Legality of Contract

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

2. Legality of Contract • Categories of contracts

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

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

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

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

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

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

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

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

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

12. Contracts in Restraint of Trade • Clauses in restraint of trade have been applied in the following situations:

13. Contracts in Restraint of Trade • If the person relying on the clause can show it is reasonable, the presumption of invalidity can be rebutted. • The restraint must not be any wider than is reasonably necessary to protect the covenantee’s interest.

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

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