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10SLLB399

AFRICA NAZARENE UNIVERSITY

NAME:

BOAZ .A. NYAKERI

STUDENT ID: 10SLLB399


UNIT CODE: LAW 106
UNIT TITLE: LAW OF CONTRACT II
TASK:

DISCUSS ILLEGAL CONTRACTS AND THE EFFECT OF


ILLEGALITY ON CONTRACTS AND TRUSTS.

LECTURER: JEFF KIMATA


DUE DATE: 14TH MARCH 2011
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TABLE OF CONTENTS

1. INTRODUCTION3
1.1 Illegality of a Contract.3
1.2 Unenforceability of a Contract...3

2. DISCUSSION3
2.1 The Presence of an Illegal Contract...3
2.2 Contracts Illegal by Statute4
2.3Contracts Illegal by Public Policy...6
2.4 The Effect of Illegality on Contracts10

3. CONCLUSION12
4. REFERENCE..13

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1. INTRODUCTION
1.1 Illegality of a Contract
The principle of freedom of contract is subject to a basic rule that the courts will not
uphold an agreement which is illegal or contrary to public policy. Where contracts
involve some kind of moral wrongdoings, it will be illegal. In other words, a contract is
said to be illegal if the law considers it is morally wrong to make it.
If, however, the conduct is neither immoral nor blameworthy, but simply undesirable, the
contract will be void a case whereby the void party may be severed from the rest of
the contract, which will remain unenforceable.
1.2 Unenforceability of a Contract
Illegal contracts are completely unenforceable, though the law will help a person who did
not know of the illegality. Contracts may be illegal, either by statute (prohibited by a
statute) or at common law (prohibited by law).
An illegal contract is made unenforceable; to discourage such undesirable conduct, and to
avoid the inappropriate use of the judicial process in carrying out the socially undesirable
bargain.

2. DISCUSSION
2.1 The Presence of an Illegal Contract
The illegality of a contract can be present in a contract in four main ways;
a. Formation of the contract. This is a case where during the formation of the contract in
relation to illegality, the contract being formed contravenes the public policy.
b. Performance of the contract. In relation to illegality as to the performance of the
contract, like where there is a contract to commit a crime.
c. Consideration of the contract and here a good example is an immoral consideration.
d. Purpose for which the contract is made. A hypothetical example is a situation
whereby a vehicle can be hired for the purpose of smuggling drugs into the country.

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Illegal contracts can be classified into two main types;


1. Illegal by statute
2. Illegal by public policy
The following brief explanation gives an overview of what exactly these two types of
contracts are and the nature in which they come in.
2.2 Contracts Illegal by Statute.
Some statutes expressly prohibit a certain type of contract. For example, under chapter 1
of the Competition Act 1998 agreements by two or more persons to fix the price at which
goods may be sold are lawful. The provision outlaws the practice of blacklisting
retailers who sale goods below a minimum resale price fixed by suppliers. However, not
all statutes are quite so specific. Some contracts may incidentally infringe the provision
of an Act of Parliament. It seems that the contract will be illegal if it was Parliaments
intention in the passing of the Act to preserve public order or protect the public.
Copes v Rowlands (1836)
In this case, a court refused to enforce a contract on behalf of an unlicensed broker
because the purpose of the licensing requirements was to protect the public.
The contract will be valid if it appears that the statutory provisions imposed for an
administrative purpose. For example in Smith v Mawhood (1894) whereby,
A tobacconist was unable to sue on a contract for the sale of tobacco even though he did
not have a license as required by the statute. The sole aim of the statute was to raise
revenue, not to prohibit contracts made by unlicensed tobacconist.
Modern U.K statutes continue to lay down that certain types of contracts are illegal, are
of course inapplicable in East Africa. It is therefore necessary to examine the legislation
of the East African countries in order to discover what transactions are forbidden. This

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can also be found in the Employment Act 1 of the East African countries. However, it is
sometimes difficult to decide whether an act renders a contract illegal as well as void.
A particular type of act that has often been the subject of legal argument is that forbidding
the sale of lease of land to a non-African.
In Lalji Manganji and Co. v Shah Mohammed2, the plaintiff leased land to a nonAfrican contrary to the Land Transfer Ordinance. The plaintiff later claimed arrears of
rent. The court held that the contract was illegal therefore the plaintiffs claim was
unenforceable. The seriousness of the contract being branded illegal can be seen, even
though the non-African was in illegal occupation he could not be made to pay up.
A similar example is that of Hamed Baali v Hamed Batwahsaff3, where the plaintiff had
various business dealings with the defendant but the plaintiff was not licensed under the
relevant Stock Trade Ordinance. The court therefore refused the plaintiffs request to
force the defendant to pay his debts. As the court explained, when the contract is illegal it
will lend no assistance to the parties involved.
As if that is not enough, Issa v Michael and Co.4 gives similar facts whereby an
ordinance proved to be the stumbling block. The plaintiffs had agreed to sell a motor
vehicle to the defendant partnership. The contract however was contrary to the Credit
Trade with Native Ordinance. The lorry had been handed over and the plaintiffs
demanded either the purchase price or the return of the lorry. The plaintiff failed.
Bourke J. explained: Now a party cannot set up a case in which he must necessarily
disclose an illegal transaction as the groundwork of his claim. In such a case the
defendant possessed the advantage over the plaintiff for if the plaintiff cannot substantiate
his claim without proof of the illegal contract he has no right to the assistance of the
1

Tanganyika Cap.366, Kenya Cap 226, Uganda Cap 196.in continuation Section 61(i) of Tanganyika Act
reads; in all contracts of service the wages of the employee shall be payable in currency which is the legal
tender at the place where the wages are paid and not otherwise and if any such contract the whole or any
part of such wages is made payable in any other manner such contract shall be illegal, null and void.
2
H.C.C.S. 660of 1959(Uganda). Also Broadways Construction Co. v. Kasule and Others [1972]E.A. 76
3
17 K.L.R 30
4
23 (1) K.L.R. 12

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court. If for instance goods are sold and delivered under an illegal contract, , the seller
cant sue neither for the price nor for the return of the goods, since he is unable to make
out his case except by the aid of the illegal contract to which he is a party.5
2.3Contracts Illegal by Public Policy
As a discretionally rule under the hands of judges, public policy has been used to
determine the legality or the illegality of contracts in determining whether such contracts
are unenforceable or not. The common heads which can be identified are as follows;
I. Contract to commit crime or a tort, civil wrong.
Hypothetically, if a shopkeeper sells a an electric drill to X knowing that X intends to use
it illegally to open a safe, then obviously the shopkeeper cannot come to the court and ask
it to enforce payment of the price against X.
In the case of Alexander v Rayson6 and the facts were as follows; the defendant agreed
to let the flat in Piccadilly from the plaintiff for a rent of $ 1, 200 a year. The contract was
embodied in two documents; a lease with some services for $450 a year and an
agreement to provide services for $750 a year. The services, in the second agreement
were much the same as in the first, with the addition of the provision of a fridge. The
plaintiff intends to show only the first document to the rating authorities in the hope of
getting the retable value of the premises reduced. This scheme was unsuccessful because
the fraud was detected. This contract was held illegal.7
II. Contracts that prejudice to public
Contracts between nationals of two countries that are at war with one another fall under
this heading. In Forster v Driscoll8 where the parties agreed to buy whiskey in the U.K.
and smuggle it into the United States when such importation was contrary to American

Cheshire and Fifoot on Law of Contract, 1st ed. P. 247

(1936) 1KB 169


Lord Evershed M.R ..In such a case, any party to the agreement who had the unlawful intention is
precluded from suing upon it. Ex turpi causa non oritur act. Whereby the adjective turpis is thus
expanded to three characteristics, illegal, immoral and contrary to public policy.
8
[1929] 1 K.B. 470
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Law. The court held the contract to be illegal as it was directed against the interests of a
friendly state and therefore contrary to international comity. 9
Perhaps a more realistic example at this present time would be contracts made between
the nationals of two countries with opposite ideologies. The sale of essential commodities
between, say, East African countries and South Africa might fall under this heading.
Another clear example is afforded by the House of Lords decision in Regazzoni v K. C.
Sethia,10 Indian law prohibited exports to South Africa. The contract however showed
that the export was destined for Italy, but with the intention of re-exporting the goods to
South Africa. The House of Lords refused to enforce the contract.
III. Contracts affecting the administration of justice.
In some cases there are contracts where a party promises to give false evidence. For
example, in R V Andrews11 whereby, D witnessed a traffic accident between a motor car
and a moped, as a result of which criminal proceedings against the car driver were
contemplated. D invited the car driver to pay him to give false evidence at the prospective
prosecution, and the driver offered him a sum of money, but no bargain was in fact
struck. D was convicted on a charge of inciting the motorist to prevent the court of
justice. The court of appeal dismissed the defendants appeal against the conviction.12
A special mention should be made under this heading of the widespread of use of
arbitration clauses in commercial contracts. The leading case here is that of Scott v
Avery13 where an insurance contract provided that if the insured goods were damaged or
lost, the question of the amount of compensation would be referred to a committee. If the
committees determination of loss differed from that of the insurance company. The issue
could not be decided by the courts until the matter had been referred to arbitration and a
decision reached. One party alleged that such a clause hausted the jurisdiction of the
court. The House of Lords held that the jurisdiction of the courts had not been excluded
and that reference to an arbitrator was merely a condition precedent to the right of action.
9

Also in Pioneer Institutional Trading Co. v Akinyele, Suit No. LD/139/68 (High Court of Lagos) in
modern African Contract Cases (ed. A. Milner) page 281.
10
[1958] A.C. 301
11
(1973) QB 422
12
Similarly, Farhad Faryab v Phillip Ross & Co. (2002)
13
(1885) 5HLC 811

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This principle was followed in Theodore Wendt v Changanlal Jiwan and Mulji 14here
two merchants agreed that any disputes between them should be referred to the local
Chamber of Commerce. The court held that such a clause could not be regarded as
ousting their jurisdiction.
IV. Contracts that tend to promote corruption in public life
The leading illustration here is Parkinson v College of Ambulance.15The secretary of the
charitable society told the plaintiff that he was in a position to procure a knighthood for
him if he would make a contribution to the society. He gave $3,000 but received no
knighthood, which was a government bestowed. He sued to recover the money; the court
held that the substance of the agreement was illegal.
Any contract the subject matter of which could be regarded as corrupt or inferring
bribery would likewise be covered by this section; for instance the misapplication of
government tenders or public office. In the Ethiopian case of Tekele Gebre Sellassie v
Sebhatu Woldemariam

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the contracting parties were potential candidates in an

election. They agreed to draw lots to determine who would stand with the proviso that
should the loser not keep the to the agreement then he should pay $E5, 000to the winner.
The looser did infact contest the election and was sued. The court held that the contract
was immoral and unlawful. They explained; Every citizen has both the right and full
freedom conferred upon him by law to stand for electionThis right or freedom
cannot be sold; nor can it be made an item of transaction. Further, one cannot acquire the
right to become a representative of the people through money or deceit.
V. Contracts to defraud the revenue, either local or national
The ingenuity of some businessmen lapses over into the world of illegality. In Miller v
Karlinski 17 the plaintiff received a salary and expenses. He was allowed to include in his
expenses the sum of money that he paid as in come tax. He sued for arrears and it was

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1. T.L.R 460, The case is analogous to an agreement to submit all disputes to a named arbitrator, per
Sherdan C.J.
15
[1952] 2 K.B. 1 This decision led to the enactment of Honours (Prevention of Abuses) Act 1925.
16
(1965) A.L.R. Comm. 593.
17
[1945] 62 T.L.R. 85. Similarly, Napier v National Business Agency Ltd. [1951] 2 All E.R. 264.

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held that the expenses / income tax arrangements was a fraud on the revenue and
therefore he could not enforce the sum owed.
However in Jhevanjee v Jamal,

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the courts were unable to brand the transaction as a

fraud. X bought a house from Y and sold it to Z. He merged the two contracts into one,
thus saving on the stamp duty which would go on to the Treasury. Z refused to pay Xs
commission and alleged the contract was illegal. The court of Appeal held that the
agreement was not in itself illegal.
VI. Contracts having sexually immoral base.
Thus if a taxi driver allowed his taxi to be used by a prostitute in looking for customers
he would not be able successfully to sue her for the hire charge. In Pearce v Brooks,

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for instance, the plaintiff agreed to hire a horse and carriage to a prostitute, knowing that
it would be used, in some way, to assist her in her enterprise. It was held that the plaintiff
could not recover the hire charge when the defendant refused to pay it.
Lord Pollock explained, I have considered it as settled law that any person who
contributes to the performance of an illegal act by supplying a thing with the knowledge
that that it is going to be sued for that purpose, cannot recover the price for the thing so
supplied..
The statement of Lord Pollock was applied in Upfill v Wright20 where the facts were P,
through his agent, let a flat in London to D, an unmarried woman. The agent knew that D
was a mistress of a certain man and he assumed that the rent will be paid as a result of her
being a kept woman that is, it would come from a man whose mistress she was.
Eventually, Ps agents gave D notice to quit. D failed to pay the rent for the last half year
of the tenancy. P sued for the rent which was still owed to him.21
VII. A subsequent or collateral contract founded on an earlier illegal transaction is tainted
by the earlier illegality. This can be illustrated in the case of House of Manji Ltd v
Liverpool Marine Insurance Co. Ltd.

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the defendant insurance company regularly

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(1967) (1) A.L.R. Comm. 395


(1886) LR 1 Ex 213,
20
[1911] 1 K.B. 506
21
Similarly in Haritomeni Hajji Mikhail v Mrco Vanian Vol. 1 S.L.R. 232 where an agreement by X that
he should pay Y $20 p.m. was declared illegal as the purpose of the agreement was an illicit cohabitation.
22
[1964] E.A. 639
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insured the plaintiffs goods in transit. The plaintiffs however were not licensed to carry
the particular goods out of which he insurance claim was made. The company therefore
argued that the policy was illegal if the original carriage was illegal. The court allowed
this argument.
Farrell J. explained the situation: they base their contention on a passage from the
judgment of Tindall, C.J., in Redmond v Smith (1844)135 E.R.p. 190) A policy on an
illegal voyage cannot be enforced; for it would be singular, if, the original contract being
invalid and therefore incapable to be enforced. It may be laid down, therefore as a general
rule, that, where a voyage is illegal, insurance upon such voyage is invalid.
In consistence with the above, If the interest of the assured is tainted with illegality he
cannot recover on his policy. The law will not admit the validity of an insurance which
assists or encourages the insurers is assured in the commission of an unlawful act.23

2.4 The Effect of Illegality on Contracts


1. Party withdrawing before performance
A party to an illegal contract may, before performance withdraw from the transaction and
recover whatever she has contributed, if the party has not engaged in serious misconduct.
A common example is recovery of money lift with a stakeholder for a wager before it is
paid over to the winner. In Taylor v Bowers24 the plaintiff fearing that his creditors
wereabout to sue him, transfereed his property to X so that it looked as though he had
sold it to him. X, without the plaintiffs knowledge, assigned the property to , who knew
of the earlier arrangement. The plaintiff had so far not defrauded his creditors and he now
sought to recover the property. The court allowed him to do so as the illegal purpose of
cheating his creditors had not been executed.

2. Party protected by statute

23
24

MacGillivray on Insurance Law, (5th ed.) Vol I, para. 508


(1876) 1Q.B.D. 291

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Sometimes an agreement is illegal because it violates a statute designed to protect
persons from the effects of the prohibited agreement. For example a state and federal
statutes prohibiting the sale of unregistered securities are designed primarily to protect
investors. In such case, even though there is unlawful agreement, the statutes usually
expressly give the purchaser a right to withdraw from the sale and recover the money
paid. In Kiriri Cotton Co. Ltd v Dewani25 the premium paid for the lease of a flat was
illegal as it contravened the Rent Restriction Ordinance. But the purpose of the Ordinance
was to protect tenants from unscrupulous landlords. Therefore the Privy Council agreed
with the Court of Appeal for East Africa that the tenant should be allowed to recover what
was basically an illegal payment.
3. Party not equally at fault
Where one of the parties is at less at fault than the other, he may be allowed to recover
payments made or property transferred. For example, this exception would apply where
one party induces the to enter into an illegal bargain through the exercise of fraud, duress
or undue influence.
4. Excusable ignorance
An agreement that appears to be entirely permissible on its face may, nevertheless, be
illegal by reason of fact and circumstances of which one of the parties is completely
unaware. For example, a man and woman make mutual promises to marry, but unknown
to the woman, the man is already married. This is an arrangement to commit the crime of
bigamy and the marriage, if entered into, is void. In such case, the courts permit the party
who is ignorant of the illegality to maintain a law suit against the other party for
damages.
A party may also be excused for ignorance of legislation of a minor character. For
instance, Jones and Old South Co. Ltd, enter into a contract to build a factory that
contains specifications in violation of the towns building ordinance. Jones did not know
of the violation and had no reason to know. Old Souths promise to build would not be

25

[1958]E.A. 239

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rendered unenforceable on the grounds of public policy, and Jones consequently would
have a claim against Old South for damages of breach of contract.

5. Partial illegality
A contract may be partially unlawful and partially lawful. The courts view such a contract
in one of two ways;
First, the partial illegality may be held to taint the entire contract with illegality, so that it
is wholly unenforceable.
Second, the court may determine if possible to separate the illegal from the legal part, in
which case the illegal part only will be held unenforceable, while the legal part will be
enforced.
For example, if a contract contains an illegal covenant not to compete, the covenant will
be enforced, though the rest of the contract may be.

3. CONCLUSION
In conclusion in effect of illegality, unenforceability neither party may recover under an
illegal agreement where both parties are in puri delicto (in equal fault).an otherwise valid
agreement may contravene a legal rule or be deemed contrary to public policy. One
should note that there are a variety of reasons of statutory and judicial intervention on the
basis of illegality. Therefore in every transaction that we take, however minute, we
should be careful to avoid illegality.

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4. REFERENCE
Hodgin R.W. (2007). Law of contract in East Africa. Kenya Literature Bureau; Nairobi
Koffman L. & Macdonald. (2010) 7TH Ed. The law of contract. Oxford University Press;
New York
Furmston M. Beale H. & Bishop W. (2008) 5th Ed. Contract cases and materials. Oxford
University Press; New York
Mann R. &Roberts B. (2005) 8th Ed. Business law and the regulation of business. Printed
in the United States of America. ISBN: 0-324-22545-8
Roach L. (2009)10th ed. Card James business law: For business, accounting &finance
students. Oxford University Press. New York ISBN: 978-0-19-928921-9
Allen V. & Riches S. (2009) 9th Ed. Keenan & Riches Business law .Ashford Color Press
Ltd ;Gosport ISBN: 978-1-4058-9964-2
Cheshire and Fifoot on Law of Contract, 1st ed. P. 247 (as a quotation)

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