Contract Law 3rd Edition

contract law
THIRD EDITION
MINDY CHEN-WISHART
1
INDEcontents
web X
Web 1 Incapacity W1
Diagram W1A Overview of incapacity W2
W1.1 Children W3
W1.1.1 Contracts to supply ‘necessaries’ W3
W1.1.2 Employment and other beneficial contracts W4
W1.1.3 Contracts involving land, marriage settlements, company shares, and
partnerships W5
W1.1.4 Other contracts W6
W1.1.5 Restitution to children W6
W1.1.6 The liability of children W6
W1.2 Mental incapacity, drink, and drugs W8
W1.3 Companies W10
W1.4 Public authorities W11
Web 2 Illegality and public policy W13
W2.1 What are illegal contracts? W14

W2.1.1 Statutory illegality W14
Diagram W2A Overview: Categories of illegal contracts W15
W2.1.2 Common law illegality W16
W2.1.2.1 Contracts to commit a crime W17
W2.1.2.2 Contracts made for the deliberate commission of a civil wrong W17
W2.1.2.3 Contracts interfering with the administration of justice W17
W2.1.2.4 Contracts to oust the jurisdiction of the courts W18
W2.1.2.5 Contracts prejudicial to the state W18
W2.1.2.6 Contracts which further sexually immoral purposes W19
W2.1.2.7 Contracts prejudicial to family life W19
W2.1.2.8 Contracts unduly restrictive of personal liberty W20
W2.1.2.9 Contracts in restraint of trade W20
W2.1.2.10 Restrictive trading and analogous agreements W24
W2.1.3 Illegality and unfairness W24
W2.2 The effects of illegality W25

W2.2.1 The enforceability of the contract W26
W2.2.1.1 Illegality at formation W26
ii WEB CONTENTS
Diagram W2B The enforceability of illegal contracts W27

W2.2.1.2 Intention to achieve an illegal purpose or perform illegally W28
W2.2.1.3 Subsequent illegality of means W30
W2.2.1.4 Severance W31
W2.2.2 The availability of restitution W31

Diagram W2C Restitution of benefits transferred under an illegal contract W32
W2.2.2.1 Unequal blame W33
W2.2.2.2 Timely withdrawal W33

W2.2.2.3 Independent property rights W34
W2.2.3 The future: the Law Commission’s suggestion W38

Web 1
Incapacity
‘I had no capacity to make this contract’
In Part III of the text we discussed a number of doctrines that control the contract
negotiation process. Some vitiation doctrines focus on the reprehensible behaviour
of the party seeking to uphold the contract (eg misrepresentation (ch 6) and duress
(ch 9)); others focus on the impaired consent of the party seeking to escape the con-
tract (eg mistake (ch 7)). This chapter examines a further basis for invalidating an
otherwise valid contract; namely, the claimant’s incapacity to make the contract in
question. Recognised categories of personal incapacity are infancy, mental incapacity,
and those so affected by drink or drugs as not to know what they are doing. All others
are presumed to have the capacity to make a valid contract although lesser weakness
of mind, immaturity, inexperience, or lack of knowledge may, in appropriate cases,
allow a party to avoid a contract for undue influence, as an unfair guarantee, or as an
unconscionable bargain (see ch 10).
The respect for the contract parties’ voluntary choices, embodied in the ideal of
freedom of contract, rests on the broad assumption that adults of sound mind are the
best judges of their self-interest. If this assumption is falsified, in that one party does
not have sufficient maturity of judgment or soundness of mind, then any apparent
agreement between the parties should not be treated as a valid contract. The justifi-
cation for the restrictions on personal contractual capacity is the protection of those
whose self-protective abilities are impaired to an unacceptable degree. It simultane-
ously restrains those who would knowingly exploit incapacitated parties by contract-
ing with them. However, this simple protective justification is complicated by the
varying strength of the protective impulse in different circumstances and by conflict-
ing considerations which make a straightforward response to incapacity cases impos-
sible. In particular, the law must:
(i) balance the interests of those who deal with the incapacitated party fairly and in
good faith (ie in ignorance of the incapacity),
(ii) minimise disruptions to the contractual capacity of those who may be mistakenly
thought to fall within the protected group (eg the very elderly), and
(iii) confine its protection to potentially harmful arrangements (and uphold contracts
beneficial to the incapacitated party).
W2 I N C A PA C I T Y
The upshot is that, although an incapacitated party is logically incapable of giving valid
consent (so that resultant contracts should be void and of no effect), the actual picture
is far messier. The agreements of incapacitated persons may be void or voidable, unen-
forceable or valid. They may also have some effect in the law of tort, property, or unjust
enrichment. Diagram W1A gives an overview of the effect of incapacity on contractual
and other liability. The capacity of corporations and public authorities is briefly men-
tioned at the end.
Diagram W1A Overview of Incapacity
39–42
I N C A PA C I T Y W3
W1.1 Children
The law adopts a strongly protective attitude towards children (persons less than 18
years of age, referred to as ‘minors’). The general rule is that contracts entered into by
a child are not binding on him unless they are ratified by him after he reaches the age of
18 (‘majority’). However, the contracts of children are not void; they are unenforceable
by the adult, but enforceable by the child. That is, the contract is binding on the adult;
the adult cannot escape the contract by pleading the child’s incapacity. This straightfor-
ward position is qualified by four exceptions designed to protect those who have dealt
fairly and in good faith with the child, and to allow children to benefit from contracts
which further their welfare. They are:
(i) contracts to supply necessaries,
(ii) employment and other beneficial contracts,
(iii) contracts involving land, marriage, company shares, or partnerships which are bind-
ing unless the child disclaims them (ie voidable), and
(iv) other contracts which are ratified by the child on reaching majority.
Broadly, the effect is that a contract which is on fair terms and which is recognised as
benefiting the child is binding (eg contracts for necessaries, employment, and the man-
agement of young pop and sports stars). Although these exceptions remain good law,
many are outmoded or unnecessary because most of the old cases involved:
• 18 to 21-year-olds who are now regarded as possessing contractual capacity (only
under-18s are now protected),
• the use of credit which is now largely unavailable to under-18s in the form of credit
cards, and
• contracts described in (iii) above are now extremely unusual, if not downright
abnormal, for under-18s.
W1.1.1 Contracts to supply ‘necessaries’

Contracts for necessaries are binding if, on the whole, they are beneficial to the child,
but not binding if their terms are harsh or onerous for the child. Three issues arise:
(i) ‘Necessaries’ is defined widely. It is not confined to essentials of life such as food,
shelter, clothing, and medical care. Where the contract involves the sale of goods, section
3(3) Sale of Goods Act 1979 defines ‘necessaries’ as: ‘goods suitable to the condition in life
of the minor . . . and to his actual requirements at the time of the sale and delivery.’ The
common law adopts a similarly liberal approach, paying particular attention to the station
in life of the child; the higher the status, the greater the range of goods and services that
may be regarded as necessaries. Thus, in Peters v Fleming (1840), rings, pins, and a watch
chain were held to be necessaries for an undergraduate with a rich father. The burden of
proof is on the adult supplier to show that the goods supplied were (Nash v Inman (1908):
(a) suitable to the child’s condition in life; and
(b) suitable to his actual requirements at the time of the sale and of delivery.
In Nash, 11 fancy waistcoats for a Cambridge undergraduate were not regarded as ‘nec-
essaries’ because he already had enough clothing fitting to his position in life. That the
same outcome would be reached even if the supplier was ignorant of this fact (Barnes &
Co v Toye (1884)) shows that the relief is based on protecting children, rather than pre-
venting exploitation.
(ii) Reasonableness: Even a contract for necessaries is not binding if it contains harsh
and oppressive terms so that, taken as a whole, the contract is not for the child’s ben-
efit (Fawcett v Smethurst (1914)). Thus, in Flower v London and North Western Railway Co
(1894), a contract of carriage, necessary in the circumstances, was void against the child
because it contained an exemption of liability for injury caused by negligence.
(iii) Contract or unjust enrichment? Section 3 Sale of Goods Act 1979 validates only
fair contracts for necessary goods which are sold and delivered. This leaves goods which
are sold but not delivered to be governed by the common law. However, the position
there is unclear. If one takes the view that children do, exceptionally, have the capacity
to make fair contracts for necessaries, such contracts should be binding even if execu-
tory (Roberts v Gray (1913)). However, if the child’s obligation to pay for necessaries
rests not on contract (since he has no capacity to make one), but on unjust enrichment
of the child at the supplier’s expense, then delivery is logically necessary. This view is
supported by:
(a) the fact that the child is not bound to pay the contract price but only a reasonable
price (ie the value of the enrichment); and
(b) the requirement that the goods must be necessary when delivered. On the unjust
enrichment view, delivery is logically necessary (Nash v Inman).1
W1.1.2 Employment and other beneficial contracts

On the same reasoning as for contracts for necessaries, contracts which enable a child to
earn a living or to obtain an education or training are binding so long as they are ben-
eficial to the child on the whole, having regard to all the circumstances (De Francesco
v Barnum (1889) at 439). This was not so in De Francesco2 where B, when 14 years old,
became DF’s apprentice dancer for seven years on terms which placed B entirely in the
power of DF. B could not marry or accept any other professional engagement without
DF’s consent and would only be paid for any performances she actually gave, while DF
was not even required to provide her with any work. In any case, many statutes now
restrict the employment of minors between 13 and 16 years of age.3
Some other contracts beneficial to the child are also enforceable, although the limit
of this category is unclear. They have included services or analogous contracts for:
✓ medical care (Gillick v W Norfolk and Wisbech Area Health Authority (1986)),
✓ legal advice (Helps v Clayton (1864)),
1
See further P Birks, An Introduction to the Law of Restitution (Clarendon Press, 1985) 436.
2
Contrast Clements v L & NW Rly (1894).
3
Children and Young Persons Act 1933 s.18(1), Employment of Children Act 1973 s.1(3) and Children
(Protection at Work) (No.2) Regulations (SI 2000/2548) reg.2(1).
✓ car hire to collect the child’s luggage (Fawcett v Smethurst (1914)) and
✓ contracts analogous to those for employment or education (eg a contract to be
bound by the rules of the British Boxing Board of Control in exchange for a box-
ing licence, Doyle v White City Stadium Ltd (1912); a contract to assign the rights
in an autobiography, Chaplin v Leslie Frewin (Publishers) Ltd (1966);4 and a contract
to employ a manager and agent for ‘The Kinks’, a group of under-aged musicians;
Denmark Productions Ltd v Boscobel Productions Ltd (1967)).
On the other hand, not every contract from which a child may benefit is binding
(Mercantile Union Guarantee Corporation Ltd v Ball (1937)). Thus:
✗ a child’s trading contracts are not binding even if they are beneficial (Cowern v Nield
(1912)).
The traditional justification is that ‘the law will not suffer him to trade, which may be
his undoing’ (Whywall v Campion (1738)). As Treitel explains (at 545), ‘A minor who
trades thereby necessarily risks his capital. If he exercises some profession or calling he
may incur expense, but putting his capital at risk is not of the essence of the matter.’
In contrast with the uncertain enforceability at common law of executory contracts
for the supply of necessary goods (see W1.1.1 (iii)), executory contracts for the supply
of necessary services in the nature of apprenticeships or of education are enforceable
against the child. In Roberts v Gray (1913), the Court of Appeal found a child liable to
pay damages when he failed to perform a contract to go on tour with a professional bil-
liard player. This is inconsistent with the view that the child’s liability is restitutionary
rather than contractual.
W1.1.3 Contracts involving land, marriage settlements,

company shares, and partnerships
There are four instances where a child who contracts for an interest in a subject matter
of a permanent nature will be bound, unless he repudiates it before or within a reasonable
time of attaining majority. This is the position even if the child does not know of his
right to repudiate (Edwards v Carter (1893)). They are contracts:
(i) to buy or lease land;

(ii) for marriage settlements;
(iii) to buy shares in a company;
(iv) to enter a partnership.
These contracts are voidable (ie being valid unless repudiated). A child is bound by any
obligations accruing before his repudiation. For example, a child is liable for rent until
the lease is given up (Blake v Concannon (1870)), and for calls on shares until they are
repudiated (Steinberg v Scala (Leeds) Ltd (1923) at 463). However, a child partner is not
liable for debts incurred by the partnership, but neither is he entitled to share in the
partnership assets until its debts are cleared (Lovell and Christmas v Beauchamp (1894)).
4
Charlie Chaplin’s son sought to repudiate the assignment of his autobiography, entitled I Couldn’t Smoke
the Grass on My Father’s Lawn and written by ghost writers because it portrayed him as a ‘depraved creature’.
The justification for treating these contracts as voidable (binding unless repudiated)
rather than unenforceable (not binding unless ratified) is that the child is acquiring an
interest in the subject matter of a permanent nature to which continuing obligations are
attached, so that it would be unjust to allow him to retain the interest without fulfilling
the corresponding obligations (Davies v Benyon Harris (1931)).
W1.1.4 Other contracts

Contracts not belonging in the previous categories (sale of necessaries, employment, and
other beneficial contracts and contracts involving land, marriage, company shares, and
partnerships) are unenforceable against the child unless positively ratified by the child
on reaching majority (Williams v Moor (1843)). However, the contract is enforceable by
the child although he cannot claim specific performance (Flight v Boland (1824)).
W1.1.5 Restitution to children

If a child has already paid the adult under a contract not binding on him, he cannot
recover his money unless he can establish a separate ground for restitution such as ‘total
failure of consideration’. In Steinberg v Scala (Leeds) Ltd (1923), the infant claimant’s
contract to buy company shares was set aside, but her claim for restitution of her pay-
ment for the shares failed because she could not establish total failure of consideration.
She had been allotted the shares and could have made a profit on them had she sold
them although she did not.
Counterpoint
Counterpoint
1. The traditional requirement that there must be total failure of consideration (ie the child must
have received nothing of the performance for which he has paid) has been undermined and
is unlikely to hold in future (see 15.4 (ii)).
2. The child should be able to recover the money paid so long as (a) he can return or pay com-
pensation for what he has received, and (b) such return does not amount to indirect enforce-
ment of the contract.
3. Payments under a contract set aside for incapacity should be returned simply because they
are unjustified or undue. If restitution is available for contracts tainted by more inchoate
impairments found in undue influence and unconscionability cases, then it should logically
be available for contracts tainted by infancy.
W1.1.6 The liability of children

A contract which does not bind the child may still generate non-contractual obligations
by the child to the other party:
(i) Passing of ownership in property: Where the adult transferor intends to pass
ownership of, and delivers, the property to the transferee, this is effective to transfer
ownership in the property even if the transferor’s reason for doing so is mistaken (ie he
believes that the transferee is an adult (Stocks v Wilson (1913)). This protects third parties
who buy the property from the child; they need not return the property to the original
transferor. However, ownership in property can also pass from a child (Chaplin v Leslie
Frewin (Publishers) Ltd; this is also assumed by s 3(1) Minors’ Contracts Act 1987). This
entails the somewhat contradictory proposition that while children have no capacity
to make a contract (under which property may pass), they do have the capacity to pass
property. Recovery by the adult depends on the law of unjust enrichment (see (iii) and
(iv) below).
(ii) Liability in tort: In principle, a child is liable for any conduct which can be
construed as a tort. However, if such conduct occurs in the shadow of a contract
which is unenforceable against the child, it is only actionable if the conduct can be
construed as something different from (independent of) his mere failure to perform
or breach in performing the contract. Otherwise, the protection of contract law could
be circumvented by granting the adult tortious remedies. For example, a child who
fraudulently misrepresents his age to obtain a loan cannot be made liable for damages
in the tort of deceit (Leslie Ltd v Sheill (1914)), since this would amount to indirect
enforcement of the unenforceable loan. Tortious liability was also rejected where a
child hired a car to collect his bag from the station, but met a friend and drove on
further where the car caught fire; the extra journey was not outside the scope of the
contract (Fawcett v Smethurst (1914)). In contrast, tortious liability in trespass was
accepted where a child hired a mare ‘merely for a ride’, and was strictly instructed
‘not to jump or lark with her’, but lent her to a friend who killed her by jumping her
(Burnard v Haggis (1863)).
(iii) Liability in restitution: A child who is not compelled to go forward with the
contract may nevertheless incur obligations to make restitution to an adult in respect
of any enrichment derived from the adult’s contractual performance. This is subject
to the concern already noted to avoid indirect enforcement of the invalid contract by
the back door, as would happen if a child is ordered to repay a loan (Leslie v Sheill) or
to pay a reasonable price for unnecessary goods and services (Lemprière v Lange (1879)).
However, this concern has sometimes gone too far, as in Cowern v Nield (1912) where a
child was allowed to keep the money paid to him for hay which he contracted but failed
to deliver. To require restitution of the money would not have amounted to indirect
enforcement of the contract; it would merely reverse unjust enrichment. In any case,
equity can give relief if the child has acted fraudulently. Thus, the proposition in Leslie v
Sheill must be qualified. As Lord Sumner said (at 618):
[W]hen an infant obtained an advantage by falsely stating himself to be of full age,

equity required him to restore his ill gotten gains, or to release the party deceived from
obligations or acts in law induced by the fraud, but scrupulously stopped short of enforc-
ing against him the contractual obligation, entered into while he was an infant and,
even by means of a fraud (emphasis added).
The law’s strongly protective attitude towards children is further instanced by the fact
that the child’s restitutionary obligation only lasts so long as the money or property or
their proceeds remains in his hands (Stocks v Wilson (1913) at 247). Even a fraudulent
child can only be made to ‘give back’ what is left; he cannot be made to ‘pay for’ the
property received under the invalid contract.5 In Leslie v Sheill, a child fraudulently
misrepresented his age to obtain a loan which he completely used up. The Court of
Appeal rejected the suggestion that the child should repay the amount he received but
accepted that, in principle, equity could compel restitution of any enrichment still
surviving in the child’s hands. The child can even be compelled to give up the proceeds
from sale of property fraudulently acquired on the principle of following (ie tracing) the
property (Stocks v Wilson).
(iv) Restitutionary liability under the Minors’ Contracts Act 1987: Section 3(1)
of the 1987 Act provides the most important means of ordering children to make res-
titution where the contract is not binding. Accordingly, ‘the court may, if it is just and
equitable to do so’, order the child to transfer to any other party ‘any property acquired’
by the child under the contract or ‘any property representing it’.
Pause
Pa
Paus
use
e for
for re
rrefl
flection
ecti n
reflection
1. The section confers a very wide judicial discretion. While this may be criticised for injecting
uncertainty, it does so in an area of the law where the promotion of commercial certainty is
less of a concern.
2. The section widens the scope of restitution over that available under equity since fraud by the
child is unnecessary.
3. It may be difficult to determine whether any current asset of the child is ‘property rep-
resenting’ the original property acquired. Aside from simple swaps, or clean sale of the
property and purchase of another, the process of ‘tracing’ property into its products can be
extremely complicated (eg where money received is mixed with the child’s own money in a
bank account, or if the child uses the money received from A as part-payment for property
under another contract with B which is also invalid for infancy; A and B may then both claim
the property).6 Courts are likely to restrict liability to fairly clear cases to avoid these difficul-
ties and to minimise the risk of indirectly enforcing the invalid contract.
4. The Law Commission suggests that courts may order restitution of the property unless the
child pays the reasonable price fixed by the court (Law Commission Report No 134, [4.21]).
This would allow the court to substitute a reasonable price for the over-price charged by the
invalid contract.
W1.2 Mental incapacity, drink, and drugs
Three categories can be distinguished:
(i) A person lacks capacity under section 2 of the Mental Capacity Act 2005 if he is
‘unable to make a decision for himself in relation to the matter’ at the time the contract
5
Contrast the law of unjust enrichment where bad faith defendants are disqualified from the change of
position defence.
6
Eg see R Goff and G Jones, The Law of Restitution (6th edn, Sweet & Maxwell, 2002) [2–021–2–053].
is made, whether the impairment is permanent or temporary. Section 3(1) describes this
impairment in terms of the inability:
(a) to understand the information relevant to the decision,

(b) to retain that information,
(c) to use or weigh that information as part of the process of making the decision, or
(d) to communicate his decision (whether by talking, using sign language, or any
other means).
According to s 3(4), the relevant information relates to the reasonably foreseeable con-
sequences of:
(a) deciding one way or another, or

(b) failing to make the decision.
The Act also gives a new Court of Protection the power to make declarations as to a
person’s capacity and ability to contract (s 15). Under previous legislation, such per-
sons were absolutely incapable of disposing of property, even during a lucid interval
(Re Walker (1905)), and the general view is that they were also incapable of making
contracts in line with the clear protective purpose of the legislation and the court’s con-
trol over the property (Chitty at [8–073]). However, the mentally incompetent remains
liable to pay a reasonable price for necessaries (section 7).
(ii) Those incapacitated by mental infirmity, drink, and drugs: A contract is still void-
able by a party not declared to be incapacitated under the above Act if he can prove that:7
(a) he did not understand the general nature of what he was doing, and
(b) his impairment was known to the other party.
The same principles apply to incapacity by reason of drunkenness (Pitt v Smith (1811);
Matthews v Baxter (1873)) and should logically extend to those incapacitated by other
intoxicating substances. As Millett LJ said in Barclay’s Bank plc v Schwartz (1995), drunk-
enness, like mental incapacity, deprives a person of both an understanding of the nature
of the transaction and the awareness that he does not understand it. Nevertheless, s 7
Mental Capacity Act 2005 imposes a liability on the incapacitated person to pay a rea-
sonable price for ‘necessaries’.
Pause
Pa
Paus
use
e for
for refl
flection
ecti n
reflection
e of mental incapacity8 may leave the incapacitated person with

1. The requirement of knowledge
insufficient protection. It is inconsistent with the absence of this requirement in cases of infancy. It
is also hard to square with the justification for intervention based on the claimant’s lack of capac-
ity to understand the general nature of the contract, which has nothing to do with the other
party’s knowledge of it. Moreover, by analogy with the doctrine of non est factum (see 7.4.2), the
contract should be void and not just voidable, irrespective of the other party’s knowledge.
7
Imperial Loan Co v Stone (1892); Gore v Gibson (1843); Archer v Cutler (1985).
8
Scots law does not require knowledge, John Loudon & Co v Elder’s CB (1923).
2. The knowledge requirement pushes incapacity to the background, for the contract can be
avoided, without relying on the incapacity, simply by reference to the objective test of inten-
tions; the enforcing party’s knowledge of the other party’s incapacity is merely knowledge
that the latter’s consent does not really count.
3. An alternative explanation for the knowledge requirement may lie in the concern to avoid
infantilising the elderly who, having more assets, require more freedom of disposition than
children. For, if the transactions of apparently sane but actually incompetent persons were to
be voidable, people might be reluctant to deal with the class of persons likely to fall into that
category without first requiring insulting medicals or the consent of their families who might
otherwise challenge the transactions.9
4. Two factors mitigate the potential harshness of the knowledge requirement.
(i) Knowledge of incapacity is easily inferable, especially from the unfairness of the
exchange.10
(ii) Relief may be available under the related jurisdictions of undue influence and uncon-
scionability where constructive knowledge of lesserr bargaining impairment is enough.
It seems anomalous to require actuall knowledge of a more serious impairment. For
example, in Ayres v Hazelgrove (1984), an 84-year-old widow with senile dementia sold
paintings worth £6,000–7,000 for £40 to a young bric-a-brac dealer who professed his
ignorance of her incapacity. The contract was set aside both for incapacity (because he
must have known of her incapacity) and as an unconscionable bargain.
(iii) Impairments short of incapacity: The Privy Council said in Hart v O’Connorr (1985) that
an insane person who appears sane can rely on the independent and separate ground of
unconscionability (see 10.4) which relieves abnormal mental weaknesses even short of
incapacity. Undue influence (see 10.2) may also apply.
W1.3 Companies
The primary justification for limiting the capacity of non-natural persons such as com-
panies and public authorities is the protection of those on whose behalf these bodies
act: shareholders and lenders in the case of companies, and taxpayers in the case of
public authorities. However, the law must balance their interests with those who deal
in good faith with the company or public authority.
A company is a legal person separate and distinct from its shareholders. But its capac-
ity to act is limited by the objects for which the company is set up, which are contained
in the company’s memorandum of association. If the company acts outside its objects,
such acts are ultra vires (beyond its powers or capacity). Contracts which are ultra vires
the company are void (Ashbury Railway Carriage and Iron Co v Riche (1875)). The ultra
vires rule is not only a logical corollary of statutory incorporation, but is also necessary
to protect the shareholders and lenders who rely on the objects clause to limit ‘the pur-
poses to which their money can be applied’ (Sinclair v Brougham (1918) at 520).
9
P Birks and N Y Chin, ‘On the Nature of Undue Influence’ in J Beatson and D Friedmann (eds), Good
Faith and Fault in Contract Law (Clarendon, 1995) 91.
10
A H Hudson ‘Mental Incapacity Revisited’ [1986] The Conveyancer and Property Lawyer 178.
However, the rule caused considerable hardship to good faith parties dealing with
the company who found they could neither enforce contracts nor, prior to the recog-
nition of restitutionary claims, recover money or other benefits transferred under the
contracts (Sinclair v Brougham and Re Jon Beauforte (London) Ltd (1953)). Article 9 of the
First Directive on Company Law (68/151 [1968] OJ L65/7) requires Member States to
ensure security of transactions between companies and those with whom they trans-
act. Sections 39–42 Companies Act 2006 abolished the ultra vires rule as regards parties
who deal in good faith with the company so that their contracts are valid and enforceable.
Moreover, s 31(1) 2006 Act now provides that ‘[u]nless a company’s articles specifically
restrict the objects of the company, its objects are unrestricted’. Section 171 imposes a
statutory duty on the directors to act in accordance with the company’s constitution.
W1.4 Public authorities
Similarly, the powers of public authorities are necessarily confined by the functions
which the authority has been created to perform. The purpose of the ultra vires rule
is to protect the public funds entrusted to such bodies. For example, at common law,
ultra vires contracts of local authorities are void (Hazell v Hammersmith & Fulham LBC
(1992)). Again, the rule can inflict grave hardship on unwary parties who deal with an
authority not knowing of its want of power. However, this harshness is mitigated by
the law of unjust enrichment, which allows recovery of money paid and property trans-
ferred under void contracts, unless this would amount to indirect enforcement of the contract.
In Westdeutsche Landesbank Girozentrale v Islington London Borough Council (1996), the
parties entered into interest rate swap agreements designed partly to generate income.
Payments were made both ways under the agreements. When such transactions were
held to be ultra vires for the local authorities (rendering them void and unenforceable),
the banks were allowed to recover the net sum of over £1 million paid plus interest. The
ultra vires rule has also been modified by the Local Government (Contracts) Act 1997
for certain long-term services contracts. These are enforceable where a local authority
has issued a certificate stating that it has power to enter into the contract.
THIS CHAPTER IN ESSENCE
1 The law contains several rules which limit the contractual capacity of natural persons (chil-
dren and those affected by mental disorder, drink, or drugs) and of non-natural persons
(companies and public authorities). These restrictions are justified by the need to protect those
whose self-protective abilities are impaired to an unacceptable extent; and to protect those on
whose behalf companies or public authorities act.
2 There are three exceptions to the general rule that a child’s contract is unenforceable
against the child (it is enforceable against the adult), unless it is ratified by the child on reaching
majority:
(i) children must pay a reasonable price for ‘necessaries’;

(ii) children are bound by employment and certain other contracts which are beneficial for the
child as a whole; and
(iii) certain contracts which confer on the child an interest in permanent subject matter, such
as land or shares, are voidable (ie binding unless the child repudiates the contract before or
within a reasonable time of attaining majority).
3 Children cannot claim restitution of payments made unless they can satisfy the independent
ground of total failure of consideration. However, children can pass property, or incur liability
in tort or restitution. Further, they may be ordered to restore property acquired under the
contract under the Minors’ Contracts Act 1987.
4 Persons lacking mental capacity under the Mental Capacity Act 2005 cannot make enforceable
contracts. Otherwise, a party’s impairment due to mental disorder, drink, or drugs renders
a contract voidable if:
(i) it is known to the other party, or

(ii) the incapacitated person can establish undue influence or an unconscionable bargain.
5 The general ultra vires rule that a contract which is outside the powers of a company is void is
practically abolished in relation to third parties who deal in good faith with the company.
6 The general ultra vires rule that a contract which is outside the powers of a public authority
is void is mitigated by the recognition of a restitutionary claim to recover money or property
transferred under the void contract and by the Local Government (Contracts) Act 1997 which
validates ‘certified contracts’.
QUESTIONS
1 ‘It seems odd that children are better protected than mental incompetents.’ Discuss.
2 ‘Even if a contract is invalid for incapacity, that is not the end of the story; other legal
consequences may attach.’ Discuss.
3 Yoko suffers from senile dementia; she sells jewellery to Zita, a bric-a-brac dealer, for £100
although it is valued at £30,000. Advise Yoko. What further facts do you need to know?
For hints on how to answer these questions, please see the Online Resource
Centre at http://www.oxfordtextbooks.co.uk/orc/chenwishart3e/
KEY FURTHER READING
Hudson, A H (1986), ‘Mental Incapacity Revisited’, The Conveyancer and Property Lawyer 178.
For updates to this chapter and links to websites relevant to the topics covered,
please see the Online Resource Centre at http://www.oxfordtextbooks.co.uk/orc/
chenwishart3e/
Web 2
Illegality and public policy
‘The law does not allow us to contract about this’
The illegality doctrine relates to contracts which are illegal or contrary to public policy
(hereafter ‘illegal contracts’). Contracts may be tainted because:
• making such contracts is itself prohibited, or

• more usually, because its means (the method of performance) is illegal; or
• the contract’s ends (purposes) are illegal.
Contracts which become illegal by changes in the law subsequent to formation are dealt
with by the doctrine of frustration (see ch 8). On one view, the illegality doctrine repre-
sents the most open and direct interference with contract parties’ freedom to determine
the substance of their contracts. An alternative view is that it designates the class of
‘unworthy’ contracts to which the law will not lend its support or force (see 13.9). Sir
William Holdsworth said:1
[A] body of law like the common law, which has grown up gradually with the growth
of the nation, necessarily acquires some fixed principles, and if it is to maintain these
principles it must be able, on the ground of public policy or some other like ground, to
suppress practices which, under ever new disguises, seek to weaken or negative them.
Lord Mansfield explains in Holman v Johnson (1775) that courts will not assist one whose
cause of action is founded upon an immoral or an illegal act (‘ex dolo malo non oritur
actio’). Thus, in general, although not always, courts will refuse to enforce an illegal con-
tract even though it meets all the requirements of formation (Part I) and is otherwise
untainted by any vitiating factor (Part III). Nor will it grant restitution of any money or
property transferred under it. For example, no remedy was given in:
• Parkinson v College of Ambulance Ltd (1925), where P ‘donated’ £3,000 to C on

the promise of C’s secretary to procure a knighthood for P which failed to even-
tuate, and
• Pearce v Brooks (1866), where P hired out an ornamental carriage to B, a prostitute,
for use in her trade but which B returned in a damaged condition and refused to
pay for.
1
History of English Law, Vol III, 55.
W14 ILLEGALITY AND PUBLIC POLICY
The questions to be considered are:
(1) What are illegal contracts?

(2) When are contracts exceptionally enforceable despite their illegality?
(3) When will restitution exceptionally be allowed of the benefits transferred under
an illegal contract?
The case law is vast and the answers to these questions are far from simple. The first
point to make is that, although contracts are sometimes said to be ‘void’ for illegality
or contravention of public policy, this does not necessarily equate with contracts void
on other grounds (such as common mistake). Thus, ‘illegality’ will be used to refer to
the whole range of cases where contract law denies a contract its ordinary legal conse-
quences because of some prohibition, breach of duty, or contravention of public policy.
We will see that the consequences of illegality vary according to factors such as:
• the nature and seriousness of the illegality,

• how far the contract was carried through,
• the parties’ states of mind, and
• the intricacies of certain property and trust law rules.
W2.1 What are illegal contracts?
Diagram W2A gives an overview of the types of illegality.
W2.1.1 Statutory illegality

A contract may be illegal because its formation, purpose, or performance contravenes
some statute or the common law. It is difficult to generalise about the wide range of
statutory prohibitions although they are often designed to secure fair trading condi-
tions, safeguard property and personal safety, and prevent competitive markets from
being undermined. Some examples are the prohibition on the marketing or sale of cer-
tain knives (Restriction of Offensive Weapons Act 1959; Offensive Weapons Act 1996;
Knives Act 1997) and the sale of body parts (Human Organ Transplants Act 1989). Many
common law illegalities (see W2.1.2) have become the subject of statutory control or
prohibitions.
The relevant statute may stipulate different consequences. For example, it may
• expressly prohibit the making of the contract (courts are reluctant to imply a pro-
hibition), barring enforcement by or restitution to either party (Re Mahmoud and
Ispahani (1921));
• only bar enforcement by one of the parties (eg s 40 Consumer Credit Act 1974; s
77 Sex Discrimination Act 1975; s 72 Race Relations Act 1976; ss 26, 27 Financial
Services and Markets Act 2000);
• permit enforcement by either party because the statutory intent is only to impose
a penalty and not to deny contractual enforcement (St John Shipping Corporation v
Joseph Rank Ltd (1957)); or
ILLEGALITY AND PUBLIC POLICY W15
Diagram W2A Overview: Categories of illegal contracts
• render the contract void and unenforceable but not bar restitution (eg s 10 Bill of
Sales Act 1878; s 395 Companies Act 1985).
Where statutes are silent (as they often are) on the effect of the illegality on the con-
tract while setting out the administrative and penal sanctions, courts must decide the
consequences on the same general principles as are applicable to common law illegality
(see W2.2). Mohamed v Alaga & Co (2000) involved an oral contract by M to introduce
refugees to A (and act as translator) in exchange for half the legal aid fees A could claim
for work in respect of the refugee’s immigration and asylum applications. The contract
was unenforceable by reference to legislation2 preventing solicitors from sharing their
fees. However, the Court of Appeal allowed M’s claim for quantum meruit (the value of
2
Rule 7 of the Solicitors Practice Rules 1990, made pursuant to s 31 Solicitors Act 1974.
services) because the parties were not equally to blame. A had knowingly disregarded
the professional conduct rules, while M had been unaware of any impropriety in the
arrangement.
Section 335(1) Gambling Act 2005 states that ‘the fact that a contract relates to gam-
bling shall not prevent its enforcement’ provided that it is not otherwise unlawful
(s 335(2)). This reverses the previous bar on enforcement and restitution in respect of
gaming and wagering contracts.
W2.1.2 Common law illegality

With statutory illegality, courts discern and apply the conception of public policy con-
tained therein. However, where courts refuse to recognise a contract as contravening
public policy at common law, they are vulnerable to the charges of:
• usurping the function of Parliament;

• giving effect to their subjective opinions on matters of morality and the public
good; and
• undermining the freedom, sanctity, and stability of contracts.
Burroughs J saw public policy as ‘a very unruly horse, and when once you get astride
it you never know where it will carry you’ (Richardson v Mellish (1824) at 252). Lord
Denning’s (predictable) response is that ‘with a good man in the saddle, the unruly
horse can be kept in control. It can jump over obstacles. It can leap the fences put up
by fictions and come down on the side of justice’ (Enderby Town Football Club Ltd v The
Football Association Ltd (1970) at 1026).
The categories of public policy are often said to be closed. Characteristically, the pic-
ture presented is of general respect for the sanctity of contract, subject to a series of
exceptions established by clear precedents. While it is still not open to courts to reject
a contract unless it falls within one of the well-established ‘heads’ of illegality, courts
have been willing to extend existing categories to reflect changing social and moral val-
ues. As Dankwerts LJ said in Nagle v Feilden (1966 at 650): ‘[T]he law relating to public
policy cannot remain immutable. It must change with the passage of time. The wind
of change blows upon it.’ Chitty concludes (at [16–004]) that ‘the difference between
extending an existing principle as opposed to creating a new one will often be wafer-
thin’. In a system of law which evolves (albeit gradually) like the common law, the
content of the public policy (which reinforces the law) cannot remain static, but must
change with the evolution of public opinion, morality, and legislative policies.
Pause
Pa
Paus
use
e for
for re
rrefl
flection
ecti n
reflection
The law fails if it does not reflect a society’s changing values over time. For example, the older
cases reflect a preoccupation with gambling, marriage brokerage, and unmarried cohabitation.
Today we may be more concerned with the commercialisation of babies, child labour, body
parts, reproductive services, sex, weapons, and addictive drugs (see 13.9). In Tinsley v Milligan
(1993), the objection was social security fraud rather than the parties’ lesbian cohabitation (see
W2.2.3). Further, the scope of impermissible restraint of trade has been modified in response to
changing economic conditions (see W2.1.2.9).
Writers disagree on how to categorise the ‘heads’ of public policy, but the differences are
largely of exposition rather than of substance. A detailed account of each category is not pro-
posed here (see further Treitel, para 11-002 to 11-004; Beatson, 348–95); the law of restraint of
trade, for example, fills whole books. What follows is a brief overview of the kinds of contracts
held at common law to contravene public policy.
W2.1.2.1 Contracts to commit a crime

This is the most obvious category of illegal contracts. Examples include contracts
which:
• breach building licence regulations (Bostel Bros Ltd v Hurlock (1949));

• breach exchange controls (Bigos v Bousted (1951));
• defraud the revenue (Miller v Karlinski (1945));
• defraud the rating authority (Alexander v Rayson (1936)).
This public policy also taints any contract which:
• enriches someone for acting unlawfully (in Beresford v Royal Insurance Co Ltd (1938),
a person insured his own life for £50,000 and then committed suicide (then a
criminal offence); his estate could not claim although the policy expressly covered
suicide);
• although lawful in itself, is made to further a criminal or civil wrong (in Langton v
Hughes (1813), juices and spices were sold to be used illegally for flavouring beer).
An offence committed in the course of an otherwise legal contract will not necessarily
taint the contract (see further W2.2).
W2.1.2.2 Contracts made for the deliberate commission of a civil wrong

Examples include contracts to:
• beat up another person (Allen v Rescous (1676));

• publish a libel (Clay v Yates (1856));
• perpetrate a fraud (Willis v Baldwin (1780));
• indemnify a person against loss resulting from his own deliberate criminal or tor-
tious act (Brown Jenkinson & Co Ltd v Percy Dalton (London) Ltd (1957)).
W2.1.2.3 Contracts interfering with the administration of justice

Contracts which amount to a conspiracy to pervert the course of justice include
agreements:
• to stifle a prosecution (R v Andreas Panayiotou (1973), for rape);

• to refrain from disclosing misconduct which ought to be disclosed to those with a

proper interest to receive it (Initial Services Ltd v Putterill (1968), unregistered price-
fixing agreement, and see A-G v Guardian Newspapers Ltd (No 2) (1990);
• to give false evidence in criminal proceedings (R v Andrews (1973));
• to obstruct bankruptcy proceedings (Elliott v Richardson (1870));
• to ‘maintain’ or support litigation in which a party has no legitimate concern with-
out just cause or excuse (Hill v Archbold (1968)), although ‘just cause and excuse’
is now widely interpreted (Giles v Thompson (1993) at 328–33) to permit litigation
supported by unions or insurance companies;
• of ‘champerty’ (ie financing another’s litigation with a view to taking a share in its
proceeds) which amounts to an aggravated form of maintenance (Giles v Thompson);
but s 58 Courts and Legal Services Act 1990 and s27 Access to Justice Act 1999 per-
mit certain ‘no win, no fee’ and other conditional fee agreements between lawyers
and their clients in the interest of increasing access to justice.
W2.1.2.4 Contracts to oust the jurisdiction of the courts

It is contrary to public policy to deny the important constitutional principle of access to
the courts for redress against legal injuries. However, the law must balance this with the
competing interest of facilitating speedy, convenient, and affordable dispute resolution.
Thus, parties can agree not to resort to the courts until they have gone to arbitration
(Scott v Avery (1855)). Under the Arbitration Act 1996 (ss 45, 87), although parties can still
appeal to the courts on questions of law, the scope of judicial control is much reduced.
For example, an appeal requires both parties’ agreement or leave of the court, and par-
ties can exclude the court’s jurisdiction in ‘non-domestic arbitration agreements’ and in
‘domestic arbitration agreements’ if entered into during the arbitration proceedings.
Separation agreements in which a wife agrees not to apply for maintenance in return
for the husband’s payments are unenforceable. The court’s power to award maintenance
cannot be ousted (Hyman v Hyman (1929)) although wives can enforce the promised
payments if the agreement is in writing (Matrimonial Causes Act 1973 s 34). Contract
clauses which make claims more difficult to prove are controlled by the Unfair Contract
Terms Act 1977 (s 13(1)). Standard terms in consumer contracts which ‘hinder a con-
sumer’s right to take legal action’ are presumptively unfair and unenforceable under the
Unfair Terms in Consumer Contracts Regulations 1999 (Sch 2 para 1(q)).
W2.1.2.5 Contracts prejudicial to the state

A wide range of cases is included. Examples are:
• contracts to commit illegal acts in friendly foreign countries (eg to facilitate the
forceful overthrow of the government of a friendly country (De Wutz v Hendricks
(1824));
• trading with the enemy in wartime, thus aiding the enemy’s economy (Potts v Bell
(1800), now Trading with the Enemy Act 1939);
• contracts which corrupt public life (eg buying public offices or honours, Parkinson
v College of Ambulance Ltd (1925), now prohibited by the Honours (see Prevention
of Abuses) Act 1925);
• contracts whereby a public official is paid a commission to use his position to pro-
cure benefits for another (Montefiore v Menday Motor Components Co (1918); Lemenda
Trading Co Ltd v African Middle East Petroleum Co Ltd (1988)) or to vote in a certain
way (Osborne v ASRS (1910)).
W2.1.2.6 Contracts which further sexually immoral purposes

Although it is sometimes said that contracts against good morals are void, traditionally
this means contracts perceived to promote extramarital sexual intercourse. In the past,
courts have refused to enforce:
• a promise to pay a woman to be a mistress (Franco v Bolton (1797));

• a promise to pay rent on premises known to accommodate the promisor’s mistress
(Upfill v Wright (1911)); and
• contracts between unmarried cohabiting couples.
The same results are unlikely to be reached today. Parliament and courts have conferred
some rights on unmarried cohabitees analogous to that of married couples, and judi-
cial attitude reflects the growing incidence of extramarital relationships and changing
social mores.3 In Tinsley v Milligan (1994), illegality was not advanced on the basis that
the parties to the agreement were lesbian lovers. And, in Armhouse Lee Ltd v Chappell
(1996), the Court of Appeal denied that an agreement to advertise telephone sex lines
was unenforceable for immorality; indeed, the court criticised C’s ‘brazen cynicism’ in
attempting to avoid payment for A’s work which generated enormous profits for C by
pleading his own immorality.
However, agreements involving prostitution are likely to remain unenforceable (eg
rent for premises knowingly let for prostitution in Girardy v Richardson (1793) or hire
of an ornamental carriage knowingly let to further a prostitute’s trade in Pearce v Brooks
(1866)). Where a contract of employment requires an employee to procure prostitutes
for the employer’s customers, this would be unenforceable for illegality (Coral Leisure
Group Ltd v Barnett (1981)).
W2.1.2.7 Contracts prejudicial to family life

This covers two types of case. First, it invalidates contracts prejudicial to the institution
of marriage, for example:
• contracts not to marry (Lowe v Peers (1768)), or to pay a sum on marriage (Baker v
White (1690));
• paying someone to procure marriage (Hermann v Charlesworth (1905)), although
the need to condemn such contracts in modern times is questionable when dating
agencies are commonplace;
• separation agreements entered while spouses are living together, since they may
induce parties not to perform their matrimonial duties (Cartwright v Cartwright
(1863)), but such agreements are valid if made in anticipation of immediate
separation.
3
See Eves v Eves (1975) and Part IV of the Family Law Act 1996.
Secondly, it invalidates attempts by parents to contract away their parental rights and
duties in relation to their child (s 2 Children Act 1989), subject to the Adoption Act 1976.
A surrogacy agreement, by which a woman agrees to carry and bear a child for another
who will assume the parental role, is unenforceable (s 1A Surrogacy Arrangements Act
1985, as amended by s 36 Human Fertilisation and Embryology Act 1990, Re P (Minors)
(Wardship: Surrogacy) (1987)). Parents cannot by agreement oust the court’s inherent
jurisdiction to make orders regarding the upbringing and maintenance of children.
Pause for reflection
Rapid medical advances now raise very difficult and controversial questions about the desirabil-
ity of supporting other contracts in this category, such as contracts to select the gender or other
attribute of one’s baby and to clone human beings.
W2.1.2.8 Contracts unduly restrictive of personal liberty

The most obvious example is the prohibition against self-enslavement, but even
employment contracts must not contain ‘servile elements’. A loan agreement in
Horwood v Millar’s Timber & Trading Co Ltd (1917) stipulated that the debtor, a clerk, was
‘not allowed to move to another district and become a clerk elsewhere, not allowed to
leave his house, however unhealthy it may be, and not allowed to deal with any part
of his unincumbered [sic] furniture or other property without the leave of the money-
lender.’ Lord Cozens-Hardy MR observed that the agreement could prevent the debtor
from raising money for the maintenance, education, or medical treatment of his fam-
ily. He commented (at 312) that ‘Possibly slavery is too strong a word, but it certainly
seems . . . to savour of serfdom’. Warrington LJ added (at 314) that: ‘The man has put
himself . . . almost body and soul in the power of this money-lender. Even in the most
trivial incidents of life he cannot do as he pleases.’
W2.1.2.9 Contracts in restraint of trade

In practice, this is the most important head of illegality in modern times. A contract or
covenant in restraint of trade is an undertaking whereby one party agrees:
• to restrict his freedom to trade or conduct his profession or business (what);

• in a particular locality (where);
• for a specified period of time (when).
Such restraints are only valid if they are reasonable. The common law is inclined against
agreements that prohibit or restrain a person from earning a living. Here, the law
appears to impose a substantive limit on contractual freedom in order to preserve it. In
Nordenfelt v Maxim Nordenfelt (1894), it was said (at 565):
The public have an interest in every person’s carrying on his trade freely: so has the indi-
vidual. All interference with individual liberty of action in trading, and all restraints of
trade of themselves, if there is nothing more, are contrary to public policy, and therefore
void. That is the general rule. But there are exceptions: . . . [it] may be justified . . . if the
restriction is reasonable . . . in reference to the interests of the parties concerned and rea-
sonable in reference to the interests of the public, so framed and so guarded as to afford
adequate protection to the party in whose favour it is imposed, while at the same time
it is in no way injurious to the public.
The doctrine applies to three principal types of contracts:
(i) employment: where an employee covenants not to compete with his employer
during or after his employment;
(ii) sales of businesses: where the seller of a business and its goodwill covenants not
to carry on competing businesses; and
(iii) exclusive dealing agreements: as where a garage agrees to buy all its petrol
from one supplier for a lengthy period (Esso Petroleum Co Ltd v Harper’s Garage
(Stourport) Ltd (1967), hereafter ‘Esso v Harper’).
In a sense, all contracts involve some restrictions on future freedom of action and it may
be a moot point in any particular case whether a contract does involve a restraint of
trade. Atiyah observes (326) that:
it would certainly be wrong to conclude that all contracts containing restrictions are now
open to challenge as contracts in restraint of trade, and must be shown to be ‘reasonable’
if they are to be valid. Many customary and accepted forms of business agreement are
probably still unchallengeable (at any rate under the common law rules), even though
they may strictly involve some degree of business restraint. In particular, it has been held
that a person who buys land (or a building) may validly enter into some restrictions on
how the land is to be used without falling foul of the restraint of trade doctrine.
The general test of enforceability is whether the restrictions on the relevant activity (in
terms of scope, time, and locality) are no more than what is reasonably necessary to
protect the legitimate interests of the party imposing the restraint (Esso v Harper). The
onus of proving reasonableness is on the party imposing the restraint. This test must
balance:
• the pro-enforcement factors, such as the legitimate interests of purchasers of businesses

to prevent competition by vendors, or of an employer by a former employee,
• against the anti-enforcement factors, such as the public interest in free competition,
an employee’s interest in retaining reasonable freedom to pursue a vocation and
the concern to protect employees from unfairness resulting from their weaker bar-
gaining power vis-à-vis their employers.
(i) Employment contracts

Employers are generally permitted more protection against the subsequent activities
of senior employees (Nordenfelt Ltd v Maxim Nordenfelt Guns and Ammunition Co Ltd
(1894)) than of junior or temporary employees (M&S Drapers Ltd v Reynolds (1957)). The
employer must satisfy two aspects of reasonableness. First, the employer must establish
his legitimate interest in imposing the restraint; that is, that he has ‘some proprietary
right, whether in the nature of trade connection or in the nature of trade secrets, for
the protection of which such a restraint is . . . reasonably necessary’ (Herbert Morris Ltd v
Saxelby (1916) at 710). Thus, it was held to be reasonable to restrain employees:
• who have acquired influence over the employers’ customers and may entice them
away (eg Fitch v Dewes (1921), a solicitor’s managing clerk; Marion White v Francis
(1972), a hairdresser); or
• who have acquired ‘trade secrets’ (which are protected even without an express
restraint) or confidential information belonging to the employers (Forster and Sons
Ltd v Suggett (1918), involving glass-making techniques).
But employers cannot protect themselves against their former employees’ personal skill
and knowledge even if acquired in the course of the employers’ business. This belongs
to the employees who are free to exploit them in the market place (Faccenda Chicken
Ltd v Fowler (1986)).
Second, the employer must show that the scope of the restraint is reasonable in:
• the scope of the activity banned: it must be confined to the business of the
employment; thus, a covenant not to carry on ‘any business whatsoever’ is void
(Baker v Hedgecock (1888));
• the extent of the locality: the restraint should cover no wider an area than is nec-
essary to protect the employer’s particular interest (this may not justify a restraint
covering a 25-mile radius of London (Mason v Provident Clothing and Supply Co Ltd
(1913), involving a canvasser for a clothing company), but may, in other circum-
stances, justify one covering the whole of the United Kingdom (Forster & Sons Ltd v
Suggett, taking into account the secrecy of the glass production methods and the
area in which the employer traded)); and
• the duration: even restraints of unlimited duration may be reasonable if they do
not exceed what is reasonably required for the protection of the covenantee and are
not against the public interest (Fitch v Dewes (1921)).
In addition to reasonableness between the parties, an enforceable restraint must not

contravene the public interest, particularly that of depriving the community of the
employee’s skills and services (Wyatt v Kreglinger and Fernau (1933); Bull v Pitney-Bowes
Ltd (1967)). In practice, reasonableness between the parties and compliance with the
public interest tend to go hand in hand.
(ii) Sales of businesses

The same tests of reasonableness and consistency with the public interest are applied
to restraints in contracts for the sale of businesses, although greater latitude is permit-
ted here since inequality of bargaining positions is less obvious. A purchaser of a busi-
ness and its goodwill is entitled to protect the value of the purchase by an appropriate
restraint clause; sellers would command lower prices if such restraints were unenforcea-
ble. The wider the restraint, the larger the legitimate interest required to justify it. In one
extreme case, a buyer of an armament business for a vast sum was permitted to restrain
the seller from competing with this business anywhere in the world for 25 years, in view of
the world-wide operation of the business sold and the fact that its main customers were
governments (Nordenfelt Ltd v Maxim Nordenfelt Guns and Ammunition Co Ltd (1894)).
(iii) Exclusive dealing agreements

These may be prohibited under Article 81 of the European Community Treaty as anti-
competitive and may attract the application of domestic law or European legislation.4
In Esso v Harper, the owner of two garages entered into a ‘solus’ agreements to buy all
its petrol from Esso, to keep the garages open at all reasonable hours, and not to sell the
garages without securing the purchaser’s agreement to enter similar arrangements with
Esso. In exchange, Esso gave a discount on the petrol supplied and provided a loan. The
House of Lords took a wide view of the legitimate interests which Esso were entitled to
protect. Bell comments:5
In considering this question, they had regard to the money spent on building refineries
and providing other outlets, the need for overall planning to justify such expenditure
and to provide a stable system of outlets, what was reasonable in return for the advan-
tages conferred by the agreement, what was necessary to secure the loan, and the general
state of the industry.
Their Lordships relied on information provided in the report of the Monopolies

Commission on petrol and took the view that the contract lasting four and a half years
was onerous but reasonably necessary to protect Esso’s interests. However, the contract
lasting 21 years:
could have effect in quite different conditions, so that the public interest in preserving
Harper’s liberty of action applied more strongly here. Although the arguments had cen-
tred on what tie could be reasonably imposed by [Esso] in support of their interests, the
basis of the decision of the house was the injury, or potential injury, to the public of the
limitations on Harper’s freedom of action. If competition is to be a generally accepted
way of running the economy, then restraints have to be justified in terms of the benefits
to the community as well as to individuals, and for this reason the public interest figures
so importantly in the considerations of the judges.
However, the Court of Appeal upheld a 21-year ‘solus’ agreement in Alec Lobb Garages v
Total Oil (GB) Ltd (1985) where the restrained party had received a substantial sum from
the restraining party. The court applied the dicta in Nordenfelt that ‘the quantum of
consideration may enter into the question of the reasonableness of the contract’.
Schroeder Music Publishing Co Ltd v Macaulay (1974) shows how substantive unfairness
in the contract can invalidate a restraint of trade clause. There, a young unknown song-
writer entered an ‘exclusive services’ agreement by which he agreed to assign the full
copyright to all his present and future works to the publisher for five years, renewable
at the latter’s option for another five years, in return for royalties. The publisher had no
obligation to publish the works, could terminate the contract on a month’s notice, and
was free to assign its rights. The song-writer was a great success and obtained a declara-
tion that the agreement was void as an unreasonable restraint of trade. As Trebilcock
observes, the contract was produced within a competitive market so there could be no
market failure justification for upsetting the terms of the contract, nor any alternative
4
See R Whish, Competition Law (5th edn, LexisNexis, 2003).
5
Policy Arguments in Judicial Decisions (OUP, 1983) 170.
set of terms to be discovered by the technique of market transference.6 Nevertheless,

the House of Lords was clearly influenced by the one-sidedness of the agreement (the
publisher giving minimal commitment in exchange for the song-writer’s total commit-
ment) in setting aside the restraint on the writer.7 As Lord Reid said (at 1314): ‘Normally
the doctrine of restraint of trade has no application to such restrictions . . . But if contrac-
tual restrictions appear to be unnecessary or to be reasonably capable of enforcement in
an oppressive manner, then they must be justified before they can be enforced.’
W2.1.2.10 Restrictive trading and analogous agreements

Cartels are agreements to regulate the production, marketing, sale price, and standards
of commodities produced. The concern with cartels is not so much unreasonableness
between the parties as their anti-competitive effect in reducing overall competition in a
particular commodity. The common law’s role in controlling such agreements has been
inhibited for a number of reasons. Courts are less adept at considering the broad pub-
lic interest and economic issues raised by these anti-competitive arrangements than
in judging reasonableness between particular specific parties. The latter, after all, are
represented in court while the public interest is assumed to be within the knowledge of
judges and not specifically represented. Moreover, courts can only adjudicate on such
agreements in the unlikely event that an affected party challenges its validity before
the courts (Courage Ltd v Crehan (2001)). Consequently, the policing of anti-competitive
agreements is largely left to detailed legislative regulation. This is usually studied as a
distinct subject under the heading of ‘competition law’. Legislation subjects such agree-
ments to a public interest test applied by specialist administrative bodies.8
W2.1.3 Illegality and unfairness

The illegality doctrine invalidates contracts which are undesirable in the public interest
or otherwise unworthy of the courts’ assistance because they do not help individuals to
achieve well-being and so realise fulfilling lives.9 While this does not directly address the
question of contractual imbalance, it is consistent with the idea that contracts which
are grossly unbalanced or which seriously harm the interests of one party may be unde-
sirable in the public interest or unworthy of the court’s assistance. Although the courts
present an all but static picture of the scope of ‘public policy’, we have seen that the
existing categories of illegality can be extended and the doctrine applied instrumentally
to deny the enforcement of substantively unfair terms. In Schroeder v Macaulay (1974),
Lord Diplock said candidly (at 1315) that:
[W]hat your Lordships have in fact been doing has been to assess the relative bargain-
ing power of [the parties] . . . to decide whether the publisher had used his superior bar-
gaining power to extract from the song writer promises that were unfairly onerous to
him . . . Under the influence of Bentham and of laissez-faire the courts in the 19th century
abandoned the practice of applying the public policy against unconscionable bargains to
6
‘An Economic Approach to the Doctrine of Unconscionability’, in B Reiter and J Swan (eds), Studies in
Contract Law (Butterworths, 1980) 381.
7
See also Silvertone Records v Mountfield (1993) and Zang Tumb Tuum Records v Johnson (1993).
8
Eg the Enterprise Act 2002, the Restrictive Trade Practices Act 1977, the Competition Act 1998, the Resale
Prices Act 1976, and Articles 81 and 82 of the European Community Treaty.
9
J Raz, The Morality of Freedom (OUP, 1986) ch 14.
contracts generally, as they had formerly done . . . but the policy survived in its applica-
tion to penalty clauses and to relief against forfeiture and also to . . . restraint[s] of trade.
If one looks at the reasoning of 19th century judges in cases about contracts in restraint
of trade one finds lip service paid to the current economic theories, but if one looks at
what they said in the light of what they did, one finds that they struck down a bargain
if they thought it was unconscionable as between the parties to it and upheld it if they
thought that it was not. So I would hold that the question to be answered . . . is: was the
bargain fair?
We have seen that substantively unfair contracts can also be invalidated by other doc-
trines such as undue influence (see 10.2); incapacity (see Web ch 1); unconscionable
bargains (see 10.4); and the special rules applicable to exemption (chs 11–13), penalty,
and forfeiture clauses (see 16.3). As Treitel (480) observes, these and others can be seen
as ‘disguised extensions or applications of the doctrine of public policy’. In this context,
the doctrine on non-commercial guarantees (see 10.3) can be understood as a recently
created head of public policy. Our discussions of these doctrines and rules reveal the
extent of their concern with procedural and substantive unfairness. Collins (28–9)
locates the real objection to the contract in Schroeder v Macaulay in terms of ‘power,
fairness, and co-operation’. He explains:
Because the composer’s career was completely dependent upon the publisher’s discre-
tion for a period up to ten years, his degree of subordination to another represented
an unjustifiable form of domination. The absence of an undertaking on the part of
the publisher to publish any of his songs rendered the exchange too one-sided to be
fair. In addition, because the composer could not terminate the agreement during its
fixed period, he had no effective sanctions against the publisher to ensure that at least
it made reasonable efforts to bring the venture to fruition by publishing and promot-
ing his work . . . [T]he concern about unjustifiable domination, the equivalence of the
exchange, and the need to ensure cooperation . . . motivate the decision in Schroeder
Music Publishing Co Ltd v Macaulay.
W2.2 The effects of illegality
While the general rule and starting point is that courts will not help parties enforce
illegal contracts nor give restitution of benefits conferred under them, illegal contracts
are not devoid of legal effect. Complex exceptions reflect the conflicting policies in this
area. The policies against assisting parties to illegal contracts are that:
(i) courts should not help parties who knowingly enter illegal contracts;
(ii) justice would be tainted and the dignity of the court offended; and
(iii) people should be deterred from entering illegal contracts.
On the other hand, these policies are not offended and some judicial assistance is justifi-
able, whether by way of enforcement or restitution, where:
(i) parties are ignorant of the illegality involved or were wrongly induced to
contract;
(ii) the relevant illegality does not involve gross moral turpitude, such as robbery or
terrorism, but merely the infringement of technical regulations;
(iii) a party has withdrawn from the illegality; or

(iv) a party would be unjustly enriched at the expense of the other.
W2.2.1 The enforceability of the contract

The law’s approach to the enforceability of illegal contracts can be divided into three
principal categories:
(i) contracts which are illegal per se (at formation);

(ii) contracts which are not illegal per se, but further an illegal purpose; and
(iii) contracts which are not illegal per se, but involve some illegality in their
performance.
Diagram W2B gives an overview of the effect of illegality on the enforceability of a

contract.
W2.2.1.1 Illegality at formation

The law adopts the strictest attitude to contracts which are illegal when entered because
they cannot be performed without commission of an illegality. Contracts which are
expressly or impliedly forbidden by statute or by public policy are unenforceable even
if both parties are ignorant of the facts constituting the illegality and did not intend
to break the law. Re Mahmoud and Ispahani (1921) provides an example of statutory
prohibition affecting both parties. The parties bought and sold linseed oil without the
required licences; the seller could not recover damages for the buyer’s non-acceptance
although the buyer had misrepresented that he had a licence. Scrutton LJ (at 730) left
open the question of whether the seller would have a remedy for deceit. In Quereshi v
Circle Properties and others (2004), Q was denied an order to freeze C’s assets to enforce a
commission agreement because, at the time the agreement was made, Q was an undis-
charged bankrupt and could not engage in estate agency work. Section 23 Estate Agents
Act 1979 rendered any commission agreement with the claimant invalid or unenforce-
able. An example of common law prohibition is a contract which involves trading with
alien enemies in wartime.
It may be very difficult to decide whether a statute or head of public policy:
(a) renders the contract unlawful per se and bars enforcement by either party, or
(b) merely bars enforcement by a guilty party (ie one who knows of the illegality).
The question is whether, having regard to the mischief against which the illegality is
directed and the circumstances in which the contract was made and is to be performed,
it would be contrary to public policy to enforce it (Shaw v Groom (1970)). In view of the
potential harshness of (a), the modern tendency is to prefer (b) unless (a) is very clearly
demanded by the statute or public policy. Thus, neither party can sue on the contract
if both parties:
• know that contractual performance would be or is intended to involve illegality

or contravention of public policy (Ashmore, Benson Pease & Co Ltd v Dawson Ltd
(1973); or
• share an illegal purpose (Bigos v Bousted (1951)).
Diagram W2B The enforceability of illegal contracts

The effect is to give one party an unmeritorious and technical defence to an action
for breach. The justification is that: ‘No court will lend its aid to a man who founds
his cause of action upon an immoral or illegal act . . . not for the sake of the defendant,
but because they will not lend their aid to such a plaintiff’ (Holman v Johnson (1775)
at 343). Kerr LJ explains in Euro-Diam Ltd v Bathurst (1990) that: ‘It applies if in all the
circumstances it would be an affront to public conscience to grant the plaintiff the
relief which he seeks because the court would thereby appear to assist or encourage the
plaintiff in his illegal conduct or to encourage others in similar acts.’
However, a court may assist an innocent claimant by allowing an action which does
not require reliance on the illegal contract. For example:
(i) Finding and enforcing a collateral contract not tainted by illegality: In Strongman
(1945) Ltd v Sincock (1955), the claimant did building works for which it had no licence
and so could not claim payment for it since the contract is absolutely prohibited by
statute. However, the defendant had promised to obtain the necessary licences and the
Court of Appeal allowed the claimant to enforce a collateral warranty that the defend-
ant would obtain the necessary licences.
(ii) Awarding damages for fraudulent misrepresentation: In Shelley v Paddock (1980),
P fraudulently induced S to buy land in Spain that P did not own in a contract which
breached the Exchange Control Regulation. P sought to retain S’s purchase money by
relying on the illegality. The Court of Appeal held that the illegality did not bar an
action in the tort of deceit; this allowed S to recover her money and an additional sum
for distress. P could not retain the profits of its own fraud.
W2.2.1.2 Intention to achieve an illegal purpose or perform illegally

A contract which is not illegal per se, but which is intended to further an improper pur-
pose or to be performed in an illegal manner, is generally unenforceable by the party
contracting with the illegal intention, or knowing of the other party’s illegal intention.10
In Taylor v Bhail (1996), T had provided an estimate inflated by £1,000 so that B could
defraud an insurance company. The Court of Appeal held the contract to be single and
indivisible so that T could not enforce it. Moreover, T could not circumvent the illegal-
ity by claiming a quantum meruit for the work done.
However, a claimant who is innocent of the other’s illegal purpose, and where the
contractual performance does not necessarily entail an illegality, can:
(i) Recover what is due under the contract, or obtain expectation damages:11 In
Bloxsome v Williams (1824), W warranted that the horse sold to B was no more than
seven years old and sound, when it was 17 years old and unsound. In defence to B’s
action for breach, W unsuccessfully pleaded his own illegality in trading horses as a
horse-dealer on a Sunday in contravention of the Sunday Observance Act 1677; B was
ignorant of W’s status.
10
Cowan v Milbourn (1867); Alexander v Rayson (1936) at 182.
11
Mason v Clarke (1955) at 793, 805; Fielding & Platt Ltd v Najjar (1969); Newland v Simons and Willer
(Hairdressers) Ltd (1981).
(ii) Recover reasonable remuneration for work done prior to discovery of the ille-
gality. In Clay v Yates (1856), a printer recovered the value of work done to publish a
treatise up to the point that its defamatory content was discovered.
(iii) Refuse to perform the contract on discovering the illegality: In Cowan v Milbourn
(1867), M agreed to let rooms to C for certain days but was allowed to refuse to proceed
when he found out that they were to be used for lectures which were blasphemous and
so unlawful.
Even a contract entered into with the intention of committing an illegal act is enforce-
able if:
(a) The illegality is too remote from the contract. In 21st Century Logistic Solutions
Ltd (In Liquidation) v Madysen Ltd (2004), C brought an action for the price of
goods sold and delivered to M who denied liability on the ground of the illegal-
ity of contract. C’s operations sought to defraud Customs of Value Added Tax by
buying goods VAT-free in the EU and selling them on plus VAT in the UK. Field
J held that the contract was lawful in itself and that C’s fraudulent intention
was too remote from the contract to make it unenforceable for illegality. C only
commits a fraud when he fails to account to Customs at the end of the relevant
accounting period.
(b) The claimant is seeking to enforce a statutory entitlement attaching to the
contract without relying directly on or effectively enforcing the illegal contract.
In Hall v Woolston Hall Leisure Ltd (2001), H successfully brought a complaint of
unfair dismissal on the ground that she had been sexually discriminated against
when she was dismissed from her job as a chef when she became pregnant. The
Court of Appeal held that she was entitled to compensation although she had
acquiesced in receiving wages for three years without deductions for tax and
national insurance. There was no causal link between H’s acquiescence in how
her wages were paid and her complaint of sex discrimination. There were no pub-
lic policy reasons for not awarding H compensation. In Laong Wheeler v Quality
Deep Ltd (2004), W successfully sued for unfair dismissal and for failure to give
itemised pay slips contrary to s 8 Employment Rights Act 1996. Although W had
received wages without deductions for tax and national insurance, there was
no evidence that W was aware of any illegality; she had a limited knowledge of
English and of the tax and national insurance provisions of the UK. In contrast,
in Vakante v Addey and Stanhope School (2004), the Court of Appeal barred V from
claiming race discrimination and victimisation when he was dismissed from his
job. V had falsely indicated in his application form that he did not need a work
permit, when he knew that, as an asylum seeker, he was not permitted to work
in the UK. The test is whether the applicant’s claim arose out of, or was so clearly
connected or inextricably bound up or linked with, the illegal conduct of the
applicant that the court could not permit the applicant to recover compensation
without appearing to condone that conduct. The test was not simply a question
of causation; the circumstances surrounding the applicant’s claim and the ille-
gal conduct, the nature and seriousness of the illegal conduct, the extent of the
applicant’s involvement in it, and the character of the applicant’s claim were all
relevant. On the facts, V’s complaints were so inextricably bound up with the
illegality of his conduct in obtaining and continuing the employment that, if
he were permitted to recover compensation for discrimination, the court would
appear to condone his illegal conduct.
W2.2.1.3 Subsequent illegality of means

Where the contract is not illegal per se (see W2.2.1.1), is not entered for an illegal pur-
pose or with an intention to perform it in an illegal way (W2.2.1.2.), but is subsequently
performed in an illegal manner, the enforceability of the contract depends on whether
‘the way in which the contract was performed turned it into the sort of contract that
was prohibited’ (St John Shipping Corporation v Joseph Rank Ltd (1957) at 284). For exam-
ple, in Anderson Ltd v Daniel (1924), the seller of agricultural fertiliser could not recover
the price because he failed to give the purchaser the required invoice showing the com-
position of the fertiliser; the seller failed to perform the contract in the only way that
the statute allowed the contract to be performed. Again, if legislation prohibits certain
activity unless licensed (eg Re Mahmoud and Ispahani), a contract to carry out unlicensed
activity will generally be unenforceable (Bostel Bros Ltd v Hurlock (1949)).
However, where the illegality is purely technical and at the low end of blame-
worthiness (eg if the speed limit or permitted driving hours in performing a contract
for transportation of goods are exceeded), a strict bar on enforcement could inflict on
the wrongdoer a loss far greater than the statutory penalty. Thus, it has been held that:
‘The fact that a party has in the course of performing a contract committed an unlawful
or immoral act will not by itself prevent him from further enforcing that contract unless
the contract was entered into with the purpose of doing that unlawful or immoral act
or the contract itself (as opposed to the mode of . . . performance) is prohibited by law’
(Coral Leisure Group Ltd v Barnett (1981) at 509)). The question is whether the statutory
purpose is to make the contract unenforceable by the parties or merely to impose a pen-
alty on the offender. In St John Shipping Corporation v Joseph Rank Ltd, S, the ship-owner,
was prosecuted and fined for committing the statutory offence of overloading its ship
in performance of certain contracts for the carriage of goods. The court allowed S to sue
J for unpaid freight, despite this illegality. The purpose behind the statute was to penal-
ise the conduct which contravened the statute and not to prohibit the contract itself.
Similarly, in Shaw v Groom (1970), a landlord committed an offence by failing to give his
tenant a rent book but could nevertheless sue for rent because the purpose behind the
legislation was to punish the conduct and not to invalidate the tenancy agreement.
The other party (not guilty of the illegal performance) can generally enforce the con-
tract if he did not know of or consent to the illegality. In Archbolds (Freightage) Ltd v
S Spanglett Ltd (1961), S agreed to transport A’s whisky but did so in an improperly
licensed van. When S’s negligence resulted in the loss of A’s whisky, S pleaded its own
illegality in defence to A’s claim. The Court of Appeal (at 390) rejected A’s defence since
the statutory purpose was sufficiently met by the penalties prescribed, and ‘the avoid-
ance of the contract would cause grave inconvenience and injury to innocent members
of the public without furthering the object of the statute.’ A party is not ‘innocent’ if he
is aware of the illegality. In Ashmore, Benson, Pease & Co Ltd v A V Dawson Ltd (1973), D
used lorries that were unlawful for transporting A’s load. When the load was damaged
in transit, A’s claim for damages failed because A’s manager knew of the illegality and
so was regarded as having participated in it. This applies even if a party only knows the
facts constituting the illegality but not the law making the performance illegal. In J M
Allan (Merchandising) Ltd v Cloke (1963), a contract to hire a roulette table to play a game
which was statutorily unlawful was unenforceable although neither party knew that
the game was illegal.
W2.2.1.4 Severance
It may be possible to sever the illegal part of the contract and enforce the remainder.
The most obvious examples are restraint of trade clauses and clauses which oust the
courts’ jurisdiction. However, severance will only be permitted if enforcement of the
rest of the contract would not subvert the policies underlying the illegality. If an agreement
is very objectionable (‘smelly’), the courts will be reluctant to allow partial enforcement
by cutting out the ‘bad bits’; the whole contract is infected (as in Napier v National
Business Agency Ltd (1951) where fraud on the revenue was involved). However, where
the illegality is based on legislation or public policy protecting a certain class of persons,
there is no objection to severing the illegal provision and enforcing the contract in
favour of a member of the protected class even if he participated in the illegality. In
Ailion v Spiekermann (1976), a lease was not illegal although the landlord received an
illegal premium. The tenant could enforce the lease without paying the premium.
Even if severance would not subvert the policy undermining the illegality, courts are
reluctant to re-write the contracts and will only allow severance if:
• the illegal part can be cut out without distorting the meaning of the remaining
contract (the ‘blue pencil’ rule, Goldsoll v Goldman (1915));
• the illegality does not form one party’s whole or main consideration for the con-
tract (otherwise the other party would be compelled to perform for no or virtually
no consideration, Bennett v Bennett (1952)); and
• severance would not leave a substantially different contract from that which the
parties agreed (Attwood v Lamont (1920)).
W2.2.2 The availability of restitution

Courts may not only refuse to assist ‘guilty’ parties in enforcing illegal contracts, they
may also refuse to help parties recover money or property transferred under an illegal
contract. The law of unjust enrichment governs the circumstances when a party can
recover benefits conferred, whether or not pursuant to a contract. Here, illegality is not
a ground for restitution; rather, it operates predominantly as a defence to an action for
restitution on other established grounds (eg mistake or failure of consideration). The
justification for barring restitution for illegality is based on deterrence. But deterrence
must be weighed against the policy of preventing unjust enrichment. The upshot is
to admit three exceptions when a party to the illegal contract may claim restitution;
namely, where the claimant:
(i) is less blameworthy than the defendant;

(ii) has withdrawn from the transaction before it is substantially performed; or
(iii) can establish a legal or equitable proprietary right to the property independent of
the illegal contract.
Diagram W2C gives an overview of the availability of restitution of benefits transferred

under an illegal contract.
The general rule against restitution was challenged in Shanshal v Al-Kishtaini (2001)
as contravening the Human Rights Act 1998 (specifically, Article 1 of the First Protocol
to the European Convention on Human Rights, which provides that ‘no one shall be
deprived of his possessions except in the public interest’). Shanshal involved contracts
made in breach of UN sanctions on trade with Iraqi citizens. The Court of Appeal
denied the claim for restitution of money paid on the basis that this (i) did not amount
Diagram W2C Restitution of benefits transferred under an illegal contract

to a deprivation of possessions’, and (ii) anyway, would fall within the ‘public interest’
exception permitted by Article 1.
W2.2.2.1 Unequal blame

A claimant who is relatively less blameworthy may claim restitution if:
(i) The contract is rendered illegal by a statute enacted to protect a class of persons
to which he belongs. In Kiriri Cotton Co Ltd v Dewani (1960), the illegality involved
legislation prohibiting landlords from demanding premiums from tenants; since the
legislative purpose is to protect tenants, they can recover such payments even if they
were willing parties to the illegality (see now s 125 Rent Act 1977).
(ii) He can establish some ground of restitution showing that he was ignorant or
innocent of the illegality. Thus, for example, restitution has been allowed where
the claimant was induced into the illegal contract by the defendant’s fraud (Shelley v
Paddock (1980)) or pressure amounting to duress (Smith v Cuff (1817)). Restitution is also
allowed where a claimant’s ignorance of some fact making the contract illegal amounts
to a mistake of fact (Oom v Bruce (1810)) or of law (Kleinwort Benson Ltd v Lincoln City
Council (1999)). The latter is highly significant given the prevalence of contracts ren-
dered illegal by legislation of which the contract parties are ignorant. Restitution is now
permitted unless to do so would undermine the purposes and policies underlying the
legislation.
W2.2.2.2 Timely withdrawal

The law provides some incentive for, or encouragement to, parties to repent and discon-
tinue an illegal contract. Where a party withdraws in time, he can recover the benefits
he has conferred on the other party. It has been held that there is no genuine with-
drawal if the claimant discontinues the illegality only because:
• it is discovered (Alexander v Rayson (1936));

• the defendant refuses to proceed (Bigos v Bousted (1951)); or
• some other event beyond his control frustrates the illegality.
However, the Court of Appeal has diluted the requirements of timely withdrawal
in Tribe v Tribe (1995). It held (at 135) that ‘genuine repentance is not required . . . vol-
untary withdrawal from an illegal transaction when it has ceased to be needed is suf-
ficient’. Thus, recovery was allowed where a father transferred shares to his son for the
illegal purpose of defrauding his creditors but the fraud was not perpetrated because the
claims were settled.
Counterpoint
Counterpoint
1. The decision in Tribe is questionable since there is no need to provide any incentive for
withdrawing when the need for the illegality has passed. Quite the reverse, this approach
leaves the transferor with nothing to lose and everything to gain from entering the illegal
transaction. Note that the father’s withdrawal was only signalled when he claimed the
return of the shares.
2. Tribe is also questionable on the issue of when the opportunity to withdraw is extinguished.
There has been long-standing uncertainty over whether partial performance extinguishes the
opportunity to withdraw. Taylor v Bowers (1876) says ‘no, only completed performance will
extinguish’, while Kearley v Thomson (1890)) says ‘yes, substantial performance will
extinguish’.12 Tribe apparently resolves this uncertainty by holding that a party cannot with-
draw if any part of the illegal purpose had been carried into effect (at 121, 135). However, this
was then applied to the facts in a rather surprising way. The court concluded that the father
had effectively withdrawn because, despite full performance (transferring the shares), no part
of this purpose was achieved as no creditors were deceived. It will be a moot point in any case
whether the partial or even full performance of the illegal transaction has achieved a signifi-
cant enough part of its purpose to extinguish the opportunity to withdraw. The degree of
moral blameworthiness may be relevant to this question, so that recovery is unlikely if money
is paid to commit kidnap or murder.13
W2.2.2.3 Independent property rights

A party can recover property transferred under an illegal contract if his claim rests, not
on the illegal contract, but on the claimant’s ‘independent’ legal or equitable proprietary
right in that property. The permissible plea is: ‘give it back, it’s mine’; the impermissible
plea is: ‘give it back, you only have it because of our illegal contract’. This exception is
difficult partly because it rests on technical rules of property law. One rule is that when
parties to an illegal contract intend to transfer a proprietary interest (whether of owner-
ship or a lesser interest such as bailment or lease), the invalidity of their contract does
not prevent property from passing (Singh v Ali (1960)). Where ownership has passed, the
transferor cannot reassert ownership without pleading the illegality of the contract; this
is impermissible and no recovery lies. However, where a more limited proprietary interest
is transferred under the illegal contract, only that portion is tainted by the illegality.
The reasoning is that on the termination of that interest (eg expiry of a lease or breach
of some condition), the transferor can assert his anterior legal proprietary interest unaf-
fected by the tainted (but now extinguished) temporary interest.
This principle has been accepted (Belvoir Finance Co Ltd v Stapleton (1971)) although its
application is a matter of some controversy. In Bowmakers Ltd v Barnet Instruments
Ltd (1945),14 the claimant sold the defendant machine tools on three hire-purchase
agreements in contravention of the Defence Regulations. The defendant, in breach of
the agreements, sold some of the tools and refused to return the remainder. The Court
of Appeal allowed the claimant’s claim for damages in the tort of conversion because
the defendant’s right to possess the goods terminated on its breach of the hire-purchase
agreements, and so the claimant could establish its title to the machine tools without
relying on the illegal transactions.
12
See J Beatson, ‘Repudiation of Illegal Purpose as a Ground for Restitution’ (1975) 91 LQR 313.
13
Kearley v Thomson (1890) at 747.
14
C J Hamson, ‘Illegal Contracts and Limited Interests’ (1949) 10 CLJ 249.
Counterpoint
Counterpoint
Three criticisms can be made of the Bowmakers decision:
1. The claimant was relying on the illegal contracts to say when the defendant’s more limited
interests expired, resurrecting his own proprietary right.
2. Although the defendant’s possessory right in the goods which it sold was terminated, its
possessory right in the goods it retained was not; yet all possessory rights were regarded as
terminated.
3. By assessing damages for conversion by reference to the value of the machine tools, the
court in effect allowed the enforcement of the illegal hire purchase contracts. On the other
hand, to deny the claimant a remedy would confer a windfall on an unmeritorious defend-
ant. Thus, the proprietary approach may lack remedial flexibility; Coote observes that: ‘the
real difficulty lies in the arbitrary, all-or-nothing character of the common law governing
illegal contracts’.15
The principle of protecting a claimant’s anterior legal proprietary interest has been
extended to the situation where the claimant’s proprietary interest in the goods is equita-
ble and so was non-existent prior to the illegal transfer. In Tinsley v Milligan (1993), the
parties jointly purchased a house to live in. They registered it in T’s name only so that M
could make fraudulent claims from the Department of Social Security. M later repented
and informed the DSS. The parties quarrelled and T asserted her sole legal ownership.
M counterclaimed for a declaration that, in equity, T held a half share in the house on
trust for her because of her contribution to its purchase price. T countered that M could
not invoke the assistance of equity since she did not come with ‘clean hands’, having
participated in the fraud. The minority of the House of Lords (Lords Goff and Keith)
agreed, but Lord Browne-Wilkinson in the majority held (at 371) that ‘[i]f the law is that
a party is entitled to enforce a property right acquired under an illegal transaction, in
my judgment the same rule ought to apply to any property right so acquired, whether
such right is legal or equitable’. M could succeed because she did not have to rely on
the illegality to establish her equitable interest. Rather, she could only rely on ordinary
principles of English trusts law which presumes that where two people contribute to the
purchase of property which is put into the name of only one of them, the latter holds
the property on a resulting trust for both parties in shares proportionate to their contri-
bution. To rebut this presumption and retain the whole property, it was T who would
have to rely on the illegality, and she was barred from doing so.
Counterpoint
Counterpoint
The decision in Tinsley can be criticised on two grounds:
1. T’s equitable proprietary interest is not ‘independent’ of the illegal transaction; it was non-
existent prior to the illegal transaction, but was born of it.
15
‘Another look at Bowmakers v Barnet Instruments’ (1972) 35 MLR 38, 51.
2. The rules determining the existence of such equitable proprietary interests are outdated and
may operate arbitrarily. The resulting trust raised is based on a presumption that the contrib-
uting party whose name is left off the title does not intend to gift his contribution to the party
who holds sole legal title to the property. However, there is a ‘presumption of advancement’
(ie a presumed intention to gift) where:
• a husband confers a benefit on his wife, or
• parents confer benefits on their children.
Thus, in Tinsley, if M had been T’s husband or parent, M’s claim would have failed since M
would have had to rely on the illegality to rebut the presumption. M’s claim succeeded because
her relationship to T, of lesbian lovers, was not one to which the presumption of advancement
attached. Today, it is questionable whether the outcome should depend on whether the parties
are married and whether the claimant is the husband or the wife.
The independent proprietary rights approach supports the policy of avoiding unjust
enrichment (see Tinsley at 366), but it relies too heavily on the ‘mechanical applica-
tion of highly technical and procedural concepts’ (Beatson, 411). As Rose observes,16 it
avoids directly confronting the issue of illegality and openly weighing its gradations of
impropriety, the extent of the parties’ participation and responsibility, and the degrees
of injustice because of unjust enrichment. For a time, these considerations led to the
development of a flexible discretionary test whereby courts could allow recovery unless
to do so would affront the ‘public conscience . . . because the court would thereby appear
to assist or encourage the claimant in his illegal conduct or to encourage others in
similar acts’ (Euro-Diam Ltd v Bathurst (1990) at 35). But in Tinsley, the House of Lords
rejected such a test because:
• it contradicts a long line of authority going back to Holman v Johnson (1775), that
courts would not lend their aid to someone resting their action on an illegality;
and
• it would make relief dependent on judicial discretion rather than on rules and this
should be sanctioned by the legislature.
Counterpoint
Counterpoint
This rejection of a discretionary approach in favour of the technical proprietary rights approach
is regrettable:
1. It can lead to too much restitution, as where a claimant can make out an ‘independent’
legal or equitable proprietary right despite strong policies against restitution. For example,
16
F Rose, ‘Reconsidering Illegality’ (1996) JCL 271.
a claimant who lends housebreaking equipment, a get-away car, or paedophilic pornog-

raphy can, in principle, ask the court to get it back after the offences have been committed;
a claimant who contributes to the purchase of a property for use in terrorism can ask for a
resulting trust to be declared. A court may not countenance recovery (Bowmakers at 72), but
it is difficult to see how a principle which entitles a party to recover his property can properly
make this sort of distinction (Tinsley, per Lord Goff at 362).
2. Equally, the proprietary approach may lead to too little restitution, as where restitution is
denied simply because of the rules on presumptions of advancement (husbands in favour
of wives and parents in favour of children) when other factors point to the desirability of
restitution.
3. Such potential for injustice can lead to another problem; inconsistent application of some
rules and the distortion of other rules to avoid unjust results. In Tribe v Tribe (1996), since a
father transferred his shares to his son to defraud his creditors, the presumption of advance-
ment should have applied to negate any resulting trust in favour of the father. The logic of
the proprietary approach should have denied restitution since the father could only rebut the
presumption of advancement by reliance on his illegal purpose. The court nevertheless
returned the shares to the father by switching to, and arguably over-stretching, the timely
withdrawal exception (see W2.2.2.2). As stated above, there was no merit in the father
withdrawing from an illegality once the necessity for it had passed and no need for the law
to provide an incentive to do so.
The proprietary approach was rejected by the High Court of Australia in Nelson v Nelson
(1995) for yielding results which are ‘essentially random and produce windfall gains as
well as losses’ (at 189). The High Court continues (at 190):
The Bowmakers rule has no regard to the legal and equitable rights of the parties, the
merits of the case, the effect of the transaction in undermining the policy of the relevant
legislation or the question whether the sanctions imposed by the legislation sufficiently
protect the purpose of the legislation. Regard is had only to the procedural issue; and
it is that issue and not the policy of the legislation or the merits of the parties which
determine the outcome. Basing the grant of legal remedies on an essentially procedural
criterion which has nothing to do with the equitable positions of the parties or the
policy of the legislation is unsatisfactory, particularly when implementing a doctrine
that is founded on public policy.
In Nelson, a mother provided the money to buy a house which was put into the names
of her two children so that she could unlawfully obtain a subsidised advance from a
governmental body to buy another property. In spite of her lack of ‘clean hands’ and
the presumption of advancement to her children, the court allowed her recovery of the
first house on condition that she recompensed the body advancing the subsidy. The test
was whether restitution would undermine the policy of the statute. The sanction for illegality
must ‘further the purpose of the statute’ and not impose an additional sanction over
and above that which the statute deems sufficient. Moreover, the sanction ‘should be
proportionate to the seriousness of the illegality involved’ assessed by reference to the
statute (at 192).
W2.2.3 The future: the Law Commission’s suggestion

Lord Goff conceded (in Tinsley at 355, 364) that the illegality doctrine ‘is not a prin-
ciple of justice, it is a principle of policy, whose application is indiscriminate and so
can lead to unfair consequences . . . the principle allows no room for the exercise of any
discretion by the court in favour of one party or the other’; it is ‘capable . . . of produc-
ing injustice’. However, he viewed any wide-ranging reform as a matter for Parliament
after a full inquiry by the Law Commission. He made particular reference to New
Zealand’s Illegal Contracts Act 1970,17 which gives courts very wide discretionary powers
to grant relief having regard to a non-exhaustive list of factors.
The English Law Commission had provisionally proposed legislative reform to give
the courts more limited discretionary powers18 to decide when illegality should operate as
a defence. It had suggested giving the courts a statutory discretion to decide whether the
claimant’s involvement in some form of illegality should act as a defence to the claim,
to be determined according to a list of factors. However, this approach was rejected in
its 2009 Consultative Report (No 189) The Illegality Defence. The Law Commission
concluded that it would be impossible to create a workable system of rules to determine
when the illegality defence should operate in claims for contractual enforcement, the
reversal of unjust enrichment or tort.
Instead, the Law Commission recommends that reform be left to the courts. It sug-
gests that a more transparent, discretionary approach should be taken. In each case,
judges should consider whether the application of the illegality defence is justified on
the basis of the policies that underlie that defence. This involves a balancing exercise,
with the defence only being allowed if it would be a proportionate response to the ille-
gality and can be justified by a particular public policy rationale. The Law Commission
considers that the new approach would not lead to any major change in the outcome
of cases, but would increase the transparency of decisions.
The Law Commission does advocate legislative reform in the area of trusts, since it
would not be open to a lower court to depart from Tinsley v Milligan. It considers that
courts should be given a structured discretion to deprive a beneficial owner of his or her
interest in the trust in limited circumstances.
THIS CHAPTER IN ESSENCE
1 In general, courts will not assist parties to a contract which is illegal or contrary to public policy
(either as to its means or ends) by enforcing the contract or permitting recovery of benefits
conferred under it.
17
M Furmston, ‘The Illegal Contracts Act 1970—An English View’ (1972) 5 NZULR 151.
18
Law Commission Consultation Paper (No 154) of 1999, Illegal Transactions: The Effect of Illegality on
Contracts and Trusts.
2 Contracts may be illegal by reference to statutes or contrary to public policy under the common
law. The courts are opposed to recognising new categories of public policy but are prepared to
extend existing categories, which include contracts:
• to commit a crime or a civil wrong,

• to oust the jurisdiction of the court,
• interfering with the administration of justice,
• prejudicial to the state,
• furthering sexually immoral purposes,
• prejudicial to family life, and
• unduly restrictive of personal liberty.
3 Contracts in restraint of trade are void and unenforceable unless they are reasonable, taking
into account the legitimate interests of (i) one party to protect its interests, (ii) the other to pur-
sue an activity, and (iii) the public to benefit from free competition. The doctrine applies mainly
to restrain employees from competing with employers during or after the employment, and to
restrain sellers of businesses and their goodwill from competing with the buyer. Similarly, exclu-
sive dealing contracts are also judged by their reasonableness.
4 If a contract is illegal at formation, being expressly or impliedly prohibited by statute or contrary

to public policy, the contract is unenforceable by either party irrespective of their good faith.
The court will be slow to reach this conclusion because of the potential harshness it can visit on
a good faith claimant. However, such a claimant may, in appropriate cases, have an action for
breach of a collateral contract or for deceit.
5 Contracts which are legal at formation but intended to further an improper purpose or to be per-
formed in an illegal way are unenforceable by parties having, or knowing of, such an intention,
unless the purpose behind the illegality is the protection of a class of persons to which the claimant
belongs and enforcement of the contract would not undermine that purpose. Even the claimant
who intends (or knows of the defendant’s intention) to further an improper purpose or perform in
an illegal manner may still be able to enforce the contract if (i) the illegality is too remote from the
contract, or (ii) the claimant is seeking to enforce a statutory entitlement attaching to the contract
(eg employment) which does not rely directly on, or effectively enforce, the illegal contract.
6 Where the illegality only attaches to the performance of a contract which is valid at formation,
the contract is enforceable by the guilty party, if the purpose behind the statute or public policy
violated does not effectively prohibit the contract. The other party can enforce the contract
if he is ignorant of the illegality, but not otherwise. If the policy underlying the illegality does
effectively prohibit the contract then neither party can enforce the contract.
7 The court may be prepared to sever the illegal part of the contract and enforce the remainder
where severance would not distort the remainder, substantially change the contract, or deprive
one party of substantially the whole or main consideration under the original contract.
8 The general bar against recovery of benefits conferred under an illegal contract is subject to
three exceptions. Namely, where the claimant:
(i) is relatively less blameworthy than the other party (unequal blame);
(ii) withdraws from the illegal purpose in time (timely withdrawal), or
(iii) can establish an independent proprietary right to the money or property transferred to the
other party without relying on the illegal contract (enforcement of proprietary right).
QUESTIONS
1 ‘The content of illegality and public policy cannot remain immutable, but must change with
the evolution of public opinion, morality, and legislative policies.’ When and why are contracts
tainted by illegality?
2 What is wrong with contracts in restraint of trade? Are they ever enforceable?
3 ‘The effect of illegality on the validity of a contract depends on a variety of factors.’ Discuss.
4 Do you agree with the Law Commission’s recommendation that courts should have discretion
in deciding whether or not illegality should be a defence to a claim for contractual enforce-
ment? What factors should the court take into account in exercising such discretion?
5 When is restitution of the benefits conferred under an illegal contract permitted, and when
should it be?
6 ‘The illegality doctrine is not a principle of justice, it is a principle of policy, whose application
is indiscriminate and so can lead to unfair consequences. It allows no room for the exercise of
any discretion by the court and is capable of producing injustice.’ Discuss.
7 Alfred was a licensed haulier under the (fictitious) Licensing and Regulation of Road Hauliers
Act 2005. Section 1 of the Act makes it a criminal offence for any road haulier to oper-
ate without a licence. Section 2 requires all loads carried to be accompanied by a ‘statutory
invoice’ detailing its content and certifying the haulier’s compliance with safety regulations
relating to loading and driver breaks. Advise Alfred in the following circumstances:
(a) Alfred delivered a load for Bob but failed to provide a statutory invoice at the time of deliv-
ery because he did not notice that it had fallen out of his truck during one of his stops.
Bob refuses to pay.
(b) Alfred delivered a load for Camilla but failed to provide a statutory invoice at the time of
delivery because Camilla said she did not need one. Camilla refused to pay but insisted
that Alfred pay for the goods damaged in transit.
(c) Alfred delivered an urgent load for Delia in breach of the safety regulations by taking
insufficient breaks during the journey at Delia’s request. Delia refuses to pay. If Delia has
pre-paid but calls off the contract before Alfred was due to take his first safety break, can
she recover the sum from Alfred?
(d) Alfred agreed to carry a load for Errol which Errol had paid for in advance. Alfred refuses
to perform the contract when he discovers that his licence has expired. Can Errol compel
Alfred to return the payment?
(e) Alfred transfers one of his trucks to Fifi (his daughter) in a sham transaction to keep it
out of the hands of his creditors. After Alfred reached a settlement with his creditors, Fifi
refuses to return the truck, claiming that it is hers.
For hints on how to answer these questions, please see the Online Resource
Centre at http://www.oxfordtextbooks.co.uk/orc/chenwishart3e/
KEY FURTHER READING
Buckley, R (1983), ‘Illegality in Contract and Conceptual Reasoning’, 12 Anglo-American LR 280.

Buckley, R (2000), ‘Illegal Transactions: Chaos or Discretion?’, 20 Legal Studies 155.
Law Commission (1999), Consultation Paper No 154, Illegal Transactions: The Effect of Illegality
on Contracts and Trusts.
For updates to this chapter and links to websites relevant to the topics covered,
please see the Online Resource Centre at http://www.oxfordtextbooks.co.uk/orc/
chenwishart3e/

Contract Law 3rd Edition

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Contract Law 3rd Edition

Uploaded by

Copyright:

Available Formats

contract law

W1.2 Mental incapacity, drink, and drugs W8

W1.3 Companies W10

W1.4 Public authorities W11

Web 2 Illegality and public policy W13

W2.1 What are illegal contracts? W14

W2.1.2.3 Contracts interfering with the administration of justice W17

W2.1.2.4 Contracts to oust the jurisdiction of the courts W18

W2.1.2.5 Contracts prejudicial to the state W18

W2.1.2.6 Contracts which further sexually immoral purposes W19

W2.1.2.7 Contracts prejudicial to family life W19

W2.1.2.8 Contracts unduly restrictive of personal liberty W20

W2.1.2.9 Contracts in restraint of trade W20

W2.1.2.10 Restrictive trading and analogous agreements W24

W2.1.3 Illegality and unfairness W24

W2.2 The effects of illegality W25

Diagram W2B The enforceability of illegal contracts W27

W2.2.1.3 Subsequent illegality of means W30

W2.2.1.4 Severance W31

W2.2.2 The availability of restitution W31

W2.2.2.2 Timely withdrawal W33

W2.2.3 The future: the Law Commission’s suggestion W38

Diagram W1A Overview of Incapacity

W1.1.1 Contracts to supply ‘necessaries’

W1.1.2 Employment and other beneficial contracts

W1.1.3 Contracts involving land, marriage settlements,

(i) to buy or lease land;

W1.1.4 Other contracts

W1.1.5 Restitution to children

W1.1.6 The liability of children

[W]hen an infant obtained an advantage by falsely stating himself to be of full age,

W1.2 Mental incapacity, drink, and drugs

Three categories can be distinguished:

(a) to understand the information relevant to the decision,

(a) deciding one way or another, or

e of mental incapacity8 may leave the incapacitated person with

W1.4 Public authorities

THIS CHAPTER IN ESSENCE

(i) children must pay a reasonable price for ‘necessaries’;

(i) it is known to the other party, or

KEY FURTHER READING

• making such contracts is itself prohibited, or

• Parkinson v College of Ambulance Ltd (1925), where P ‘donated’ £3,000 to C on

The questions to be considered are:

(1) What are illegal contracts?

• the nature and seriousness of the illegality,

W2.1 What are illegal contracts?

Diagram W2A gives an overview of the types of illegality.

W2.1.1 Statutory illegality

Diagram W2A Overview: Categories of illegal contracts

W2.1.2 Common law illegality

• usurping the function of Parliament;

W2.1.2.1 Contracts to commit a crime

• breach building licence regulations (Bostel Bros Ltd v Hurlock (1949));

This public policy also taints any contract which:

W2.1.2.2 Contracts made for the deliberate commission of a civil wrong

• beat up another person (Allen v Rescous (1676));

W2.1.2.3 Contracts interfering with the administration of justice

• to stifle a prosecution (R v Andreas Panayiotou (1973), for rape);

• to refrain from disclosing misconduct which ought to be disclosed to those with a

W2.1.2.4 Contracts to oust the jurisdiction of the courts

W2.1.2.5 Contracts prejudicial to the state

W2.1.2.6 Contracts which further sexually immoral purposes