5.4.2 Illegality Lecture

Statutory prohibition of contracts

Express Prohibitions

Neither party will be able to enforce the contract - Re MahMoud and Ispahani [1921] 2 KB 716.

Implied prohibitions:

  1. If the sole object of the statute is to increase national revenue, the contract itself is not illegal
  2. Does the statute contemplate that the prohibited act will be done in the performance of a contract?

Contracts which are not illegal, but have been performed in an illegal manner

Ashmore, Benson, Pease & Co Ltd v A V Dawson Ltd [1973] 1 WLR 828

Restrictions - Anderson Ltd v Daniel [1924] 1 KB 138

Court considerations:

  1. The object and intent of the party attempting to enforce the contract;
  2. The gravity of the illegality in the context of the claim; and
  3. The nature of the illegality.

The effect of statutory penalties

Proportionality - St Johns Shipping Corporation v Joseph Rank [1957] 1 QB 267.

Common law prohibition of contracts – Public Policy

Contracts to commit crimes

Bigos v Boustead [1951] 1 All ER 92 confirms a contract which includes an obligation to commit a crime will be illegal.

Contracts which prevent the administration of justice

See Hyman v Hyman [1929] AC 601 and Scott v Avery (1855) 5 HL Cas 811.

Contracts which are sexually immoral

Sexually immoral contracts refer to those relating to contracts for sexual acts or services - Pearce v Brooks(1865) LR 1 Ex 213.

However, this approach has evolved along with societies views - Sutton v Mishon de Reya [2003] EWHC 3166 (Ch).

Contracts which involve public corruption

Some contracts are invalid because they involve corruption - Parkinson v College of Ambulance Ltd [1925] 2 KB 1.

Common law prohibition of contracts – restraint of trade

Contracts that restrain trade can be void for illegality - Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535.

Is the contract reasonable?

In Herbert Morris Ltd v Saxelby [1916] AC 688 3 general presumptions identified.

Reasonableness as to the public interest is a further important consideration for the courts - Herbert Morris Ltd v Saxelby [1916] AC 688.

Exclusivity dealing contracts

Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968] AC 269.

Exclusive service agreements

An exclusive service agreement is similar to an exclusive dealing contract, but instead it relates to where a person provides services for only one recipient.

The effect of illegality

Holman v Johnson(1775) 1 Cowp 341

Severable illegal contracts

Sadler v Imperial Life Assurance Co of Canada Ltd(1988) IRLR 388 – 3-part test

Collateral contracts

This may be enforceable, but only if providing for a remedy under the collateral contract is not equal to enforcing the illegal contract - Fisher v Bridges(1854) 3 El & Bl 642.

Claims based on an illegal contract

Euro-Diam Ltd v Bathurst [1990] 1 QB 1.

Recovery under illegal contracts

Both parties are guilty

Holman v Johnson (1775) 1 Cowp 341

One party unfairly induced into the illegal contract

Victim may successfully recover money or property they have passed subject to the contract - Hughes v Liverpool Victoria Legal Friendly Society [1916] 2 KB 482.

One party withdraws from the contract

Locus poenitentiaeTribe v Tribe [1996] Ch 107.

The withdrawal from the contract needs to be voluntary - Bigos v Boustead [1951] 1 All ER 92.

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