Void and Illegal Contracts

Void Contracts
Void contracts are basically those which contravene a provision in a statute or are contrary to public policy at
common law but to which the ex turpi causa principle does not apply.

Void by Statute
A statute may declare expressly that a particular contract is void, eg s 45 of the Trade Practices Act 1974 which
provides that clauses purporting to exclude, restrict, or modify the liability of a corporation imposed by Division 2
Part V of the Act (that is the implication of terms such as an implied condition of merchantability and of fitness for
purpose) are void. The effect is a question of statutory interpretation.

Void at Common Law on the Grounds of Public Policy

Restraint on Trade
A restraint on trade is a promise by one party, the covenantor, to give up a freedom that he would otherwise enjoy in
relation to his or her trade, for the benefit of another party, the covenantee: Amoco Aust v Rocca Bros Motor
Engineering Co.

Trading activities will include employment, operating a business and restrictive practices such as agreeing to obtain
supplies exclusively from one supplier for a lengthy period of time.

While prima facie all restraints of trade are void, a restraint is valid if it can be shown to be reasonable in the
interests of (Nordenfelt v Maxim Nordenfelt Guns and Ammunition):
1. the parties; and
2. the public.

The onus is on the covenantee to show the restraint is reasonable in the interests of the parties. If successful, it will
shift to the covenantor to show that it is unreasonable in the interest of the public: Amoco Aust v Rocca Bros Motor
Engineering Co.

The validity of a restraint must be decided as at the date of the agreement: Lindner v Murdock's Garage.

Interests of the Parties

If a restraint is to be reasonable between the parties the covenantee must have a legitimate interest which the
restraint goes no further than is necessary to protect: Amoco Aust v Rocca Bros Motor Engineering Co.

Whether an interest is legitimate will depend on the nature of the contract eg the covenantee’s interest to protect the
goodwill of a business from competition by the seller (Butt v Long) cf the prevention of a competitor from the
purchase of similar equipment form the same supplier (ICT v Sea Containers).

Whether the restraint does no more than provide adequate protection of the covenantee’s legitimate interest depends
upon the balancing of a number of relevant factors:
• The scope of the restraint, in terms of both area and duration. The wider and longer the restraint, the more
likely it will be unreasonable: Butt v Long.
• The activities covered by the restraint. If the restraint purports to restrict activities that are unrelated to the
covenantee’s legitimate interest, the more likely it will be unreasonable: Nordenfelt v Maxim Nordenfelt
Guns and Ammunition.
• The relative bargaining power of the parties. Relevant, not conclusive, if the covenantee is in a stronger
position than the covenantor: A Schroeder Music Publishing Co v Macauley. The court may be willing to
show more latitude if the parties are on equal footing: Amoco Aust v Rocca Bros Motor Engineering Co.
• The consideration paid in exchange for the restraint. The restraint allowed may be greater where the
covenantor has received large consideration: Nordenfelt v Maxim Nordenfelt Guns and Ammunition.
• The context of the contract. Setting may be relevant eg restraint upheld where inserted into a partnership
agreement between two solicitors: Bridge v Deacons.
Master and Servant
Interests which the master is entitled to protect are his/her trade secrets, including secret manufacturing processes
(Foster Ltd v Suggett) and his/her business connections, if any, of which the servant has knowledge: Herbert Morris
Ltd v Saxelby.

General skill and knowledge that an employee obtains in the course of employment does not qualify as ‘trade
secrets: Drake Personnel v Beddison.

Contracts of Exclusive Service

A contract of exclusive service is valid as it is required to enable the covenantee to obtain full benefit of the
covenantor’s services: Esso Petroleum v Harpers’s Garage. Contracts will be judged strictly in relation to duration.

An agreement between employers restricting the employment of each other's former employees may be void: Kores
Co. Ltd v Kolok Co Ltd.

Sale of Business
Restraints are more readily upheld as ti allows the vendor to obtain full value for the business bing purchased and
enables the purchaser to obtain exactly what he or she is bargaining for: Esso Petroleum v Harpers Garage. will be
judged strictly in relation to duration.

The purchaser is only entitled to protect the business bought: Nordenfelt v Maxim Nordenfelt Guns Ltd

“Solus” (Exclusive dealing) agreements

Courts tend to uphold the restraint where the parties have bargained at arms length.

Factors such as length and an obligation to purchase minimum quantities regardless of market condition may render
an exclusive dealing arrangement unreasonable: Qld Cooperative Milling Association v Pamag.

Interests of the Public

Public interest often follows private interest, but may have independent significance: Amoco Australia v Rocca Bros
Motor Engineering.

Statute
Section 45 of the TPA prohibits corporations from entering into or giving effect to any contract arrangement or
understanding which is an exclusionary provision or which has the purpose or would likely to have the effect of
substantially lessening competition. Section 51(2) contains exception to s 45 providing that a restraint of trade
provision will not breach s 45 unless it is an unreasonable restraint of trade at law. Specifically:
• A provision in a contract of service or for services restricting the work in which a person may engage during
or after termination
• A provision in a contract of partnership relating to competition between the partnership and a partner before
or after cessation of the partnership; and
• A provision in a contract for thee sale of a business that is solely for the protection of the purchaser in
respect of the goodwill of a business.

Attempts to Oust Jurisdiction of the Court

Contracts which purport to destroy the right to submit questions of law to the courts are void at common law on the
ground of public policy: Baker v Jones.

However, parties are entitled to agree that any dispute arising between them may be settled by a particular person or
body, provided that recourse to the courts remains open for determination of questions of law eg third party
arbitration: Scott v Avery; s10(1) Arbitration Act 1973.

Contract Prejudicial to the Status of Marriage

Contractual provision that are prejudicial to the status of marriage are void eg contracts which impose a restraint on
marriage (Lowe v Peers), contract providing for future separation of married couples (Money v Money), and
marriage brokerage contracts pursuant to which money is paid in return for the organization of marriage (Herman v
Charlesworth).

This is a policy head of diminishing significance due to changes in society’s attitude to marriage. Pursuant to the
 Family Law Act 1975 prenuptial agreements can be binding.

Illegal Contracts
Illegal contracts are those to which the ex turpi causa principle applies. This may occur where the contract is
expressly or impliedly prohibited by statute, or where there is a contravention of public policy at common law
where the contract is for an illegal or immoral purpose.

Formed vs Performed
If there was a way in which the contract could have been performed without infringing the prohibition the contract
will be illegal as performed. If not, it will be illegal as formed.

Illegal by Statute
Express Prohibition
A contract may be expressly prohibited by statute as formed or performed eg. “contracts entered into for the capture
of stray dogs are prohibited in the absence of the catcher possessing a current licence”: Re Mahmoud and Ispahani.

Implied Prohibition
In some cases, although the statute does not expressly prohibit a contract, a court may be prepared to hold that by its
terms the statute impliedly prohibits the contract, as formed or performed.

Relevant factors in construing a statute include:

• where a penalty for contravention of a statute is imposed, whether the object of the penalty was to increase
the revenue (contract probably legal): Cope v Rowlands ;
• or whether the object was to protect the public (contract probably illegal): Pretorius Pty Ltd v Muir & Neil
Pty Ltd [1976] 1 NSWLR 213;
• whether the scope and purpose of the statute will be sufficiently served by the penalties imposed and the
inconvenience to the public or to commercial life, if the contract is held to be void: First Chicago Australia Ltd v
Yango Pastoral Co. Pty Ltd (1978) 139 CLR 410;
• any inconvenience to the public or to commercial life (as opposed to the parties to the contract), if the
contract is held to be void: First Chicago Australia Ltd v Yango Pastoral Co. Pty Ltd

Illegal at Common Law on the Grounds of Public Policy

At common law contracts may be illegal on the grounds of being contrary to public policy. A number of head of
policy have been recognized and, although the list is regarded as finite, Australian courts have adopted a flexible
approach to the heads: Fitzgerald v FJ Leonhardt Pty Ltd.

The old fixed list of “heads” may now serve as useful examples of cases held to be immoral or illegal and therefore
contravene public policy.

Contracts to commit a crime or tort

A contract to commit a crime or tort is illegal eg an arrangement to pay money in exchange for the murder of a
person (Cowan v Milbourn) or to defraud a third party (North v Marra Developments Ltd). Knowledge of the
particular law contravened is not necessary: Waugh v Morris. The commission of the offence must be more than
incidental or subsidiary to the main purpose of the contract: Neal v Ayers.

Contract to defraud revenue

A contract designed to defraud revenue will be illegal eg a lease drafted in two separate documents to defraud
authorities: Miller v Karlinski.

Contract prejudicial to the administration of justice

A contract prejudicial to the administration of justice is illegal eg a contract which has the effect of concealing a
crime or withholding evidence (A v Hayden); a contract to stifle a prosecution for a public offence (Clegg v Wilson).

Where the offence is of a public nature, the public has an interest in seeing it prosecuted eg a contract to provide
compensation for any harm done to a victim by the accused will be regarded as contrary to public policy. Where the
offence is of a private nature a valid contract may be made for compensation in return for the victim not to purse any
prosecution of the offence: Kerridge v Simmonds.

Contracts tending to corrupt public officials

A contract which interferes with the impartial judgment of a public official, including members of parliament, will
be illegal: Wilkinson v Osborne. It is sufficient if there is merely a potential for a conflict of interests, actual
corruption need not be shown: Horne v Barber.

Contracts prejudicial to national security or foreign relations

Contracts prejudicial to national security will be illegal eg a contract entered into with a national of a country at war
with Australia: Ertel Bieber & Co v Rio Tinto Co Ltd. Contracts contrary to foreign relations will be illegal eg a
contract that if performed would involve doing in a friendly foreign country an act which violates the law of the
country: Foster v Driscoll.

Contracts promoting sexual immorality

This head requires the court to apply the moral standards of the day, therefore, is of diminishing significance.
Contracts that have the purpose of the continuation of unmarried cohabitation are lawful: Andrews v Parker. A
more relaxed attitude has been shown towards prostitution and contracts that facilitate it: Barac v Farnell.

Effect of Illegality
Ex turpi causa principle
Where a contract is illegal by statute or at common law the ex turpi causa rule applies. The contract is wholly void
and neither party can enforce it. Therefore, neither party can claim, eg damages, amounts due under the contract,
specific performance, injunction.

Title of goods delivered or money paid may pass under a contract notwithstanding any illegality: Taylor v Chester.
Where a transaction is illegal, the rights of a person who is not a party to the illegal contract is not effected by the
illegality unless they are a knowing participant in it: Cannon b Bryce. However, a person who has rendered services
under an illegal contract, may be able to recover a quantum meruit for those services: Clay v Yats.

Exceptions
In Nelson v Nelson per McHugh J; Fitzgerald v F J Leonhardt Pty Ltd per McHugh, Gummow J and Kirby J four
exceptions to the general rule were approved where the parties were not equally at fault (in pari delicto).

1. Claimant Ignorant or Mistaken

Ignorance
A contract can be ex facie lawful but nevertheless illegal eg parties enter a lease with the ulterior motive of
defrauding revenue. If a contract is ex facie lawful an additional question is asked whether the intention to break the
law is shared, in which case the contract is illegal as formed, or only held by one party in which case the contract is
regarded as illegal as performed. A contract which is ex facie will be illegal unlawful as formed eg murder contract.

If the contract is ex facie unlawful it will be illegal as formed and both parties will be seen to have shared the
intention to break the law. If the contract is ex facie lawful and legal as performed and one party is ignorant of the
illegality (did not know and should not have known of illegality), that party will be able to claim a remedy as usual.
Mistake
A similar position applies as to that of ignorance.

2. Statutory Protected Classes

A party will have contractual relief where the statutory scheme which rendered the contract illegal was enacted for
the benefit of a class of which the claimant is a member: Kiriri Cotton Co v Dewani.

3. Fraud, Oppression or Undue Influence

A party will have contractual relief where the contract was induced by the defendants fraudulent misrepresenation,
both common law and statute, oppression or undue influence. A broad approach as to what constitutes oppression
has been taken: Andrews v Parkinson.

4. Illegal Purpose not carried into effect

Where the contract has been fully performed in a way that involved no illegality a party will have contractual relief
the mere existence of an unlawful intent is in the transactions irrelevant where no part of the intent is manifested:
Payne v McDonald.

Where the party repents before performance has taken place (Payne v McDonald) or where partial performance has
taken place but he illegal purpose is still wholly executory (Clegg v Wilson) the party will have contractual relief.

More Flexible Approach

Regards should be had to a more flexible approach, especially in relation to restitution of money or property
transferred, outlined by McHugh J in Nelson v Nelson. A court should not refuse to enforce legal or equitable rights
simply because they arose out of or were associated with an unlawful purpose unless one of two situations exists:
either the statute disclose an intention that those rights should be unenforceable in all circumstances, or:
• The sanction of refusing to enforce those rights is not disproportionate to the seriousness of the unlawful
conduct;
• The imposition of the sanctuary is necessary, having regard to the terms of the statute, to protect is objectsor
policies; and
• The statute does not disclose an intention that the sanction and remedies contained in the statute are to be the
only legal consequences of a breach of the statute or the frustration of its policies.

More Flexible Approach – Bowmakers Principle

If a party is precluded by illegality from relying on a contract, this does not necessarily mean that all is lost. A party
can still upon some other cause of action (eg conversion) if that cause of action does not rely upon having to prove
the existence of the contract: Bowmakers Ltd v Barnet Instruments.

Severance
In appropriate circumstances, an illegal or void part of a contract may be severed by taking out the objectionable
part enabling that which remains to be enforced. There are three main forms of severance:

Severance of associated dealing

Where tow or more contracts are so closely connected that the court regards them as being in effect a single
transaction, severance will not be possible and the entire transaction will fail: Amoco Australia v Rocca Bros Motor
Engineering Co. Conversely, where the associated contracts are able to stand alone, the illegality of one will not
affect he enforceability of another: Dalgety and NZ Loan v C Imeson.

Severance of an objectionable promise

An offending term may be severed where it does not form the whole or a substantial part of the consideration
promised by one of the parties (O’Loughlin v O’Loughlin) and will only be permitted where it was the intention of
the parties that the contract could take effect notwithstanding the excision of the term: Brooks v Burns Phi8lp
Trustee.

Severance of an objectionable part of a term

An illegal or void part of a term may be severed if the term is divisible. Severance will be permitted where the
covenant can be divided into distinct promises: Bacchus Marsh Concentrated Milk Co v Joseph Nathan & Co.
Severance does not permit the court to selectively enforce an other objectionable covenant - the court will not
rewrite the promise or destroy the substance what was agreed: Attwood v Lamont.