a crime is one of strict liability, and the party doing the illegal act does not know the facts which make the conduct illegal, the illegality defense will not apply.

Question 7

Restraint of trade

Answer 7

As far as contracts involving commission of a tort are concerned, the most important area is contracts in restraint of trade. Four groups:
1. Contracts for the sale of a business.
2. Contracts between businesses by which prices or output are regulated. This is now largely governed by legislation.
3. Contracts in which an employee agrees that on leaving the company, they will not set up in business or be employed in such a way as to compete with that employer.
4. Contracts where a person agrees to restrict their mode of trade by, for example, only accepting orders from one particular company - a solus agreement, typical in pubs where they buy all their beer from one brewery.
In each case, the contract may prohibit the competing activity completely (a general restraint) or only for a certain period or are (partial restraint).
The purpose of invalidating such agreements is to promote free competition, but there are cases in which it is recognised that it may be desirable to allow people to bind themselves in such ways. So the courts take a balanced approach.

Question 8

Nordenfelt v Maxim

Answer 8

Breach of common law, restraint of trade. All restraing is contrary to public policy and therefore void, unless it can be show that it is reasonable with regard to the parties, and is not unreasonable with regard to the public interest - if this can be done, the contract will be valid. The only legitimate interests that can be protected are relationship with customers and their trade secrets. Restrictions designed simply to prevent competition will not be upheld. The court must be satisfied that the agreement is no wider than is necessary to protect those interests, and the scope of the restraint and the area and period of time it covers are all properly balanced against one another.

Question 9

Mason v Provident

Answer 9

Restraint of trade. A restriction to work 25 miles from his previous employer was too wide and therefore void.

Question 10

Esso v Harper’s Garage

Answer 10

Restraint of trade. He had two garages and Esso had a monopoly - 4.5 years on one, 21 years on the other. The former was upheld, the other voided. 5-year limit on “tied garage” agreements.

Question 11

Proactive Sports v Rooney

Answer 11

Restraint of trade. Rooney made an agreement when he was 17 for the exploitation of his image for 8 years. He tried to get out of it early after his image became worth a lot more, citing unreasonable restraint of trade. He won - it was not reasonable, particularly given the very substantial imbalance in the bargaining power at the time.

Question 12

Cope v Rowlands

Answer 12

Breach of legislation. The stockbroker did some work for the defendant, who failed to pay. However, it was illegal to do stockbroker without a license, and he didn’t have one. Was unable to reclaim the money, the courts could not enforce an illegal contract.

Question 13

Equality Act 2010

Answer 13

Contract which discriminate either directly or indirectly are illegal. Age, disability, gender reassignment, marriage, civil partnership, pregnancy, maternity, race, religion or belief, sex and sexual orientation. The Act prohibits discrimination in relation to the provision of public services, disposal of premises, work, education and associations. Section 142: A term of a contract is unenforceable against a person in so far as it constitutes, promotes or provides for treatment of that or another person that is of a description prohibited by this Act.

Question 14

Article 85 of the European Community Treat, Competition Act 1998

Answer 14

Breach of legislation: Competition Law. The first applies to all of the EU, the latter only to the UK (for now). Apply to agreements between undertakings, decisions by associations of undertaking or centered practiced, which 1. may affect trade, and 2. have as their object or effect the prevention, restriction or distortion of trade. Prohibited agreements are in general void unless an exemption is granted.

Question 15

Gambling Act 2005

Answer 15

There used to be an illegality with gambling, but with the 2005 act, that was lifted. All debts are now enforceable, unless it was substantially unfair - 6 months from the date of the gamble, but no time limit in cases of cheating.

Question 16

Pearce v Brookes

Answer 16

Against public policy: promoting sexual immorality. He rented a carriage to a prostitute, knowing she would use it to see her clients. She didn’t pay, he couldn’t claim, this was seen as against public policy.

Question 17

Armhouse v Chappell

Answer 17

Against public policy: promoting sexual immorality. Paid the claimant to place adverts for telephone sex lines in magazines. They terminated the contract and were still owing money, got sued. Defended themselves that the contract was unenforceable since illegal. The court refuted this, there was no evidence, that any “generally accepted moral code condemned these telephone sex lines.” Contract should only be found illegal under this heading if an element of public harm clearly exists.

Question 18

Hermann v Charlesworth

Answer 18

Against public policy: Contracts prejudicial to the status of marriage. Here, she paid a company to find her a husband. She was introduced to several, but didn’t marry any, didn’t pay. She was sued, the court refused to enforce the contract for marriage brokerage contracts.

Question 19

Radmacher v Granatino

Answer 19

Against public policy: Contracts prejudicial to the status of marriage. It used to be that prenups had no effect in UK law, as the fact of even contemplating divorce was against the sanctity of marriage. This court finally changed that. Family law is applied here rather than contract law. The court held that the agreements should be looked at as part of achieving fairness in a divorce settlement, given that: 1. It was entered into willingly, of free will without any undue influence. 2. Fully informed of the impact of entering into the agreement (including independent advice) 3. No material lack of disclosure so that both parties have all the relevant information to understand the impact of the agreement. Legal advice not necessary but highly desirable. 4. Should intend that the agreement will govern the financial consequences of the marriage coming to an end. Courts will look at fairness, maturity of the couple, length of marriage (circumstances change more in longer marriages), etc. Guidance going forward will require a prenup to have the following:

1. Compliant with traditional contractual rules.
2. Entered after both parties received legal advice.
3. Entered after full disclosure of financial situation.
4. In writing.
5. Signed at least 28 days before wedding.
6. Made by deed.
7. Contains a statement that the parties understand that the marital agreement will partially remove the court’s discretion to make financial orders.

Question 20

Kremen v Agrest

Answer 20

Against public policy: Contracts prejudicial to the status of marriage. Postnuptial agreements treated the same way as prenuptial agreements, same criteria. This happened to be put aside because it didn’t sufficiently take account of the childrens’ needs, but would otherwise be discharged.

Question 21

Foster v Driscoll

Answer 21

Against public policy: Contracts prejudicial to public safety. These are contracts that will be illegal because they are transactions with those living in an enemy country during wartime, contracts to perform acts illegal in a friendly foreign country and contracts which are damaging to foreign relations. Here, the contract was to supply alcohol in the US when it was illegal to do that there then. Illegal.

Question 22

Royal Boskalis v Mountain

Answer 22

Against public policy: Contracts prejudicial to public safety. An agreement to make up for seized lands in Iraq during war, which was against UN sactions. Court refused to enforce it, it was made illegal by breaching UN sanctions.

Question 23

Morris v Southwark

Answer 23

Against public policy: Contracts prejudicial to the administration of justice. A contract which in some way frustrates the administration of justice will be illegal on public policy grounds. Here, the lawyers agreed to shoulder the cost of the legal defense if her appeal failed, and to split the fee if they won. That first part went farther than usual, and champerty was usually illegal in the UK (where funding of someone else’s case in view of splitting the damages, which was usually invalidated). Here the courts found it not champertous because it facilitated access to civil justice, not against public policy.

Question 24

Bennett v Bennett

Answer 24

Against public policy: Contracts to oust the jurisidction of the courts. Not enforceable on public policy grounds. Here, a wife promised her husband that she would not apply to the court for maintenance after divorce.

Question 25

Parkinson v College of Ambulance

Answer 25

Against public policy: Contracts tending to encourage corruption in public life. Had given a charity 3k after receiving assurances that it could secure him a knighthood. It failed to do so, but he was not allowed to claim back his money because the transaction was illegal.

Question 26

Patel v Mirza

Answer 26

Effect of an illegal contract. There was a payment to buy shares based on insider trading which is illegal. He didn’t get the information and didn’t buy the shares, but didn’t return the money. Here, his defense was that the contract was illegal and so the court shouldn’t uphold the agreement. The court said the court needs to take 3 factors into account.
1. The underlying purpose of the prohibition which has been transgressed.
2. ANy other relevant public policies which may be rendered less effective by denial of the claims.
3. The possibility of overkill unless the law is applied with a due sense of proportionality.
Here the court allowed the restitution - The other shouldn’t be allowed to rely on the illegality to have a windfall of 620k, who satisfies the ordinary requirements of a claim for unjust enrichment, he should not be debarred from that claim because the money was paid for an illegal purpose. There may be cases where such a restitution would be against public policy, but not here. In order to decide whether to allow a claim which is some way tainted by illegality, the court has to consider whether the public interest would be harmed by damaging the integrity of the legal system.
Gave more of a free hand for courts to look at the gravity of the illegality and what a just outcome would be, curing some of the uncertainty with illegal contracts. 1. Allows courts to look at the facts of the case, and 2. illegality could be used less often to deprive claimants their usual rights and remedies.
This abolished the earlier case of Tinsley v Morgan, where a couple who jointly bought a house in his name only in order for her to make false claims on social security, and granted her half the possession anyway even if the contract was illegal.

Question 27

St John v Joseph

Answer 27

Effects of an illegal contract: Contracts illegal as performed. Where it is a lawful contract but performed illegally, it may be possible to enforce if the illegal act was merely incidental to the performance (speeding during a delivery service). HEre, he carried grain from Alabama to England, he overloaded the ship so that the the load line was submerged, which was a statutory offence. The other party tried to get out of paying them for that reason, but that was rejected, it was only incidental.

Question 28

Ashmore v Dawson

Answer 28

Effects of an illegal contract: Contracts illegal as performed. It may also be that only one party intended the illegal performance, or both did, and the courts distinguish between the two. If both are, neither is likely to be able to enforce it. Here, they agreed to transport two boilers, and did it here on lorries that were not allowed to do so. He was not allowed to claim back for the damage done to the goods here as he not only knew, but helped him arrange it. Where the other party doesn’t know, they are likely to be able to enforce and claim with the usual contractual remedies (where for example he rents out a car that was intended to be used for carrying stolen goods.)

Question 29

Goldsoll v Goldman

Answer 29

Severance. Sometimes, it’s possible to divide the illegal parts from the legal ones, and enforce that which is not illegal. This can be done if those parts are relatively unimportant. If the severance leaves the nature of the contract unchanged, this can be done. Here, he bought the business who traded in imitation jewelry - it was a term that the seller wouldn’t operate in imitation or real jewelry in the UK or several other countries. They said it was too wide a restriction, but lifted that part and left it with a restriction on imitation jewelry in the UK.