Vitiating Factors Flashcards
what is a vitiating factor?
A vitiating factor is a circumstance that can affect the validity of a contract, making it void or voidable
what are examples of vitiating factors?
o misrepresentation
o duress
o undue influence
o mistake
o illegality
what are the types of undue influence?
o Actual
o Presumed
what are the types of duress?
o Threats of physical violence
o Illegitimate threats
what are the types of misrepresentation?
o Fraudulent
o Negligent
o Innocent
what are the types of mistake?
o Common mistake
o Cross-purpose mistake
o Unilateral Mistake
what are the types of illegality?
o Illegal at formation
o Illegal by performance
o Illegal under statute / common law
what effect does misrepresentation have on a contract?
it renders it voidable
what effect does duress have on a contract?
it renders it voidable
what effect does undue influence have on a contract?
it renders it voidable
what effect does mistake have on a contract?
it renders it void
what effect does illegality have on a contract?
it renders it void
what remedies are available where there has been misrepresentation?
o Fraudulent - rescission and damages
o Negligent - rescission and damages
o Innocent - rescission only
what remedies are available where there has been duress?
o Rescission only
what remedies are available where there has been undue influence?
o Rescission only
what remedies are available where there has been mistake?
None. If a court declares a contract void, there is no remedy.
what remedies are available where there has been illegality?
None. If a court declares a contract void, there is no remedy.
what is a misrepresentation?
A misrepresentation is when one party makes a misleading statement to another party that causes the other party to enter into a contract. Misrepresentation can be intentional or unintentional.
How is a misrepresentation considered?
Misrepresentation can be considered in 4 stages:
o Categories of pre-contract statements
o Definition of misrepresentation
o Types of misrepresentation
o Remedies
re: misrepresentation
what are the categories of pre-contract statement? What effect can they have?
o Sales puff - i.e. extravagant sales not meant to be believed and so not actionable if untrue
o Contract terms - this will give rise to a breach of contract if untrue
o A representation - this may be actionable as a misrepresentation
re: misrepresentation
how does you determine which category a pre-contract statement falls into?
- the courts will look at ‘the common intention of parties’ at the time they entered into the contract
- if intention is unclear, the court will consider various factors
re: misrepresentation
when considering which category a pre-contract statement falls into, what factors will the court consider if intention is unclear?
o Whether one party had more skill or knowledge of the subject matter
o Whether a statement was made verbally before it was repeated in a written contract
o Whether the recipient of the statement was made clear of the importance
o Whether the statement maker invited the other party to verify the statement
o Whether there was a lapse of time before the statement being made and the contract being formed
re: misrepresentation
when considering the guidelines to determine which category a pre-contract statement falls into, how will the delivery of the statement likely affect this determination?
If a statement was made verbally before it was repeated in a written contract it is likely to be a term.
If for whatever reason it is not a term, it may be a representation.
re: misrepresentation
when considering the guidelines to determine which category a pre-contract statement falls into, how may the knowledge or skill of a party affect this determination? Give an example
If an expert makes a false preliminary statement to a non-expert, this may be deemed a term of the contract.
Whereas, if a non-expert makes a statement to an expert it is more likely to be deemed a representation.
re: misrepresentation
when considering the guidelines to determine which category a pre-contract statement falls into, if the importance of the issue was made clear, how is this likely to affect this determination?
it is likely to be a term
re: misrepresentation
when considering the guidelines to determine which category a pre-contract statement falls into, what affect is a lapse of time likely to have?
Longer the time lapse, the more likely to be a representation
re: misrepresentation
when considering the guidelines to determine which category a pre-contract statement falls into, if the statement maker invited the other party to verify the statement, what impact is this likely to have? Give an example
It is likely to be a representation but may be a term if the other party was told not to bother checking it.
representation - the seller tells the buyer a boat is sound but advised her to have it surveyed. The buyer chose not to.
term - the seller tells the buyer a boat is sound and so she need not have it surveyed. Even if the buyer chose not to have the boat surveyed, this is likely to be a term because the statement about the quality of goods suggests a term.
re: misrepresentation
give an example of a statement likely to be a representation and explain why
a woman sells a bike stating the date of manufacture is 1992. A written contract is drawn up and signed a week later. There is to mention of the date in the contract. It transpires to be a much earlier model. This is likely to be a representation because:
the written contract does not state the age of the bike
the seller did not have any special skill or knowledge
there was a lapse of time between the representation and contract
re: misrepresentation (definition of misrepresentation)
what is the definition of a misrepresentation?
an untrue statement of fact made by one party to a contract, by words or by conduct, to the other contracting party, which induced the other to enter into the contract
re: misrepresentation (definition of misrepresentation)
what form can the ‘untrue statement’ take?
oral, in writing or by conduct
re: misrepresentation (definition of misrepresentation)
give a example in relation to the form of an untrue statement
Spice Girls v Aprilia World Serve [2000] - by participating in a commercial, the Spice Girls represented that they did not know or have reasonable grounds. However, this was untrue as one of the girls had given notice of their intention to leave. The filming amounted to a misrepresentation by conduct and the sponsor who relied on the misrepresentation when entering into the contract was entitled to damages.
re: misrepresentation (definition of misrepresentation)
what is the buyer beware rule?
also known as caveat emptor, a seller does not have to disclose material facts before entering into a contract and so the buyer must do due diligence before entering into the contract
re: misrepresentation (definition of misrepresentation)
what are the exceptions to the buyer beware rule?
although the seller does not have to disclose material information, silence can amount to a misrepresentation where:
o there is a fiduciary relationship
o the contract is one of the utmost good faith (i.e. an insurance contract)
o there has been a half-truth
o a statement of fact is true when it is made but there is a change of circumstance before the contract is formed making the statement untrue but this is not disclosed
re: misrepresentation (definition of misrepresentation)
how can a half-truth amount to a misrepresentation? How can a seller avoid falling foul of this?
Give an example.
where what was not said distorts what was actually said e.g. if a car is advertised as ‘one lady owner’, whilst this is true, it ignores previous male owners and gives the impression the car has only had one owner. Tell seller should tell the whole truth or nothing at all.
re: misrepresentation (definition of misrepresentation)
when will a statement not amount to a misrepresentation? What is the exception to this?
the statement must be a statement of fact and not opinion, if it is not a statement of fact there will not be a misrepresentation
If the statement is a statement of future intention or a reasonably held opinion, this is not a statement of fact.
However, if party has lied about their intention or states a baseless opinion (i.e. not based on fact) then it will be a statement of fact
re: misrepresentation (definition of misrepresentation)
what are the key elements to the definition of misrepresentation?
- there must be an untrue statement
- this statement must be a statement of fact (not opinion)
- the statement must be made from one contracting party to another
- the statement must induce the other party to enter into the contract
re: misrepresentation (definition of misrepresentation)
what is an example of a statement of fact
You are thinking of buying a house that has a tenant living in-situ. The seller tells you the tenant is a ‘most desirable’ tenant. It transpires the tenant has been in arrears with rent for some time and the seller knew this.
This statement would be a statement of fact and not opinion since the maker of the statement was aware that the tenant was in arrears with the rent and therefore would not be regarded as desirable.
re: misrepresentation (definition of misrepresentation)
explain ‘the statement must be made from one contracting party to another’
If the statement is not made to a contracting party, then there can be no claim for misrepresentation
There may be a claim in tort for negligent misstatement or deceit
re: misrepresentation (definition of misrepresentation)
explain ‘the statement must induce the other party to enter into the contract’
this has a low threshold, the statement only needs to be a reason the other party entered into the contract
re: misrepresentation (definition of misrepresentation)
even though someone has made a representation, when will the law not regard the party as having relied on is?
if the represented appointed an expert to verify the representation and relied solely on their report, the court will not consider that they relied on the representer’s statement
re: misrepresentation (types & damages)
what are the types of misrepresentation?
o Fraudulent misrepresentation
o Negligent misrepresentation
o Innocent misrepresentation
re: misrepresentation (types & damages)
when will a misrepresentation be fraudulent?
A misrepresentation will only be fraudulent if:
o It is made knowing it is false; or
o It is made without belief it is true; or
o It is made recklessly, not caring if it is true or false
There must be proof of fraud and this can be difficult to establish
re: misrepresentation (types & damages)
what is the position regarding damages in relation to fraudulent misrepresentation?
Damages in the tort of deceit are available
The damages awarded will reflect how much the representee is out of pocket by and all consequential losses. Remoteness of loss is not relevant here.
re: misrepresentation (types & damages)
when does negligent misrepresentation take place?
These are statements that are made carelessly
re: misrepresentation (types & damages)
when will a representor be liable to pay damages for a negligent representation?
s2(1) of the Misrepresentation Act 1967: a misrepresentor is liable to pay damages where, although the truth of the statement was honestly held, it was not on reasonable grounds
re: misrepresentation (types & damages)
who bears the burden of the burden of proof where a negligent representation has been made?
- The claimant only has to establish the misrepresentation and loss
- The burden of proof is on the misrepresentor to prove that the statement was honest and reasonable
re: misrepresentation (types & damages)
how are damages assessed where there has been a negligent misrepresentation?
the same way as fraudulent misrepresentation, i.e.:
o Damages in the tort of deceit are available
o The damages awarded will reflect how much the representee is out of pocket by and all consequential losses
o Remoteness of loss is not relevant here
re: misrepresentation (types & damages)
what is an innocent misrepresentation?
A statement would be an innocent misrepresentation if the misrepresentor managed to prove they did have reasonable grounds to believe their statement
re: misrepresentation (types & damages)
what remedy is available for an innocent misrepresentation?
No damages are available but they may be able to rescind the contract
what is rescission?
rescission is an equitable remedy that makes a contract voidable and returns the parties to the position they were in before the contract was signed.
re: misrepresentation
where there has been a misrepresentation, what options are available to the claimant?
- affirm the contract;
- rescission;
- damages (apart from innocent misrepresentation)
rescission may be awarded in addition to damages (apart from innocent misrepresentation)
what is the difference between a void and voidable contract?
a void contract is not legally binding, it is unenforceable from the beginning; while a voidable contract is initially valid and enforceable until one party chooses to void it
when is there a bar to rescission? what does this mean?
this means the right to rescind has been lost. The following is a bar to rescission:
o Affirmation
o Undue delay
o Bona fide purchaser
o Where it is substantially impossible to restore the goods or property
re: rescission
explain affirmation as a bar to rescission
Once the innocent party has affirmed, they cannot change their mind and rescind.
re: rescission
explain undue delay as a bar to rescission
Generally, the court looks at when the misrepresentation should have been discovered, not when it was actually discovered
This does not apply to fraudulent misrepresentation. The relevant time is when the misrepresentation was actually discovered.
re: rescission
explain regarding a bona fide purchaser as a bar to rescission
A bona fide purchaser prevents rescission because it’s not possible to return the parties to their pre-contract position if the property has been obtained by a bona fide purchaser.
re: rescission
what is a bona fide purchaser?
A bona fide purchaser is someone who exchanges value (i.e. not a gift) for property without any reason to suspect irregularities in the transaction. They acquire the item in good faith and have no reason to believe there is any defect in title.
re: rescission
give an example relating to a bona fide purchaser
Car & Universal Finance v Caldwell [1964] - the seller sold a car to a rogue who made a misrepresentation. When the seller realised, he told the AA and the police. The rogue then sold the car to third party (a bona fide purchaser).
Usually, where the bona fide purchaser has purchased property, this is a bar to rescission. However, where it is impossible to give communicate intention to rescind due to the other party being a fraudulent rogue and absconding, expression of intention to rescind short of communication or repossession is enough. The court held that when the seller reported this to the police and attempted to help locate the rogue, the seller rescinded the contract. The seller should not be prejudice by the fact the rogue could not be located. Therefore, the third party had no title to the car.
If the car had been sold to the third party before notification to the police and AA, rescission would have been barred as they would have acquired an interest in the subject matter (which is a bar to rescission)
re: duress
when can a claimant rely on duress?
if it was a reason the party entered into the contract
Duress need not be the only reason why the party entered a contract, but it must be a reason
what is the remedy if there has been any duress or undue influence?
The only remedy is rescission (i.e. no damages)
re: rescission
give an example of ‘where it is substantially impossible to restore the goods or property’
rescission is rarely available when the contract is for the sale of a business for this reason because usually the new owner has changed the business/premises etc in some way
another example: Crystal Palace v Iain Dowie [2007] - under the employment contract, the defendant would need to pay the claimant £1m in compensation if he left prematurely to work for another club. There was a compromise agreement releasing him from the employment contract and the obligation to pay the £1m.
Shortly after, the defendant become a manager of another club. The court held the defendant had deceived the claimant into entering into the compromise agreement, but refused to order rescission. This is because the claimant had already appointed a new manager and the defendant had a job. Rescission would mean that the defendant’s employment contract would be revived and they could not perform 2 contracts at once.
what is the effect if there has been any duress or undue influence?
If there has been any duress or undue influence exerted on the innocent party the contract or variation to the contract is voidable (i.e. can be set aside)
re: duress
who holds the burden of proof?
The burden of proof is on the party alleging duress
re: duress
what are the types of duress?
o Threats of physical violence (also called duress to the person) (this is rare)
o Illegitimate threats / pressure (this is more common – likely to be a threat to a person’s economic or business interest)
re: economic duress
what is the test for economic duress? what is an example?
To prove economic duress there must be pressure which:
o Has the practical effect of compulsion or lack or practical choice for the victim;
o Which is illegitimate; and
o Which is a significant cause inducing the claimant to enter into the contract
i.e. a threat to breach contract or commit a tort
re: economic duress
what else will the court consider when deciding whether there has been illegitimate pressure?
In determining whether there is illegitimate pressure, the court will also consider whether:
o There has been an actual or threatened breach of contract;
o The threat was made in good or bad faith; or
o The victim protested at the time
re: economic duress
what is not economic duress? give examples.
a legitimate commercial pressure is not duress and will not affect the contract. Examples include:
o A threat to take a business elsewhere
o To sell to a competitor
o Not to give a discount in the future
re: duress
if there is only duress in relation to the variation, what happens?
the innocent party has a remedy in relation to the variation only. The variation is voidable and can be rescinded, not the whole contract.
remember, rescission involves putting the parties back to the position they were in, if the whole contract is being rescinded, they parties will be put back to the position they were in pre-contract. If only the variation is being rescinded, it will be the position pre-variation (i.e. so the rest of the contract will be unaffected)
re: duress
what options are available where there has been duress?
The innocent party has two options:
o Affirm the contract; or
o Rescind the contract (even though it is voidable, it is a binding contract until it is rescinded)
re: duress
if a party wants to rescind, what must they do?
The innocent party must notify the other party that it wants to rescind. The innocent party can apply to the court for an order of rescission if the other party refuses.
re: undue influence
what is meant by undue influence?
There is no fixed definition of undue influence but it has come to mean:
o Influence that goes beyond what is regarded as acceptable; or
o Where one party is in a position to influence the other and takes unfair advantage of that position
re: undue influence
what are the types?
actual and presumed
re: undue influence
what are the elements required for presumed undue influence?
There must be:
o A relationship of trust and confidence; and
o A transaction that calls for an explanation
re: presumed undue influence
explain the position regarding the ‘relationship of trust and confidence’ element
if there is a fiduciary relationship, it is irrebuttably presumed that there is a relationship of trust and confidence.
where is is not a fiduciary relationship, the innocent party must prove it is a relationship of trust and confidence
re: undue influence
explain actual undue influence. Give an example
This must be proved on facts and is quite hard to prove
Daniel v Drew [2005] - Mrs Drew was an old lady who intensely disliked confrontation and was afraid of her nephew and the prospect of going to court, so when he asked her to sign the contract she did. This was supported by a witness. Actual UI was found.
re: presumed undue influence
what are example of fiduciary relationship?
o Solicitor and client
o Doctor and patient
o Parents and children under 18
o Religious advisors and followers
re: presumed undue influence
what is not a fiduciary relationship?
spouses
re: presumed undue influence
what is meant by a ‘transaction that calls for an explanation’? Give an example.
the transaction is not easy to explain i.e. when a party enters into a contract not for their benefit or that exposes them to risk
what is the position in relation to third parties and undue influence?
if a party (a surety) has been unduly influenced (actual or presumed) by the debtor to enter into a transaction with a third party (i.e. a creditor), then the surety may be able to rescind the agreement if the third party had actual or constructive notice of the undue influence
give an example of undue influence and a transaction with third parties
o A husband’s business needs cash.
o He approaches the bank for a loan.
o The bank wants security over the jointly owned matrimonial home.
o The wife (the surety) will need to agree as it is jointly owned.
o The wife agrees to sign the document due to undue influence imposed by the husband.
o The husband’s business fails and the bank want to enforce the security.
o The wife says that she only signed the papers due to undue influence.
o If the contract is deemed voidable and the wife keeps the property, this is unfair to the bank because they will have to join the pool of unsecured creditors.
o If the contract is upheld, then this is unfair on the wife.
o The courts have developed the principle of actual or constructive notice to deal with this
re: undue influence and third parties
what is the effect if the creditor had actual or constructive notice of the undue influence?
The surety may rescind the security agreement (noting the bars to this remedy).
The creditor would join the pool of unsecured creditors.
The creditor can take action against the debtor but this may be difficult as they may not have any enforceable assets
re: undue influence and third parties
when will a creditor have constructive notice?
a creditor will have constructive notice if:
o It ought to have been put ‘on inquiry’; and
o It did not take reasonable steps to ensure that the surety was aware of the implications of what they were signing
re: undue influence and third parties
what is meant by the ‘put on inquiry’ stage?
If the relationship between the debtor and surety is non-commercial (i.e. husband/wife, employer/employee) and the loan is not for their joint benefit, the creditor will always be put on inquiry.
re: undue influence and third parties
what is the exception to the ‘put on inquiry’ stage? Give an example.
If there is no reason to believe the loan is not for their joint benefit, the creditor will not be put on inquiry
i.e. if the husband completes the loan agreement and says it is for a holiday home for him and his wife (even though that is not his intention) the creditor will not be put on inquiry as there is no apparent risk of wrongdoing
re: undue influence and third parties
what is meant by the ‘reasonable steps’ stage? Give examples.
Once a creditor is put on inquiry, they must take meaningful steps to ensure the surety is made aware of the legal implications. This may include:
o Holding a private meeting with the surety;
o Insisting the surety takes independent legal advice and even paying for it. They would then expect a certificate from the solicitor. If the surety refuses to take advice, the creditor should refuse to offer security
re: undue influence and third parties
if the surety takes independent legal advice and it later transpires the debtor exerted undue influence on the surety, what effect would this may?
If the surety later contends that they were not fully informed of the risk the cause of action would be against the solicitor and would not affect the validity of the security.
re: undue influence and third parties
explain the best way to approach an SQBA
- has there been either actual undue influence or presumed undue influence?
- did the lender have actual or constructive notice of this?
o Constructive notice = put on inquiry & reasonable steps
what is the doctrine of mistake?
The doctrine of mistake is a legal principle that allows a court to void a contract if a mistake was made by one or more parties
when does the doctrine of mistake operate?
The doctrine only operates in exceptional circumstances where one or both parties can establish that the contract was entered into under a mistake that was so fundamental it effectively negates the agreement and thus existence of the contract
In all cases, the mistake must precede the contract and induced party(s) to enter into it
what are the types of mistake?
o Common mistake
o Cross-purpose mistake
o Unilateral mistake
what is common mistake? what are other names for it?
where both parties have made the same fundamental mistake
This is also called identical or shared mistake
what are the limitations to common mistake?
There are strict limitations on the operation of this:
o It will not operate if one party is as fault
o The contract must not make express provision on the matter
o The mistake must be fundamental (i.e. it renders performance of the contract impossible or radically different from what was expected)
in what situations are the court likely and unlikely to find common mistake? Give examples.
The courts are likely to find common mistake if there is a mistake regarding the existence of the subject matter i.e. the subject matter of a contract is a car, neither party is aware the car has already been destroyed.
Mistake as to quality of the subject matter is unlikely to sufficiently fundamentally affect the validity of the contract i.e. a settlement agreement was agreed but both parties had forgotten about earlier breached. The employer sought return of the money on the basis the agreement was void for mistake. The court held the mistake was not fundamental enough.
what is cross-purpose mistake? Give an example.
Also called mutual mistake
Where the parties are literally at cross-purposes about a crucial point of the contract and they are unable to resolve this, therefore no contract can exist
example - two ships of the same name sailing to the same place. One was sailing in October and the other December. The seller thought the contract was in relation to the December ship, the buyer thought the October ship. The buyer argued that was a latent ambiguity. There was no objective way to establish what was agreed so the court found that the contract was void.
What is unilateral mistake?
where one party is genuinely mistaken and the other knows or ought to have known of the mistake. If the mistake relates to the fundamental nature of the offer the contract can be voided.
even if parties are at cross-purposes, when might a contract exist?
If, from the parties’ words and conduct, only one possible interpretation of what was agreed can be deduced, the contract will still be valid. Otherwise it will be void.
When is unilateral mistake commonly used? What are the circumstances for it to apply? Give an example
This is often used when there has been a mistake as to the identity of the other party
This will only be available if there is a genuine mistake of this nature and the identity of the other party is of vital importance.
The mistake must relate to the identity of the person, not an attribute (i.e. credibility). This is rarely successfully argued.
Cundy v Lindsay [1878] - a rogue set up a business under the name ‘Blenkarn’ at 37 Wood Street. A reputable business named Blenkiron and Co traded at 123 Wood Street. The rogue made their signature look like Blenkiron. C thought they were doing business with Blenkiron as business took place in writing. C sent Blenkarn the goods and D resold them. C realised but the goods had already been sold. C successfully argued unilateral mistake.
what is the effect of rescinding a contract?
when a contract is rescinded, title to the goods revert from the buyer back to the original seller
remember, there are bars to rescission i.e. if the buyer has sold the item to a bona fide purchase before recession takes place, then the contract cannot be rescinded.
if someone has misrepresented who they are, what may be the best course of action for the original seller to take and why?
if a party has misrepresented who they are, the innocent party has two possible arguments:
1. the contract is voidable due to misrepresentation
2. the contract is void due to mistake
if the buyer still possesses the goods, option 1 would be the better option. The seller would be entitled to damages and/or rescission (unless rescission is barred). This is a lower threshold than mistake.
However, if the buyer has sold the goods to a bona fide purchaser, the original seller would need to pursue option 2 because rescission would be barred. Where there has been mistake, the contract is void and it is as if the seller never sold the car in the first place and they will still have title to the goods. This means the bona fide purchaser never had title and the goods can be recovered from them. Mistake has a high threshold to evidence.
where there has been a misrepresentation and the goods have been sold to a bona fide purchaser, what claims must be brought and what are the possible outcomes?
in summary: one innocent party will get the goods and the other will have to make a claim for damages
o The mistaken party would make a claim for damages for breach of an express term and/or misrepresentation
o The bona fide purchaser would bring a claim for damages for a breach of the statutory implied condition (i.e. SGA 1979 & CRA 2015) in contracts for the sale of goods that the seller has the title to the goods that they can pass on
The court tends to have more sympathy for the bona fide purchaser so it is more likely that they will get to keep the goods and the mistaken party will need to bring a claim for damages. This is particularly true if the meeting between the mistaken party and the defendant was face to face.
how will a court determine whether a contract is voidable for misrepresentation or void for mistake? Give an example.
Summary:
o mistake as to identity (i.e. the intention was to contract with someone else) = contract void
o mistake as to attributes = contract voidable
Example - seller sold a car to someone who purported to be famous. The buyer produced ID in the form of a studio pass. They buyer then sold the car to a bona fide purchaser. The buyer transpired to be a fraudster and the check bounced. The court held if this was down to mistake of creditworthiness (i.e. attribute) and not identity. Therefore, it was not fundamental enough for mistake.
what are the case law guidelines in relation to misrepresentation / mistake?
Case law guidelines:
o in-person dealings - strong presumption that the innocent party is dealing with the person in front of them (i.e. the rogue) as opposed to the person they are pretending to be. Contract unlikely to be declared void under mistake but may be rescinded under misrepresentation
o dealings in writing - the agreement must be construed to determine with whom the innocent party intended to contract. If it was with someone other than the rogue, it may void for mistake.
o if the nature of the contract means it is vital they possesses a particular attribute which the rogue does not - likely void. The rogue could not accept the offer as they do not have the skill (i.e. an oral commission of a portrait from an unknown offer passing themselves off as a famous painter)
o if the person/entity who the rogue is pretending to be exists and is known to the mistaken party, it suggests the offer is not addressed to the rogue. Likely void as no intention to contract with the rogue.
what remedy is available where there has been a mistake?
the only remedy is for the court to declare the contract void (i.e. there are no damages)
what is the effect of the contract is illegal?
It will be void
when will a contract be deemed illegal?
o the contract may be illegal the time of formation
o the contract may become illegal because of the way it has been performed
o certain contracts are deemed to be illegal by statute or common law
when will a contract be illegal at formation? What is the court’s position in relation to these contracts?
a contract for commission of a legal wrong like breach of a statutory provision or violation of public policy would be illegal at formation
the general rule is that there contracts are void and courts will not allow recovery of benefits conferred in the performance of an illegal contract
when will a contract be illegal due to performance?
i.e. the contract is formed legally but the way it is executed is illegal
If the illegal act is purely incidental to performance of the contract, this is unlikely to affect the validity of the contract i.e. a contract to deliver goods would not be void if the driver was caught speeding.
What is the court’s position in relation to contracts illegal by performance?
In the court’s view, it is enough that the wrongdoer is punished (i.e. driver is speeding, they pay a fine)
One or both parties can intend illegal performance. If both parties are aware, the courts tend to take the view that neither should be entitled the enforce the contract i.e. it is void.
If only one party knew of the illegality, the other party may be able to enforce it (the illegal performer should not be permitted to enforce)
explain contracts illegal by statute using an example
These are easy to identify i.e. the Competition Act 1998 renders contracts unenforceable if they have the effect of restricting, preventing or distorting trade within the UK
explain contracts illegal at common law
The courts will refuse to enforce some contracts if they are contrary to public policy or morality i.e.:
o They challenge the sanctity of marriage
o They are sexually immoral
o They seek to challenge the jurisdiction of the court
re: illegal contracts
what is the position in relation to covenants in restraints of trade? Give an example.
i.e. a clause in an employment contract that prevents someone senior from working for a competitor when their employment ends
Covenants in restraints of trade clauses are prima facie void as being contrary to public policy to allow freedom of movement and trade. However, they may be enforceable if:
o There is a legitimate business interest to protect i.e. customers, employees and trade secrets; and
o The restraint is reasonable in terms of geographical area, duration and scope of prohibited activities
re: illegal contracts
when may a covenant in restraint of trade be enforceable?
it may be enforceable if:
o There is a legitimate business interest to protect i.e. customers, employees and trade secrets; and
o The restraint is reasonable in terms of geographical area, duration and scope of prohibited activities
re: illegal contracts
if a covenant in restraint of trade is reasonable and breached, what options are available to the party that imposed it?
If the clause is reasonable and it is breached, then the party who imposed it may:
o Apply for relief to prevent;
o Or curtail the breach or apply for damages
