LWZ118 Lecture 9: Contracts-Lecture-9-Notes
Lecture 9
Contracts
COMMON LAW AND STATUTORY ILLEGALITY - The court will not enforce a contract which is expressly or
impliedly forbidden by statute or that is entered into with the intention of committing an illegal act. The
court will not assist a claimant to recover a benefit from his own wrongdoing.
In Moore Stephens (a firm) v Stone Rolls Ltd (in liq) [2009] 3 WLR 455, the House of Lords decided
that where the director and sole shareholder of a closely held private company deceived the auditors with
fraud carried out on all creditors, subsequently the creditors of the insolvent company would be barred
from suing the auditors for negligence from the shoes of the company. The Lords reasoned that where the
company was only identifiable with one person, the fraud of that person would be attributable to the
company, and the "company" (or the creditors standing in its insolvent shoes) could not rely on its own
illegal fraud when bringing a claim for negligence against any auditors. It was the last case to be argued
before the House of Lords.
STATUTORY ILLEGALITY - In Cope v. Rowlands (1836) 150 E. r. 707, a broker, without taking out a licence
required by Statute, had entered into transactions on behalf of his principals. It was held that he could not
maintain an action for the recovery of commission due to him. Parke B., observed, “It is perfectly settled
that where the contract which the plaintiff seeks to enforce, be it express or implied, is expressly or by
implication forbidden by the common or Statute law, no Court will lend its assistance to give it effect.”
However, certain contracts in which the contract itself does not violate the statute, hut some
incidental illegality occurs in carrying it into effect. In these latter cases the contract is good, and may be
made the subject-matter of an action, notwithstanding the breach of the law which has occurred in
carrying it into effect. For e.g. in Wetherell v Jones (1832) 110 ER 82), a spirits rectifier brought an action
against a confectioner to recover the price of spirits sold and delivered to him. The defence relied upon
was illegality. Under the Excise Acts, a rectifier or distiller, when he sends out spirits, is bound to send with
them a permit truly specifying their strength. The plaintiff had sent a permit but it did not specify the true
strength; and the defendant relied on this violation of the statute as an avoidance of the contract. But the
Court held that the illegality was not in the contract to sell the spirits, but in the subsequent act of
removing them without a proper permit, and, therefore, that an action was maintainable upon the
contract.
Where a statute imposes a penalty, it is a question of construction whether the statute intends to prohibit
the contract or whether it intends only that the penalty for which it provides shall be inflicted. In Yango
Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410, Respondent lent some money to the
Appellants secured by a mortgage and a guarantee. After the appellants defaulted on the repayment,
Respondent sought to recover on the guarantee. In defence, the appellants argued that the mortgage and
guarantee were illegal and void as they contravened s 8 of the Banking Act 1959 (C'th), which prohibits the
carrying on of banking business without being authorised to do so and at the time provided for a penalty
of $10,000 for each day during which the contravention continues. As the parties agreed that First Chicago
was in breach of s 8, the real question concerned the status of the mortgage and guarantees.
A unanimous High Court of Australia found that the contracts were both valid and enforceable. The
court held that s 8 did not expressly or impliedly prohibit the loan made by the respondent. The court also
noted that the penalty imposed by s 8 was calculated on the number of days the contravention continued,
and not on the number of transactions made. In the court's view, this was an indication that the
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legislature was more concerned with preventing unlicensed trading than with prohibiting each contract
which resulted from that trading.
In Nelson v Nelson (1995) 184 CLR 538, a mother bought a house, later registered in her son and
daughter’s names. The purpose behind the transaction was to allow the mother to purchase another home
at some future time, with the benefit of a subsidy under the Defence Service Homes Act 1918 (Cth), which
was only available for one house. Sometime later the mother purchased another house using the subsidy,
making false declarations that she did not own any other property. The house in the children’s names was
later sold. The daughter argued that she had a beneficial interest in the proceeds, whereas the mother and
the son claimed a beneficial interest for the mother.
Deane and Gummow JJ stated, “that there were three relevant doctrines in the case. The first
concerned the presumption of resulting trust in favour of the mother. The second concerned the
presumption of advancement that arose in favour of the daughter. The third doctrine was that of illegality
on the mother’s ability to rebut the presumption of advancement.” On the issue of illegality Deane and
Gummow JJ found that, It was not to prevent them from owning more than one house. As such, the policy
did not require the court to automatically refuse: equitable relief. Additionally, given the mother was
seeking equitable relief, she was obliged to make good the amounts that she had defrauded from the
government, before a resulting trust would be enforced.
CONTRACTS EXPRESSLY PROHIBITED BY STATUTE
Where a statute expressly prohibits the making of a contract, one made in breach of the statute will be
illegal and void and unenforceable (Yango v First Chicago)
The wording of an express prohibition need not be literal. In Re Mahmoud and Ispahani [1921] 2 KB 716,
an Order made under the Defence of the Realm Regulations prevented the sale of linseed oil without a
licence. Briefly the relevant part of the legislation provided as follows:
"Until further notice a person shall not buy or sell or otherwise deal in ... any [linseed oil] except
under and in accordance with the terms of a licence issued by or under the authority of the Food
Controller.
The plaintiff seller sold linseed oil to the defendant who did not have the necessary authority from the
Food Controller. The defendant refused to accept the goods and argued that the statute prohibited the
contract and that therefore the court could not enforce it.
The court held that the contract was illegal because the statute expressly prohibited it. You can tell that by
the words “shall not sell” shall not buy”. The vendor plaintiff could not enforce the contract even though it
was innocent and the defendant was able to rely on its own illegal act to defend the action. But at least the
goods had not been delivered as if the Defendant refused to pay the plaintiff vendor, he could not have
recovered the price and the defendant would have been enriched at the plaintiff’s expense.
Contracts Impliedly Prohibited by Statute - Difficulties can arise when the statute, on the one hand,
imposes a penalty in contravention of its provisions but, on the other hand, remains silent about the status
of contracts which may have been created in the course of those acts. So when does a statute impliedly
prohibit a contract?
The fundamental principle in assessing the effect of statute law upon contracts is whether the statute
intended to affect contracts and make them void. Was Parliament intending to penalize the specific
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Lecture 9
Contracts
conduct mentioned in the statute or was it also intending to go further to deprive the contracting party the
benefits under the contract? Further, did Parliament intend by its statute that both parties be deprived of
their contractual rights or only the party committing the wrongful act? (Justice Mason in Yango Pastoral
Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410, 426)
So how do you know whether the statute intended such a result? Per Gibbs ACJ, the court will use the rules
of statutory interpretation to ascertain the intention of the legislation.
In Yango v First Chicago, The court held that s 8 did not expressly or impliedly prohibit the loan made by
the respondent. The court observed that if section 8 invalidates a contract made with the unauthorised
'bankers' would mean 'that persons who had deposited money with such a body corporate would be
unable to seek the assistance of the courts to recover it. Moreover, if a body corporate were unable to
recover money that it had lent, it would be disabled from performing its own obligations, including those
owed to its depositors. The court also noted that the penalty imposed by s 8 was calculated on the
number of days the contravention continued, and not on the number of transactions made. In the court's
view, this was an indication that the legislature was more concerned with preventing unlicensed trading
than with prohibiting each contract which resulted from that trading.
COMMON LAW ILLEGALITY encompass a broader range of conduct, including contracts prejudicial to the
administration of justice, promoting corruption in public life, prejudicing the status of marriage, promoting
sexual immorality and contracts in restraint of trade. It is not always easy to classify these types of contract
and what constitutes conduct that is contrary to 'public policy' varies with the prevailing morality of the
relevant jurisdiction.
A contract that has an illegal purpose or the subject matter is intended to be used for an illegal purpose, is
void ab initio. In Pearce v Brooks (1866) LR 1Ex 213, there was a contract under which the claimants
supplied the defendant with an ornamental broughman (a type of carriage) to be paid for in instalments.
After one instalment, the broughman was returned damaged. The claimants sued for £15 compensation
which was payable under the agreement if the broughman was returned. The defendant, however, was a
prostitute, and there was evidence that she intended to use the broughman to attract customers.
Moreover, it seems that at least one partner in the claimant’s firm was aware of this. On this basis, the
court held that this would be an illegal contract, so that the claimants would be unable to recover either
under the contract or for the damage.
“Restraint of trade” is any activity that hinders someone else from doing business in the way that he
would normally do it if there were no restraints. A non-compete clause, also known as a worker restraint
clause or a covenant not to compete, is one type of restraint of trade that is generally considered
acceptable as long as it is reasonable. It usually appears in a contract between a worker and an employer.
It states that the worker will not compete with the employer’s business in a certain way or for a certain
amount of time. Non-compete clauses often require workers to keep proprietary information confidential.
In order to be reasonable, a non-compete clause must:
Protect a legitimate interest, such as the employer’s interest in protecting its trade secrets or
business connections, and
Be limited to reasonable bounds as to time, place, and type of work the employee cannot perform.
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