Illegality in Contracts

Question 1

Categories; (3)

Answer 1

1. Contract is itself illegal or contrary to public policy
2. Contract to do something illegal or contrary to public policy
3. Illegal manner of performance of lawful contract

Question 2

Illegality may arise from statute or common law: (3)

Answer 2

1. Express statutory illegality - the contract is expressly prohibited by the statute
2. Implied Statutory illegality: the contract is impliedly prohibited by the statute
3. Common law illegality: agreement to do something which constitutes a serious criminal offence

Question 3

Cuthbertson v Lowes 1870

Answer 3

Expressly illegal under statute - statute made contracts of sale in a specific measurement illegal - the contract was void - was made void specifically under the wording of the statute

The contract was void but remedy was allowed under the law of unjustified enrichment. It was clear that the buyer of the potatoes was at it, so the Lords allowed an UE claim.

Question 4

Barr v Crawford 1983

Answer 4

Bribing a public official - against public policy - unenforceable

‘in pari delicto’ - in equal fault

Question 5

In some cases the courts will allow the contract to be enforced (the parties will not be in pari delicto): 4 points

Answer 5

1. If a contract is illegal because at the time of its formation one party intended to perform it in an unlawful way, then the innocent party can sue on the contract and recover losses (Jamieson v Watt’s trs 1950)
2. where a person has entered into an illegal contract as a result of the other party’s fraud, the innocent party is entitled to relief
3. if a party to an illegal contract repents timeously, he can recover any payments made before the contract is performed
4. where a contract is expressly or impliedly illegal because of statutory provisions designed to protect one of the parties then that party is entitled to relief. Where the purpose of a statutory requirement to provide an invoice to a purchaser is to protect the purchaser, he can sue the seller for breach of contract (Archbold’s v Spanglett 1961

[pg 281 thomson]

Question 6

St. John Shipping v Joseph Rank 1957

Answer 6

They broke a statute - overloaded the ship - was the contract still enforceable even though a crime had been committed? Yes - there was no provision in the statute that covered contractual situations

Question 7

ex turpi causa non oritur actio

Answer 7

from a dishonorable cause an action does not arise

Question 8

Jamieson v Watt’s trs 1950

Answer 8

You needed a licence to do timber work - he got a license to do £40 worth of work but did £114. This was prohibited by statute.

He wanted to rely on Cuthbertson in order to sue for the price but this was not allowed. He had intended to do something illegal from the start and the offence he committed was a serious offence, rather than using the wrong measurement. Also, the lords labelled the contract in Cuthbertson a void but in this case labelled it as illegal.

Question 9

Nordenfelt v Maxim Nordenfelt 1894

Answer 9

The test to see whether a covenant on restraint of trade is legal. The covenantee (person trying impose the restriction) must show:

1. That the covenant is necessary to protect a legitimate interest of the covenantee; it is not sufficient that the covenantee wishes to avoid competition per se from the covenanter.
2. That the restraint in the covenant is reasonable as between the parties.
3. That the restraint is in the public interest.

If successful, the restriction will be legal and is usually enforced with an interdict. The test is ultimately one of reasonableness; the spatial area of the restraint, the duration of the restraint and the nature of the restriction will all be taken into account to determine whether or not the covenant is reasonable between the parties and in the public interest.

Question 10

Covenants on restraint of trade are pima facie illegal and unenforceable when they are included in… (2 types of contract):

Answer 10

1. Contracts for the sale of businesses and partnerships

2. Contracts of employment

Question 11

Example of covenant of restraint in relation to contract for the sale of a business:

Answer 11

Nordenfelt v Maxim Nordenfelt 1894: Arms deal - business that manufactured weapons.

When buying a business you are also buying the goodwill that the business has accrued over the years.Similar bargaining power will also come into playNumber of customers/availability of cutovers (not that big a market for massive weapons - only governments)*

Question 12

Example of covenant of restraint in relation to contract of employment:

Answer 12

Morris v Sexalby 1916

‘gardening leave’ - *** in these contracts, parties do not have equal bargaining power. The covenant must not prevent the former e/ee from earning a living. It is more difficult for an employer to show that this sort of restriction is reasonable.

Question 13

Mulvein v Murray 1908

Answer 13

Blue pencil rule - where a covenant contains two or more restraints, the court can blue pencil out an unreasonable restraint while upholding the reasonable restraints.