Legality of Contract

1
Legality of Contract

• Being able to distinguish between the different
  categories of contract is important as the
  consequences flowing from each are different
• Contracts can be illegal or void at both statute
  and common law.

2
Legality of Contract

• Categories of contracts

3
Void Contracts

• An agreement rendered void by statute is void and
  will not be enforced by the courts.
• Any money paid or property transferred under such
  an agreement may be irrecoverable.

4
Illegal Contracts

• A contract deemed illegal when it is formed is
  totally void.
• Illegality may arise either because the contract
  is of a kind prohibited by statute, or because it
  is of a class regarded as contrary to public
  policy.
• Neither party has any rights or remedies.

5
Contracts Void by Statute

• The parties have no rights or remedies.
• The extent of the invalidity depends upon the
  terms of the statuteit may be possible to sever
  the void term out of the contract (e.g. hire
  purchase agreements) and leave the remainder of
  the contract still valid.

6
Contracts Illegal by Statute

• Consequences of statutory illegality depend upon
  when the contract becomes illegal
• If it is illegal as formed, the contract is void
  ab initio and property is only recoverable if
  disclosure of illegality is not essential to the
  cause of action
• CASE Re Mahmoud v Ispahani 1921
• If the contract is illegal as performed, the
  contract is void, but not void ab initio. The
  guilty party has no rights, but the innocent
  party is little affected
• CASE Anderson Ltd v Daniel 1924
• CASE St John Shipping Corporation v Joseph Rank
  Ltd 1957

7
Contracts Illegal at Common Law

• Contracts which would violate the social or moral
  attitudes of the community and are void ab initio
  include
• contracts to commit a crime, a tort or a fraud on
  a third party
• contracts that are sexually immoral or which
  prejudice the status of marriage
• contracts prejudicial to the administration of
  justice
• CASE Public Service Employees Credit Union
  Co-operative Ltd v Campton (1984)

8
Contracts Illegal at Common Law

• Contracts which would violate the social or moral
  attitudes of the community and are void ab initio
  include (cont.)
• contracts to the prejudice of public safety, or
  of good relations with other countries
• contracts which tend to promote corruption in
  public life
• CASE Parkinson v College of Ambulance Ltd 1925
• contracts to defraud the revenue and
• contracts that involve a breach of duty.

9
Contracts Void at Common Law

• Three types of contract are void at common law
• Contracts which attempt to oust the jurisdiction
  of the courts.Distinguish between contracts
  which are binding in honour only (where the
  parties expressly declare that they do not intend
  to create legal relations, e.g., Jones v Vernons
  Pools Ltd ( 1938) from contracts which attempt
  to oust the jurisdiction of the courts
• Contracts prejudicial to the status of marriage
  and
• Contracts in restraint of trade.

10
Contracts in Restraint of Trade

• Common law view is that such contracts
• injure the person involved by reducing their
  means of earning a livelihood
• deprive the public of the services of person in
  their useful capacities
• discourage industry and enterprise and
• restrict competition.

11
Contracts in Restraint of Trade

• Clauses in contracts in restraint of trade are
  prima facie void as being contrary to public
  policy unless the restraint is reasonable
• CASE Nordenfelt v Maxim Nordenfelt Guns and
  Ammunition Co Ltd 1894
• Reasonableness is determined by
• the geographic extent
• the time period involved
• the nature of the business and the activity being
  restrained and
• whether the restraint is reasonable, both in the
  interests of the parties and the public.

12
Contracts in Restraint of Trade

• Clauses in restraint of trade have been applied
  in the following situations

13
Contracts in Restraint of Trade

• If the person relying on the clause can show it
  is reasonable, the presumption of invalidity can
  be rebutted.
• The restraint must not be any wider than is
  reasonably necessary to protect the covenantees
  interest.

14
Contracts in Restraint of Trade

• Contracts of employment
• As the parties are usually in an unequal
  bargaining position, restraint clauses are
  generally struck down by the courts unless
• there is a protectable proprietary interest,
  e.g., intellectual property rights, customer
  connections
• CASE Forster Sons Ltd v Suggett (1918)
• they are of reasonable length in time and area
• CASE Atwood v Lamont 1920
• they are reasonable fair for both parties
• CASE A Schroeder Music Publishing Co Ltd v
  Macauley 1974

15
Contracts in Restraint of Trade

• Restraints imposed upon the vendor of a business
• Sale of a business assumes the parties are in a
  more equal bargaining position.
• Question of fact as to whether the restraint is
  reasonable (but look carefully at the type of
  business)
• CASE Amoco Australia Pty Ltd v Rocca Brothers
  Motor Engineering Co Pty Ltd 1973