Law of Contract

Unlawful contracts
including illegal contracts, void contracts and
restraint of trade

LW1154
BCL 2005-2006
1
Reading

• Text
Clark chapters 14-15

• Reference
McD chapters 15-16 2
Unlawfulness - definition
• If a contract conflicts with the criminal
law …
• … or with other important legal
principles …
• … then the court may not give full effect
to the contract …
• … or may even give it no effect at all
3
Who makes the objection?
• If there is a clear illegality, the court itself
must raise the point …
 …even if neither party wants this to
happen
• But usually one party is raising the point
tactically …
 … as an excuse to escape the
contract 4
A matter of balance
• “Unlawfulness” is an objection based on
public policy
• But upholding commercial contracts is
also a goal of policy
• So the court is often engaged in
balancing different policies …
• … especially where the illegality is
relatively trivial 5
Effect of illegality?
• “Balancing” can be complex
• Possibilities solutions are:
• All remedies denied
• Some are denied, eg severance of
the illegal part
• Remedies on the contract are
denied, but non-contractual 6
remedies are allowed
Which contracts are illegal?
• The list is long and disordered
• Different writers organise it all
differently
• Not everyone agrees on how to
structure the cases
• Basic distinction: illegality by
statute and at common law 7
By statute / At common law
• Statutory illegality is very wide-
spread …
• … and I can only deal with
general principles
• Common law illegality is more
manageable …
• … but also more antiquated 8
“Illegal” or “void” ??
• Some writers distinguish “illegal
contracts” from “void contracts”
• But the distinction is not awfully
clear …
• … and relates mostly to the finer
points of the effects of illegality
• I will refer to it briefly later 9
Scheme of the lectures

• Illegality at common law

(with specific examples)
• Illegality by statute
(mostly general principles)
• Effect: contractual remedies
• Effect: non-contractual remedies 10
Common law
illegality
11
Types of illegality
• Commission of wrongs
• Corruption and tax evasion
• Trading with the enemy
• Interference with the administration of
justice
• Encouraging sexual immorality
12
• Restraint of trade
 Common law
illegality

1. Contracts to commit
wrongs
13
Commission of wrongs
• Contracts to commit crimes or other
wrongs are illegal
• Contractual rights cannot be acquired by
unlawful acts
 eg Arsonists cannot claim on their
insurance (Gray v. Hibernian Insc
(HC, 27/5/93) 14
 Common law
illegality

2. Corruption and tax

evasion
15
Corruption and tax evasion

• Contracts involving fraud or corrupt

payments are illegal
• eg Procuring election as City Marshall,
by promising to hand over some of the
fees a Marshall can collect
(Mayor of Dublin v. Hayes (1876) 10
IRCL 226)
16
Corruption: tax evasion
• Many taxes are defined so as to catch
certain types of contract
 eg Income tax (employment)
 eg VAT (sale of goods)
 eg Stamp duty (sale of land)
• If the parties agree to mislead the tax
authorities … 17

• … then the contract is illegal

Example
Lewis v. Squash Ireland [1983] ILRM 363

• Managing director of company

• Part of his salary was officially
recorded as “expenses”
• He later claimed for unfair
dismissal from the company
• But as his employment contract
was illegal, he had no rights 18
Statutory exception
• Lewis was thought too harsh
• Statute now provides that the
employment tribunal will itself ignore the
illegality …
• … but must inform the tax authorities of
the true facts
(Unfair Dismissal (Amendment) Act 1993
s 7) 19
 Common law
illegality

3. Trading with the enemy

20
Trading with the enemy

• Where the country is at war …

• … contracts with those voluntarily living
in enemy territory are illegal
• eg Ross v. Shaw [1917] 2 IR 367
(contract with nationals of areas overrun
by the enemy) 21
 Common law
illegality

4. Interference with the

administration of justice
22
 Interference with the
administration of justice
Essentially two categories:
• Preventing court actions which should
occur
 eg by corruptly abandoning a
prosecution
• Encouraging court actions which
shouldn’t occur
23
 eg by paying another’s costs
Wrongly preventing actions
1. Compromising crime
• Dropping a prosecution in return for
money is illegal
• Ditto hiding evidence, or agreeing not to
disclose it
• But the victim of a crime may accept
“reasonable compensation” (Criminal
Law Act 1997 s 8(1)) 24
Wrongly preventing actions
2. Ousting the courts’ jurisdiction
• The contract cannot bar access to the
courts, or establish another tribunal
• Provision for arbitration is valid …
• … but an appeal will lie from the
arbitrator to the courts (Scott v. Avery
(1856) 10 ER 1121)
25
Wrongly preventing actions
3. Unfair advantage in bankruptcy
• If a trader is bankrupt, their assets are to
be divided equally between their
creditors
• An agreement treating one creditor more
favourably than the others is illegal
26
Example
Daly v. Daly (1870) IR 5 CL 197
• The debtor concealed assets, and
obtained a discharge from his debts
• One creditor discovered the truth,
threatened legal proceedings unless
paid in full
• The debtor paid him
• This was held to be illegal
27
Wrongly encouraging
actions
Traditionally, two overlapping concepts:
• Maintenance
= improperly helping another to litigate
• Champerty
= improperly making a profit from
another’s litigation
28
Wrongly encouraging
actions
• However, these objections are today
less urgent
• “No foal no fee” is not seen as
intrinsically objectionable
• People should be allowed to litigate
“reasonably stateable claims”
(O’Keefe v. Scales [1998] 1 IRLM 393)
29
The modern law
4 main areas of concern today:

• Contingency fees
• Fee sharing agreements
• Assignment of rights to litigate
• Heir-locator agreements
30
1. Contingency fees
• Legislation prohibits lawyers from acting
in return for a percentage of the
damages won (Solicitors (Amendment)
Act 1994 s 68(2))
• An agreement for payment only if the
action is won makes the contract invalid
(Attorneys’ and Solicitors’ Act 1870 s
11) 31
1. Contingency fees
• However, an agreement to work
“no win no fee” does not have
criminal consequences, it simply
renders the agreement invalid
• In practice, much legal work
(especially for personal injury
litigation) is done that way 32
2. Fee sharing agreements
• An agreement by a solicitor to share
fees with a non-lawyer is professional
misconduct …
• … and the agreement cannot be
enforced
• eg Mohamed v. Alaga
[1999] EWCA Civ 1716 33
3. Assignment of a right
to litigate
• At common law, someone with a right to
litigate may not transfer that right to
another

• 2 exceptions are now recognised:

• If you sell property and include
connected rights to litigate;
• If the assignee has a legitimate 34
commercial interest in the right
4. Heir-locator agreements
• Where one party offers to help
another to make a claim from a
deceased person’s estate …
• … and contracts for payment out
of the proceeds of the claim …
• … then the contract is unlawful
and unenforceable 35
Survival of the doctrine
• The doctrine is an antique one
• But the Supreme Court have confirmed
that it still applies today …
• … even if the estate claimed is outside
Ireland
(Fraser v. Buckle [1996] 2 IRLM 34,
discussed by Capper (1997) 60 MLR
286) 36
Example
McElroy v. Flynn [1991] IRLM 294
• Offer to act for particular claimants in
return for 25% of the proceeds
• Costello J held this to be caught by the
heir-locator doctrine …
• … as the help went beyond mere sale of
information relating to the claim
37
 Common law
illegality

5. Encouraging sexual
immorality
38
Encouraging sexual
immorality
• The case law is antique …
• … and some of it is overtaken by
modern developments
(eg the 15th amendment to the
constitution, 1996)
• How much of it is still good law is very
speculative 39
Encouraging sexual
immorality
4 basic areas of concern:-
• Prostitution
• Contracts affecting the
decision to marry
• Contracts modifying obligations
deriving from marriage
• Cohabitation and sex outside marriage
40
1. Prostitution
• The older cases invalidate any contract
concerning or encouraging prostitution
• eg A contract to hire a carriage to a
prostitute for use in her trade (Pearce v.
Brooks (1866) LR 1 Ex 213)

41
1. Prostitution
• The Oireachtas has specified in
legislation which aspects of prostitution
are illegal
(Criminal Law (Sexual Offences) Act
1993)
• Arguably, the courts should go no further
than the statute 42
2. Decisions to marry
• At common law, any contract intended to
influence or restrict choice of marriage
was invalid
 eg A contract not to marry anyone
but the other party
 eg A contract to find the other party a
husband 43
2. Decisions to marry
Exception at common law:
• An agreement by two parties to marry
one another was valid …
• … provided both were at that point free
to marry
• However, this action was abolished by
statute (Family Law Act 1981 s 2)
44
3. Contracts modifying
the marriage obligations
• Contracts encouraging separation in the
future are invalid
• So a contract by a married couple
providing for a possible future separation
is invalid …
• … but an agreement reached on an
actual separation is valid 45
3. Contracts modifying
the marriage obligations
• It has been held that a contract to secure
a (foreign) divorce is unlawful (Dalton v.
Dalton [1982] ILRM 418) …

• … but it is an open question what the

courts would do today
46
4. Cohabitation and sex
outside marriage
• Traditionally, a contract was invalid if it
encouraged sex outside marriage …
• … though not if it merely followed a
period of cohabitation
(eg man making provision for his
illegitimate children, Reade v. Adams
(1855) 2 Ir Jur NS 197)
47
Example
Ennis v. Butterly [1997] 1 ILRM 28
• Cohabitation agreement
• Kelly J held this unenforceable
• He could not square legal enforcement
with the status granted to marriage
under the constitution
• For discussion see: Mee (1997) 19
DULJ 149
48
 Common law
illegality

6. Restraint of trade

49
Restraint of trade
• Again, the common law rules are antique
• Nonetheless, the common law rules
remain in full force …
• … though there is also statutory
provision against anti-competitive
contracts
(see Competition Act 1991)
50
What is the doctrine?
• The doctrine invalidates contracts not to
engage in trade
• Exceptions are allowed when a
particular contract can be shown to be
reasonable both from the parties’ point
of view …
• … and from the public point of view
51
When does the doctrine
apply?
• The usual case is of an express contract
not to trade
 eg A contract by an apprentice not to
compete with his/her master
• But some contracts only indirectly
restrict trade
• Does the doctrine apply to them?
52
Kerry Co-Op v. An Bord Bainne [1991]
IRLM 851
• An Bord Bainne was a trade association for
farming co-ops
• There was no effective sanction to force co-
ops to remain part of An Bord
• A proposed rule change would penalise any
co-ops who left it
• Was this change subject to the doctrine of
restraint of trade?
53
Kerry Co-Op v. An Bord Bainne [1991]
IRLM 851
The Supreme Court disagreed whether the
doctrine applied: -
• McCarthy J said it did, but that the
proposed rule change was reasonable
• O’Flaherty J said that the doctrine did
not apply
• Finlay CJ expressed no opinion
54
So the law is unclear
But it seems that the doctrine will not be
applied to:-
• Minor exclusive dealing arrangements
(Murphy v. O’Donovan [1939] IR 455)
• Promises by buyers of land not to trade
on that land (Sibra Building v. Ladgrove
[1998] 2 IR 589)
55
What does the doctrine
require?
All restraints within the doctrine are invalid
unless it can be shown that:-
• The restraint is reasonable as between
the parties, and
• The restraint was reasonable from the
point of view of the public
56
Example
Macken v. O’Reilly [1979] IRLM 79
• The Equestrian Federation of Ireland
changed its rules …
• … so that all their Irish members who
competed abroad had to do so on Irish-bred
horses
• The plaintiff, a show-jumper, complained that
this was an unreasonable restriction
• But was there restraint of trade?
57
Example
Macken v. O’Reilly [1979] IRLM 79
The Supreme Court thought this was
reasonable:-
• As to the public interest, the Federation were
legitimately seeking to protect the position of
Irish horse breeders
• As to the position between the parties, the
plaintiff's sacrifice was considered relatively
minor
58
Burden of proof
• Reasonableness as between the parties
must be affirmatively proved
(John Orr Ltd v. Orr [1987] IRLM 702)
• But (probably) the burden is reversed as
to the public’s interest

59
Restraint of trade - examples

3 major examples of the doctrine at work:

• Employment
• Sale of business
• Exclusive dealing contracts
60
1. Employment
• Any substantial interference with freedom to
work or freedom to trade may be within the
doctrine
• In these cases, most of the attention is on
reasonableness as between the parties
themselves
• Appeals to the public interest are rarely
successful 61
Example
Johnston v. Cliftonville FC [1984] NI 9
• A part-time professional footballer sought
higher pay than was permitted under Irish
League rules
• Murray J held that restrictions on pay were
an interference with a basic liberty …
• … without any plausible justification being
advanced
62
Music cases
• A string of cases on pop stars illustrate the
concentration on reasonableness as between
the parties
• The public interest is largely irrelevant …
• … and the emphasis is on the legitimate
interests of both parties

63
Example 1
Silverstone Records v. Mountfield [1993]
EMLR 152
• Contract which absolutely restrained the
group from performing for any other
employer for 7 years
• Various other clauses were unusually harsh
• Neither the group nor their manager had
much experience with contracts
• Restraint of trade found 64
Example 2
Panayiotou v. Sony [1994] EMLR 229

• The singer was obliged to produce 8 albums

over a 15-year period
• But the court emphasised that the length of
the contract was a function of success
• The singer was well advised throughout, and
had negotiated actively
• No restraint found 65
 Music cases
• All the cases emphasise that
inexperienced performers are
entitled to protection of their
interests …
• … but also that, from the record
company's point of view, the rare
success has to pay for the many 66

failures
Ordinary employment cases

• Again, in more ordinary cases,

the court tries to identity the
legitimate interests of employer
and employee …

• … in order to balance the parties’

interests against each other 67
Knowledge gained from employment

• So a contract clause cannot forbid ex-

employees from using knowledge gained
during employment ...

• ... unless the clause protects legitimate

employer interests
 eg trade secrets
 eg customer lists 68
2. Sale of a business
• Again, the court must balance the interests of
the parties against each another
• Some restrictions on the seller’s business
activities will be necessary
 (eg prohibitions on approaching former
customers)
• … but the issue will often be how broad such
clauses can be 69
Example
John Orr Ltd v. Orr [1987] IRLM 702
• Sale of a fabrics business
• Clause forbidding the seller from competing
anywhere in the world
• This was held by Costello J to be
unjustifiably broad …
• … but he restrained the seller from dealing
with anyone who was already a customer of
the buyer 70
3. Exclusive dealing contracts

• Under these contracts, one party agrees to

buy all their requirements for certain types of
products from the other party (or to sell only
to them)
• The courts have never been very ready to
strike such agreements down …
• … and today tend to defer to competition law
in the matter 71
Length of the tie
• The main consideration today is the length of
the tie
• So an obligation on a petrol station to buy
petrol only from one firm is valid if for 5 years
(Continental Oil v. Moyhihan (1977) 111 ILTR
5) …
• … but not if for 21 years (Esso v. Harpers
Garage [1968] AC 269) 72
Foreign illegality
What if there is illegality under foreign law but
not Irish law?
• Much depends on whether the contract was
to be performed here or abroad
• Another question is whether the foreign law
can be seen as analogous to Irish laws

73
Example 1
Lemenda Trading v. African Petroleum
[1988] QB 448
• Contract to pay commissions to certain
intermediaries involved in an oil supply
contract
• The commissions were not illegal by English
law …
• … but were forbidden by Qatar in an attempt
to curb corruption
• The right to the commissions was not 74

enforceable in England
Example 2
Stanhope v. Hospitals Trust (1936) Ir Jur Rep
25
• Sale of lottery tickets
• Tickets were sold in Natal and sent on to
Dublin
• However, when the organisers were told that
lotteries were illegal in Natal, they refused to
include the Natal tickets in the draw
• A ticket-seller from Durban sued 75
Example 2
Stanhope v. Hospitals Trust (1936) Ir Jur Rep
25
Fitzgibbon J held that:-
• The non-inclusion was wrong, as the lottery
was to be held in Dublin, and was legal by
Irish law
• However, the damages could not include
damages for injury to the ticket-seller’s
business, as that business was illegal
76
Illegality by statute

77
Express prohibition
• Some types of transaction are specifically
stated by statute to be illegal
 eg legislation on shop hours
• Contracts in contravention of such laws are
always illegal …
• … unless the legislation states that they
should not be so treated
78
Implied prohibition

• Where a contract necessarily involves an

act which statute has declared illegal …
• … then the contract is itself illegal
• However, the courts are reluctant to apply
this where no illegal intent is proved

79
Example 1
Namlooze Venootschap v. Dorset
Manufacturing [1949] IR 203
• Action for the price of goods sold and
delivered
• The price was payable in guilders …
• … but no official permission from the Minister
for Finance had been sought, as statute then
required
• The contract was held illegal and
unenforceable 80
Example 2
Gavin Low Ltd v. Field [1942] IR 86
• Contract for sale of a cow carcass
• After delivery, the seller claimed the price
• But the carcass had already been condemned
as unfit for human consumption
• It is illegal to offer such goods for sale
• But the contract was still enforceable
81
Examples of statutory illegality

• Wagering, gaming and lotteries

(see especially Gaming and Lotteries
Acts 1956-1986)

• Unfair Competition
(see especially Treaty of Rome article
81) 82
The effect of illegality on
contracts
83
Effect of illegality - general
• A contract illegal on its face is completely
unenforceable
• If one party has an illegal intent, they may be
refused remedies
• An illegal provision may be cut out of an
otherwise lawful contract
• We also need to ask whether other heads of
the law (eg property, tort) can be relevant
84
Illegality on the face of
the contract
• A contract which is expressly for a
purpose which is illegal cannot be
enforced by either party

• Knowledge of the relevant law is not

required
(‘ignorance of the law is no excuse’) 85
Example
Gray v. Cathcart (1899) 33 ILTR 35
• A landlord leased a house in poor condition
• When the rent was not paid, the landlord
sued
• But letting unsanitary premises was contrary
to statute ...
• … so the contract was illegal on its face, and
the rent not recoverable
86
Illegal intent or performance

• If a contract is legal on its face, but

 one or both sides intends to perform in
an illegal way,
 or does in fact perform in an illegal way
• then any party who acted or intended
illegally is barred from remedies
87
Example 1
Ashmore v. Dawson [1973] 1 WLR 828

• An engineering firm contracts with hauliers to

move some heavy equipment
• As the hauliers know, the law requires the
use of a more powerful lorry than they have
available
• The hauliers cannot enforce
• Whether the engineers can enforce depends
on their knowledge 88
Example 2
Kavanagh v. Caulfield [2002] IEHC 67

• P agreed to buy premises from D

• As part of the price, P was to pay £7,500 to
“The Marion Work of Atonement”, said to be
a charity
• In fact, this additional payment was a tax
dodge
• But it could not be shown that P knew of any
illegality 89

• Therefore P could enforce against D

Example 3
Whitecross Potatoes v. Coyle [1978] IRLM
31
• A farmer in Meath contracts to sell potatoes
to an English firm
• They suspect that the UK government may
soon introduce import restrictions
• They agree that if this happens, a higher
price will be payable
• The new restrictions are indeed introduced
90
Example 3
Whitecross Potatoes v. Coyle [1978] IRLM
31
• What was intended by the parties?
 The buyer intended that the seller would
supply from NI (lawful)
 The seller intended to smuggle his own
potatoes into NI and supply them (unlawful)
• Therefore the buyer could enforce but the
seller could not
91
Separation of legal from illegal parts of
the agreement

• A possible response to illegality is not to

declare the entire arrangement illegal …
• … but simply to strike out the part which is
illegal and leave the rest
• The law is confused and controversial

92
Separation – two distinct ideas

• Two distinct notions seem to be

involved:
• If an agreement naturally falls into two
or more parts, only one of which is
illegal, there is no reason why the rest
should not be enforceable
93
Separation – two distinct ideas

• Some types of illegality are inherently

trivial, and so should not result in the
illegality of the entire contract …
• … so the contract is valid, but the
objectionable term is “void”
 eg terms ousting the courts’
jurisdiction
 eg terms in restraint of trade 94
Example 1
Murphy v. Crean [1915] 1 IR 111
• Lease of pub premises
• Illegal term (that the tenant would transfer the
licence as directed by the landlord)
• The landlord tried to enforce other clauses of
the lease
• But the entire contract was held
unenforceable
95
Example 2
McIlvenna v. Ferris [1955] IR 318
• Contract for building work
• Under Emergency Powers legislation, such
work could not be done without a licence
• The contract was accordingly held illegal …
• … except for part of the work done after the
legislation was revoked
96
 The effect of illegality on
contracts – other heads of
the law
97
Other principles of law
• Where a claim on an illegal contract is not
permitted …
• … the plaintiff may consider invoking some
other head of the law
• But the court will need to ask whether the
illegality equally bars action under that other
head of the law
98
Other principles: 1. Property

• Plaintiff are entitled to claim

property belonging to them, even
if there is evidence of illegality
connected with it
• Perhaps surprisingly, an illegal
contract may still pass ownership
just as if it were valid 99
Example
Bowmakers v. Barnet Instruments [1945] KB
65
• Sale of machine tools on H-P terms
• The contracts infringed anti-inflation
legislation, and so could not be enforced
• When buyers defaulted, sellers claimed the
tools back
• Ownership was determined by reference to
the illegal contracts
100
An exception?
• Bowmakers involved a rather technical type
of illegality
• Perhaps a different attitude will be taken to
more flagrant illegality
 eg ownership of goods it is illegal for
anyone to own
 eg ownership of bribe money (Brady v.
Flood (1841) 6 Ct Rep Ir 309) 101
Other principles: 2. Fraud

• Where one party to the contract has

committed fraud on the other, an action may
lie in deceit …
• … even if the contract is illegal
• This approach will only succeed if the
illegality seems relatively trivial (eg
Saunders v. Edwards [1987] 2 AER 651) 102
Other principles: 3. Restitution

• Suppose one side transfers money or other

property to the other under the contract …
• … but later seeks to recover it
• This would involve the court helping a party
to an illegal contract …
• … but helping them to unravel the contract,
not to perform it
103
Other principles: 3. Restitution

The basic principle is:-

• “In pari delicto, potior est conditio
defendentis”
• =“When both sides are equally guilty, the
defendant’s case is the stronger of the two”
But when are both parties “equally guilty”?
104
The guiltless plaintiff
• A plaintiff is not caught by this rule if s/he is
entirely innocent of any illegality …
• … or has repented of any illegality …
• … or was the victim of fraud or oppression
by the other party …
• … or was one of a class that the legislation
was meant to protect
105
The innocent plaintiff
• A plaintiff who does not know the facts
rendering the transaction illegal may be able
to recover money paid
• eg Insuring an enemy cargo in ignorance of
the declaration of war (Oom v. Bruce (1810)
12 East 225)
• The other party’s guilt or innocence appears
to be irrelevant 106
The repentant plaintiff

• Where the plaintiff transfers money or

property with unlawful intent …
• … but the plaintiff thinks better of the
scheme before anything illegal is done …
• … then the plaintiff may recover back the
money or property
107
The repentant plaintiff
• At one time, the courts required genuine
penitence …
• … and would refuse a remedy if no remorse
was shown
• Today, the approach is more pragmatic
• Recovery is permitted so that there is an
incentive to withdraw before any crime is
actually committed 108
Example
Tribe v. Tribe [1995] 4 AER 236
• A father transferred shares to his son,
apparently on sale
• In fact, the purpose was to prevent the
shares falling into the hands of the father’s
creditors
• The father made a satisfactory arrangement
with his creditors …
• … and successfully claimed the shares back109
Fraud or oppression
• Where money or property was obtained by
fraud …
• … the defrauded party may recover it back
despite any illegality
• eg where P is tricked into entering an illegal
insurance contract
(Hughes v. Liverpool Victoria [1916] 2 KB
482) 110
Protected class

• Where the object of legislation is to protect

people in P’s position …
• … then the courts will be slow to say that
breach of the legislation bars P from a
remedy
• The statute is to be read in the light of its
objects 111
Example
Kiriri Cotton v. Dewani [1960] AC 192

• Legislation made it illegal for a landlord to

demand “key money” from tenants
• A tenant nonetheless paid this money on
taking a lease
• Because the object of the legislation was to
protect tenants …
• … the tenant was able to claim the money
back from the landlord 112
 That’s all
on illegality
113