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5.4.3 Illegality Lecture – Hands on Example

The following section will test your knowledge of illegality in the context of contract law – in what ways a contract can be illegal, how this is assessed and the exceptions, and the effect of illegality. After studying the detailed version of illegality you should be able to identify the issues in these questions and apply the law correctly. The answers for the questions can be found at the very bottom of this page.

A question involving illegality can usually be identified by there being a mention of a statutory prohibition on a type of contract, a contract which places restraints on someone’s freedom to trade, or one of the discussed contracts contrary to public policy arising. The below example should allow you to get a general idea of how questions involving illegality of a contract may appear.

When addressing an issue involving the illegality of a contract, this would be the appropriate method:

  • Is the contract expressly illegal through a statutory provision?
  • Is the contract impliedly illegal through a statutory provision?
  • Has the contract been performed in an illegal manner?
  • Is the contract subject to illegality due to any public policy reasons, such as preventing the administration of justice?
  • Does the contract set a restraint on trade?
  • Once you have identified which type of illegality applies to the contract, how will the illegality affect the contract?

This step-by-step approach will cover all of the potential illegalities and ensure you do not miss one. You will need to have knowledge of the relevant legal principles and relevant cases once you manage to identify the type of illegality.

Scenario

Gareth owns a motorbike garage and deals in buying and selling race motorbikes. He also has a number of lucrative sponsorship contracts with famous racers. He has been accused of making a few illegal contracts and would like some advice on these.

  1. Gareth has two types of licence to sell motorbikes; one to sell generic bikes and the other to sell dangerous, race specification superbikes. Gareth’s licence to sell the regular motorbikes recently ran out. He had forgotten to renew it but was planning on doing so in a few weeks. He sold a motorbike to Ben, who agreed to pay six months later. Now Ben has discovered that Gareth sold the motorbike without a licence he is refusing to pay Gareth.

Is this contract illegal, and if so, what happens as a result?

  1. A member of the royal family approached Gareth wanting to buy a particular motorbike which Gareth was planning on selling to somebody else. The member of the royal family promised Gareth he would get him a knighthood as part of the deal.

Is this contract illegal?

  1. One of Gareth’s former employees, Rob, has begun working at another motorbike garage in America. In Rob’s termination of employment contract with Gareth there was a term that stated ‘After the term of employment ends, you shall not work for any competitors anywhere in the world for five years’. Rob was not paid anything on termination of his employment.

Is this contract enforceable or is it illegal?

  1. There is a statutory prohibition on selling ‘Tamaya’ motorbikes to people under 25. Gareth has formed a contract with John, who is 22, which includes the clause:

              ‘John will purchase 2 Tamaya motorbikes along with 1 Londa motorbike’

If this contract is illegal, can Gareth enforce the promise to buy the Londa motorbike?

  1. This contract is subject to an implied prohibition. The case to apply here is Smith v Mawhood (1845) 14 M & W 452. It is clear that a licence is required to sell generic motorbikes only as a way to increase the national revenue, and is not for any public policy reasons (whereas the license to sell dangerous superbikes might be for public policy reasons).
  1. This contract is illegal under public policy as it involves public corruption. The case of Parkinson v College of Ambulance Ltd [1925] 2 KB 1 can be applied due to the similar facts. Therefore this contract is illegal and invalid.

Therefore, as the sole purpose of a statute is to increase the national revenue, the contract itself is not illegal, meaning Gareth can enforce the contract and force Ben to pay him the price for the bike.

  1. This contract will amount to a contract which imposes a restraint on trade. Whether or not the contract is valid is dependent on the reasonableness of the terms. The leading case to apply is Herbert Morris Ltd v Saxelby [1916] AC 688, which states generally that employment contracts restricting former employees from being employed by competitors are not valid.

In order to make a complete decision, the duration and the geographical extent of the limitations must be assessed. In the case of Mason v Provident Clothing & Supply Co Ltd [1913] AC 724, a term preventing employment within 25 miles of London when the employment was in Islington was held to be disproportionate and therefore illegal. Therefore, it is clear that a clause preventing employment in the rest of the world would also be illegal. The duration of five years is also extremely excessive.

  1. The principle issue here is the effect of illegality, and whether the illegal part of the contract is severable from the legal part of the contract. The test from Sadler v Imperial Life Assurance Co of Canada Ltd (1988) IRLR 388 must be applied.

The first step is the ‘blue pencil’ test, where it is considered whether the illegal provision can be removed without modifying the words of the remaining terms. If the illegal provision is removed, the contract will read ‘John will purchase along with 1 Londa motorbike’.  It is clear that once the illegal provision has been removed, the remainder of the clause does not make grammatical or verbal sense, and therefore the test fails at the ‘blue pencil’ stage.

If the clause had passed the blue pencil test, it would be considered whether the remaining terms were still supported by consideration, and whether the contract was still of the same character.

In conclusion, Gareth cannot enforce any part of this contract due to the failure of the ‘blue pencil’ test.


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