ILLEGALITY
Definition: ex turpi causa non oritur actio (court will not allow a party to base a cause of action upon an illegal act (a base act))
Ex dolo malo no oritur actio (no court will lend its aid to a man who founds his cause of action upon an illegal or immoral act)
Effect of Finding Illegality: Four Alternatives:
1. Entirely void
2. Term only void (consider severability)
3. Void only in certain circumstances
4. Not void but unenforceable
Four categories of illegality:
1. Contracts rendered illegal at common law
2. Contracts rendered void at common law
3. Contracts rendered illegal by statute
4. Contracts rendered void by statute
1. CONTRACTS RENDERED ILLEGAL AT COMMON LAW
Justification for doctrine: public policy (Wilkinson v Osborne)
Traditional Approach: Contracts are ILLEGAL if they are to:
Commit crime, a tort/fraud on third party, or contemplates the possibility of such
North v Marra Developments Ltd (1981): P (stockbroker)’s claim on remuneration for services from D failed. Tried to manipulate stock market etc. HC: ILLEGAL as it contemplated from outset, a breach of statute.
Depends upon the seriousness of the wrongdoing – if minor then not illegal.
No knowledge that it is crime – no excuse. JM Allan (Merchandising) v Cloke: P leased D roulette table and wheel for unlawful game.
Promote sexual immorality: change in social attitudes
Pearce v Brooks [1866]
Andrews & Parker [1973]: man and married woman live together. Man transfer house on condition that if she return to husband, must retransfer house. Woman returned to husband, husband moved in and man moved out. Held: NOT ILLEGAL – man got house back.
Property (Relationships) Act, 1984, NSW s45:
“Notwithstanding any rule of public policy to the contrary, two persons who are not married to each other may enter into a domestic relationship agreement or termination agreement.”
Prejudice national public safety or good relations with other states:
Hirsh v Zinc Corp Ltd (1917): illegal if contract with resident of country which at war with, and hinders war effort
Regazzoni v KC Sethia (1944): illegal if intention to infringe laws of a foreign country
Prejudicial to the administration of justice:
Criminal: money paid to stifle prosecution cannot be recovered.
Civil (private): money paid not to proceed with prosecution is not illegal.
A V Hayden (1984)
Promote corruption in public life: person in public office with conflict between public/private interests
Wilkinson v Osborne (1915): P (2 members of parliament) agreed to urge gov to approve sale of land (needed gov approval) for land agent, for a fee. P sued land agent for fee afterwards. Held: ILLEGAL
Parkinson v College of Ambulance Ltd and Harrison
Defraud the revenue authorities:
Alexander v Rayson [1936]: landlord got tenant to sign rent of 450 and then service agreement of 750. Object to defraud revenue authorities by only showing first doc (450). Tenant refused to pay full amount because services were poor. Held: ILLEGAL. Landlord cannot sue.
Modern Approach
More expansive than traditional approach: if contract illegal at common law, the courts should enforce it unless:
1. Refusal to enforce is proportionate to seriousness of unlawful conduct
2. Refusal is necessary to protect the object/policies of statute
3. Statute must state that its remedies are to be the only ones to be used.
Fitzgerald v F J Leonhardt Pty Ltd (1997): F contract with licensed driller to drill holes. Sued F for money, F raised defence of illegality – no permit issued under Water Act (NT), which imposed fine. HC: disallowed defence.
1. Determine if contract was expressly/impliedly prohibited by Act: no, just penalized non-permitted conduct.
2. Determine whether should be illegal on public policy: no,
a. to deny driller claim for work was disproportionate to offence
b. penalty was sufficient to protect object of act
c. no such intention.
2. CONTRACTS RENDERED VOID AT COMMON LAW
Contracts to exclude right to sue in court
o Parties may be final arbiter on questions of fact, but not law.
Baker v Jones [1954]: constitution of unincorporated organization said central council to make final decisions and interpret rules as they wanted. Used funds to pay legal fees of some members. Members argued payments illegal under constitution. Council argued that their decisions were final. Held: rejected council’s argument.
o Arbitration clauses (clause referring to arbitrator) are not void
Scott v Avery (1856)
o Contracts prejudicial to the status of marriage
Money v Money
Property (Relationships) Act, 1984, NSW
Family Law Act, 1975, C’lth
Restraint of Trade:
Definition:
“A contract in restraint of trade is one in which a party (the covenantor) agrees with any other party (the covenantee) to restrict his liberty in future to carry on trade with other persons not parties to the contract in such manner as he chooses”
Petrofina (Great Britain) Ltd v Martin
Restraint of Trade Clauses (Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd):
General rule: prima facie void as being contrary to public policy (illegal)
Exceptions: if restraint is reasonable
o reasonable as between the parties’ interests
o reasonable in relation to the interests of the public
Burden of proof of reasonableness:
o Initial onus on covenantee to prove reasonable – party getting benefit of ROT.
o Latter onus on convenantor to prove unreasonable.
o Amoco Aust Pty Ltd v Rocca Bros Motor Engineering Pty Ltd
Timing when arguing validity of a rot clause
o at contract formation
Linder v Murdock’s Garage (1950)
Factors which courts consider in assessing reasonableness:
o defining the legitimate interest to protect
o no more than necessary to protect that legitimate interest
Factors in assessing compliance with criteria
o duration of restraint
o geographic extent
o bargaining power of the parties
o type of business / type of activity
o context, eg, solicitor’s partnership
o specific wording of the restraint clause
o consideration / quantum received as payment for the restraint
o need for certainty
Categories of Restraint of Trade
o Contracts for the sale of business: restraint from competing in near future
o Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd: N had worldwide business making/selling guns. Sold business and promised not to compete for 25 worldwide. Held: reasonable for protection of purchaser.
o ‘Exclusive dealing’ contract – buy/sell exclusively from/to other party.
o Amoco Aust Pty Ltd v Rocca Bros Motor Engineering Pty Ltd (1973): R lease service station to A for 15 years and A underlease R for less than one week. R agreed to purchase exclusively from A. Wanted to change suppliers. Held: ROT for 15 years was not reasonably necessary to protect A’s commercial interests.
o Trade Practices Act, 1974, C’lth, s4M: same as 51(2), 45: prevent contracts, arrangements and understandings which substantially lessen competition, 47: prevents exclusive dealing, 51(2): common law unaffected by Act.
o Employment contracts: former employee cannot divulge trade secrets, solicit old customers.
o Employer prove valid ROT by arguing trade secret:
information is a trade secret
employee has sufficient knowledge to exploit trade secret
employee gained that knowledge during course of employment
Herbert Morris Ltd v Saxelby [1916]
o Abuse of trade secrets
Foster & Sons Ltd v Suggett (1918)
o Abuse of customer lists
Fitch v Dewes [1921]: restriction for life on solicitor’s clerk from practicing within 7 miles of former employer’s place of business.
Deacons v Bridge [1984]: 5 yr restriction on solicitor acting on any client engaged with firm in past 3 years.
Curro v Beyond Productions Pty Ltd (1993): presentor contract not to engage in other presentation activity whilst in agreement – went to 60 mins.
o Relative bargaining position of the parties
Schroeder Music Publishing Co Ltd v Macaulay [1974]: artist bound exclusively to other party
Summary on Common Law Illegality and Voidness
Fitzgerald v F J Leonhardt Pty Ltd
3. CONTRACTS RENDERED ILLEGAL BY STATUTE
Expressly Illegal:
o Issue: does Act prohibit contract – mere penalty (prohibit conduct) or deprives legal effect of contract?
o Example of drastic effect of finding contract prohibited by statute: Re Mahmoud and Ispahani [1921]: statute that no person sell linseed oil unless with gov license. P (licensed) sold to D (who lied and said he had license). D then refused to accept delivery. P sued and D argued illegality of contract. Held: D won. P could not enforce, even though innocent party.
Impliedly Illegal:
To determine if illegal – look at intention of statute: Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd
Just penalize illegal conduct?
Or deprive parties of benefits of contract (void)?
o Both parties?
o Guilty party?
Use rules of statutory interpretation. Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd: FC lent Y money secured by mortgage and guarantee. Y defaulted. Y argued illegal as Act prohibits carrying on of banking business without license. Held: mortgage and guarantee is valid/enforceable.
Two types - either:
o Illegal as formed – vitiating factor at time of formation eg. Alliance Acceptance Co Ltd v Vella
o Illegal as performed:
Factors
• Wording of statute:
Re Mahmoud and Ispahani: “shall not buy or sell” – prohibits.
• Primary aim of legislation – if for public policy (illegal), but if eg. to raise revenue (not illegal).
Smith v Mawhood: statute against sale of tobacco by unlicensed vendors. Held: sale contract legal, despite unlicensed.
Alliance Acceptance Co Ltd v Vella: V leased amusement machines from AA. If V defaulted, liable to pay residual value of machines. V defaulted and argued illegality as defence. Held: illegal, even though not expressly prohibited, as object of contract aw to do prohibited act.
Anderson Ltd v Daniel: statute that sale of artificial fertilizer must have invoice of different %s of chemicals in it. Merely said penalty for breach – is contract void? Held: void, given nature of contracts covered by Act – must be intention of legislatures.
• Severity of the penalty:
Yango Pastoral Co Pty Ltd v First Chicago Ltd: heavy penalty determined on $10,000 per day. Held: since continuing penalty – penalty as main focus not contract (determined on number of transactions)
Dalgety and NZ Loan Co Ltd v C Imeson Pty Ltd: light/discretionary penalty indicates full extent of legal sanctions applying.
Were parties innocent or guilty of knowledge of illegality?
Dalgety and NZ Loan Co Ltd v C Imeson Pty Ltd: P auctioned 6 cows (1 with tuberculosis). D refused to pay on illegality (statute against sale of diseased cattle). Held: not illegal – parties innocent.
Buckland v Massey: vendor sold car without roadworthiness certificate. Purchaser refused to pay balance. Held: illegal – vendor knew.
• Commercial convenience
Yango Pastoral Co Pty Ltd v First Chicago Ltd: voiding contract would mean that “bankers” who deposited money with a corporate body could not recover, corporate body would not be able to recover money lent.
Dalgety and NZ Loan Co Ltd v C Imeson Pty Ltd: voiding contract would create commercial uncertainty – never know if cattle was diseased until slaughtered.
Mis-performance must be substantial, central to contract – to be illegal
St John Shipping Corporation v Joseph Rank Ltd: contract between cargo owner and shipper. Shipper overloaded in breach of statute, argued contract void due to illegality. Held: not illegal – illegal conduct was merely incidental to contract, not intended by parties.
4. CONTRACTS RENDERED VOID (OR PARTIALLY VOID) BY STATUTE
• express specific sections – rendered void by legislation
Eg. Trade Practices Act, 1974 (C’lth) s68: renders void any term in a contract with a consumer which tries to exclude implied warranties.
• against specific persons – only void against them
Income Tax Assessment Act (1936) s260L: void against Commissioner of Taxation
Duties Act 1997 (NSW)
5. EFFECT OF FINDING ILLEGALITY BY STATUTE OR BY COMMON LAW
(a) Illegal as formed:
void ab initio Re Mahmoud and Ispahani [1921]
neither party can enforce, i.e., no common law remedies such as damages,
no equitable remedies such as specific performance, injunctions, rectification
no right to recover an amount due under the contract, eg, unpaid progress payment
property / money already transferred under contract does not have to be returned
Non return of property / money:
In pari delicto portior est conditio possidentis - where both parties are equally at fault, property should remain with the party who has possession of it when the matter is disputed.
Example: Newcastle District Fisherman’s Co-operative Society v Neal (1950)
Exceptions to enforcing contract or recovering the return of property (traditional):
Listed by McHugh J in Nelson v Nelson (1995)
Mistake: as to facts/law that make contract illegal
o David Securities Pty Ltd v Commonwealth Bank of Australia (1992)
Plaintiff has legal right (cause of action) independent of contract:
o Bowmakers Ltd v Barnet Instruments (1945): P transfer machinery tools to D under illegal contract. D kept/sold/refused to return, arguing illegal contract. P sued in tort.
HC: P may recover his chattels if “plaintiff does not seek, and is not forced, either to found his claim on the illegal contract or to plead its illegality in order to support his claim”.
o Tinsley v Milligan [1994]: agreed with above.
o Nelson v Nelson (1995): HC criticized above cases – too inflexible. Focuses on procedural rather than merits of parties.
Victim of fraud, duress, undue influence or unconscionability (not in pari delicto)
o George v Greater Adelaide Land Development Co Ltd [1929]
Purpose of legislation to protect a class of persons
o Kiriri Cotton Co Ltd v Dewani [1960]: offence for leasor to receive any money other than rent. D paid unlawful amount to K for grant of lease. Held: recoverable – purpose to protect tenants.
(b) Illegal as performed:
Void only against guilty party so cannot demand specific performance nor recover property
Innocent party can enforce – sue for breach, recover moneys etc.
Marles v Philip Trant & Sons Ltd [1954]: P (farmer) ordered spring wheat seed. D (merchants) gave winter wheat seed. P sued for breach of contract – even though contract was illegal (contravened Act).
Exceptions to non return of property
• Same as for illegal as formed plus
• Transferor repents before substantial performance:
o Due notice of repudiation needed.
o No need to repent, just repudiate (no subjective element)
o Clegg v Wilson (1932): P transferred land in return for D not giving evidence to prosecute P’s son. Prosecution dropped but D committed on other charges. Held: recoverable – illegal purpose still wholly recoverable.
Modern Rule:
In Nelson v Nelson (1995), courts should enforce contract (or allow restitution) unless:
• EXPRESSLY: statute indicates the intention of parliament is to make the contract unenforceable in all circumstances
or
• non-enforcement is proportionate to the seriousness of the unlawful conduct and
• non-enforcement is necessary to protect the object of the legislation and
• statute by implication disclosures an intention that the sanction under the statute is not to be the sole sanction
6. EFFECT OF FINDING VOID BY STATUTE OR BY COMMON LAW
Depends on statute:
• partially void
• property transferred is recoverable
• offending term may sometimes be removed (severability)
Thomas Brown & Sons Ltd v Fazal Deen (1962)
Tests of Severability:
Illegality not taint the contract as a whole (minor illegality):
o North v Marra Developments Ltd (1981): stockbroker advised client to illegally manipulate stock market. Client didn’t pay. Held: S cannot claim payment – illegal conduct was integral part of conduct performance.
o Amoco Aust Pty Ltd v Rocca Bros Motor Engineering Pty Ltd (1973): R in underlease to purchase petrol from A for 15 years. Held: cannot sever – trade tie was fundamental to underlease.
Illegal consideration not substantial part of consideration: promise given in return of void promise is void too:
o Brooks v Burns Philp Trustee Co Ltd (1969): voidness of wife’s promise not to apply for alimony made husband’s promise of weekly payments also void.
Severable in changing extent of contract, not the type/nature of it:
o Thomas Brown & Sons Ltd v Fazal Deen (1962): illegal bailment of gold bars and gems. Gems not illegal. Held: severable – just changed extent of contract.
Restraint of Trade – severing objectionable part
s4 Restraint of Trade Act 1976 (NSW): restraint of trade is valid to the extent to which it is not against public policy whether or not it is in severable terms
Meaning: enforced up to the point the term becomes unreasonable eg. 15yrs ROT becomes 5 yrs ROT.
Restriction: court cannot rewrite ROT if party had made no attempt to make the term reasonable in the first place. Orton v Melman [1981]
Future of Illegality Theory
• public conscience test – rejected in Tinsley v Milligan
• liberalization re non enforcement
• liberalisation of no retrieval of property / money paid
Nelson v Nelson
Fitzgerald v F J Leonhardt Pty Ltd