Part D: Illegal And Unenforcable Contracts Flashcards
What is an illegal contract?
An agreement that is prohibited by statute or is illegal at common law on grounds of public policy.
Held to be good ab initio and treated as though it never existed.
As the contract is treated as though it never existed - no action can be taken for breach and no benefits.
What are the exceptions where the courts will allow recovery?
- If one of the parties unaware of illegality
- If party can prove without reliance on the illegal act that they were entitled to money or property transferred.
What are the two areas that illegal agreements can be broken down into?
- Contracts illegal by statute
- Contracts illegal at common law (including contracts contrary to public policy)
What contracts will be regarded as illegal by statute?
Contracts in breach of statutory provisions can be illegal and void.
CASE: Under regulations, oil was prohibited from dealing without a licence. Claimant did not have a licence so defendant did not deliver oil. Contract unenforceable as to enforce contract would conflict with statute.
Contracts also void if creation in itself is prohibited.
CASE: Claimant failed as he was an unlicensed broker - and anyone Acton on as a broke in the city has to have a licence.
CASE: Statute requires vendors of fertilisers to state chemical breakdown on invoice. Defendant did not pay and claimant sued. Contract was unlawful.
If claimant was unaware of illegality - court to decide between innocent and non-innocent participants.
CASE: Company contracted to carry goods - but did not realise the van was not licensed to carry goods apart from own. Claimant unaware and could therefore recover damages.
In contrast…
CASE: Lorry been overloaded but party was aware of breach. Claimant unsuccessful in claiming damages.
What contracts are illegal at common law?
Historically, judges tried to conserve concept public policy.
In some cases, courts may allow contract to stand if illegal clause is removed - instead of declaring the whole contract is void.
Contracts regarded as illegal at common law:
1. Agreement to commit a crime, a tort or a fraud
2. Agreement to defraud HMRC
3. Contracts damaging public safety or foreign relations
4. Contracts prejudicial to admin of justices (e.g to provide false evidence)
5. Contracts that are sexually immoral
6. Contracts leading to corruption in public life
What are restraint clauses and contracts?
A restraint clause is a term within a contract that prevents seller or employee engaging in similar business to their employer within a specified area or period.
The purpose is to protect trade secrets or info.
They are only enforceable if reasonable and if it is not contract to public policy.
CASE: Nordenfell v Maxim Nordenfell Guns
Leading case of doctrine of restraint of trade.
Claimant was not meant to work for rival business for 25 years - breached covenant.
Judge stated normally restraints of trade are void but exception to rule where restraint can be proven to be reasonable.
What criteria need to be met for restraint clause to be enforceable?
- Initial statement that prima facie contracts in restraint of trade are void
- Consider whether there are any special circumstances that should be taken into account which justify the restraint and make it reasonable?
- Look at whether the restraint meets the test of reasonability - must meet all criteria to be enforceable:
a) is there legitimate interest?
b) is it reasonable with reference to the interest of the parties involved?
c) is it reasonable in the public interest?
In relation to restraint clause, what does legitimate interest mean?
There are two types of interests that can be legitimately protected:
- Restraints on employees
- Restraints on the vendor of business
Overall, legitimate interests protected are trade secrets and customer connection relationships with suppliers and senior employees.
Court to ensure genuine reason for protection and convenient is not simply an attempt to prevent competition per sa.
CASE: Agreement included a clause to prevent manager working as glassmaker as manager had learnt trade secrets. Covenant held to be enforceable and reasonable.
In contrast…
CASE: Contract included covenant restricting small company from establishing new business. Held void as it did not protect proprietary interest (no threat to much larger business)
In relation to restraint clause, what does reasonableness mean?
The main factors to consider is nature, geographical area and duration.
Courts will only enforce to protect interest.
If duration of time is excessive, courts will not enforce it.
CASE: contract restricted manager from working within 7 miles and extended to the rest of their life.
Court held clause reasonable as necessary to protect business.
In relation to restraint clause, what does geographical extent mean?
It depends on the circumstances of the case.
CASE: Restriction to prevent glass-maker manager working as he had learnt trade secrets. Held enforceable.
In contrast…
CASE: Contract restricted person from being able to work as a tailor, dressmaker or draper within 10 miles. Held unenforceable as geographical area was too wide.
Overall, geographical restrictions vary - some cases will merit wider restraint than others.
In relation to restraint clause, what does duration mean?
Restriction must not be excessive in duration.
CASE: Restricted former manager of paper tissue company who was made redundant after 20 years from working in industry for 12 months.
Held unenforceable as it was too wide and no specific trader secrets mentioned.
In relation to restraint clause, what does public interest mean?
Consideration must be given to the interests of general public.
Public interest has no precise definition .
CASE: Stated that a covenant that restrains a person from competition is always void and unreasonable - unless
proprietary interest is exceptional.
CASE: Held that banning claimant from operating a wool trade served to deprive the community of a service which could be an advantage.
What are the effects of an illegal contract which has been void?
They are treated as if it was never formed.
Neither party allowed to seek a remedy and no action will lie in damages.
If part of the contract is “illegal” - sometimes possible to spilt agreement so that the valid part is enforceable.
This process is known as severance.
What is severance?
When part of the agreement is “illegal” - sometimes possible to spilt agreement so that valid part is enforceable.
Before the clause is struck out - must ensure that lawful part is of greater importance that unlawful part.
CASE: Contract to pay illegal premium could be severed because precise amount could be assigned to illegal parts of agreement.
When can severance not occur?
- If subject matter is criminal offence
- Contrary to public policy
