Illegal contracts

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					             Law of Contract

   Unlawful contracts
including illegal contracts, void contracts
           and restraint of trade

            BCL 2005-2006

• Text
  Clark chapters 14-15

• Reference
  McD chapters 15-16     2
Unlawfulness - definition
• If a contract conflicts with the criminal
  law …
• … or with other important legal
  principles …
• … then the court may not give full effect
  to the contract …
• … or may even give it no effect at all
Who makes the objection?
• If there is a clear illegality, the court itself
  must raise the point …
    …even if neither party wants this to
• But usually one party is raising the point
  tactically …
    … as an excuse to escape the
     contract                                   4
A matter of balance
• “Unlawfulness” is an objection based
  on public policy
• But upholding commercial contracts is
  also a goal of policy
• So the court is often engaged in
  balancing different policies …
• … especially where the illegality is
  relatively trivial                      5
Effect of illegality?
•   “Balancing” can be complex
•   Possibilities solutions are:
     • All remedies denied
     • Some are denied, eg severance of
       the illegal part
     • Remedies on the contract are
       denied, but non-contractual
       remedies are allowed
Which contracts are illegal?
 • The list is long and disordered
 • Different writers organise it all
 • Not everyone agrees on how to
   structure the cases
 • Basic distinction: illegality by
   statute and at common law           7
By statute / At common law
• Statutory illegality is very wide-
  spread …
• … and I can only deal with
  general principles
• Common law illegality is more
  manageable …
• … but also more antiquated           8
“Illegal” or “void” ??
• Some writers distinguish “illegal
  contracts” from “void contracts”
• But the distinction is not awfully
  clear …
• … and relates mostly to the finer
  points of the effects of illegality
• I will refer to it briefly later  9
Scheme of the lectures

•   Illegality at common law
    (with specific examples)
•   Illegality by statute
    (mostly general principles)
•   Effect: contractual remedies
•   Effect: non-contractual remedies   10
Common law
Types of illegality
•   Commission of wrongs
•   Corruption and tax evasion
•   Trading with the enemy
•   Interference with the administration of
•   Encouraging sexual immorality
•   Restraint of trade
   Common law

1. Contracts to commit
Commission of wrongs
• Contracts to commit crimes or other
  wrongs are illegal
• Contractual rights cannot be acquired by
  unlawful acts
   eg Arsonists cannot claim on their
    insurance (Gray v. Hibernian Insc
    (HC, 27/5/93)                       14
  Common law

2. Corruption and tax
Corruption and tax evasion

• Contracts involving fraud or corrupt
  payments are illegal
• eg Procuring election as City Marshall,
  by promising to hand over some of the
  fees a Marshall can collect
  (Mayor of Dublin v. Hayes (1876) 10
  IRCL 226)
Corruption: tax evasion
• Many taxes are defined so as to catch
  certain types of contract
    eg Income tax (employment)
    eg VAT (sale of goods)
    eg Stamp duty (sale of land)
• If the parties agree to mislead the tax
  authorities …                             17

• … then the contract is illegal
Lewis v. Squash Ireland [1983] ILRM 363

 • Managing director of company
 • Part of his salary was officially
   recorded as “expenses”
 • He later claimed for unfair
   dismissal from the company
 • But as his employment contract
   was illegal, he had no rights          18
Statutory exception
• Lewis was thought too harsh
• Statute now provides that the
  employment tribunal will itself ignore the
  illegality …
• … but must inform the tax authorities of
  the true facts
  (Unfair Dismissal (Amendment) Act 1993
  s 7)                                   19
    Common law

3. Trading with the enemy

Trading with the enemy

• Where the country is at war …
• … contracts with those voluntarily living
  in enemy territory are illegal
• eg Ross v. Shaw [1917] 2 IR 367
  (contract with nationals of areas overrun
  by the enemy)                          21
   Common law

4. Interference with the
administration of justice
 Interference with the
 administration of justice
Essentially two categories:
• Preventing court actions which should
    eg by corruptly abandoning a
• Encouraging court actions which
  shouldn’t occur
    eg by paying another’s costs
Wrongly preventing actions
1. Compromising crime
• Dropping a prosecution in return for
  money is illegal
• Ditto hiding evidence, or agreeing not to
  disclose it
• But the victim of a crime may accept
  “reasonable compensation” (Criminal
  Law Act 1997 s 8(1))                    24
Wrongly preventing actions
2. Ousting the courts’ jurisdiction
• The contract cannot bar access to the
  courts, or establish another tribunal
• Provision for arbitration is valid …
• … but an appeal will lie from the
  arbitrator to the courts (Scott v. Avery
  (1856) 10 ER 1121)
Wrongly preventing actions
 3. Unfair advantage in bankruptcy
 • If a trader is bankrupt, their assets are to
   be divided equally between their
 • An agreement treating one creditor more
   favourably than the others is illegal
Daly v. Daly (1870) IR 5 CL 197
• The debtor concealed assets, and
  obtained a discharge from his debts
• One creditor discovered the truth,
  threatened legal proceedings unless
  paid in full
• The debtor paid him
• This was held to be illegal
Wrongly encouraging
Traditionally, two overlapping concepts:
• Maintenance
  = improperly helping another to litigate
• Champerty
  = improperly making a profit from
  another’s litigation
Wrongly encouraging
• However, these objections are today
  less urgent
• “No foal no fee” is not seen as
  intrinsically objectionable
• People should be allowed to litigate
  “reasonably stateable claims”
  (O’Keefe v. Scales [1998] 1 IRLM 393)
The modern law
4 main areas of concern today:

•   Contingency fees
•   Fee sharing agreements
•   Assignment of rights to litigate
•   Heir-locator agreements
1. Contingency fees
• Legislation prohibits lawyers from acting
  in return for a percentage of the
  damages won (Solicitors (Amendment)
  Act 1994 s 68(2))
• An agreement for payment only if the
  action is won makes the contract invalid
  (Attorneys’ and Solicitors’ Act 1870 s
  11)                                    31
1. Contingency fees
• However, an agreement to work
  “no win no fee” does not have
  criminal consequences, it simply
  renders the agreement invalid
• In practice, much legal work
  (especially for personal injury
  litigation) is done that way   32
2. Fee sharing agreements
• An agreement by a solicitor to share
  fees with a non-lawyer is professional
  misconduct …
• … and the agreement cannot be
• eg Mohamed v. Alaga
  [1999] EWCA Civ 1716                     33
3. Assignment of a right
to litigate
•   At common law, someone with a right to
    litigate may not transfer that right to

•   2 exceptions are now recognised:
     • If you sell property and include
       connected rights to litigate;
     • If the assignee has a legitimate
       commercial interest in the right
4. Heir-locator agreements
• Where one party offers to help
  another to make a claim from a
  deceased person’s estate …
• … and contracts for payment out
  of the proceeds of the claim …
• … then the contract is unlawful
  and unenforceable            35
Survival of the doctrine
• The doctrine is an antique one
• But the Supreme Court have confirmed
  that it still applies today …
• … even if the estate claimed is outside
  (Fraser v. Buckle [1996] 2 IRLM 34,
  discussed by Capper (1997) 60 MLR
  286)                                  36
McElroy v. Flynn [1991] IRLM 294

• Offer to act for particular claimants in
  return for 25% of the proceeds
• Costello J held this to be caught by the
  heir-locator doctrine …
• … as the help went beyond mere sale of
  information relating to the claim
  Common law

5. Encouraging sexual
Encouraging sexual
• The case law is antique …
• … and some of it is overtaken by
  modern developments
  (eg the 15th amendment to the
  constitution, 1996)
• How much of it is still good law is very
  speculative                                39
Encouraging sexual
4 basic areas of concern:-
• Prostitution
• Contracts affecting the
    decision to marry
• Contracts modifying obligations
    deriving from marriage
• Cohabitation and sex outside marriage
1. Prostitution
• The older cases invalidate any contract
  concerning or encouraging prostitution
• eg A contract to hire a carriage to a
  prostitute for use in her trade (Pearce v.
  Brooks (1866) LR 1 Ex 213)

1. Prostitution
• The Oireachtas has specified in
  legislation which aspects of prostitution
  are illegal
  (Criminal Law (Sexual Offences) Act
• Arguably, the courts should go no further
  than the statute                      42
2. Decisions to marry
• At common law, any contract intended to
  influence or restrict choice of marriage
  was invalid
    eg A contract not to marry anyone
     but the other party
    eg A contract to find the other party a
     husband                             43
2. Decisions to marry
Exception at common law:
• An agreement by two parties to marry
  one another was valid …
• … provided both were at that point free
  to marry
• However, this action was abolished by
  statute (Family Law Act 1981 s 2)
3. Contracts modifying
the marriage obligations
• Contracts encouraging separation in the
  future are invalid
• So a contract by a married couple
  providing for a possible future separation
  is invalid …
• … but an agreement reached on an
  actual separation is valid             45
3. Contracts modifying
the marriage obligations

• It has been held that a contract to secure
  a (foreign) divorce is unlawful (Dalton v.
  Dalton [1982] ILRM 418) …

• … but it is an open question what the
  courts would do today
4. Cohabitation and sex
    outside marriage
• Traditionally, a contract was invalid if it
  encouraged sex outside marriage …
• … though not if it merely followed a
  period of cohabitation
  (eg man making provision for his
  illegitimate children, Reade v. Adams
  (1855) 2 Ir Jur NS 197)
Ennis v. Butterly [1997] 1 ILRM 28

• Cohabitation agreement
• Kelly J held this unenforceable
• He could not square legal enforcement
  with the status granted to marriage
  under the constitution
• For discussion see: Mee (1997) 19
  DULJ 149
 Common law

6. Restraint of trade

Restraint of trade
• Again, the common law rules are antique
• Nonetheless, the common law rules
  remain in full force …
• … though there is also statutory
  provision against anti-competitive
  (see Competition Act 1991)
What is the doctrine?
• The doctrine invalidates contracts not to
  engage in trade
• Exceptions are allowed when a
  particular contract can be shown to be
  reasonable both from the parties’ point
  of view …
• … and from the public point of view
When does the doctrine
• The usual case is of an express contract
  not to trade
    eg A contract by an apprentice not to
    compete with his/her master
• But some contracts only indirectly
  restrict trade
• Does the doctrine apply to them?
Kerry Co-Op v. An Bord Bainne [1991]
IRLM 851
• An Bord Bainne was a trade association for
  farming co-ops
• There was no effective sanction to force co-
  ops to remain part of An Bord
• A proposed rule change would penalise any
  co-ops who left it
• Was this change subject to the doctrine of
  restraint of trade?
Kerry Co-Op v. An Bord Bainne [1991]
IRLM 851
The Supreme Court disagreed whether the
  doctrine applied: -
• McCarthy J said it did, but that the
  proposed rule change was reasonable
• O’Flaherty J said that the doctrine did
  not apply
• Finlay CJ expressed no opinion
So the law is unclear
But it seems that the doctrine will not be
  applied to:-
• Minor exclusive dealing arrangements
  (Murphy v. O’Donovan [1939] IR 455)
• Promises by buyers of land not to trade
  on that land (Sibra Building v. Ladgrove
  [1998] 2 IR 589)
What does the doctrine
All restraints within the doctrine are invalid
  unless it can be shown that:-
• The restraint is reasonable as between
  the parties, and
• The restraint was reasonable from the
  point of view of the public
Macken v. O’Reilly [1979] IRLM 79
• The Equestrian Federation of Ireland
  changed its rules …
• … so that all their Irish members who
  competed abroad had to do so on Irish-bred
• The plaintiff, a show-jumper, complained that
  this was an unreasonable restriction
• But was there restraint of trade?
Macken v. O’Reilly [1979] IRLM 79
The Supreme Court thought this was
• As to the public interest, the Federation were
  legitimately seeking to protect the position of
  Irish horse breeders
• As to the position between the parties, the
  plaintiff's sacrifice was considered relatively
Burden of proof
• Reasonableness as between the parties
  must be affirmatively proved
  (John Orr Ltd v. Orr [1987] IRLM 702)
• But (probably) the burden is reversed as
  to the public’s interest

Restraint of trade - examples

 3 major examples of the doctrine at work:

 • Employment
 • Sale of business
 • Exclusive dealing contracts
1. Employment
• Any substantial interference with freedom to
  work or freedom to trade may be within the
• In these cases, most of the attention is on
  reasonableness as between the parties
• Appeals to the public interest are rarely
  successful                                 61
Johnston v. Cliftonville FC [1984] NI 9

 • A part-time professional footballer sought
   higher pay than was permitted under Irish
   League rules
 • Murray J held that restrictions on pay were
   an interference with a basic liberty …
 • … without any plausible justification being
Music cases
• A string of cases on pop stars illustrate the
  concentration on reasonableness as between
  the parties
• The public interest is largely irrelevant …
• … and the emphasis is on the legitimate
  interests of both parties

Example 1
Silverstone Records v. Mountfield [1993]
EMLR 152
• Contract which absolutely restrained the
  group from performing for any other
  employer for 7 years
• Various other clauses were unusually harsh
• Neither the group nor their manager had
  much experience with contracts
• Restraint of trade found                 64
Example 2
Panayiotou v. Sony [1994] EMLR 229

• The singer was obliged to produce 8 albums
  over a 15-year period
• But the court emphasised that the length of
  the contract was a function of success
• The singer was well advised throughout, and
  had negotiated actively
• No restraint found                       65
 Music cases
• All the cases emphasise that
  inexperienced performers are
  entitled to protection of their
  interests …
• … but also that, from the record
  company's point of view, the rare
  success has to pay for the many 66

Ordinary employment cases

• Again, in more ordinary cases,
  the court tries to identity the
  legitimate interests of employer
  and employee …

• … in order to balance the parties’
  interests against each other       67
Knowledge gained from
• So a contract clause cannot forbid ex-
  employees from using knowledge gained
  during employment ...

• ... unless the clause protects legitimate
  employer interests
    eg trade secrets
    eg customer lists                        68
2. Sale of a business
• Again, the court must balance the interests of
  the parties against each another
• Some restrictions on the seller’s business
  activities will be necessary
    (eg prohibitions on approaching former
• … but the issue will often be how broad such
  clauses can be                             69
John Orr Ltd v. Orr [1987] IRLM 702

• Sale of a fabrics business
• Clause forbidding the seller from competing
  anywhere in the world
• This was held by Costello J to be
  unjustifiably broad …
• … but he restrained the seller from dealing
  with anyone who was already a customer of
  the buyer                                 70
3. Exclusive dealing contracts

• Under these contracts, one party agrees to
  buy all their requirements for certain types of
  products from the other party (or to sell only
  to them)
• The courts have never been very ready to
  strike such agreements down …
• … and today tend to defer to competition law
  in the matter                               71
Length of the tie
• The main consideration today is the length of
  the tie
• So an obligation on a petrol station to buy
  petrol only from one firm is valid if for 5 years
  (Continental Oil v. Moyhihan (1977) 111 ILTR
  5) …
• … but not if for 21 years (Esso v. Harpers
  Garage [1968] AC 269)
Foreign illegality
What if there is illegality under foreign law but
   not Irish law?
• Much depends on whether the contract was
   to be performed here or abroad
• Another question is whether the foreign law
   can be seen as analogous to Irish laws

Example 1
Lemenda Trading v. African Petroleum
[1988] QB 448
• Contract to pay commissions to certain
  intermediaries involved in an oil supply
• The commissions were not illegal by English
  law …
• … but were forbidden by Qatar in an attempt
  to curb corruption
• The right to the commissions was not     74

  enforceable in England
Example 2
Stanhope v. Hospitals Trust (1936) Ir Jur
Rep 25
• Sale of lottery tickets
• Tickets were sold in Natal and sent on to
• However, when the organisers were told that
  lotteries were illegal in Natal, they refused to
  include the Natal tickets in the draw
• A ticket-seller from Durban sued              75
Example 2
Stanhope v. Hospitals Trust (1936) Ir Jur
Rep 25
Fitzgibbon J held that:-
• The non-inclusion was wrong, as the lottery
  was to be held in Dublin, and was legal by
  Irish law
• However, the damages could not include
  damages for injury to the ticket-seller’s
  business, as that business was illegal
Illegality by statute

Express prohibition
• Some types of transaction are specifically
  stated by statute to be illegal
    eg legislation on shop hours
• Contracts in contravention of such laws are
  always illegal …
• … unless the legislation states that they
  should not be so treated
Implied prohibition

• Where a contract necessarily involves an
  act which statute has declared illegal …
• … then the contract is itself illegal
• However, the courts are reluctant to apply
  this where no illegal intent is proved

Example 1
Namlooze Venootschap v. Dorset
Manufacturing [1949] IR 203
• Action for the price of goods sold and
• The price was payable in guilders …
• … but no official permission from the
  Minister for Finance had been sought, as
  statute then required
• The contract was held illegal and
Example 2
Gavin Low Ltd v. Field [1942] IR 86

• Contract for sale of a cow carcass
• After delivery, the seller claimed the price
• But the carcass had already been condemned
  as unfit for human consumption
• It is illegal to offer such goods for sale
• But the contract was still enforceable
Examples of statutory illegality

• Wagering, gaming and lotteries
  (see especially Gaming and Lotteries
  Acts 1956-1986)

• Unfair Competition
  (see especially Treaty of Rome article
  81)                                      82
The effect of illegality on
Effect of illegality - general
• A contract illegal on its face is completely
• If one party has an illegal intent, they may be
  refused remedies
• An illegal provision may be cut out of an
  otherwise lawful contract
• We also need to ask whether other heads of
  the law (eg property, tort) can be relevant
Illegality on the face of
the contract
• A contract which is expressly for a
  purpose which is illegal cannot be
  enforced by either party

• Knowledge of the relevant law is not
  (‘ignorance of the law is no excuse’)
Gray v. Cathcart (1899) 33 ILTR 35

• A landlord leased a house in poor condition
• When the rent was not paid, the landlord
• But letting unsanitary premises was contrary
  to statute ...
• … so the contract was illegal on its face, and
  the rent not recoverable
Illegal intent or performance

•   If a contract is legal on its face, but
      one or both sides intends to perform in
        an illegal way,
      or does in fact perform in an illegal way
•   then any party who acted or intended
    illegally is barred from remedies
Example 1
Ashmore v. Dawson [1973] 1 WLR 828

 • An engineering firm contracts with hauliers to
   move some heavy equipment
 • As the hauliers know, the law requires the
   use of a more powerful lorry than they have
 • The hauliers cannot enforce
 • Whether the engineers can enforce depends
   on their knowledge                         88
Example 2
Kavanagh v. Caulfield [2002] IEHC 67

 • P agreed to buy premises from D
 • As part of the price, P was to pay £7,500 to
   “The Marion Work of Atonement”, said to be
   a charity
 • In fact, this additional payment was a tax
 • But it could not be shown that P knew of any
   illegality                                89

 • Therefore P could enforce against D
Example 3
Whitecross Potatoes v. Coyle [1978] IRLM
• A farmer in Meath contracts to sell potatoes
  to an English firm
• They suspect that the UK government may
  soon introduce import restrictions
• They agree that if this happens, a higher
  price will be payable
• The new restrictions are indeed introduced
Example 3
Whitecross Potatoes v. Coyle [1978] IRLM
• What was intended by the parties?
    The buyer intended that the seller would
    supply from NI (lawful)
    The seller intended to smuggle his own
    potatoes into NI and supply them
• Therefore the buyer could enforce but the
  seller could not                          91
Separation of legal from illegal parts
of the agreement

• A possible response to illegality is not to
  declare the entire arrangement illegal …
• … but simply to strike out the part which is
  illegal and leave the rest
• The law is confused and controversial

Separation – two distinct ideas

•   Two distinct notions seem to be
•   If an agreement naturally falls into two
    or more parts, only one of which is
    illegal, there is no reason why the rest
    should not be enforceable
Separation – two distinct ideas

•   Some types of illegality are inherently
    trivial, and so should not result in the
    illegality of the entire contract …
•   … so the contract is valid, but the
    objectionable term is “void”
      eg terms ousting the courts’
      eg terms in restraint of trade          94
Example 1
Murphy v. Crean [1915] 1 IR 111

• Lease of pub premises
• Illegal term (that the tenant would transfer the
  licence as directed by the landlord)
• The landlord tried to enforce other clauses of
  the lease
• But the entire contract was held
Example 2
McIlvenna v. Ferris [1955] IR 318

• Contract for building work
• Under Emergency Powers legislation, such
  work could not be done without a licence
• The contract was accordingly held illegal …
• … except for part of the work done after the
  legislation was revoked
 The effect of illegality on
contracts – other heads of
          the law
Other principles of law
• Where a claim on an illegal contract is not
  permitted …
• … the plaintiff may consider invoking some
  other head of the law
• But the court will need to ask whether the
  illegality equally bars action under that other
  head of the law
Other principles: 1. Property

• Plaintiff are entitled to claim
  property belonging to them, even
  if there is evidence of illegality
  connected with it
• Perhaps surprisingly, an illegal
  contract may still pass ownership
  just as if it were valid        99
Bowmakers v. Barnet Instruments [1945]
KB 65
• Sale of machine tools on H-P terms
• The contracts infringed anti-inflation
  legislation, and so could not be enforced
• When buyers defaulted, sellers claimed the
  tools back
• Ownership was determined by reference to
  the illegal contracts
An exception?
• Bowmakers involved a rather technical type
  of illegality
• Perhaps a different attitude will be taken to
  more flagrant illegality
    eg ownership of goods it is illegal for
     anyone to own
    eg ownership of bribe money (Brady v.
     Flood (1841) 6 Ct Rep Ir 309)           101
Other principles: 2. Fraud

• Where one party to the contract has
  committed fraud on the other, an action may
  lie in deceit …
• … even if the contract is illegal
• This approach will only succeed if the
  illegality seems relatively trivial (eg Saunders
  v. Edwards [1987] 2 AER 651)                102
Other principles: 3. Restitution

• Suppose one side transfers money or other
  property to the other under the contract …
• … but later seeks to recover it
• This would involve the court helping a party
  to an illegal contract …
• … but helping them to unravel the contract,
  not to perform it
Other principles: 3. Restitution

The basic principle is:-
• “In pari delicto, potior est conditio
• =“When both sides are equally guilty, the
  defendant’s case is the stronger of the two”
But when are both parties “equally guilty”?
The guiltless plaintiff
• A plaintiff is not caught by this rule if s/he is
  entirely innocent of any illegality …
• … or has repented of any illegality …
• … or was the victim of fraud or oppression
  by the other party …
• … or was one of a class that the legislation
  was meant to protect
The innocent plaintiff
• A plaintiff who does not know the facts
  rendering the transaction illegal may be able
  to recover money paid
• eg Insuring an enemy cargo in ignorance of
  the declaration of war (Oom v. Bruce (1810)
  12 East 225)
• The other party’s guilt or innocence appears
  to be irrelevant                          106
The repentant plaintiff

• Where the plaintiff transfers money or
  property with unlawful intent …
• … but the plaintiff thinks better of the
  scheme before anything illegal is done …
• … then the plaintiff may recover back the
  money or property
The repentant plaintiff
• At one time, the courts required genuine
  penitence …
• … and would refuse a remedy if no remorse
  was shown
• Today, the approach is more pragmatic
• Recovery is permitted so that there is an
  incentive to withdraw before any crime is
  actually committed                     108
Tribe v. Tribe [1995] 4 AER 236
• A father transferred shares to his son,
  apparently on sale
• In fact, the purpose was to prevent the
  shares falling into the hands of the father’s
• The father made a satisfactory arrangement
  with his creditors …
• … and successfully claimed the shares back109
Fraud or oppression
• Where money or property was obtained by
  fraud …
• … the defrauded party may recover it back
  despite any illegality
• eg where P is tricked into entering an illegal
  insurance contract
  (Hughes v. Liverpool Victoria [1916] 2 KB
  482)                                       110
Protected class

• Where the object of legislation is to protect
  people in P’s position …
• … then the courts will be slow to say that
  breach of the legislation bars P from a
• The statute is to be read in the light of its
  objects                                         111
Kiriri Cotton v. Dewani [1960] AC 192

• Legislation made it illegal for a landlord to
  demand “key money” from tenants
• A tenant nonetheless paid this money on
  taking a lease
• Because the object of the legislation was to
  protect tenants …
• … the tenant was able to claim the money
  back from the landlord                      112
That’s all
illegality   113

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