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Void and Illegal Contracts

Void Contracts
Void contracts are basically those which contravene a provision in a statute or are contrary to public policy at
common law but to which the ex turpi causa principle does not apply.

Void by Statute
A statute may declare expressly that a particular contract is void, eg s 45 of the Trade Practices Act 1974 which
provides that clauses purporting to exclude, restrict, or modify the liability of a corporation imposed by Division 2
Part V of the Act (that is the implication of terms such as an implied condition of merchantability and of fitness for
purpose) are void. The effect is a question of statutory interpretation.

Void at Common Law on the Grounds of Public Policy

Restraint on Trade
A restraint on trade is a promise by one party, the covenantor, to give up a freedom that he would otherwise enjoy in
relation to his or her trade, for the benefit of another party, the covenantee: Amoco Aust v Rocca Bros Motor
Engineering Co.

Trading activities will include employment, operating a business and restrictive practices such as agreeing to obtain
supplies exclusively from one supplier for a lengthy period of time.

While prima facie all restraints of trade are void, a restraint is valid if it can be shown to be reasonable in the
interests of (Nordenfelt v Maxim Nordenfelt Guns and Ammunition):
1. the parties; and
2. the public.

The onus is on the covenantee to show the restraint is reasonable in the interests of the parties. If successful, it will
shift to the covenantor to show that it is unreasonable in the interest of the public: Amoco Aust v Rocca Bros Motor
Engineering Co.

The validity of a restraint must be decided as at the date of the agreement: Lindner v Murdock's Garage.

Interests of the Parties
If a restraint is to be reasonable between the parties the covenantee must have a legitimate interest which the
restraint goes no further than is necessary to protect: Amoco Aust v Rocca Bros Motor Engineering Co.

Whether an interest is legitimate will depend on the nature of the contract eg the covenantee’s interest to protect the
goodwill of a business from competition by the seller (Butt v Long) cf the prevention of a competitor from the
purchase of similar equipment form the same supplier (ICT v Sea Containers).

Whether the restraint does no more than provide adequate protection of the covenantee’s legitimate interest depends
upon the balancing of a number of relevant factors:
• The scope of the restraint, in terms of both area and duration. The wider and longer the restraint, the more
likely it will be unreasonable: Butt v Long.
• The activities covered by the restraint. If the restraint purports to restrict activities that are unrelated to the
covenantee’s legitimate interest, the more likely it will be unreasonable: Nordenfelt v Maxim Nordenfelt
Guns and Ammunition.
• The relative bargaining power of the parties. Relevant, not conclusive, if the covenantee is in a stronger
position than the covenantor: A Schroeder Music Publishing Co v Macauley. The court may be willing to
show more latitude if the parties are on equal footing: Amoco Aust v Rocca Bros Motor Engineering Co.
• The consideration paid in exchange for the restraint. The restraint allowed may be greater where the
covenantor has received large consideration: Nordenfelt v Maxim Nordenfelt Guns and Ammunition.
• The context of the contract. Setting may be relevant eg restraint upheld where inserted into a partnership
agreement between two solicitors: Bridge v Deacons.
Master and Servant
Interests which the master is entitled to protect are his/her trade secrets, including secret manufacturing processes

s10(1) Arbitration Act 1973. Specifically: • A provision in a contract of service or for services restricting the work in which a person may engage during or after termination • A provision in a contract of partnership relating to competition between the partnership and a partner before or after cessation of the partnership. Section 51(2) contains exception to s 45 providing that a restraint of trade provision will not breach s 45 unless it is an unreasonable restraint of trade at law. and marriage brokerage contracts pursuant to which money is paid in return for the organization of marriage (Herman v Charlesworth). The purchaser is only entitled to protect the business bought: Nordenfelt v Maxim Nordenfelt Guns Ltd “Solus” (Exclusive dealing) agreements Courts tend to uphold the restraint where the parties have bargained at arms length. will be judged strictly in relation to duration. Interests of the Public Public interest often follows private interest. of which the servant has knowledge: Herbert Morris Ltd v Saxelby. Attempts to Oust Jurisdiction of the Court Contracts which purport to destroy the right to submit questions of law to the courts are void at common law on the ground of public policy: Baker v Jones. However. parties are entitled to agree that any dispute arising between them may be settled by a particular person or body. but may have independent significance: Amoco Australia v Rocca Bros Motor Engineering. Factors such as length and an obligation to purchase minimum quantities regardless of market condition may render an exclusive dealing arrangement unreasonable: Qld Cooperative Milling Association v Pamag. provided that recourse to the courts remains open for determination of questions of law eg third party arbitration: Scott v Avery. This is a policy head of diminishing significance due to changes in society’s attitude to marriage.(Foster Ltd v Suggett) and his/her business connections. if any. General skill and knowledge that an employee obtains in the course of employment does not qualify as ‘trade secrets: Drake Personnel v Beddison. An agreement between employers restricting the employment of each other's former employees may be void: Kores Co. Contract Prejudicial to the Status of Marriage Contractual provision that are prejudicial to the status of marriage are void eg contracts which impose a restraint on marriage (Lowe v Peers). Contracts will be judged strictly in relation to duration. and • A provision in a contract for thee sale of a business that is solely for the protection of the purchaser in respect of the goodwill of a business. contract providing for future separation of married couples (Money v Money). Pursuant to the . Statute Section 45 of the TPA prohibits corporations from entering into or giving effect to any contract arrangement or understanding which is an exclusionary provision or which has the purpose or would likely to have the effect of substantially lessening competition. Contracts of Exclusive Service A contract of exclusive service is valid as it is required to enable the covenantee to obtain full benefit of the covenantor’s services: Esso Petroleum v Harpers’s Garage. Ltd v Kolok Co Ltd. Sale of Business Restraints are more readily upheld as ti allows the vendor to obtain full value for the business bing purchased and enables the purchaser to obtain exactly what he or she is bargaining for: Esso Petroleum v Harpers Garage.

if the contract is held to be void: First Chicago Australia Ltd v Yango Pastoral Co. “contracts entered into for the capture of stray dogs are prohibited in the absence of the catcher possessing a current licence”: Re Mahmoud and Ispahani. The commission of the offence must be more than incidental or subsidiary to the main purpose of the contract: Neal v Ayers. if the contract is held to be void: First Chicago Australia Ltd v Yango Pastoral Co. as formed or performed. Pty Ltd (1978) 139 CLR 410. Where the offence is of a public nature. it will be illegal as formed. Family Law Act 1975 prenuptial agreements can be binding. Knowledge of the particular law contravened is not necessary: Waugh v Morris. • whether the scope and purpose of the statute will be sufficiently served by the penalties imposed and the inconvenience to the public or to commercial life. although the statute does not expressly prohibit a contract. Australian courts have adopted a flexible approach to the heads: Fitzgerald v FJ Leonhardt Pty Ltd. Contract prejudicial to the administration of justice A contract prejudicial to the administration of justice is illegal eg a contract which has the effect of concealing a crime or withholding evidence (A v Hayden). Relevant factors in construing a statute include: • where a penalty for contravention of a statute is imposed. the public has an interest in seeing it prosecuted eg a contract to provide compensation for any harm done to a victim by the accused will be regarded as contrary to public policy. Where the . If not. Illegal by Statute Express Prohibition A contract may be expressly prohibited by statute as formed or performed eg. a contract to stifle a prosecution for a public offence (Clegg v Wilson). whether the object of the penalty was to increase the revenue (contract probably legal): Cope v Rowlands . Implied Prohibition In some cases. Pty Ltd Illegal at Common Law on the Grounds of Public Policy At common law contracts may be illegal on the grounds of being contrary to public policy. • or whether the object was to protect the public (contract probably illegal): Pretorius Pty Ltd v Muir & Neil Pty Ltd [1976] 1 NSWLR 213. Illegal Contracts Illegal contracts are those to which the ex turpi causa principle applies. • any inconvenience to the public or to commercial life (as opposed to the parties to the contract). Contract to defraud revenue A contract designed to defraud revenue will be illegal eg a lease drafted in two separate documents to defraud authorities: Miller v Karlinski. a court may be prepared to hold that by its terms the statute impliedly prohibits the contract. Formed vs Performed If there was a way in which the contract could have been performed without infringing the prohibition the contract will be illegal as performed. The old fixed list of “heads” may now serve as useful examples of cases held to be immoral or illegal and therefore contravene public policy. although the list is regarded as finite. This may occur where the contract is expressly or impliedly prohibited by statute. A number of head of policy have been recognized and. or where there is a contravention of public policy at common law where the contract is for an illegal or immoral purpose. Contracts to commit a crime or tort A contract to commit a crime or tort is illegal eg an arrangement to pay money in exchange for the murder of a person (Cowan v Milbourn) or to defraud a third party (North v Marra Developments Ltd).

Title of goods delivered or money paid may pass under a contract notwithstanding any illegality: Taylor v Chester. Where a transaction is illegal. will be illegal: Wilkinson v Osborne. 1. Effect of Illegality Ex turpi causa principle Where a contract is illegal by statute or at common law the ex turpi causa rule applies. specific performance. Mistake A similar position applies as to that of ignorance.offence is of a private nature a valid contract may be made for compensation in return for the victim not to purse any prosecution of the offence: Kerridge v Simmonds. the rights of a person who is not a party to the illegal contract is not effected by the illegality unless they are a knowing participant in it: Cannon b Bryce. It is sufficient if there is merely a potential for a conflict of interests. Contracts tending to corrupt public officials A contract which interferes with the impartial judgment of a public official. If the contract is ex facie lawful and legal as performed and one party is ignorant of the illegality (did not know and should not have known of illegality). However. oppression or undue influence. If a contract is ex facie lawful an additional question is asked whether the intention to break the law is shared. that party will be able to claim a remedy as usual. Therefore. 3. Contracts that have the purpose of the continuation of unmarried cohabitation are lawful: Andrews v Parker. A contract which is ex facie will be illegal unlawful as formed eg murder contract. Fitzgerald v F J Leonhardt Pty Ltd per McHugh. may be able to recover a quantum meruit for those services: Clay v Yats. A more relaxed attitude has been shown towards prostitution and contracts that facilitate it: Barac v Farnell. Gummow J and Kirby J four exceptions to the general rule were approved where the parties were not equally at fault (in pari delicto). Exceptions In Nelson v Nelson per McHugh J. Contracts contrary to foreign relations will be illegal eg a contract that if performed would involve doing in a friendly foreign country an act which violates the law of the country: Foster v Driscoll. Contracts promoting sexual immorality This head requires the court to apply the moral standards of the day. a person who has rendered services under an illegal contract. neither party can claim. The contract is wholly void and neither party can enforce it. including members of parliament. Illegal Purpose not carried into effect . Fraud. Oppression or Undue Influence A party will have contractual relief where the contract was induced by the defendants fraudulent misrepresenation. eg damages. injunction. Statutory Protected Classes A party will have contractual relief where the statutory scheme which rendered the contract illegal was enacted for the benefit of a class of which the claimant is a member: Kiriri Cotton Co v Dewani. If the contract is ex facie unlawful it will be illegal as formed and both parties will be seen to have shared the intention to break the law. Claimant Ignorant or Mistaken Ignorance A contract can be ex facie lawful but nevertheless illegal eg parties enter a lease with the ulterior motive of defrauding revenue. in which case the contract is illegal as formed. or only held by one party in which case the contract is regarded as illegal as performed. amounts due under the contract. Contracts prejudicial to national security or foreign relations Contracts prejudicial to national security will be illegal eg a contract entered into with a national of a country at war with Australia: Ertel Bieber & Co v Rio Tinto Co Ltd. therefore. both common law and statute. 2. A broad approach as to what constitutes oppression has been taken: Andrews v Parkinson. is of diminishing significance. 4. actual corruption need not be shown: Horne v Barber.

More Flexible Approach Regards should be had to a more flexible approach. Severance does not permit the court to selectively enforce an other objectionable covenant . where the associated contracts are able to stand alone. Severance will be permitted where the covenant can be divided into distinct promises: Bacchus Marsh Concentrated Milk Co v Joseph Nathan & Co. More Flexible Approach – Bowmakers Principle If a party is precluded by illegality from relying on a contract. and • The statute does not disclose an intention that the sanction and remedies contained in the statute are to be the only legal consequences of a breach of the statute or the frustration of its policies. the illegality of one will not affect he enforceability of another: Dalgety and NZ Loan v C Imeson. • The imposition of the sanctuary is necessary. There are three main forms of severance: Severance of associated dealing Where tow or more contracts are so closely connected that the court regards them as being in effect a single transaction. this does not necessarily mean that all is lost. A party can still upon some other cause of action (eg conversion) if that cause of action does not rely upon having to prove the existence of the contract: Bowmakers Ltd v Barnet Instruments. A court should not refuse to enforce legal or equitable rights simply because they arose out of or were associated with an unlawful purpose unless one of two situations exists: either the statute disclose an intention that those rights should be unenforceable in all circumstances. Where the party repents before performance has taken place (Payne v McDonald) or where partial performance has taken place but he illegal purpose is still wholly executory (Clegg v Wilson) the party will have contractual relief. having regard to the terms of the statute. an illegal or void part of a contract may be severed by taking out the objectionable part enabling that which remains to be enforced. . Conversely. Severance of an objectionable promise An offending term may be severed where it does not form the whole or a substantial part of the consideration promised by one of the parties (O’Loughlin v O’Loughlin) and will only be permitted where it was the intention of the parties that the contract could take effect notwithstanding the excision of the term: Brooks v Burns Phi8lp Trustee. especially in relation to restitution of money or property transferred. Severance In appropriate circumstances. to protect is objectsor policies. severance will not be possible and the entire transaction will fail: Amoco Australia v Rocca Bros Motor Engineering Co. outlined by McHugh J in Nelson v Nelson.the court will not rewrite the promise or destroy the substance what was agreed: Attwood v Lamont. or: • The sanction of refusing to enforce those rights is not disproportionate to the seriousness of the unlawful conduct. Severance of an objectionable part of a term An illegal or void part of a term may be severed if the term is divisible.Where the contract has been fully performed in a way that involved no illegality a party will have contractual relief the mere existence of an unlawful intent is in the transactions irrelevant where no part of the intent is manifested: Payne v McDonald.