Contract Law

contract law
THIRD EDITION
MINDY CHEN-WISHART
INDE web contents X
Web 1 Incapacity
Diagram W1A Overview of incapacity
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W1.1 Children
W1.1.1 Contracts to supply necessaries W1.1.2 Employment and other benecial contracts W1.1.3 Contracts involving land, marriage settlements, company shares, and partnerships W1.1.4 Other contracts W1.1.5 Restitution to children
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Web 2 Illegality and public policy

W2.1 What are illegal contracts?
W2.1.1 Statutory illegality Diagram W2A Overview: Categories of illegal contracts W2.1.2 Common law illegality
W2.1.2.1 W2.1.2.2 W2.1.2.3 W2.1.2.4 W2.1.2.5 W2.1.2.6 W2.1.2.7 W2.1.2.8 W2.1.2.9 Contracts to commit a crime Contracts made for the deliberate commission of a civil wrong Contracts interfering with the administration of justice Contracts to oust the jurisdiction of the courts Contracts prejudicial to the state Contracts which further sexually immoral purposes Contracts prejudicial to family life Contracts unduly restrictive of personal liberty Contracts in restraint of trade
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W2.1.2.10 Restrictive trading and analogous agreements
W2.1.3 Illegality and unfairness
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W2.2 The effects of illegality

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

W2.2.1.2 W2.2.1.3 W2.2.1.4 Intention to achieve an illegal purpose or perform illegally Subsequent illegality of means Severance
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W2.2.2 The availability of restitution Diagram W2C Restitution of benets transferred under an illegal contract
W2.2.2.1 W2.2.2.2 W2.2.2.3 Unequal blame Timely withdrawal Independent property rights
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W2.2.3 The future: the Law Commissions suggestion
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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 contract (eg mistake (ch 7)). This chapter examines a further basis for invalidating an otherwise valid contract; namely, the claimants 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 inuence, 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 falsied, in that one party does not have sufcient maturity of judgment or soundness of mind, then any apparent agreement between the parties should not be treated as a valid contract. The justication for the restrictions on personal contractual capacity is the protection of those whose self-protective abilities are impaired to an unacceptable degree. It simultaneously restrains those who would knowingly exploit incapacitated parties by contracting with them. However, this simple protective justication is complicated by the varying strength of the protective impulse in different circumstances and by conicting considerations which make a straightforward response to incapacity cases impossible. 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) conne its protection to potentially harmful arrangements (and uphold contracts benecial to the incapacitated party).
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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, unenforceable 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 briey mentioned at the end.
Diagram W1A Overview of Incapacity
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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 ratied 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 childs incapacity. This straightforward position is qualied by four exceptions designed to protect those who have dealt fairly and in good faith with the child, and to allow children to benet from contracts which further their welfare. They are: (i) contracts to supply necessaries,
(ii) employment and other benecial contracts, (iii) contracts involving land, marriage, company shares, or partnerships which are binding unless the child disclaims them (ie voidable), and (iv) other contracts which are ratied by the child on reaching majority. Broadly, the effect is that a contract which is on fair terms and which is recognised as beneting the child is binding (eg contracts for necessaries, employment, and the management 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 benecial to the child, but not binding if their terms are harsh or onerous for the child. Three issues arise: (i) Necessaries is dened widely. It is not conned 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 denes 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 childs condition in life; and (b) suitable to his actual requirements at the time of the sale and of delivery.
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In Nash, 11 fancy waistcoats for a Cambridge undergraduate were not regarded as necessaries because he already had enough clothing tting 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 preventing 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 childs benet (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 executory (Roberts v Gray (1913)). However, if the childs 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 suppliers 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 benecial 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 benecial 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 DFs 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 DFs 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 benecial 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)),
See further P Birks, An Introduction to the Law of Restitution (Clarendon Press, 1985) 436. 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).
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car hire to collect the childs 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 boxing 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 benet is binding (Mercantile Union Guarantee Corporation Ltd v Ball (1937)). Thus:
a childs trading contracts are not binding even if they are benecial (Cowern v Nield (1912)).
The traditional justication 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 billiard player. This is inconsistent with the view that the childs 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 Chaplins son sought to repudiate the assignment of his autobiography, entitled I Couldnt Smoke the Grass on My Fathers Lawn and written by ghost writers because it portrayed him as a depraved creature.
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The justication for treating these contracts as voidable (binding unless repudiated) rather than unenforceable (not binding unless ratied) 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 fullling 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 benecial contracts and contracts involving land, marriage, company shares, and partnerships) are unenforceable against the child unless positively ratied by the child on reaching majority (Williams v Moor (1843)). However, the contract is enforceable by the child although he cannot claim specic 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 claimants contract to buy company shares was set aside, but her claim for restitution of her payment for the shares failed because she could not establish total failure of consideration. She had been allotted the shares and could have made a prot 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 compensation for what he has received, and (b) such return does not amount to indirect enforcement of the contract. 3. Payments under a contract set aside for incapacity should be returned simply because they are unjustied or undue. If restitution is available for contracts tainted by more inchoate impairments found in undue inuence 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 transferors reason for doing so is mistaken (ie he
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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 re; 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 adults 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 (Lemprire 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 qualied. 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 enforcing against him the contractual obligation, entered into while he was an infant and, even by means of a fraud (emphasis added).
The laws strongly protective attitude towards children is further instanced by the fact that the childs 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
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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 childs 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 restitution 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 r re ection ecti n reection

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 difcult to determine whether any current asset of the child is property representing 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 childs 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 difculties 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 xed 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 disqualied from the change of position defence. 6 Eg see R Goff and G Jones, The Law of Restitution (6th edn, Sweet & Maxwell, 2002) [20212053].
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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 consequences 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 persons capacity and ability to contract (s 15). Under previous legislation, such persons 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 courts control over the property (Chitty at [8073]). However, the mentally incompetent remains liable to pay a reasonable price for necessaries (section 7). (ii) Those incapacitated by mental inrmity, drink, and drugs: A contract is still voidable 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 Barclays Bank plc v Schwartz (1995), drunkenness, 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 reasonable price for necessaries.
Pause Pa Paus use e for for re ection ecti n reection

1. The requirement of knowledge e of mental incapacity8 may leave the incapacitated person with insufcient protection. It is inconsistent with the absence of this requirement in cases of infancy. It is also hard to square with the justication for intervention based on the claimants lack of capacity to understand the general nature of the contract, which has nothing to do with the other partys 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 partys knowledge.
7 8
Imperial Loan Co v Stone (1892); Gore v Gibson (1843); Archer v Cutler (1985). Scots law does not require knowledge, John Loudon & Co v Elders CB (1923).
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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 intentions; the enforcing partys knowledge of the other partys incapacity is merely knowledge that the latters 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 rst 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 inuence and unconscionability where constructive knowledge of lesser r bargaining impairment is enough. It seems anomalous to require actual l knowledge of a more serious impairment. For example, in Ayres v Hazelgrove (1984), an 84-year-old widow with senile dementia sold paintings worth 6,0007,000 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 OConnor r (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 inuence (see 10.2) may also apply.
W1.3 Companies
The primary justication for limiting the capacity of non-natural persons such as companies 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 capacity to act is limited by the objects for which the company is set up, which are contained in the companys 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 purposes 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 Inuence 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.
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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 recognition of restitutionary claims, recover money or other benets 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 transact. Sections 3942 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 companys articles specically 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 companys constitution.
W1.4 Public authorities

Similarly, the powers of public authorities are necessarily conned 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 inict 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 transferred 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 modied by the Local Government (Contracts) Act 1997 for certain long-term services contracts. These are enforceable where a local authority has issued a certicate 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 (children and those affected by mental disorder, drink, or drugs) and of non-natural persons (companies and public authorities). These restrictions are justied 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 childs contract is unenforceable against the child (it is enforceable against the adult), unless it is ratied 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 benecial for the child as a whole; and
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(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 partys 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 inuence 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 certied 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 contracts 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 represents 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 xed 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 Manseld 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 contract 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 Cs secretary to procure a knighthood for P which failed to eventuate, 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.
History of English Law, Vol III, 55.
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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 benets transferred under an illegal contract? The case law is vast and the answers to these questions are far from simple. The rst 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 consequences 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 difcult to generalise about the wide range of statutory prohibitions although they are often designed to secure fair trading conditions, safeguard property and personal safety, and prevent competitive markets from being undermined. Some examples are the prohibition on the marketing or sale of certain 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 prohibition), 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
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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 contract 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 refugees immigration and asylum applications. The contract was unenforceable by reference to legislation2 preventing solicitors from sharing their fees. However, the Court of Appeal allowed Ms claim for quantum meruit (the value of
Rule 7 of the Solicitors Practice Rules 1990, made pursuant to s 31 Solicitors Act 1974.
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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 gambling 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 contained 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 Dennings (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 ctions 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 picture 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 reect changing social and moral values. 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 [16004]) that the difference between extending an existing principle as opposed to creating a new one will often be waferthin. 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 r re ection ecti n reection

The law fails if it does not reect a societys changing values over time. For example, the older cases reect 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
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W2.2.3). Further, the scope of impermissible restraint of trade has been modied 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 proposed here (see further Treitel, para 11-002 to 11-004; Beatson, 34895); the law of restraint of trade, for example, lls 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 avouring 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 tortious 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 stie a prosecution (R v Andreas Panayiotou (1973), for rape);
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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 pricexing 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 without just cause or excuse (Hill v Archbold (1968)), although just cause and excuse is now widely interpreted (Giles v Thompson (1993) at 32833) to permit litigation supported by unions or insurance companies; of champerty (ie nancing anothers 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 permit 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 parties can exclude the courts 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 husbands payments are unenforceable. The courts 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 difcult to prove are controlled by the Unfair Contract Terms Act 1977 (s 13(1)). Standard terms in consumer contracts which hinder a consumers 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 enemys economy (Potts v Bell (1800), now Trading with the Enemy Act 1939); contracts which corrupt public life (eg buying public ofces or honours, Parkinson v College of Ambulance Ltd (1925), now prohibited by the Honours (see Prevention of Abuses) Act 1925);
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contracts whereby a public ofcial is paid a commission to use his position to procure benets for another (Monteore 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 promisors mistress (Upll 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 judicial attitude reects 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 Cs brazen cynicism in attempting to avoid payment for As work which generated enormous prots 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 prostitutes trade in Pearce v Brooks (1866)). Where a contract of employment requires an employee to procure prostitutes for the employers 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.
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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 courts inherent jurisdiction to make orders regarding the upbringing and maintenance of children.
Pause for reection

Rapid medical advances now raise very difcult and controversial questions about the desirability of supporting other contracts in this category, such as contracts to select the gender or other attribute of ones 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 Millars 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 moneylender. Lord Cozens-Hardy MR observed that the agreement could prevent the debtor from raising money for the maintenance, education, or medical treatment of his family. 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 specied 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 persons carrying on his trade freely: so has the individual. 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
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void. That is the general rule. But there are exceptions: . . . [it] may be justied . . . if the restriction is reasonable . . . in reference to the interests of the parties concerned and reasonable 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 Harpers 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 employees interest in retaining reasonable freedom to pursue a vocation and the concern to protect employees from unfairness resulting from their weaker bargaining power vis--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
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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 inuence over the employers customers and may entice them away (eg Fitch v Dewes (1921), a solicitors managing clerk; Marion White v Francis (1972), a hairdresser); or who have acquired trade secrets (which are protected even without an express restraint) or condential 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 conned 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 necessary to protect the employers 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 circumstances, 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 employees 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 permitted here since inequality of bargaining positions is less obvious. A purchaser of a business 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 unenforceable. 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)).
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(iii) Exclusive dealing agreements These may be prohibited under Article 81 of the European Community Treaty as anticompetitive 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 purchasers 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 reneries 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 advantages 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 Essos interests. However, the contract lasting 21 years:
could have effect in quite different conditions, so that the public interest in preserving Harpers liberty of action applied more strongly here. Although the arguments had centred 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 Harpers freedom of action. If competition is to be a generally accepted way of running the economy, then restraints have to be justied in terms of the benets to the community as well as to individuals, and for this reason the public interest gures 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 songwriter 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 ve years, renewable at the latters option for another ve years, in return for royalties. The publisher had no obligation to publish the works, could terminate the contract on a months notice, and was free to assign its rights. The song-writer was a great success and obtained a declaration 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 justication for upsetting the terms of the contract, nor any alternative
4 5
See R Whish, Competition Law (5th edn, LexisNexis, 2003). Policy Arguments in Judicial Decisions (OUP, 1983) 170.
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set of terms to be discovered by the technique of market transference.6 Nevertheless, the House of Lords was clearly inuenced by the one-sidedness of the agreement (the publisher giving minimal commitment in exchange for the song-writers total commitment) 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 contractual restrictions appear to be unnecessary or to be reasonably capable of enforcement in an oppressive manner, then they must be justied 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 laws role in controlling such agreements has been inhibited for a number of reasons. Courts are less adept at considering the broad public interest and economic issues raised by these anti-competitive arrangements than in judging reasonableness between particular specic parties. The latter, after all, are represented in court while the public interest is assumed to be within the knowledge of judges and not specically 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 agreements 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 fullling 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 undesirable in the public interest or unworthy of the courts 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 bargaining power of [the parties] . . . to decide whether the publisher had used his superior bargaining power to extract from the song writer promises that were unfairly onerous to him . . . Under the inuence 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 Mounteld (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.
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contracts generally, as they had formerly done . . . but the policy survived in its application 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 nds lip service paid to the current economic theories, but if one looks at what they said in the light of what they did, one nds 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 doctrines such as undue inuence (see 10.2); incapacity (see Web ch 1); unconscionable bargains (see 10.4); and the special rules applicable to exemption (chs 1113), 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 (289) locates the real objection to the contract in Schroeder v Macaulay in terms of power, fairness, and co-operation. He explains:
Because the composers career was completely dependent upon the publishers discretion for a period up to ten years, his degree of subordination to another represented an unjustiable 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 xed 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 promoting his work . . . [T]he concern about unjustiable 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 benets conferred under them, illegal contracts are not devoid of legal effect. Complex exceptions reect the conicting 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 justiable, 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;
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(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 laws 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 buyers 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 Cs assets to enforce a commission agreement because, at the time the agreement was made, Q was an undischarged bankrupt and could not engage in estate agency work. Section 23 Estate Agents Act 1979 rendered any commission agreement with the claimant invalid or unenforceable. An example of common law prohibition is a contract which involves trading with alien enemies in wartime. It may be very difcult 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)).
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Diagram W2B The enforceability of illegal contracts
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The effect is to give one party an unmeritorious and technical defence to an action for breach. The justication 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 defendant 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 Ss 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 prots 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 purpose or to be performed in an illegal manner, is generally unenforceable by the party contracting with the illegal intention, or knowing of the other partys illegal intention.10 In Taylor v Bhail (1996), T had provided an estimate inated 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 illegality by claiming a quantum meruit for the work done. However, a claimant who is innocent of the others 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 Bs 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 Ws status.
Cowan v Milbourn (1867); Alexander v Rayson (1936) at 182. Mason v Clarke (1955) at 793, 805; Fielding & Platt Ltd v Najjar (1969); Newland v Simons and Willer (Hairdressers) Ltd (1981).
11
10
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(ii) Recover reasonable remuneration for work done prior to discovery of the illegality. 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 enforceable 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 illegality of contract. Cs 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 Cs 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 Hs acquiescence in how her wages were paid and her complaint of sex discrimination. There were no public 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 applicants 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 applicants claim and the illegal conduct, the nature and seriousness of the illegal conduct, the extent of the applicants involvement in it, and the character of the applicants claim were all
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relevant. On the facts, Vs 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 purpose 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 example, 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 composition 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 blameworthiness (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 inict 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 penalty on the offender. In St John Shipping Corporation v Joseph Rank Ltd, S, the ship-owner, was prosecuted and ned 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 penalise 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 contract if he did not know of or consent to the illegality. In Archbolds (Freightage) Ltd v S Spanglett Ltd (1961), S agreed to transport As whisky but did so in an improperly licensed van. When Ss negligence resulted in the loss of As whisky, S pleaded its own illegality in defence to As claim. The Court of Appeal (at 390) rejected As defence since the statutory purpose was sufciently met by the penalties prescribed, and the avoidance 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 As load. When the load was damaged
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in transit, As claim for damages failed because As 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 partys whole or main consideration for the contract (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 benets 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 justication 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
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(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 benets 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 (specically, 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 benets transferred under an illegal contract
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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 defendants fraud (Shelley v Paddock (1980)) or pressure amounting to duress (Smith v Cuff (1817)). Restitution is also allowed where a claimants 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 signicant given the prevalence of contracts rendered 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 discontinue an illegal contract. Where a party withdraws in time, he can recover the benets he has conferred on the other party. It has been held that there is no genuine withdrawal 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 . . . voluntary withdrawal from an illegal transaction when it has ceased to be needed is sufcient. 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.
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
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transaction. Note that the fathers 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 withdraw 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 signicant 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 claimants independent legal or equitable proprietary right in that property. The permissible plea is: give it back, its mine; the impermissible plea is: give it back, you only have it because of our illegal contract. This exception is difcult 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 ownership 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 unaffected 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 claimants claim for damages in the tort of conversion because the defendants 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 13 14
See J Beatson, Repudiation of Illegal Purpose as a Ground for Restitution (1975) 91 LQR 313. Kearley v Thomson (1890) at 747. C J Hamson, Illegal Contracts and Limited Interests (1949) 10 CLJ 249.
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Three criticisms can be made of the Bowmakers decision: 1. The claimant was relying on the illegal contracts to say when the defendants more limited interests expired, resurrecting his own proprietary right. 2. Although the defendants 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 defendant. Thus, the proprietary approach may lack remedial exibility; Coote observes that: the real difculty lies in the arbitrary, all-or-nothing character of the common law governing illegal contracts.15
The principle of protecting a claimants anterior legal proprietary interest has been extended to the situation where the claimants proprietary interest in the goods is equitable 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 Ts 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 contribution. 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.
The decision in Tinsley can be criticised on two grounds: 1. Ts equitable proprietary interest is not independent of the illegal transaction; it was nonexistent prior to the illegal transaction, but was born of it.
15
Another look at Bowmakers v Barnet Instruments (1972) 35 MLR 38, 51.
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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 contributing 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 benet on his wife, or parents confer benets on their children. Thus, in Tinsley, if M had been Ts husband or parent, Ms claim would have failed since M would have had to rely on the illegality to rebut the presumption. Ms 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 application 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 exible 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.
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.
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a claimant who lends housebreaking equipment, a get-away car, or paedophilic pornography 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 difcult 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 advancement 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 sufciently 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 rst 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 sufcient. Moreover, the sanction should be proportionate to the seriousness of the illegality involved assessed by reference to the statute (at 192).
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W2.2.3 The future: the Law Commissions suggestion

Lord Goff conceded (in Tinsley at 355, 364) that 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 . . . 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 producing 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 Zealands 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 claimants 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 suggests that a more transparent, discretionary approach should be taken. In each case, judges should consider whether the application of the illegality defence is justied 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 illegality and can be justied 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 benecial 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 benets conferred under it.
M Furmston, The Illegal Contracts Act 1970An English View (1972) 5 NZULR 151. Law Commission Consultation Paper (No 154) of 1999, Illegal Transactions: The Effect of Illegality on Contracts and Trusts.
18
17
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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 pursue an activity, and (iii) the public to benet 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, exclusive 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 performed 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 defendants 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 benets 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
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(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 Commissions recommendation that courts should have discretion in deciding whether or not illegality should be a defence to a claim for contractual enforcement? What factors should the court take into account in exercising such discretion? 5 When is restitution of the benets 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 (ctitious) Licensing and Regulation of Road Hauliers Act 2005. Section 1 of the Act makes it a criminal offence for any road haulier to operate without a licence. Section 2 requires all loads carried to be accompanied by a statutory invoice detailing its content and certifying the hauliers 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 delivery 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 insufcient breaks during the journey at Delias request. Delia refuses to pay. If Delia has pre-paid but calls off the contract before Alfred was due to take his rst 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 Fi (his daughter) in a sham transaction to keep it out of the hands of his creditors. After Alfred reached a settlement with his creditors, Fi 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/
W41
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/

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INDE web contents X

Web 2 Illegality and public policy

W2.1.2.10 Restrictive trading and analogous agreements

W2.1.3 Illegality and unfairness

W2.2 The effects of illegality

WEB CONTENTS Diagram W2B The enforceability of illegal contracts

W2.2.3 The future: the Law Commissions suggestion

Diagram W1A Overview of Incapacity

W1.1.1 Contracts to supply necessaries

W1.1.2 Employment and other benecial contracts

W1.1.4 Other contracts

W1.1.5 Restitution to children

W1.1.6 The liability of children

Pause Pa Paus use e for for re r re ection ecti n reection

W1.2 Mental incapacity, drink, and drugs

Pause Pa Paus use e for for re ection ecti n reection

W1.4 Public authorities

THIS CHAPTER IN ESSENCE

KEY FURTHER READING

History of English Law, Vol III, 55.

ILLEGALITY AND PUBLIC POLICY

W2.1 What are illegal contracts?

W2.1.1 Statutory illegality

ILLEGALITY AND PUBLIC POLICY

Diagram W2A Overview: Categories of illegal contracts

ILLEGALITY AND PUBLIC POLICY

W2.1.2 Common law illegality

Pause Pa Paus use e for for re r re ection ecti n reection

ILLEGALITY AND PUBLIC POLICY

W2.1.2.1 Contracts to commit a crime

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

W2.1.2.3 Contracts interfering with the administration of justice

ILLEGALITY AND PUBLIC POLICY

W2.1.2.4 Contracts to oust the jurisdiction of the courts

W2.1.2.5 Contracts prejudicial to the state

ILLEGALITY AND PUBLIC POLICY

W2.1.2.6 Contracts which further sexually immoral purposes

W2.1.2.7 Contracts prejudicial to family life

ILLEGALITY AND PUBLIC POLICY

Pause for reection

W2.1.2.8 Contracts unduly restrictive of personal liberty

W2.1.2.9 Contracts in restraint of trade

ILLEGALITY AND PUBLIC POLICY

ILLEGALITY AND PUBLIC POLICY

ILLEGALITY AND PUBLIC POLICY

ILLEGALITY AND PUBLIC POLICY

W2.1.2.10 Restrictive trading and analogous agreements

W2.1.3 Illegality and unfairness

ILLEGALITY AND PUBLIC POLICY

W2.2 The effects of illegality

ILLEGALITY AND PUBLIC POLICY

W2.2.1 The enforceability of the contract

W2.2.1.1 Illegality at formation

ILLEGALITY AND PUBLIC POLICY

Diagram W2B The enforceability of illegal contracts

ILLEGALITY AND PUBLIC POLICY

W2.2.1.2 Intention to achieve an illegal purpose or perform illegally

ILLEGALITY AND PUBLIC POLICY

ILLEGALITY AND PUBLIC POLICY

W2.2.1.3 Subsequent illegality of means

ILLEGALITY AND PUBLIC POLICY

W2.2.2 The availability of restitution

(ii) has withdrawn from the transaction before it is substantially performed; or