Illegality - Lecture notes 3 PDF

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Illegality Illegality means otherwise valid contracts: • are tainted by illegal purpose or offend public policy • Used to approach it by deciding whether it was void as a result of a statute provision by applying fixed rules by reference to the text and effect of the provison • Illustration was commonly evoiked that if the statutory provision prohibitited entry into or performance of the contract, contract would be regarded as void. • Wetherell v Jones (1832) 110 ER 82 – where a contract that a party seeks to enforceis forbidden by the court then the court will not be able to give that contract affect • Carter: • An act may prohibit the making of contracts of a particular description or agreements, arrangement or understandings. Many acts which while lacking of express prohibition, penalise the making of contracts of a particular description, fall within first class. • Parliament may declared contracts of a particular descript null and void • Parliaments may merely declare a void a particular class of contractual prvision, such as an exclusion clause. • Parliament may render them void In who o in part as againast a third party only, while not ouching the validity of contracts as between the parties. • Statutes or regs may make a contract void with or without prescribing for an offence if such a contract is made or performed. • But it may also create an ofence if the court if made or performed but be silent on its enforceability. – courts will have to determine the real object of any legislation that has a bearing on a particular contract and on any related contract. – explanatory memorandum can be usedIllegality may arise in a express way or implied way Equuscorp Pty Ltd v Haxton (2012) 246 CLR 498 – The loan agreements related to a number of investment schemes in which members of the public were invited to invest in a blueberry farming enterprise. The lure of the schemes was that non-farmers could claim amounts expended on farming enterprises as tax deductions in relation to their non-farming incomes.The investment schemes were run through Cordini Blueberry Growers Pty Ltd (CBG) controlled by Anthony and Francis Johnson (the Johnson Brothers). The investments consisted of a farm agreement between the investor and CBG with management fees payable to Johnson Farm Management Pty Ltd (JFM) (which was also controlled by the Johnson Brothers). The investors were given an option to enter into a loan agreement with Rural Finance where Rural Finance would finance the investors' payment of the management fees. On 7 January 1991 CBG granted a registered mortgage over the farming land to Equuscorp. Three days later Equuscorp registered charges over the assets of CBG, JFM and Rural Finance to secure a grant of loan facilities in the group of companies controlled by the Johnson Brothers. In or around July 1991 the investors stopped receiving proceeds from the sale of fruit and no further repayments were made in reduction of the loans. Following this, Equuscorp appointed receivers and managers to the assets of CBG, JFM and Rural Finance. On 16 May 1997 Rural Finance sold the loan agreements to Equuscorp through an asset sale agreement. Under this agreement Rural Finance assigned its interests and the amount of debt owing under the agreements to Equuscorp for $500,000 (excluding a deduction for previous collections). The face value of the debts under the loan agreements was $52,584,005. Between November 1997 and March 1998 Equuscorp commenced proceedings to enforce the loans against the borrowers. The borrowers pointed out that the schemes had been illegal

because there had not been any prospectuses lodged with respect to them. They argued that the loans had been an integral part of the schemes and that, if the schemes were illegal, it followed that the loans should be unenforceable. Equuscorp did not challenge the finding that the loan agreements were unenforceable. Equuscorp's argument, instead, was that this was a case of unjust enrichment: even if the loans were not enforceable, the investors had no right to hold on to the money. Accordingly, it claimed against them in restitution.Equuscorp was not, of course, the original lender. It had bought the loan book from Rural Finance.The deed of assignment transferred the loans and "all legal and other remedies for these matters". One of the questions for the High Court was whether "all legal and other remedies" included a restitutionary claim for money advanced under the loans. The High Court split 50/50 on this question. Three judges (Chief Justice French and Justices Crennan and Kiefel) said that "legal and other remedies" only referred to legal enforcement of debts. Equuscorp's claim in restitution was not an enforcement of the loans; instead, it was a result of the fact that the loans were unenforceable. Justices Gummow and Bell took a more liberal view: "Any action for money had and received was a remedy "for these matters" in the sense that it arose out of or by reason of the failure of the loan agreements. There would have been little sense for the [vendor] to retain these restitutionary actions and for Equuscorp to pay for some but not all of the rights… against the borrowers." Justice Hayne's reasoning was largely similar to that of Justices Gummow and Bell. The effect It would have been helpful if the High Court bench hearing this case had had seven rather than six Justices! As a result, we are left with no clear guidance and, given that this case took 20 years to reach the High Court, no prospect of a definitive statement in the foreseeable future. The upshot for anyone taking an assignment of similar assets is that the wording used in this case should not be relied upon. As well as all legal and other remedies, the assignment should specifically provide that any restitutionary rights in respect of the assets are also assigned.

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Many kinds that coul affect serious to minor offences A contract maybe legal when formed but not legal after formation eg when govt intervenes, contract becomes illegal when there is a change of law An agreement to terminate an illegal contract is not in itself illegal and can be used for discharge A statue made may prohibit a certain contract, can’t do x if its illegal. May still be enforceable if it promotes illegal policy

• If the scope of the statue can still be fulfilled then the contract is still enforceable Statutory illegality • S 23 of the acl – a term in a standard form contract it maybe void • S 64 – any term in a consumer contract that purports to exclude liability is void • Whether or not a contract will be held void will be up to the • Its been passed by parliament to avoid something or some kind of mischief Express statutory illegality • Re Mahmoud and Ispahani [1921] 2 KB 716 – He sued and declared that the contract is void •

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In Re Mahmoud and Ispahani [1921] 2 KB 716 - here an Order made under the Defence of the Realm Regulations prevented the sale of linseed oil without a licence. Briefly the relevant part of the legislation provided as follows: "Until further notice a person shall not buy or sell or otherwise deal in ... any [linseed oil] except under and in accordance with the terms of a licence issued by or under the authority of the Food Controller. The plaintiff seller sold linseed oil to the defendant who did not have the necessary authority from the Food Controller. The defendant refused to accept the goods and argued that the statute prohibited the contract and that therefore the court could

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not enforce it. The court held that the contract was illegal because the statute expressly prohibited it. You can tell that by the words “shall not sell” shall not buy”. The vendor plaintiff could not enforce the contract even though it was innocent and the defendant was able to rely on its own illegal act to defend the action. But at least the goods had not been delivered .If the purchaser had accepted delivery and then refused to pay the plaintiff vendor could not have recovered the price and the defendant would have been enriched at the plaintiff’s expense.

Implied statutory illegality What was the intention of the legislature? Factors: language of the statute, purpose of the statute and consequences for the parties • It raises the idea , Courts will ask what the parliament’s intention of passing the statute was? Was parliament intending to punish or deprive the contract of its legal effect because of the conduct of others? Court will then decide if both should be deprived of their rights or only one which is the party responsible, Contract possible of being prohibited by implied statute. Even though a statute may prohibit a specific contract it does not mean that it is void, it will depened on the anticipated consequences • A statute does not expressly prohibit a contract. • Where a statute makes it an offence to ake a particular contract or to make it in defined circumstances, it will be construed as an implied prohibition of the making of the contract, unless the statutory provision is mere in aid of the revenue. Smith v Mawhood –

Not necessary t show that a cpntract is illedgal ab (intion in order to avoid it. Enough to show that a party did not perfor it in the only way in which it is allowed to be performed. • What is the purpose of he contract? In effect there is an implied prohibition • The purpose of the statute can be fulfilled in declaring the contract void then the contract will be held enforceable • Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410 – First Chicago lent to Yango the sum of $132, 600 secured by a mortgage and a guarantee. After Yango defaulted on the repayment of the loan, First Chicago sought to recover on the guarantee. In defence, the appellants argued that the mortgage and guarantee were illegal and void because they contravened s 8 of the Banking Act 1959 (C'th). That provision prohibits the carrying on of banking business without being authorised to do so and at the time provided for a penalty of $10,000 for each day during which the contravention continues. As the parties agreed that First Chicago was in breach of s 8, the real question concerned the status of the mortgage and guarantees. A unanimous High Court of Australia found that the contracts were both valid and enforceable. The court held that s 8 did not expressly or impliedly prohibit the loan made by the respondent. The court took into account the fact that a finding that s 8 invalidates a contract made with the unauthorised 'bankers' would mean 'that persons who had deposited money with such a body corporate would be unable to seek the assistance of the courts to recover it. Moreover, if a body corporate were unable to recover money that it had lent, it would be disabled from performing its own obligations, including those owed to its depositors' (at page 3 of the report). The court also noted that the penalty imposed by s 8 was calculated on the number of days the contravention continued, and not on the number of transactions made. In the court's view, this was an indication that the legislature was more concerned with preventing unlicensed trading than with prohibiting each contract which resulted from that trading.“In deciding the question the court will take into account the scope and purpose of the statute and the consequences of the suggested implication with a view to ascertaining whether it would conduce to, or frustrate, the object of the statute” Gnych v Polish Club Ltd (2015) 255 CLR 414 - The Club granted a lease to Mr and Mrs Gnych to run a restaurant. However, the Club failed to obtain approval from the Authority. Section 92 of the Liquor Act provides that the licensee must not lease or sublease any other part of the licensed premises except with the approval of the Authority. A financial penalty applies for any breach of the provision. The Liquor Act also gives the Authority the power to suspend, cancel or impose conditions on the liquor licence. In addition, the Liquor Act gives the Authority the power to “decide not to take any action”. Subsequently, when disputes arose between the parties, the Club claimed that the lease was unenforceable because approval had not been obtained. The Club excluded Mr and Mrs Gnych from the premises. Mr and Mrs Gnych took action. •

On appeal, the High Court’s majority judgment recalled the test that: “an agreement may be unenforceable for statutory illegality in three

categories of case, where: the making of the agreement or the doing of an act essential to the agreement’s formation is expressly prohibited absolutely or conditionally by the statute; the making of the agreement is impliedly prohibited by statute. A particular case of an implied prohibition arises where the agreement is to do an act the doing of which is prohibited by the statute; the agreement is not expressly or impliedly prohibited by a statute but is treated by the courts as unenforceable because it is a 'contract associated with or in the furtherance of illegal purposes’.” However, it can often be difficult to work out whether any of the categories apply. The most obvious case, category 1, is where the legislation expressly states that a contract is unenforceable. An example is section 56 of the Property Law Act 1974 (Qld), which is replicated in other states. That section provides that no action may be brought against a person on a guarantee unless the guarantee is in writing and signed by the person to be charged. In other words, if those conditions are not satisfied, the guarantee cannot be enforced. The position can be more difficult to work out where the legislation, such as section 92 of the Liquor Act, provides that an agreement must not be made unless some condition or requirement is met. The legislation may then provide for a consequence to follow from the contravention, such as a penalty, but it does not state expressly that the agreement is unenforceable. That the granting of the sublease was not contrary to the purposes of the act, as s 92(1) in fact contemplated that subleases could be grants. Therefore their honours pointed to the complainant provision under the act and the servers of authority as further reasons why the sublease was not voi or unenforceable. Anderson Ltd v Daniel [1924] 1 KB 138 – uk statute which said that anyone selling fertiler had to supply info tot he buyer about the chemical makeup of the product, there was one one way to perform the contract and that was to say the info but he didn’t it was illegal. here the English Court of Appeal had to decide the effect of non-compliance with a statute which provided that every sale of artificial fertiliser had to be accompanied by an invoice which stated the percentages of certain chemicals found in the fertiliser. The statute merely provided for a penalty for breach. The court held that, given the nature of the contracts covered by the statute, the legislature intended that the contracts be invalidated for misperformance. So given this fact, the court would not allow the party guilty of contravening the statute the right to enforce the contract. Common Law illegality A contract may be prohibited by a statue or it maybe entered into for some immediate or illegal purpose. Performance may include committing an offence or a group offence The word illegal in the context used by Lord Mansfield refers to conduct that is prhobited by the law A contract that has an illegal purpose is void at common law in ab initio A contract not illegal but is intended to be used illegally is void Money not recovered Contract is illegal

Contracts to commit a crime, tort or fraud Contracts made with the intention of acting unlawfully  Contracts that have the objective of committing an illegal act are contray to policy and void.  Proof of an intention to act unlawfully is crucial – parties must have knowledge that they are acting unlawfully Contracts aimed at defrauding the state of tax revenue  Alexander v Rayson [1936] 1 KB 169 - Owners and properties have to pay council rates so if you get rates from the tenants. He had to pay extra money to the landlord for services rendered, Court held that it was to hide the true rent, the landlord failed to enforce both of them and it was held to be illegal  The plaintiff, Alexander, agreed to rent a flat in Piccadilly to the defendant, Mrs. Rayson, at a rent of £1200 a year. This included the provision of certain services by the plaintiff. However, in order to reduce the rateable value in the eyes of the local council, the agreement was effected by two documents. The first was a lease of the flat for a rent of £450 a year. The second was an agreement to render services which were virtually the same as under the lease for £750 a year. When Rayson refused to pay some of the rent the plaintiff sued her. At first instance, the trial judged held that the contract was lawful and there was no intention to perform it in an unlawful manner. The defendant appealed.  The Court of Appeal allowed the appeal and found for the defendant. It was obvious that the plaintiff intended to commit fraud against the council. The attempt only failed because the defendant disclosed the matter. The court held that where a contract was intended to be used for an unlawful purpose courts will not enforce it. Contracts prejudicial to the administration of justice • Parkingeye LTD v Somerfield SOtes – The object and intent of the parties committing the illegality • The gravity of illegality in the context of the contract • The nature of illegality • Public Service Employees Credit Union Cooperative Ltd v Campion (1984) 75 FLR 131 Contracts to oust the jurisdiction of the courts  Agreement to oust the jurisdiction of the court is void at common law on grounds of public policy  Facts: 

The respondent, Avery, took out a policy of insurance on a ship from the appellant. A clause in the policy stated that in the case of any dispute about an award, the matter should first be referred to arbitration. This was said to be a “condition precedent” to the maintaining of an action. The respondent claimed under the policy for losses, but a dispute arose as to the amount to be awarded. Avery was dissatisfied by the amount offered. He refused to refer

the matter too arbitration and instead took the matter directly to court. 

Issues:

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The respondent argued that the clause requiring the matter be referred to arbitration was illegal. He claimed that by denying the parties the right to sue for any amount except that which the arbitration panel committee awarded him the agreement was ousting the jurisdiction of the court to settle such claims and make such awards as they saw fit.

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Held:

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The House of Lords found for the insurers. Lord Cransworth distinguished between a clause that ousted the jurisdiction of the court where a cause of action had already risen, and the present case. Here, the clause stated that there was no cause of action until an arbitration decision had been made. He stated that the principle against ousting the court’s jurisdiction was one of public policy and said (at 853):

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“I can see not the slightest ill consequences that can flow from such an agreement, and I see great advantage that may arise from it.”

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Therefore, the clause to refer the matter to arbitration did not offend public policy and as enforceable.

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‘Scott v Avery’ clauses – A contract between two parties that they will submit any dispute between them to arbitration before taking any court action. An express and clear provision in a contract that defers any dispute first to arbitration before any litigation is commenced.

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Contracts that promote sexual immorality Contracts void because they promote immorality of society, eg.prosttituion and anything that endangered the sanctity of marrigg. But there have been changes in time and the law tries to reflect these Upfill v Wright [1911] 1 KB 506 – a lease of an apartment for three years, agent knew that he had that apartmen for his mistress and that It would b...