If parties enter into K that is “illegal as formed” parties can not rely on it – K is void ab initio (Archbolds).
Where K is illegal in performance, it is unenforceable by those who intend to do or rely on an illegal act, but it is enforceable by a party who is not relying on the illegal act (Archbolds).
You can recover from an illegal K if you are the one who is less guilty (pari delicto); the one who is more guilty can not recover (Kiriri Cotton).
Holman v. Johnson (1775)
P sold to tea to D. P knew D was smuggling tea into England. D did not pay so P sues for price of tea. D alleged P can not enforce K b/c P knew of illicit purpose in making the K.
Issue: can you bring an action under such circumstances? Principle of public policy is this: “No court will lend its aid to a man who founds his cause upon an immoral or illegal act”. Is K entered into with common purpose that is illegal? If yes, then illegal in formation.
Court said although K was contrary to revenue laws, it did not create an inherently immoral K. P interest in matter ended when he completed the K by delivering the goods at Dunkirk. P wins. Knowledge of illegal use is not enough.
As long as you do not have to rely on illegality yourself, you can rely on K.
Archbolds Ltd. v. Spanglett Ltd. (1961) [Performance]
D are furniture manufacturers and P are carriers. Need “A” traffic license to carry goods of others for profit. D had “C” license – allowed them to carry their own goods but not goods of others. P had “A” license. Part of load was carried by P and part by D to Leeds. On return route to London goods stolen as a result of D’s negligence and P suing for loss. D claim K was illegal b/c P van did not have “A” license. Here, it’s a legal K that is legal in formation but can be performed illegally.
Effect of illegality on a K can be threefold:
If at time of making K there is an intent to perform it in an unlawful way, the K, although it remains alive, is unenforceable at the suit of the party having that intent. If the intent is held in common, the K is not enforceable at all;
Can prevent a P from recovering under a K if in order to prove his rights he has to rely upon an illegal act.
K void ab initio if the making of the K is expressly or impliedly prohibited by statute or is otherwise contrary to public policy.
Here, regardless of intention of parties, legal in formation unless parties intend to perform illegally.
Court: it if had been a K to carry goods on a “C” license truck, it would not be enforceable because the K itself would be against the law. P not to be treated as using the van b/c they supplied the load.
If parties enter into K that is illegal as formed then it is illegal and cannot rely on it-K void ab initio. Where K is illegal in performance, unenforceable by those who intend to do or rely on illegal act.
K of carriage was not expressly forbidden by statute. Statute did not prohibit carriage but merely regulated the means of carriage. There was nothing illegal about the terms of the K. Only way the K could have been performed was illegally but P were unaware of that fact. K should not be rendered illegal only b/c one of the parties was aware the K was illegal.
Court must look at following:
Intention of the party: did they intend to perform illegal act? If yes, K is void. In this case P did not intend to commit illegal act.
Look at statute: does statute itself prohibit the making of a K or just the act in question?
Does the statute expressly or impliedly prohibit K?
Was contract such that act could only be performed illegally?
If a K can be performed in one of two ways, legally or illegally, it is not an illegal K, though it may be unenforceable at the suit of a party who chooses to perform it illegally. In this case, there is an implied warranty that the van is properly licensed.
Notes:
Cannot make a claim if you relied on an illegal act-in this case, D could not have made claim against P if they did not pay.
When dealing with statutes, 2 possibilities:
The contract is prohibited-it expressly or impliedly prohibits to formation of contract (question of legislative intent)
Statute prohibits the contract if it is performed in a certain way-saying are consequences regarding sale
Even if law does not prohibit a contract, a person who a penalty is imposed against may not be able to recover under the K because of their act.
Note the role of knowledge in Holman: if parties entered into the K with intent to break the law, the K is illegal; if you know K will violate the law, cannot recover.
Kiriri Cotton v. Dewani [Restitution]
D took out loan to pay Kiriri £10,000 premium for residential flat. D then says premium illegal b/c it was in violation of a statute. At the time of transaction, neither party thought there was any illegality. The premium was in fact illegal b/c cannot charge for residential premises.
Court: landlord and tenant not at equal fault, was duty imposed on landlord.
If the K is illegal in formation, the K is void ab initio, and the only recourse is in restitution, if and only if you are the more innocent party. General proposition: you can recover from an illegal K if you are the one who is less guilty-the one who is in “pari delicto”-the one more guilty cannot recover.
Here, statute imposed duty on the landlord. Therefore, both parties are not equally guilty.
