Void and Illegal Contracts

Topics: Contract, Law, Common law Pages: 10 (2934 words) Published: April 20, 2011
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...
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