3.

CONTRACTS RENDERED ILLEGAL BY STATUTE

What if a contract infringes legislation? Again Kirby J in Fitzgerald suggests
that a contract might infringe both public policy and legislation. In that case he
recommends that the question of statutory infringement be considered first.
Some contracts are epressly prohibited by statute. If so! the courts "ill not
uphold the contract in any "ay.
In #e Mahmoud and Ispahani $%&'%( ' K) *%+ , here an -rder made under
the .efence of the #ealm #egulations pre/ented the sale of linseed oil "ithout
a licence. )riefly the rele/ant part of the legislation pro/ided as follo"s0
12ntil further notice a person shall not buy or sell or other"ise deal in ...
any $linseed oil( ecept under and in accordance "ith the terms of a
licence issued by or under the authority of the Food 3ontroller.
4he plaintiff seller sold linseed oil to the defendant "ho did not ha/e the
necessary authority from the Food 3ontroller. 4he defendant refused to accept
the goods and argued that the statute prohibited the contract and that therefore
the court could not enforce it.
4he court held that the contract "as illegal because the statute epressly
prohibited it. 5ou can tell that by the "ords 6shall not sell7 shall not buy7. 4he
/endor plaintiff could not enforce the contract e/en though it "as innocent and
the defendant "as able to rely on its o"n illegal act to defend the action. )ut at
least the goods had not been deli/ered .If the purchaser had accepted deli/ery
and then refused to pay the plaintiff /endor could not ha/e reco/ered the price
and the defendant "ould ha/e been enriched at the plaintiff8s epense.
An eample is Australia is section 9: ;'< of the 4rade =ractices Act that says0
6A corporation shall not ... ma>e a contract ... if the pro/ision of the proposed
contract arrangement or understanding ... "ould ha/e or be li>ely to ha/e the
effect of substantially lessening competition7.
Can statutes impliedly pr!i"it #ntra#ts$
.ifficulties can arise "hen the statute! on the one hand! imposes a penalty or a
fine on persons "ho act in contra/ention of its pro/isions but! on the other
hand! remains silent about the status of contracts "hich may ha/e been created
in the course of those acts. So "hen does a statute impliedly prohibit a
contract?
4he fundamental principle in assessing the effect of statute la" upon contracts
is "hether the statute intended to affect contracts and ma>e them /oid. Was
=arliament intending to penalize the specific conduct mentioned in the statute
or "as it also intending to go further to depri/e the contracting party the
benefits under the contract? Further! did =arliament intend by its statute that
both parties be depri/ed of their contractual rights or only the party committing
the "rongful act? Justice ?ason said in Yango Pastoral Co Pty Ltd v First
Chicago Australia Ltd ;%&*@< %A& 3B# 9%C
6Where as here! as statute imposes a penalty for contra/ention of an
epress prohibition against carrying on a business "ithout a license or an
authority and the business is carried on by entry into contracts! the question is
"hether the statute merely intends to penalize the person "ho contra/enes the
prohibition or "hether it intends to go further and prohibit contracts the ma>ing
of "hich constitute the carrying on of the business7 ;at 9'+<
So ho" do you >no" "hether the statute intended such a result? 4he court "ill
use the rules of statutory interpretation to ascertain the intention of the
legislation. 3onsider the "ords of then Acting 3hief Justice Dibbs in Yango
Pastoral case!
64he question "hether a statute! on its proper construction! intends to
/itiate a contract made in breach of its pro/isions! is one "hich must be
determined in accordance "ith the ordinary principles that go/ern the
construction of statutes7.
4he follo"ing cases illustrate the approach ta>en by the courts "hen the
rele/ant statute is silent about the fate of contracts formed or performed in
contra/ention of its pro/isions. 4here is a slo" change beginning "ith Yango in
the philosophy of the Eudges in declaring a contract illegal impliedly by statute!
especially since Fitzgerald v FJ Leonhardt Pty Ltd ;%&&*< %@& 3B# '%: at
'9A.
%
In the case of Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd in the
caseboo> at %%%C! First 3hicago lent to 5ango the sum of F%A'! +CC secured by
a mortgage and a guarantee. After 5ango defaulted on the repayment of the
loan! First 3hicago sought to reco/er on the guarantee. In defence! the
appellants argued that the mortgage and guarantee "ere illegal and /oid
because they contra/ened s @ of the Banking Act !"! #C$th%. 4hat pro/ision
prohibits the carrying on of ban>ing business "ithout being authorised to do so
and at the time pro/ided for a penalty of F%C!CCC for each day during "hich the
contra/ention continues. As the parties agreed that First 3hicago "as in breach
of s @! the real question concerned the status of the mortgage and guarantees.
A unanimous Gigh 3ourt of Australia found that the contracts "ere both /alid
and enforceable. 4he court held that s @ did not epressly or impliedly prohibit
the loan made by the respondent. 4he court too> into account the fact that a
finding that s @ in/alidates a contract made "ith the unauthorised Hban>ersH
"ould mean Hthat persons "ho had deposited money "ith such a body corporate
"ould be unable to see> the assistance of the courts to reco/er it. ?oreo/er! if
a body corporate "ere unable to reco/er money that it had lent! it "ould be
disabled from performing its o"n obligations! including those o"ed to its
depositorsH ;at page A of the report<. 4he court also noted that the penalty
imposed by s @ "as calculated on the number of days the contra/ention
continued! and not on the number of transactions made. In the courtHs /ie"! this
"as an indication that the legislature "as more concerned "ith pre/enting
unlicensed trading than "ith prohibiting each contract "hich resulted from that
trading.
Is 5ango a case of reasoning bac>"ards? If the contract is illegal neither party
could enforce the in/alid contract bet"een the ban> and its depositors "hich
"ould ha/e drastic commercial consequences so that contract had better remain
/alid.
In the case Justice ?ason said
6In deciding the question the court "ill ta>e into account the scope and
purpose of the statute and the consequences of the suggested implication
"ith a /ie" to ascertaining "hether it "ould conduce to! or frustrate! the
obEect of the statute7 ;at 9'+<
)y #ntrast! consider the WA case of Alliance Acceptance Co Ltd v &ella
;%&@:< ' S# ;WA< A:: , the respondent Iella leased se/eral amusement
3
machines from the appellant! a finance company. A term of the lease pro/ided
that if the lessee defaulted under the agreement it "as liable to pay the lessor a
sum equal to the residual /alue of the machines. Iella defaulted so the
appellant claimed the amount so calculated. )y "ay of defence! Iella argued
that as the contract "as for the lease of goods "hose use "as prohibited under s
@&A of the =olice Act %@&' ;WA<! consequently it "as an illegal contract and!
as such! the money claimed by the appellant pursuant to the contact "as not
reco/erable. 4he court agreed! e/en though s @&A did not epressly prohibit
the ma>ing of such contracts. In the "ords of Geenan 3J .3 ;at page A&% of
the report0
H4he question that arises is0 .id the parties deliberately enter into the
contract in order to do a prohibited act? In my opinion! the question must
be ans"ered in the affirmati/e. 4he prohibited act "as the use or
possession of the machines and the "hole purpose of the contract "as to
gi/e to the defendant both use and possession. 3onscious as I am of the
need for a court to be slo" in holding that a statute intends to interfere
"ith the rights and remedies gi/en by the ordinary la" of contract ... I am
satisfied that the contract "as illegal at its formation. $Furthermore( it is
no ans"er for the plaintiff to say that it did not >no" the la" on the
matterH.
Jote the emphasis on the "ords 6at its formation7. So no" "e loo> at se/eral
cases "here the Eudges said entering into a contract "as legal! but then there
"as an argument about illegality because of the "ay the contract "as
per&rmed. .e/lin J in St John8s Shipping said0
64here is a distinction K bet"een a contract "hich has as its obEect the doing
of the /ery act forbidden by the statute! and a contract "hose performance
in/ol/es an illegality only incidentally.7
4he same principles apply "here the statute dictates the "ay in "hich a
contract is to be per&rmed. 4he statute may epressly indicate the
consequences that "ill flo" from a mis,performance of the contract. For eg.
under the JSW 3redit legislation! if a credit pro/ider fails to gi/e the borro"er
certain information the credit pro/ider is liable to a penalty but also the
legislation impacts upon the contract because it says the borro"er does not
ha/e to pay the credit charge.
'
Where the statute does not indicate the consequences that "ill flo" from a mis,
performance of the contract! the courts "ill ha/e to decide the matter and! as
before! they "ill ha/e to ascertain the true purpose of the statute.
3onsider the Lnglish case of Anderson Ltd v 'aniel $%&'9( % K) %A@ , here
the Lnglish 3ourt of Appeal had to decide the effect of non,compliance "ith a
statute "hich pro/ided that e/ery sale of artificial fertiliser had to be
accompanied by an in/oice "hich stated the percentages of certain chemicals
found in the fertiliser. 4he statute merely pro/ided for a penalty for breach.
4he court held that! gi/en the nature of the contracts co/ered by the statute! the
legislature intended that the contracts be in/alidated for mis,performance. So
gi/en this fact! the court "ould not allo" the party guilty of contra/ening the
statute the right to enforce the contract.
-f course! the mis,performance must be substantial before a court "ill declare
the contract illegal. 3onsider the Lnglish case of (t John (hipping
Corporation v Joseph )ank Ltd $%&:*( % M) '+*. Gere the contract "as
bet"een a cargo o"ner and shipper. 4he ship "as o/erloaded in breach of the
?erchants Shipping ;Safety and Boad Bimits 3on/ention< Act %&A'. 4he
shipper alleged the contract "as /oided by this statutory illegality. .e/lin J
held the contract "as not /oided because the contract "as one of a type "here
the illegality "as of collateral or incidental and not a central character and the
courts are reluctant to stri>e do"n such contracts. 4he o/erloading "as not
intended by the parties as the means of performing the contract.
Gence the contract for freight "as enforceable. 4he o/erloading of the ship
"as only an incidental part of the contract of freight. According to the court!
=arliament did not intend to ma>e this contract /oid! so the shipo"ners! e/en
though they "ere the guilty party! could enforce the contract.
4here are other cases listed in the course outline to illustrate statutory illegality
, /arious 1tests1 ha/e been applied by the courts to determine legislati/e
intention.
3onsider the JSW case of 'algety and *+ Loan Co v C Imeson Pty Ltd
$%&+9( JSW# +A@ , Gere the =laintiff company auctioned + co"s but one had
tuberculosis ;and of course there is legislation "hich prohibits the sale of
diseased cattle<. 4he .efendant meat company argued it did not ha/e to pay
for its purchase! as there "as an illegal contract. -n appeal the court found for
(
the /endor on the basis that the statute "as intended only to apply a
discretionary penalty and not to render a contract ;"here both parties did not
>no" of the facts gi/ing rise to the illegality< /oid for illegality , so the rele/ant
consideration "as the innocence of the parties and the fact that /oiding the
contract "ould produce commercial uncertainty ;could not >no" of the disease
until co" slaughtered<.
-f course a different result "ould ensue if /endor >no"s of the illegality. For
eample consider the Mueensland case of Buckland v Massey $%&@:( % Md #
:C' , here the /endor sold a car "ithout a road"orthiness certificate as required
by la". =urchaser refused to pay o/er the balance of the purchase price. 4he
court held that the contract "as unla"ful and unenforceable.
4o summarise this first category it appears that the cases "e ha/e considered
ha/e been of ' types , they are either
(,-. /)A*(PA)0*CY
;%< ille)al as &rmed , ie. the /itiating factor operates at the time of
formation , eg. Aliance Acceptance v &ella1 or
;'< ille)al as per&rmed , ie. the contract is legal at formation but "hile
it is 1on foot1 ;ie. being performed<! a factor rendering it illegal comes
into play , eg. Anderson v 'aniel.
4he factors stressed by the court in "or>ing out legislati/e intention are ,
(,-. /)A*(PA)0*CY
%. *rdin) & t!e statute + see ?ahmoud / Ispahani
'. ,rimary aim & t!e le)islatin , if public safety! then a
contra/ention is li>ely to ma>e the contract illegal! but if the
primary aim is e.g.! to raise re/enue then the contract "ill not be
illegal. Authority is (mith v Ma2hood ;%@9:< %9 ? and W 9:'. A
statute prohibited sale of tobacco by /endors "ho did not ha/e a
licence. 4he sale contract "as legal despite the /endor not ha/ing a
licence.
A. ,enalty test NWhat conduct does the statute penalize? What is the
form of the penalty? -b/iously the outcome depends upon the
se/erity of the penalty. If the penalty is 1light1 and O or
-
discretionary! then that might indicate the intention that the penalty
be the full etent of the legal sanctions applying , ie. status of
contract not effected ;eg. .algety case<. Alternati/ely a statute
might pro/ide a hea/y penalty "or>ed out on a continuing basis eg
F%C!CCC per day N 4he Eudges said in 5ango that because it "as a
continuing penalty that indicated =arliament intended the penalty to
be the main focus , not the contract itself. Kirby J said in Fitzgerald
/ Beonhardt at '99 that a finding of illegality in 5ango "ould ha/e
depri/ed the parties of contractual rights "hich 6might be
enormous! supplementing in a "holly arbitrary "ay the defined
penalties for "hich the legislature has epressly pro/ided7.
9. InnocenceOguilty >no"ledge of party relying upon defence
;)uc>land / ?assey<.
:. 3ommercial con/enience ;.algety and 5ango cases again<.
+. 3entral or collateral conduct to the performance of the contract ,
;St John Shipping 3orporation<.
Jo" let8s mo/e to the last maEor illegality category.
(,-. /)A*(PA)0*CY
'. CONTRACTS RENDERED .OID BY STATUTE
For /arious reasons! the legislature has chosen to depri/e particular contracts of
their legal efficacy rather than prohibit them outright. In such cases! the
contract is rendered /oid! not illegal.
A current 6/oid7 eample is section +@ of the /rade Practices Act %&*9 "hich
renders /oid any term in a contract "ith a consumer "hich tries to eclude
implied "arranties.
So! "hile some statutes render the contract totally /oid for all purposes! other
statutes eg are more limited in their application. Another eample! are statutes
"hich render a contract /oid but only against certain persons. For instance! s
'+C of the Income /a3 Assessment Act %&A+ ;3Hth< pro/ides as follo"s0
HL/ery contract! agreement! or arrangement made or entered into! orally or in
"riting! "hether before or after the commencement of this Act! shall so far as it
has or purports to ha/e the purpose or effect of in any "ay! directly or
indirectly ,
/
;a< altering the incidence of any income taP
;b< relie/ing any person from liability to pay any income ta or ma>e
any returnP
;c< defeating! e/ading! or a/oiding any duty or liability imposed on any
person by this ActP or
;d< pre/enting the operation of this Act in any respect be absolutely /oid! as
against the Commissioner, or in regard to any proceeding under this Act,
but without prejudice to such validity as it may have in any other respect
or for any other purpose' ;emphasis added<.
3onsequently! as far as the 3ommissioner of 4aation is concerned! the
contract! agreement or arrangement is /oidP but /is,a,/is persons other than the
3ommissioner! the contract! agreement or arrangement remains /alid.
Similar pro/isions apply under the 'uties Act !!4 #*(.%
Well! no" "e ha/e finished co/ering the 9 maEor categories of illegality.
#emember they "ere,
contracts illegal by statute
contracts /oid by statute
contracts illegal by common la"
contracts /oid by common la".
So once a finding has been made by the court that some type of illegality
doctrine affects a particular type of contract or term "ithin the contract! "hat
then results. Se/eral results are a/ailable depending upon "hether the court
decides the illegality is serious and the contract should be /oid in toto or less
serious so only a bit of the contract is /oid or unenforceable only by the party
responsible for the illegality.
Although I ha/e di/ided discussion into ' distinct sections N finding illegality
and then loo>ing at its effects! remember that often the Eudges in fact ;and the
more modern approach suggests this is the "ay to go< loo> at the effect a
finding of illegality "ould ma>e on the li>ely remedy and so then do not find
illegality if it "ould harm a party unfairly or in reality defeat the /ery purpose
of the legislation targeting the prohibited conduct..
0
Jo" "e "ill combine the categories to loo> at general effects of a finding of
illegality either by statute or by the common la"
(,-. /)A*(PA)0*CY
1. E22ECTS O2 A CONTRACT BEING 3ELD TO BE ILLEGAL BY
STATUTE OR BY CO44ON LA*
T!ere are % su"5#ate)ries t #nsider 5 ille)al as &rmed and ille)al as
per&rmed.
A. Ille)al as &rmed
(00 /)A*(PA)0*CY
If contract is illegal as formed ie. "here the ma>ing of the contract is epressly
or impliedly prohibited by statute it is /oid ab initio , )e Mahmoud and
Ispahani $%&'%( ' K) *%+. #emember e turpi causa non oritur actio ;no cause
of action arises from a base cause<
4his means that neither party has any rights under the contract so the courts
"ill not enforce the contract by either party.
So
no damages for breach
no right to reco/er an amount due under the contract! eg! a progress payment
no specific performance granted
no inEunction to enforce a negati/e co/enant! eg! a restraint of trade
no equitable remedies such as rectification
no return of money or property already transferred
(00 /)A*(PA)0*CY
n return & mney r prperty
If property "as transferred under the illegal contract to eg! the purchaser! the
purchaser does not ha/e to return it ;e/en if he has not paid for it< as the /endor
cannot enforce his right to payment under this illegal contract , so the purchaser
6
ma>es a "indfall gain! or the opposite! "here the purchaser has paid o/er the
money in ad/ance but got nothing for it the /endor gets to >eep the money and
ma>es a "indfall gain. 4his follo"s a general rule! "hich is summarised in a
Batin maim , In pari delicto portior est conditio possidentis5
4his means that "here both parties to a transaction are equally at fault! property
should remain "ith the party "ho has possession of it "hen the matter is
disputed. An eample of this result is *e2castle 'istrict Fisherman6s Co7
operative (ociety v *eal ;%&:C< :C S# ;JSW< 'A*.
Well this does not seem to be fair or Eust.
So naturally to get around this percei/ed inEustice! there are certain e7#eptins.
4hese eceptions allo" the plaintiff to reco/er money! chattels or land
transferred to the defendant pursuant to an illegal contract in the follo"ing
circumstances. 4his list comes partly from ?cGugh J in *elson v *elson
;%&&:< %@9 3B# :A@ at +C@. 4he basis of these eceptions is that the 3ourt
thin>s that really the parties are not equally at fault. ?cGugh said ;at +%A<0
64he sanction of refusing those rights ;to sue for damages< is not
disproportionate to the seriousness of the unla"ful conduct7
the eceptions are
(00 /)A*(PA)0*CY
mista>e of fact , 'avid (ecurities Pty Ltd v Common2ealth Bank o8
Australia ;%&&'< %*: 3B# A:A
independent cause of action
False statements
purpose of statute is to protect class of persons
Independent ri)!t
Where the plaintiff as>s for relief by arguing its cause of action based upon an
illegal contract! it cannot epect the court to grant relief. )ut if in a situation
"here possession but not title has been transferred! a party can base its claim on
a legal right completely independent of the illegal contract! then it may obtain
18
relief such as tortuous damages. 4his principle is sometimes referred to as the
6no reliance7 principle.
In Bo2makers Ltd v Barnet Instruments Ltd #!9"% % K) +:! )arnet sued
)o"ma>ers for tortious damages for con/ersion. 4he plaintiff had transferred
machinery tools to the defendant under an illegal hire purchase agreement. 4he
defendant had >ept some and sold some and refused to return the tools. It
argued that the tools did not ha/e to be returned as the contract "as illegal
under statute. 4he court held the plaintiff could sue in tort and not mention the
illegal contract.
4he 3ourt said
6 In our opinion! a man8s right to possess his o"n chattels "ill as a general rule
be enforced against anyone "ho! "ithout any claim of right! is detaining them
or has con/erted them to his o"n use! e/en though it may appear either from
the pleadings! or in the course of the trial! that the chattels in question came
into the defendant8s possession by reason of an illegal contract bet"een himself
and the plaintiff! pro/ided that the plaintiff does not see>! and is not forced!
either to found his claim on the illegal contract or to plead its illegality in order
to support his claim7.
In /insley v Milligan $%&&9( % A3 A9C the Lnglish court re,emphasized the no
reliance principle from )o"ma>ers "ith Bord )ro"ne N Wil>inson stating ;at
A*C<
6property in chattels and land can pass under a contract "hich is illegal
and therefore "ould ha/e been unenforceable as a contractK a plaintiff
can at la" enforce property rights so acquired pro/ided that he does not
need to rely on the illegal contract for any purpose other than pro/iding
the basis of his claim to a property right7
4his case has been later criticised by tort la"yers as not fulfilling the
con/ersion or detinue criteria of satisfactorily pro/ing the right to immediate
possession of the tools. ?ore importantly! in *elson v *elson ;%&&:< %@9 3B#
:A@ ?cGugh remar>ed that )o"ma>ers had relied on a procedural point of
ho" you plead your cause of action rather than merit. Ge said0
6A doctrine of illegality that depends upon the state of the pleadings or the need
to rely on a transaction that has an unla"ful purpose is neither satisfactory nor
11
soundly based in legal policy. 4he results produced by such a doctrine are
essentially random and produce "indfall gains as "ell as losses! e/en "hen the
parties are in pari delictoK the )o"ma>ers 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 rele/ant legislation or the question
"hether the sanctions imposed by the legislation sufficiently protect the
purpose of the legislation. #egard is had only to the procedural issues0 and it is
that issue and not the policy of the legislation or the merits of the parties that
determine the outcome. )asing the grant of legal remedies on an essentially
procedural criterion "hich has nothing to do "ith the equitable positions of the
parties or the policy of the legislation is unsatisfactory! particularly "hen
implementing a doctrine that is founded on public policy7.
4he Gigh 3ourt in criticising )o"ma>ers as too infleible has said that the real
issue should be "hether protection of the public is better ser/ed by allo"ing
reco/ery of property than by disallo"ing it.
2alse Statement
Gere equity "ill help if the plaintiff has been a /ictim of fraud! duress! undue
influence or unconscionability by the defendant in relation to the contract.
4he authority is the Gigh 3ourt decision of :eorge v :reater Adelaide Land
'evelopment Co Ltd $%&'&( 9A 3B# &% ;at %C%<. A person entering into an
illegal contract because of the other8s fraud! "ho rescinds upon hearing of the
unla"fulness! preser/es his or her rights. Gere the parties are not equally
blame"orthy ;ie not in pari delicto< and the party see>ing reco/ery is
considered more innocent. Again the innocent party is not really arguing breach
of contract. It is using another cause of action such as fraud! negligence! breach
of s :' of the 4rade =ractices Act or breach of a promise in a collateral contract.
Class & persns
Where the obEect of the legislation in declaring the contract illegal is to protect
a class of persons and the plaintiff is a member of that class that party can still
reco/er property. In ;iriri Cotton Co5 Ltd v 'e2ani $%&+C( A3 %&' a tenant
paid etra money to secure a flat! but 2gandan rent restriction legislation said
this "as illegal ;it "as a form of queue Eumping for lo" income earners trying
to gain accommodation< .espite the contract being declared illegal! the tenant
could get his money bac> as he "as in the class of persons the legislation "as
1%
trying to protect. 4he legislation aimed at stamping out eploitation of tenants
by landlords "hen there "as a housing shortage.
4he 'nd sub,category is effect on contracts that are held to be illegal as
performed.
B. Cntra#ts ille)al as per&rmed.
(00 /)A*(PA)0*CY
Where a contract is illegal because it is not performed as required by statute!
the rights of the parties depend upon their role! if any! in the mis,performance.
A party responsible for the illegality has no remedy. -n the other hand! an
innocent party has the normal remedies open to it. It can! for eample! sue to
reco/er damages for breach of contract or to reco/er money or other property
that it transferred to the other party pursuant to the contract.
4hus! in Marles v Philip /rant and (ons Ltd v Mackinnon /hird Party $%&:9(
% M) '&! the defendant sold to the plaintiff a quantity of "heat as spring "heat.
It "as! in fact! "inter "heat! and "hen the crop failed! the plaintiff sued for
breach of contract. Gis action "as successful! e/en though the sale "as illegal
as it contra/ened the Seeds Act %&'C ;2K< in that the seller did not pro/ide an
in/oice "ith the "heat "hen deli/ered. 4he 3ourt of Appeal held that the
illegality rendered the contract unenforceable by the defendantP the plaintiff!
being an innocent party! retained the right to sue. In the "ords of .enning BJ
at page A+,A* of the report0
Q4here can be no doubt that the contract bet"een the seed merchants and
the farmer "as not unla"ful "hen it "as made. If the farmer had
repudiated it before the time for deli/ery arri/ed! the seed merchants
could certainly ha/e sued him for damages. Jor "as the contract
rendered unla"ful simply because the seed "as deli/ered "ithout the
prescribed particulars. If it "ere unla"ful! the farmer himself could not
ha/e sued upon it as he has done. 4he truth is that it "as not the contract
itself that "as unla"ful! but only the performance of it. 4he seed
merchants performed it in an illegal "ay in that they omitted to furnish
the prescribed particulars. 4hat renders the contract unenforceable by
them! but it does not render the contract illegal8.
13
So here the court is tal>ing about illegality of performance! but imposing a
result of unenforceability only upon the guilty party. Gence the contract is not
/oid ab initio.
E7#eptins t nn5return & prperty "y )uilty party
T!e e7#eptins re&erred t a"9e in &rmatin ille)ality als apply t
per&rman#e ille)ality. In additin t!ere is ant!er e7#eptin:
repentan#e "e&re e7e#utin & ille)al #ndu#t
If the transferor repents before there has been a substantial degree of
performance of the illegal contract then reco/ery of property is permissible.
What constitutes substantial performance is a question of fact depending upon
the circumstances of the particular case.
In Clegg v .ilson $%&A'( A' S# ;JSW< %C& in the caseboo> at %%:9 , the
plaintiff claimed rescission of a contract in "hich the defendant said he "ould
refrain from gi/ing e/idence in a criminal trial against her son in return for
transfer to him of her house. )efore the trial! she sought reco/ery of the house.
Bong Innes J said ;at %':<
6While the illegal purpose remains "holly eecutory! this court should
grant equitable relief by ordering the repayment of money paid! goods
deli/ered! or property transferred to the defendant pursuant to the
contract! not"ithstanding that there is an element of turpitude in the
contract! and that both parties are in pari delicto7.
What "as interesting in that case "as the fact that the plaintiff only repented
because the contract had been frustrated as the police had abandoned the
prosecution Nso repentance does not ha/e to ha/e a subEecti/e element attached
to it.
4ODERN A,,ROAC3 TO RETURN O2 ,RO,ERTY
4he eceptions referred to are from traditional cases. 4he Gigh 3ourt has
signalled a more liberal approach can no" be considered. In Fitzgerald v F J
Leonhardt Pty Ltd1 Fitzgerald! a contractor! drilled : "ater bores belie/ing that
1'
the o"ner had obtained the necessary licences under the Water Act. 4he Act
said
6a person shall not unless authorized under the Act permit a bore to be
drilled ;fine F:CCC<7
4he o"ner had only obtained ' licences. In an action by the driller to get paid!
the o"ner as defendant argued an illegal contract by legislation. 4raditionally! if
the court found the contract "as illegal at formation due to non, compliance
"ith the legislation ;eg! as in ?ahmoud / Ispahani< the court "ould rule the
contract /oid and neither party! including the innocent driller! could enforce.
Gence the o"ner "ould ma>e a "indfall gain at the epense of the driller. 4he
court found that the contract formed or performed "as not prohibited by the
legislation.
4he second issue before the court "as as a matter of public policy "hether the
court should decline to enforce the contract on the ground that it "as associated
"ith an illegal acti/ity. 4he court held that the driller8s actions "ere
insufficiently associated "ith the o"ner8s breach of the Act. 4he drilling
contractor could reco/er as denying a remedy "ould be disprprtinate t
t!e seriusness & t!e &&en#e. In deciding "hether the contractor could
reco/er his ependiture ?cGugh and Dummo" JJ ad/ocated a more fleible
approach. 4he court adopted the approach suggested by ?cGugh J in *elson v
*elson "ho said that you should en&r#e a #ntra#t ;r at least all< a #laim
&r return & mney r prperty= unless:
statute epressly indicates the intention of parliament is to ma>e the contract
unenforceable in all circumstances
r
non,enforcement is proportionate to the seriousness of the unla"ful conduct
and
non,enforcement is necessary to protect the obEect of the legislation and
statute by implication disclosures an intention that the sanction under the
statute is not to be the sole sanction
4he court found that obEect of the Water Act to control the right to bore for
"ater "as sufficiently protected by the fine.
4o summarise! Kirby! 4oohey! Dummo" and ?cGugh JJ found for the driller
as other"ise the o"ner "ould obtain a "indfall gain of A free "ater bores at the
1(
epense of the driller and such no, enforcement of the contract "ould be
disproportionate to the seriousness of the offence.
%. Cntra#ts 9id "y statute r "y #mmn la<
(00 /)A*(PA)0*CY
#emember a statute might say directly that a contract is /oid eg. 4rade
=ractices Act section 9:. 4he only effect of such a declaration is that the
agreement cannot be enforced. 4he parties may perform it if they "ish but
enforcement is left to their sense of honour. ?oney or property transferred
under it is normally reco/erable by the transferor. )ut you must loo> to the
particular statute to see if the statute limits rights.
#emember sometimes the statute only ma>es a contract /oid eg against the
3ommissioner of 4aation. 4he parties can enforce the contract amongst
themsel/es.
Sometimes a statute only >noc>s out one term but lea/es the rest in tact.
(00 /)A*(PA)0*CY
SE.ERABILITY
4he contract may not be /oid in totoP it is /oid only as far as is necessary to
remo/e the affront to public policy as re/ealed by common la" or statute.
Accordingly! for eample an obEectionable restraint on an employee "ill not
pre/ent the employee or employer eercising the normal contractual rights
a/ailable to them in such contractsP merely remo/e the restraint of trade clause.
4he court may remo/e the obEectionable term. See /homas Bro2n and (ons
Ltd v Fazal 'een ;%&+'< %C@ 3B# A&%. 4here are A broad tests to be satisfied
before a term of a contract can be se/ered.
%st the nature of the illegality must not taint t!e #ntra#t as a <!le , ie. the
illegality must be of a relati/ely minor degree of moral turpitude eg. restraint of
trade clause rather than a clause to commit murder ;remember "e are in the
category of effects of finding a contract is /oid rather than illegal<.
1-
In *orth v Marra 'evelopments Ltd ;%&@%< %9@ 3B# 9' a stoc>bro>er helped
his client inflate the mar>et price of stoc> in/ol/ed in a company the subEect of
a ta>e o/er by buying shares on the stoc> mar>et to inflate the price. When the
stoc>bro>er sued the client company for unpaid fees the court held the
stoc>bro>er8s actions in the mar>et "ere illegal and could not be separated or
se/ered from the remainder of "or> underta>en by the stoc>bro>er under the
contract "ith the client. In Amoco Australia Pty Ltd v )occo Bros Motor
0ngineering Co Pty Ltd ;%&*A< %AA 3B# '@@ the restraint of trade clause "as
also held to be an integral part of the lease so could not be se/ered.
'nd! se/erance cannot occur "here "hat "ould be se/ered is a su"stantial
part of a party8s #nsideratin. If you "ipe out the offending term! then there
"ill be no consideration for the opposite promises. In Brooks v Burn Philp
/rustee Co ;%&+&< %'% 3B# 9A'! the "ife8s promise not to sue for maintenance
"as lin>ed to the reciprocal promise of the husband to pay /oluntary
maintenance. Since the "ife8s promise "as held to be /oid as it attempted to
oust the Eurisdiction of the court! it could not be se/ered from the contract as it
"as the consideration for the reciprocal promise from the husband.
Ard! the term must be se9era"le in t!e te#!ni#al sense. 4he term "ill only be
se/erable if its elimination does not change the nature of the contract but only
its etent. If the elimination of the offending term "ould lea/e the contract
meaningless! se/erablity is not technically possible. 4o restate! the court "ill
not re"rite the contract. 4his is sometimes referred to as the blue pencil test.
As an adEunct to this test! it may be that only part of a term offends so may be
se/ered. In that case the term must consist of 6di/isible7 parts so that the
offending part can be se/ered lea/ing the balance of the term still meaningful.
eg! 6any other business7 in the Jordenfelt case. 4hat part "as held to be
unreasonable but the rest of the clause "as o>.
In /homas Bro2n and (ons Ltd v Fazal 'een $%&+'( %C@ 3B# A&%,caseboo>
p%%9A the contract "as of bailment "here the plaintiff deposited "ith the
defendant gems and gold bars. At the time a statute prohibited pri/ate citizens
from >eeping gold. 4he defendant refused to return the property alleging
illegal contract. G3 held it "as illegal and unenforceable in respect of the gold
but not the gems so that part of the contract of bailment relating to gems could
be se/ered and enforced.
1/
So to summarize! se/erance can only be used if a/ailable to delete a term! that
is! cross it out "ith a blue pencil! not re"rite it.
In Je" South Wales! the common la" rules in regard to se/ering the
obEectionable portion of an other"ise /alid restraint of trade stipulation are
subEect to the )estraints o8 /rade Act %&*+. It "as found that the common la"
rules abo/e often led to proliity ie. the clauses "ere drafted broadly "ith
riders , if the court finds this restraint of trade unenforceable then the follo"ing
clause "ill apply. So the parties ne/er >ne" unless they "ent to court "hich
/ariation of the restraint of trade clause "as the correct one. So legislation
stepped in. 4his Act pro/ides that a restraint of trade is /alid to the etent to
"hich it is not against public policy "hether or not it is in se/erable terms0 s
9;%<.
4herefore! if a restraint of trade term is unreasonable it "ill be enforceable up
to the point at "hich it "ould become unreasonable eg. if restriction for %:
years but : is reasonable! court "ill enforce the pro/ision for up to : years.
4he courts can also recast the restraint to ma>e it reasonable! ie. It is not merely
confined to stri>ing out "ords. )ut the ability to re"rite under section 9 is
limited by subsection A of that section "hich says that the court cannot re"rite
if the party had made no attempt to ma>e the term reasonable in the first place
, -rton v Melman $%&@%( % JSWB# :@A.
SU44ARY RE ,OLICY O2 ILLEGALITY
Illegality la" is messyR In Lngland the Eudges tried to clean it up by instituting
a broad test called the 6public conscience7 test. 4he test "as "hether it "ould
is an affront to public conscience to grant the relief sought. So it "ould be a
balancing test of the consequences of granting relief "eighed against the
consequences of refusing relief. )ut in /insley v Milligan $%&&9( %A3 A9C the
Gouse of Bords thought this discretionary test created too much uncertainty so
reEected it. 4he Lnglish position therefore remains "ith the non,reco/ery
principle unless )o"ma>ers can be used.
Is our Gigh 3ourt heading for more fleibility after Jelson / Jelson and
Fitzgerald? Will the court increasing lean to"ards using the la" of restitution
and unEust enrichment to ha/e discretion to craft the appropriate balance
bet"een enforcing public policy and allo"ing freedom of contract?
10
16