ILLEGALITY

1. Common law Illegality

a) Contracts to commit a crime or tort.
-Where a contract is made to commit a crime or tort or anything contrary to the law. An action to enforce
such contracts will fail.
b) Contracts contrary to customary law.
-Where customary law is recognized as a source of law a contract that contravenes customary law can not be
enforced.
c) Contracts contrary to public policy.
-The common law has treated particular types of contracts, which fall short of requiring the performance of
criminal or tortious acts, as void on public policy grounds. These includes ----Agreements to oust the
jurisdiction of the courts - But distinguish an agreement to submit disputes to mediation or arbitration prior
to commencing legal proceedings.
• Agreements to indemnify (i.e. insure) against criminal acts or torts
• Agreements in unreasonable restraint of trade Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co
Ltd [1894] AC 535 Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Co Pty Ltd [1968] AC 269
• Agreements to promote immoral conduct (e.g. undermine the sanctity of marriage) Lyden v Folau [1908-
59] Tonga LR 39
• Agreements to promote corruption in public life
• Agreements to pervert the course of justice
• Agreements which are prejudicial to public safety

NOTE * Where a party to a contract which is illegal at common law withdraws from the contract before the
illegal purpose is carried out, that party will be able to recover any money paid or property transferred under
the terms of the contract. It is said that the party has ‘repented’ of the illegality.
 Kearley v Thomson (1890) 24 QBD 742 - involved a plaintiff who had a friend who was bankrupt. The
defendants were solicitors who were acting for one of the creditors of the bankrupt friend. The plaintiff
agreed to pay the defendants a sum of money if they agreed not to appear at the public examination of the
bankrupt person. This was an agreement to pervert the course of justice. The money was paid and the
solicitors failed to appear, so the illegal purpose had been carried out (at least in part), so the plaintiff could
not rely on the illegality of the contract as a basis for claiming the return of his money. His “repentance”
came too late. If he had cancelled his agreement with the solicitors earlier, the case would have been
decided differently.

2. Contracts Illegal by statute. -When considering whether a contract is unenforceable on account of

statutory illegality, one has to take great care in construing the language of the relevant statute. In
particular, it is important to distinguish between a statute which prohibits the creation of the type of
contract that the parties have made – so the contract is illegal as formed - and one which merely
prohibits aspects of the performance of the contract – so the contract may be illegal as performed.
a. Illegal in creation or as formed - Re Mahmoud and Ispahani [1921] 2 KB 716 involved a situation in
which the plaintiff, who was a licensed linseed oil dealer, sold linseed oil to the defendant, who assured the
plaintiff that he was a licensed linseed oil dealer. In fact, the defendant did not hold a licence. At the time, in
Great Britain, both the sale and purchase of linseed oil without a licence were prohibited. The relevant
statute prohibited the making of a contract of the type that the parties made. It was irrelevant that the
plaintiff did not know that the defendant did not hold a licence. The contract was illegal and the plaintiff
was unable to bring an action to enforce the contract. The Fijian case of Narendra Nand Sharma v Jagdeo
Singh (1973) 19 Fiji LR 164 were the Fijian legislation prohibited the transfer of a taxi permit, so a contract
 whereby the defendant would sell his taxi, together with his taxi permit, to the plaintiff was illegal and
unenforceable.
b. Illegal in Performance. - In St John Shipping Corporation v Joseph Rank Ltd [1957] 1 QB 267, Devlin J
said that, in relation to illegality of contracts, there are two general principles: -
1. If the parties intend to break the law, then the parties’ intention to break the law makes the contract
unenforceable.
2. If the contract is expressly or impliedly prohibited by statute, then the contract is unenforceable
whether the parties intended to break the law or not.
When illegality arises from the way the contract is performed, it is necessary to ask whether the parties
intended to perform the contract in that way (and only in that way). St John Shipping Corporation v
Joseph Rank concerned a situation in which the plaintiffs had overloaded a ship with cargo.
Overloading was prohibited by legislation. The defendants, who were the consignees of some of the
cargo, refused to pay some of the freight charges due to the plaintiffs. The defendants alleged that the
contract was illegal in its performance, so was unenforceable. The defendant’s argument was rejected.
The statute prohibited overloading of ships and imposed a penalty for infringing this prohibition. It did
not prohibit, either expressly or by implication, the making of a contract of the type that the parties
made. The parties did not make that contract with the intention of infringing the statutory prohibition.
The terms of the contract did not require the ship to be overloaded. The overloading of the ship was
merely an event which occurred in the course of performance of the contract. The same logic justifies
the decision in the Fijian case of

 Deo v Narayan (1971) 17 Fiji LR 162. - The respondent owned a motor vehicle subject to a Bill of Sale in
favour of Suva Motors Ltd. for £980 repayable by monthly instalments but requiring also payment of £225
on the 30th November 1963. On the 4th June, 1965, by a contract partly written and partly oral the appellant
agreed to sell the motor vehicle to the respondent, who was given possession and commenced using the
vehicle as a taxi. He paid a deposit and made payments on account of the instalments due to Suva Motors
Ltd. Under the Bill of Sale but neither the registration of the car (which was in the name of the appellant)
nor the insurance policy was transferred to the respondent.

The sum of £225 abovementioned had not been paid to Suva Motors Ltd. on the due date and this fact was
overlooked by the appellant and Suva Motors Ltd. at the time of sale agreement. In October, 1965, the vehicle
was re-possessed by Suva Motors Ltd. for non-payment of this sum and was sold.

In the Supreme Court the respondent obtained judgment for the sums paid by him as money had and received
by the appellant to the use of the respondent less an allowance for the use of the vehicle. It was con-tended on
appeal that the contract between the appellant and the respandent was illegal and unenforceable as being in
contravention of section 19(1) of the Traffic Ordinance and of section 4(1) of the Motor Vehicles (Insurance)
Ordinance. The former section prohibits the use of a motor vehicle which has been transferred by the registered
owner unless the new owner is registered as the owner thereof. The latter section prohibits the use of a motor
vehicle unless there is in force in relation to that use a third party insurance policy.

When would a contract be impliedly prohibited by statute? The Solomon Islands case of Griffiths v Indian
Pacific Fisheries Ltd (Unreported, High Court, Solomon Islands, 30 September 1997) involved a contract
of employment for a dive instructor. The plaintiff employee was an Australian. Employment of Australian
dive instructors was not prohibited in the Solomon Islands, but section 68 of the Labour Act prohibited the
employment of ‘an immigrant or nonindigenous worker’ unless the worker has obtained a permit to work
in the Solomon Islands. The plaintiff did not obtain a work permit. Lungole-Awich J said that ‘the
intention of the legislation is overwhelmingly to prohibit an immigrant or non-indigenous worker from
 taking up employment before he has obtained a work permit’. His Honour concluded that the plaintiff
could not bring an action to recover unpaid wages because allowing such an action would, in effect, allow
the employee to enforce a contract which the statute intended to prohibit. The purpose of the statute was to
prohibit immigrants from working in the Solomon Islands unless they have obtained permits.

In summary, we could say that a contract will be unenforceable for illegality where enforcing it would
frustrate the purpose of a statute. Clearly, the purpose of a statute will be frustrated by a contract in the
following situations:–
1. The statute prohibits the making of a contract of that type.
2. The parties have agreed on a method of performance which the statute prohibits.

3. Severance of Illegal Provisions. – This simply refers to deleting contractual provisions or parts of the
provisions that makes the contract illegal so that it is no longer illegal. It cannot be used to undermine
the party’s intentions.
 Attwood v Lamont [1920] 3 KB 571 concerned a restraint of trade clause. The defendant, on leaving the
employment of the plaintiff (who carried on business as a draper, tailor and outfitter in Kidderminster),
agreed that he would not carry on business as ‘a tailor, dressmaker, general draper, milliner, hatter,
haberdasher, gentlemen’s, ladies’ or children’s outfitter at any place within 10 miles of Kidderminster’. It
was found that the provision was unreasonable in its scope, but that it was not possible to sever all of the
restrictions apart from that of tailor. Younger LJ said that this was ‘one covenant for the protection of the
respondent’s entire business, and not several covenants for the protections of his several businesses’.
Therefore, the clause was unenforceable in its entirety.

4. Illegal Contracts Act. The Illegal Contracts Act 1987 (Cook Islands) does not change the law as to
what types of contracts are illegal, but modifies the consequences of illegality. Section 3 of the Act
defines an illegal contract as a contract that ‘is illegal at law or in equity, whether the illegality arises
from the creation or performance of the contract’. Section 4 states that a contract is not illegal simply
because the way the contract is performed contravenes a statute. The purpose of the statute must require
that a contract performed that way be unenforceable. This reflects the position taken in the English and
South Pacific case law discussed previously. Section 5 states the illegal contracts are to be ‘of no effect’,
although subsequent transfers of property (which passed under the illegal contract) to people who were
not parties to the illegal contract and had no notice of the illegality are not invalidated. The most
significant change to the law is found in Section 6. A person who was a party to the illegal contract or
disqualified from enforcing the contract by reason of its illegality may claim ‘relief by way of
restitution, compensation, variation of the contract, validation of the contract in whole or part or for any
particular purpose, or otherwise howsoever as the Court in its discretion thinks just.’ In considering
whether to grant relief, the Court must consider the matters listed in subsection (3) of section 6. Section
7 deals specifically with restraint of trade clauses. The enforceability of a restraint of trade clause is not
an “all or nothing” matter. A court will decline Law of Contract II – Topic 5 Page 8 to enforce the
contract only where deleting or modifying the offending provision ‘would so alter the bargain between
the parties that it would be unreasonable to allow the contract to stand’.

TUTORIAL QUESTION ONE

The Republic of Perdita is situated in the South Pacific. Perdita has received English common law and common
law has continued to apply since Perdita’s independence from Great Britain on 1 July 1979. Hazim is the
Minister for Agriculture and Fisheries in Perdita. He is also chairperson of the charity “Save the Orphans”
which arranges foster care with loving families for Perditan orphans. On 1 April 2015, Hazim told Codja that, if
Codja donated $10,000 to Save the Orphans, Hazim will use his influence within the government to ensure that
Codja was appointed an Officer of the Order of the Dugong (DO) in the next round of admissions. Officer of
the Order of the Dugong is the second-highest non-military honour that can be awarded by the Republic of
Perdita. It is awarded to people whose actions have, in the opinion of a committee appointed by the government,
contributed to the welfare of the Republic of Perdita and its citizens. The recipients of honors are announced
each year on Independence Day. On 8 April 2015, Codja donated $10,000 to Save the Orphans and informed
Hazim that he had done so. On 1 July 2015, Codja was disappointed to discover that his name was not on the
list of people who had received awards in the Order of the Dugong.
Is Codja able to sue Hazim for breach of contract?
The contract between Codja and Hazim can be classified as Contracts Illegal by Statue and one that is illegal in
performance.
St John Shipping Corporation v Joseph Rank Ltd [1957] 1 QB 267, Devlin J said that, in relation to illegality
of contracts, there are two general principles: -
1. If the parties intend to break the law, then the parties’ intention to break the law makes the contract
unenforceable.

Question Two
NB – The Tongan legislation referred to in the question is hypothetical.
Part (a)
Mele lives in Nuku’alofa in Tonga. She wanted to sell her car, so she advertised it for sale in a
local newspaper. Sione, who wanted to buy a secondhand car, saw Mele’s advertisement and
agreed to buy Mele’s car for $16,000 (pa’anga). Section 24 of the Sale of Motor Vehicles Act 2014 (Tonga)
states as follows:-
(1) No person may sell or otherwise dispose of a motor vehicle without, within three
months before selling or disposing of the vehicle, obtaining an inspection certificate
from the Ministry of Transport.
(2) A person may apply for an inspection certificate by presenting the vehicle to an
authorised officer of the Ministry of Transport for a safety inspection and paying the
prescribed inspection fee.
(3) A person who contravenes subsections (1) of this section is liable to a fine of $3,000.
The long title of the Act is ‘An Act to ensure the safety of motor vehicles at the time of sale’.
Neither Mele nor Sione was aware of the existence of the legislation. Sione became aware of
the legislation when, after paying the agreed purchase price and taking delivery of the car, he
sought to have the car registered in his name. An employee of the Ministry told Sione that he
could not have the car registered because there was no record of any inspection certificate
having been issued for the car in the previous three months.
Sione wants to return the car to Mele and get his money back.
Can he take legal proceedings to recover the purchase price from Mele?
PART (B)
Consider the following variation on the facts of Part (a):-
(1) Both Mele and Sione knew about section 24 of the Sale of Motor Vehicles Act 2014
(Tonga);
(2) Sione had, after agreeing to buy the car but before taking delivery, asked Mele whether
she had obtained the inspection certificate and Mele stated (falsely) that she had done so;
(3) Sione paid the purchase price by cheque;
(4) Sione, after discovering that he could not get the car registered in his name, had a stop
payment order placed on the cheque and drove the car back to Mele’s place.
Can Mele sue Sione for breach of contract?
Part (c)

Would your answer to Part (a) be different if the facts had occurred on Rarotonga in the Cook
Islands? Assume that the Cook Islands has legislation that is identical to the Sale of Motor
Vehicles Act 2014 (Tonga).