ELEMENTS OF LAW OF CONTRACT - ILLEGALITY

ILLEGALITY IN THE FORMATION OF CONTRACT

As a general rule the court will not enforce a contract which is illegal or contrary to public policy nor will they permit recovery of benefit conferred under such a contract Peace v Brooks (1866) (the coach builder who hired carriage to a prostitute who refused to pay); Franco v Bolton (1707) contract for a woman to become mistress. It is however necessary to ensure justifiable balance between the need to discourage illegality, uphold freedom of contract and prevent unjust enrichment. Illegal contracts could involve either innocent infringement of regulatory legislature, gross immorality or a calculated attempt to break the law. Illegality may relate to the formation of a contract which made such contract void ab ibitio or illegality in the performance of validly formed contract (St. John Shipping Corporation v Joseph Rank Ltd (1957). The freight contract was valid but overloading the ship was an offence. Shaw v Groom (1970) the landlord who failed to give rent book to a tenant (against statutory provision) was able to enforce rental agreement. Contrary authority in Anderson v Daniel (1924) guilty party was unable to enforce contract. Ashmore, Benson, Pearse & Co. Ltd v D V Danwson Ltd (1903). Active participation in an illegal contract (transportation of pipes) rendered claim for damages impossible.

The scope of the doctrine of illegality at common law is extremely wide and it was sum up in the maxim a court will not enforce contracts which are contrary to public policy e.g. Peace and Franco. Such moral code as however relaxed now as in Timsley v Milligan (1994) where agreement by lovers to purchase property was not held to be unenforceable because they were not married. It could also be contract prejudicial to family life Lower v Peers (1978) contract which restrain a party from getting married. Herman v Charlesworth (1905) - contract to procure marriage for a fee. The emergence of introductory agencies has however changed the landscape in this regard. However, promise to promise to pay money as long a couple stayed married is enforceable Gibson v Dickie (1915). Contracts contrary to exchange control regulation Bigos v Bousted (1915, defraud revenue service Allexander v Rayson(1938) or confer benefit on another party through an illegal conduct Beresford v Royal Exchange Assurance (1938) s(where the insured commit suicide which was illegal), Clay v Yates (1858) contract to commit libel, R v Andrew (1973) prejudicial to administration of justice and Elliot v Richardson false evidence were all declared illegal. Contract against public relation such as D Wutz v Hendricks (1924) contract overthrown foreign government, purchase of Knighthood Parkingson v College of Ambullance Ltd (1925) etc were all declared illegal.

Restraint of trade is another area where public policy is against unreasonable contracts. For restraint to be legal in contract of employment, it must be both reasonable and show propriety right of the employer Fitch v Davies (1921) an employee who has influence over employer’s customers was restrained and one who has acquired trade secret or confidential information Forster and Sons v Suggett (1918). The restraints must however not cover utilisation of personal skill or place unreasonable limitation Marson v Provident Clothing Supply Co. 1913 – restraint covered working within 25 miles of London.

In the administration of justice with regard to illegality in the formation of a contract and the extent to which courts will enforce a contract despite the taint of illegality. For statutory illegality the court will considered the purpose behind the statute and most of the it was usually to penalise conduct and not prohibit contract. The requirement to provide an invoice appears to regulate the conduct of business rather than the legality if business. The above will indicated that contracts which do not comply with this requirement are illegal as performed rather than as formed. In some circumstances, courts have allowed the innocent party for reason of fraudulent misrepresentation, breach of warranty or on quantum merit basis allowed such contract to be enforced (cf Archbolds (Freightage) v Spanglett); in other cases, courts have not allowed the contract to be enforced (cf Re Mahmoud and Ispahani)
Where statute does not specify the consequences of illegality on contract, the better view is that the effect should be determined by reference to the statute. Here it is arguable that the purposes of the statute would not be further by denying Monty the remuneration due under his agreement with Norman.

Monty would be able to recover on a quantum valebat provided the parties are not in pari delicto, equily guilty. Re Mahmoud and Ispahani (1921): Held that since the defendant has no licence to purchase or sell linseed oil, the contract with the plaintiff who had a licence to was illegal and unenforceable. in other cases, courts have not allowed the contract to be enforced. but not if public policy would prevent such a restitutionary recovery (Awwad v Geraghty & Co.) The parties are in pari delicto and neither can sue on the contract. Archbolds (Freightage) v Spanglett; Held that the contract was not prohibited expressly or implied by statute, and therefore cannot be illegal at its inception. Since the plaintiff were unaware of the true facts and were innocent parties, they could recover damages for breach of contract.

The court recently allowed the recovery of quantum valebat basis to protect the very essence of the law which rendered the conduct of the defendant illegal. Hill v Secretary of State for the Environment, Food and Rural Affairs [2005] EWHC 696: Hill was an undischarged bankrupt who managed a company contrary to the provisions of the Company Directors Disqualification Act 1986. Hart J held that the company was entitled to be remunerated on a quantum meruit basis for the work done. If the company could not sue on its contracts, the very persons the legislation was designed to protect would be prejudiced. Court would also allow the recover of money spend if the contract is repudiated early enough (sigh or repentance) Taylor v Bowers (1876), or if the claim could be brought while avoiding the illegality Bowmakers Ltd v Barnet Instruments Ltd (1945). The claimant bought machine tools in contravention of the defence regulation and delivered to the defendant. The defendant in breach of agreement sold some of the machine and refused to return the remainder. The claimant sue in tort of conversion successful establish their title to the good i.e. showing equitable proprietary interest, which is applicable to a party who can establish the existence of such interest in any goods Tinsley v Milligan (1994) – two lovers who jointly purchased a property (presumption of resulting trust) in the name of one of them so that the other can claim social benefits. he Court held that a contract legal in England was enforceable even though illegal in another jurisdiction. In further of public policy the court was also willing to enforce a contract that was legal in England which was illegal in another jurisdiction in Maccaba v Lichtenstein [2006] BPIR 994.

Both case illustrated the inadequacy of present remedial regime concerning illegal contacts. The law focuses attention on the state of pleading and has little regard for the merit of the case. The presumptions of advancement (only between husband and wife and not girlfriend or lesbians/gay lovers) and resulting trust are outmodel presumption which doesn’t reflect modern reality. To remedy the situation the law Commission has made provisional recommendations which give broad discretional powers to decide whether illegality should act as a defence in a claim for contractual enforcement where there is legal wrong, a claim for reversal of an unjust enrichment under contract which is unenforceable for illegality and recognition of contractually transferred or created properties rights where the formation purpose of performance involve commission of legal wrong. Exercising the discretion should however be guided by the seriousness of the illegality, knowledge and intention of the claimant, would denial serve as a deterrent factor, would denial further the purpose of the rule, whether denial is proportionate to the illegality. There was no power to proportional loses or re-adjust the contract. The proposal was an attempt to structure high level of generality and it could be argued that it has gone too far to bring too many contract swithin the scope of the discretionary regime (illegality in performance and formation). It could be criticised as undue interference in with both freedom of contract and sanctity of contract (and possible violation of the human rights of the party). One way of resolving the problem might be to provide that the court should start of with a presumption in favour of enforcement of the contract and that this presumption should only be rebutted by clear countervailing factors.