Although a contract may be complete in all respects, it may be held to be unenforceable if its purpose or objects is illegal or contrary to the policy of the law. The concept of illegality seems to be derived from two sources. First of all, a contract may be illegal because it involves the doing of something which is unlawful because it is prohibited by statute. Secondly, a contract may be unenforceable, not because it is prohibited by statute, but because it involves the doing of something which is considered to be against the public good or public interest. Such contracts are said to be contrary to public policy.
Contracts which are illegal on grounds of public policy
The concept of public policy is applied by the courts to emphasize he fact that no court would assist a plaintiff to enforce a contract, which in its view, is injurious to society. Injury to society is not easy to define. It is clear, however that the courts in applying the concept of public policy have been of the view that any contract which tends to prejudice the social and economic interest of the community must be forbidden.
Public policy is a variable or changing notion depending on changing matters, morals and social and economic conditions of a particular society. It changes with time and place since social and economic conditions are invariable reflected in the ideas of public policy.
The following are the categories of cases which are deemed at common law to be illegal and unenforceable on grounds of public policy
1. Contracts to commit a crime, tort or fraud on another party
It is clear that a contract which has as its objects the deliberate commission of a criminal offence or a tort is illegal and unenforceable as being contrary to public policy. This rule has been applied to contracts designed to obtain goods by false pretences contracts to defraud shareholders, contracts to assault a third party, contracts to publish libel…BERG & SADLER V MOORE
On the bass of this principle an agreement to deceive even it is shown to be a common practice in a particular trade will still be illegal and unenforceable as being contrary to public policy.
BROWN JENKINS & CO V PERCY DALTON
Contract for shipment of orange juice contained in barrels. Barrels was leaking. Plaintiff (ship owners) advice defendant (shippers) that clause bill of lading be issued. Defendant wanted clean bill of laden and promised that is if ship owners signs bill of laden stating that goods were shipped in “good” condition” they would give an indemnity against all losses ship owners might incur. Ship owner gave clean bill of laden. Compensated owners of bill because barrels were leaking when they arrived. Ship owners sought to recover under indemnity. Held- Agreement was to deceive third party when it stated that barrels were shipped in god condition when in fact they were not ….even though it was shown that this was a common practice and quite harmless , such an agreement was not enforceable.
2. Contracts which promote sexual immorality
Generally, any contract which directly or indirectly promotes sexual immorality or which is contra bonos mores is treated by the law as illegal on grounds of public policy. Such contracts are contrary to good morals. PEARCE V BROOKS
3. Contracts which interfere with the regulations of foreign countries
Contracts which contemplate the performance of acts in a foreign and friendly country which are illegal in or inimical to that country are unenforceable as being contrary to public policy. For example, an agreement to raise money for subversion in another country would be unenforceable in Ghana. FOSTER V DRISCOLL, REGAZZONIA V SETHIA
4. Contracts prejudicial to the administration of justice
Contracts which tend to stifle or compromise a public prosecution or which interfere with or pervert the course of justice are unenforceable as being contrary to public policy. A good example or agreement to stifle as criminal prosecution by paying a bribe to a policeman to drop charges against a person. KEIR V LEEMAN
5. Contracts leading to inefficiency and corruption in public life
The common law takes the view that the public has an interest in the proper performance of the duties of public servants, and is entitled to be served by the fittest persons available. Thus contracts which have as their object, the sale of a public officer or honor are unenforceable as being contrary to public policy. So is the procuration of a public officer for another for monetary consideration. PARKINSON V COLLEGE OF AMBULANCE,
OKANTEY V KWADDEY
The Shippi of Anahor conveyed to Alfred Okantey a piece of land of Anahor quarter land. The Osu Mantse approved the conveyance to Okantey who erected boundary pillars. Subsequently, the Shippi granted the dame land to Obodai Annan conveyed it to one Torto, and he in turn conveyed it in 1954 to Kwaddey. She commenced to build on it. Okantey commenced an action against her. In 1966 O. applied for a writ of possession to execute his judgment. Execution was stayed at the instance of K. who promptly issued a writ of summons against 0. to restrain O. from interfering with her possession of the land. In her statement of claim K. averred that in furtherance of his wish to be appointed a lay magistrate O. had made certain promises, in a letter addressed to the then Minister of Justice and copied to K., to the effect that in consideration of such appointment O. would not pursue his rights under the judgment. O. admitted writing the letter. K. further averred that even though O. failed to procure the appointment, he had, however, by a separate and subsequent agreement accepted monetary consideration from K. in order not to execute the judgment. The learned High Court judge Coussey J. found as a fact that O. had waived his rights under the judgment by accepting monetary consideration and gave judgment for K. On appeal to the Court of Appeal, counsel for O. contended that the only agreement between the parties was that by which O. agreed not to execute the judgment in consideration for appointment as a magistrate and submitted that such an agreement was unenforceable being contrary to public policy. Held- even if the contract was not void by statute, it would be void at common law as contrary to public policy. The agreement was therefore illegal and unenforceable.
6. Contract to deceive public authorities
An agreement on terms which are directly or indirectly intended to deceive the authorities is against public policy and therefore unenforceable. ALEXANDER V RAYSON
7. Contracts to oust the jurisdiction of the courts
It is a long established principle that any contract which seeks to destroy the right of one or both parties to submit questions of law to the courts is contrary to public policy and therefore unenforceable.
LEE V THE SHOWMEN’S GUILD OF GREAT BRITAIN
A trade union committee sat on dispute between two members. After imposing penalty on one and dismissing him from the union, rules of union provided that such disputes could not be submitted to a court of law. Held- Plaintiff conduct did not amount to unfair competition as alleged, hence fine and expulsion were ultra vires. Lord Denning: parties by contract cannot oust the ordinary courts their jurisdiction…they can, indeed make the tribunal the final arbiter on questions of fact, but they cannot make it the final arbiter on questions of law.
Arbitration clauses which simply provide that the parties must resort to arbitration before submitting any disputes to court have always been recognized as valid. IN RE GHANA PRIVATE ROAD TRANSPORT UNION (GPRTU); TETTEH V ESSILFIE
8. Contracts to use official positions or public office to secure private reward
Contracts involving the use of one’s position or public office to secure a private reward are unenforceable on grounds of public policy.
AMPOFO V FIORINI
Plaintiff an employee of forestry department entered into agreement with defendant to form timber business with the help of plaintiff. Defendant agreed to pay to plaintiff 35% net profit annually. Defendant refused to pay. Held- Action was dismissed because the consideration for which defendant might have entered the agreement was in contravention of the Civil Service Act, 1960(C.A.5) and illegal. It was a misconduct for civil servant to take improper advantage of the position in the civil service for private financial gain.
9. Contracts in restraint of trade
A contract in restraint of trade is one which a party restricts his freedom to carry on his trade, business or profession in the future. Agreements which have been generally held to raise the issue of restraint in trade can be divided into two main groups: agreements between a vendor and purchaser of a business and agreements between an employer and an employee.
The issue rises in the case of the sale of business where a vendor of the goodwill in business agrees not to carry on a similar business in competition with the purchaser. In the case of agreements between an employer and an employee, the issue arises where an employer agrees, upon leaving an employment that he will not compete against his former employer by setting up a business on his own or entering the service of a rival trade.
Since it in public interest that people should be free to practice their professions and pursue their trades, all such contracts are prima facie contrary to public policy. However, such contracts will be upheld if it is shown to be reasonable as between the parties and it is shown that it is not unreasonable in the public interest.
The principles stated by Lord MacNaughten in the case of MAXIN NORDENFELT GUNS & AMMUNITION COMPANY LIMITED are used to govern contracts in restraint of trade.
–Restraint clauses in contracts for the sale of a business
If the seller of a business he has just sold immediately sets up competition next door, the purchaser would not get the full value of what he has paid for. This is because he purchased the proprietary interest as well as the goodwill in the business. Therefore an agreement which stipulates that the vendor will not set up business in competition with the purchaser would not generally be enforceable as long as it is reasonable in the circumstances. NORDENFELT V MAXIM GUNS AND AMMUNITION COMPANY LTD.
It has to be reasonable in terms of the area covered, the duration of the restraint and the activities covered. The terms should not be wider or longer in duration than what is reasonably needed to protect the proprietary interest of the seller. The restraint must also generally limited to the business activity in respect of which the goodwill has been built. VANCOUVER MALT CO V SAXELBY
–Restraint clauses in employment contracts
Such a contract would be enforceable only if it is reasonably necessary to protect a proprietary right of the employer in the nature of trade connections or trade secrets. The employer is not entitled to protect himself against mere competition.
HERBERT MORRIS V SAXELBY
The plf company was a manufacturer of hoisting machinery in the UK and the def had been in their employment as draughtsman from the time he left school after several years’ service, the def was engaged by the company as engineer for two years and thereafter left the company under the agreement which contained a covenant by the def that he would not, during a period of seven years from his ceasing to be employed by the company, either in the UK or in Ireland, carry on business In the sale or manufacture of hoisting machinery. Held- the covenant or restraint in this case was wider than was required for the protection of the proprietary interests of the plf company and therefore unenforceable.
In has also been held that for the restraint to be reasonable, it must afford no more than adequate protection for the party in whose favor it is imposed.
KORES MANUFACTURING LTD V KOLOK MANUFACTURING LTD
An agreement was made between two companies that neither would, without the consent of the other, employ any person who had been employed by the other company within the past five years. The agreement was intended to protect trade secrets, since they were both working on similar products involving chemical processes. In addition, at the time it was thought that their factories would be adjacent, though this turned out not to be the case. One of the companies brought an action to restrain the other from employing a particular former employee. It seems clear that there was in this case a legitimate interest to protect, but the Court of Appeal held that the restraint was too wide. It had the potential to cover an unskilled labourer as much as the chief chemist. On that basis, it was unreasonable.
The invalidity of a particular provision or the part of the contract does not nullify the whole contract. If the valid parts of the contract or the valid terms are severable, the court will proceed to enforce the valid part of the contract.
GODSOLL V GOLDMAN
In the sale of a business specialising in the sale of imitation jewellery in the UK the buyer sought to include a clause restraining the seller from engaging in real or imitation jewellery across the UK, EU, and the USA. Held the scope was to wide i.e. the business only concerned imitation jewellery and was limited to the UK. The court decided to narrow the scope of the restriction by simply the deleting the words ‘real or’ and the reference to Europe and the USA
What are the Effects and consequences of illegality on Contracts?
The consequences if illegality may vary depending on whether the contract is illegal at its inception or illegal in its performance. A contract illegal at its inception is unenforceable of the courts. No person can claim any right or remedy whatsoever under an illegal contract in which he has participated. The principle same whether the contract is prohibited at common law on grounds of public policy or where its very formation is prohibited. IN RE MAHMOUD & ISAAHANI, OLATIBOYE V CAPTAN
Illegality in performance
In some cases the contract itself may be lawful at its inception, but one of the parties, with or without the knowledge of the other exploits it or performs it in an illegal manner. Example a contract for the carriage of goods being performed illegally because the carrier’s driver in driving the vehicle exceeds the speed limit or does not have a valid license.
Where a perfectly legal and valid contract is performed in an illegal way, the party responsible for the illegal performance may not be allowed to enforce the contract or rely on any contractual rights or remedies under the contract. This is generally so where the illegal act is central to the performance of the contract and not merely incidental to it. ANDERSON V DANIEL
Where a legal contract is performed in an illegal manner, the innocent party will be entitled to enforce the contract and rely on the available remedies if it is shown that he did not condone or participate in the illegal performance in any way. ARCHIBOLD V SPANGLETT,
SCHANDORF V ZEINI
The appellants held a lease of a plot of land which contained a covenant against underletting without the lessors’ consent. The appellants constructed a house on the plot. In 1969 the appellants entered into an oral agreement to sell the unexpired term of the leasehold property, furniture and a cooker to the respondent for ¢19,290.00. The respondent commenced payment by instalments and by January 1970 he had paid ¢11,000.00 to the appellants. The second appellant left the country for good some time thereafter, having given the keys to the house to the respondent and appointed the first appellant his agent to take all legal steps to assign the house to the respondent. The respondent moved into the house on 11 February 1970 and continued with payment of the amount outstanding on the house, furniture and cooker. By 7 March 1972 the respondent had overpaid the appellants by ¢661.00. The first appellant however refused to convey the house to him. The respondent therefore brought an action for specific performance of the oral agreement and for the recovery of the ¢661.00 overpayment. The appellants denied that there had been an agreement for the purchase of the house. They contended, inter alia, that the agreement had been for a tenancy of the house completely furnished for six years at an annual rental of ¢2,500.00. The appellants therefore counterclaimed for a declaration that the transaction entered into with the respondent had been a tenancy for six years certain.
On appeal to the Court of Appeal the appellants contended that: (a) the trial judge misdirected himself in decreeing specific performance because the appellants could not make title by reason of the absence of the prior consent of the lessors and (b) since part of the payment was made in foreign exchange the transaction offended the Exchange Control Act, 1961 (Act 71), and the regulations made thereunder and was otherwise contrary to public policy and therefore void and unenforceable. Held- The respondent was not obliged to disclose that he had paid the whole purchase price of the alleged sale before he could succeed on his claim. Consequently the respondent was not obliged to disclose or to rely upon the illegal payment in order to obtain the relief he sought. The court should therefore not deny him assistance merely because some illegality in his performance of the contract came to their notice. Since possession in the property had by agreement fallen to the respondent, who had discharged the obligations of owner and made improvements, the court would let the property lie where it fell. The court noted that a sub-lease in contravention of the covenant always gave the head-lessor a right to damages and he might determine the lease but the sublease was not void ab initio. Section 8(1) of act 123 did not require the concurrence of the minister to precede disposition. The minister’s concurrence could be sought after all arrangement for the disposition.
If however, it is established that the other party was privy to or condoned he illegal performance, neither party will be allowed to enforce any rights under the contract. Here the contract is treated as if it was illegal at its inception. ASHMORE V DAWSON
Recovery of money or property transferred under an illegal contract
One important consequence if illegality is that where a contract if found to be illegal, monies paid or property transferred under such a contract is found to be illegal, monies paid or property transferred under such a contract are generally not recoverable, especially if the plaintiff has to rely on or disclose the illegality in order to establish his claim. The court will not lend its aid to a party who has paid money or transferred property under an illegal contract in his attempt to recover it. This is expressed in the maxim ‘in pari delicto potior est condition defendentis’ (in equal fault, the stronger is the situation of the defendant) PARKINSON V COLLEGE OF AMBULANCE LTD,
TAYLOR V CHESTER
The plaintiff sued for the return of half a £50 note which he had delivered to the def. the def pleaded that the half note had been deposited with her by way of a pledge to secure a debt owed to her by the plf. The plf’s reply was that the debt owed to the def was in respect of the provision of wine and suppers supplied by the def for the purpose of being consumes by the plf and several prostitutes in a debauch that was meant to incite prostitutes to disorderly conduct. Held- the plf could not recover the half note because in order to get rid of the def’s defence, the plf had to set up this immoral and illegal contract in which he had participated.
Exceptions to general rule that moneys paid and property transferred under an illegal contract are irrecoverable
Claim and founded on illegal act
-A party can recover money or property transferred to the other party if he can establish his claim without reliance on the illegal contract.
AMAR SINGH V KULUBYA
A statutory ordinance in Uganda prohibited the sale or lease of ‘maila’ land by a non-african except with the written consent of the governor, without obtaining the consent, the plf agreed to lease ‘maila’ land of which he was the registered owner, to the def for one year and thereafter on a yearly basis. The agreement itself was void and no legal interest was vested in the def. after the def had been in possession for several years, the plf gave him seven weeks’ notice to quit and ultimately sued for recovery for the land. Held- the plf could succeed since his claim was based not upon the agreement but was founded on the independent ground of his registered ownership.
Where plaintiff is no in pari delicto with the defendant-where parties are not equally guilty
Where the parties are not in pari delicto (equally guilty) the court in certain circumstances will allow the innocent party to recover any monies or property that he has transferred to the other party under the contract. This relief is usually granted to the plaintiff upon proof that he has induced to enter into the contract by fraud or duress or oppression at the hands of the defendant. HUGHES V LIVERPOOL VICTORIA FRIENDLY SOCIETY,
KWARTENG V DONKOR
Agreement between parties to the effect that if certain chief was destooled and defendant sees to it that plaintiff’s nephew was elected chief of town, plaintiff would not recover debt owed by defendant. Defendant framed destoolment charges against chief in question and made plaintiff to be elected but plaintiff’s nephew was never installed chief. Plaintiff brought action to recover debt.
–What are Class protecting statutes?
In some cases the contract formed is illegal because it violates a statutory provision was enacted to protect a certain class of persons from oppression or exploitation by another class of persons b virtue of the latter’s stronger bargaining position. Such statutes are described as class protecting statutes. Examples include conveyancing decree, NRCD 175 and the hire purchase decree.
The law states that where a contract is made in violation of such a provision in a class protecting statute, the party who is a member of the protected class is not considered to be in pari delicto with the other party. Such party can therefore recover monies and property transferred under the contract. KIRIRI COTTON CO LTD V DEWANI,
CITY & COUNTRY WASTE LTD V ACCRA METROPOLITAN ASSEMBLY
The def engaged the plf company to render waste disposal services within the city of Accra in an a agreement with the option that both parties can renew it for a further seven years. The def terminated the agreement. The plf company brought an action to recover damages for breach of contract. He def challenged the enforceability of the contract and claimed that it was executed under duress and in breach of the local government act as well as other regulations of the def. held- the plf was not in pari delicto in a broad sense and so the lf must be paid reasonable compensation for the services rendered to the def.
-Recovery of money or property transferred under a contract is allowed where the plaintiff can show that he was induced to enter the contract b fraud, duress or oppression of the party; it was ignorant of the fact which made the contract illegal or where the plaintiff belonged to a vulnerable class protected by statute. However a strict adherence is bound to unduly penalize the plaintiff as the ban on recovery of property or money on an illegal contract does not take into consideration relevant factors such as where the illegality involved is minor or insignificant, wholly r largely due to the fault of the defendant or merely incidental to the contract in question.
What is Locus poenitentiae?-where one party to an executory contract repents before performance
-This exception applies where money has been paid or property transferred for an illegal purpose which has not yet been performed and the plaintiff changes his mind and withdraws from the contract. A party to a contract despite its illegality is allowed an opportunity to repent or change his mind and may be allowed to recover any money or property transferred under the contract, provided he begins proceedings before the illegal purpose has been performed either in whole or in part. KEARLEY V THOMSON
-It must be shown that the plaintiff repented and not merely that the defendant deliberately failed or was unable to perform his side of the contract. Also, the mere frustration of an illegal contract owing to the circumstances beyond the plaintiff’s control does not entitle the plaintiff to recover his property under this exception. BIGOS V BOUSTEAD