Illegal and Void Contracts

The courts may sometimes refuse to give effects to some contracts because the contract involves the doing of a legal wrong or are contrary to public policy. The term illegality, when used in relation to contracts, is a very wide and imprecise one. According to Anson, an agreement which is invalidated either expressly or implicitly by a statute, or by rules of common law, is illegal. Where the law refuses to assist a person whose course of action is founded upon an illegal contract, such a contract is void. So it can be seen that the two terms are similar.

An illegal act is defined by the Osborne dictionary as “an unlawful act which the law forbids, as to commit a murder, or to obstruct a highway” while a void contract or state of things is defined as “an act or state of things which the law disregards, or does not recognize as capable of giving rise to rights.” For instance, a contract made ultra-vires is void, but not illegal, and so also is a contract furnished by an immoral consideration, with void contracts being of no effect.

A close examination of the definitions will show that while the only effect of a void contract is that no rights can be acquired under it, an illegal contract is usually followed by a form of sanction. A void contract usually violates no basic feeling of morality, but runs counter to certain social and economic attitudes. An example is section 9(1) of the 1893 Sales of Goods Act which provides that where an agreement to sell goods is on the term that the price is to be fixed by the valuation of a third party and such a third party cannot or does not make the evaluation, the agreement is void.

The distinction between illegal and void contracts was amplified by Akanbi J.C.A.(as he then was) in Thirwell v Oyewunmi, where he said the following.

The law recognizes and draws a distinction between a contract declared void by statute and an illegal contract in which the parties have purported to do what the law prohibits. Certainly, the law will not lend its aid to the perpetrators of any illegality, save the certain exceptional circumstances. On the contrary, a contract declared void by statute may not be an illegal contract unless in relation thereto, there is also a penalty imposed by law. The penalty, it is said, makes it illegal.

The distinction which flows from Akanbi’s amplification is that in illegal contracts, the formation of the contracts would usually be followed by sanctions, while no sanctions follow the formation of void contracts.

Illegal and void contracts may be classified into three.

1. Contracts illegal by statute.
2. Contracts illegal at common law.
3. Contracts void at common law.

Contracts illegal by statute

Statutes rendering contracts illegal can take various forms. These include:

1. The express prohibition of certain kinds of contracts.
2. The regulation of a particular trade, profession, or the dealings in a particular commodity or resource.
3. The protection of a class of persons, the public, or the promotion of an object of public policy.
4. The raising of revenue.

a. The express prohibition of certain types of contracts

Where the contract made by the parties is expressly forbidden by statute, its illegality is undoubted as it follows therefore, that where the contract which the plaintiff seeks to enforce has been expressly or impliedly forbidden by statute, no court will lend its assistance to give it effect. It does not matter that one party was more culpable than the other, and both would be prevented from suing upon the contract. It is irrelevant whether or not the parties knew that the act was prohibited.

One type of contract which was prohibited in Nigeria until January 1995 was the dealing in foreign exchange by any person in Nigeria or outside Nigeria with any person resident in Nigeria without the permission of the minister of finance or through an authorized dealer. In Sodipo v Lemmikainen, the plaintiffs, two foreign companies, brought an action against the defendant, Sodipo, for the repayment of loans in foreign currency which in total sum came to $1,169,817.41 and 17,000 pounds. There was no indication that the minister had authorized the transaction. The court raised the issue suo motu and refused to enforce the contract for being illegal.

b. The rule as to the regulation of a particular trade, profession or dealing in a particular commodity or resource.

These include enactments regulating the practice of professions like law, medicine, auctioneers, land transactions, etc. An example is the Land Use Act which makes it unlawful to alienate a right of occupancy or ownership of land without the permission of the governor, or the local government chairman in some cases.

In Canfaila v Chahin, a Ghanaian case heard by the West African Court of Appeal, the plaintiff was engaged by the defendant to build a house for him. The specifications on the proportion of cement to sand and stone in the contract was much lower than that contained in the building permit granted to the defendant by the Accra Town Council. When the defendant refused to pay the plaintiff, the plaintiff brought an action which was dismissed for the illegality of the contract.

Also, a landlord who sublet crown land without government permission had the contract declared void and could not collect arrears rent in Sam Warri Esi v Moruku.

Where the contract is not illegal in form, but is illegal as performed, the innocent party may still have rights under the contract. In AG Federation v Sode, the court held that the innocent party still had rights under the contract as it was the duty of the holder of the right of occupancy to obtain the governor’s permission.

c. The protection of a class of persons, the public or the promotion of an object of public policy.

Laws are enacted for the protection of a specific class of people or for the public generally. Examples of such laws are the Illiterates Protection Act and Money Lenders Act. For example, section 3 of the Illiterates Protection Act provides that any person who writes or prepares a document at the request of or on behalf of an illiterate person must read it over and explain the contents to the illiterate person before the latter signs it or makes his mark on it. Any contract in breach of this statute would be illegal and void, although the illiterate person would be allowed to sue on the contract in some instances. In UAC (NIG) Ltd v Edems and Another, the court held that the second defendant could not be sued on the contract because it did not comply with the statute.

In Cope v Rowlands, a statute provided that anyone who acted as a broker in the city of London without first obtaining a license should forfeit and pay to the city the sum of 25 pounds for every such offence. The plaintiff, who was an unlicensed broker, sued the defendant for work he had done in buying and selling stock for him. The court held that the aim of the statute was to protect the public from unlicensed brokers, and so the plaintiff could not sue on the contract.

d. Revenue raising statutes

There are some statutes which do not prohibit a contract per se, but simply aim to create revenue for the state by charging those who wish to enter such contracts. The law on such contracts was properly stated in Smith v Manhood, where a tobacconist failed to take out a license, and did not have his name painted on his business premises as required by law. Although this omission attracted a penalty of 200 pounds under the law, he was nevertheless allowed to recover the price of tobacco delivered by him to the defendant. It was held by Park B that there was nothing in the statute which prohibited a contract of sale by dealers who did not comply with it. Its only effect was to impose a penalty for the purpose of revenue on the carrying of trade without compliance with the Act.

The rule as regards contracts created in violation of revenue raising statutes is that such contracts shall still be binding on both parties, although whatever fine is attached to omission to pay the fees shall still be paid.

Contracts illegal at common law

Contracts illegal at common law are contracts which were declared to be illegal by the common law courts of England several centuries ago. The contracts are usually forbidden by common law based on grounds of public policy. These contracts are regarded as being so injurious to society and prejudicial to the social and economic interests of the community, that they are prohibited and declared illegal.

Contracts regarded as illegal at common law include the following.

1. A contract to commit a crime, a tort or a fraud.
2. A contract prejudicial to the status of marriage.
3. A contract prejudicial to public safety.
4. A contract prejudicial to the administration of justice.
5. A contract that tends to promote corruption in public life.
6. A contract to defraud the state of revenue.

a. A contract to commit a crime, a tort or a fraud.

A contract to commit a crime is illegal and the courts will not lend their assistance to it. Any agreement which has as its object the commission of a crime is illegal, and so the court will not enforce such agreements. In Allen v Rescous where one of the parties agreed to beat up a third party at the behest of another for consideration. It was held that the agreement was void and unlawful. Also in Mallalieu v Hodgson where a debtor made a composition with his creditors to pay six shillings and eight pence for every pound owed, and then he entered into a separate agreement with the plaintiff, one of the creditors to pay him a part of his debt in full. This agreement was declared void as a fraud on all the other creditors.

b. A contract prejudicial to the status of marriage.

Normally, contracts within this category are treated as merely void, and not illegal. However, such contracts could be classified under illegal contracts because such contracts, if actually performed, would result in the commission of a crime. For example, if an already married man concludes a statutory marriage with another woman, he will be guilty of bigamy under section 370 of the criminal code. Where a man already married under customary law, concludes a statutory marriage with another woman, or vice versa, he will be guilty of an offence under the Marriage Act. In light of the existence of these offences, it follows that a contract to commit the offence should itself be classified as illegal rather than as merely void.

In Spiers v Hunt, a promise by a man to marry the plaintiff after his wife’s death was held illegal as it had a tendency to break up the marriage, encourage sexual immorality and even crime.

c. Contracts prejudicial to public safety.

It is contrary to public policy to engage in commercial intercourse with an enemy country, and such contracts are illegal because they aid the economy of the enemy country. This also includes contracts with institutions and residents in the enemy country and territories controlled by the enemy country. It was for this reason that contracts between Nigerians and Nigerians in the Biafran-controlled territory of Nigeria were consistently declared frustrated by the courts, with one of those cases being Daps v Haco Ltd.

d. Contracts prejudicial to the course of justice.

A contract which has the effect of impeding or preventing the course of justice, or of stifling prosecutions, is contrary to public policy and therefore illegal. In R v Andrews, the defendant was convicted for demanding bribe from the driver of a car who had collided with and injured a motorcyclist in order to give false evidence in favour of the car driver at the court hearings on the accident. In confirming the decision of the crown court, Widgery C.J. at the Court of Appeal held that to produce false evidence with a view to misleading the court and perverting the course of justice is a substantive offence.

A criminal action cannot be settled out of court, especially where it is a felony. However, a contract to settle a civil action out of court is legal.

e. Contracts that tend to promote corruption in public life.

Any contract whereby a person is to be appointed into a public office for a private consideration or gratification received by those in a position to make or influence such an appointment is contrary to public policy and void. In Montifiore v Menday Motor Co. Ltd., it was held that a contract whereby a member of a government board was to use order to obtain funds for financing a private company could not be enforced as it was contrary to public policy.

Consideration for the purpose of obtaining an undue advantage over others in a transaction of a non-private nature is illegal and therefore void. The Nigerian Criminal Code makes giving of bribes to public officers or asking for such bribes a felony.

f. A contract to defraud the state of revenue.

Any contract deliberately entered into by the parties with the intention of depriving the state of revenue is contrary to public policy and so illegal. In Alexander v Rayson, the plaintiff let a flat to the defendant for 1,200 pounds per annum. In a bid to defraud the state of revenue and pay a much smaller amount for tax than he would normally be obliged to pay, the defendant prepared two documents for the purpose of the rent agreement. The first one disclosed that the rent for the flat and certain services was only 450 pounds. The second one disclosed a fee of 750 pounds for the same services, plus the use of a refrigerator. The plaintiff intended to tender only the first document to the rating authorities and pay tax only on the 450 pounds, instead of 1,200 pounds. When the defendant failed to pay an installment due under the agreement, the plaintiff sued him to recover the unpaid sum. The claim was dismissed as the contract was illegal, being one made to defraud the state of revenue.

Consequences of illegal contracts

Where the contract is ex facie illegal

Where the contract is ex facie illegal, which means it is illegal as formed and from its inception, neither party can derive any rights under such a contract. The contract is void ab initio. Such contracts attract the Latin maxim ex turpi causa oritur non actio, which literally means that an action does not arise from a base cause. In such instances, the defendant who took part in the illegality will be allowed to plead illegality to escape contractual obligations.

Lindley C.J. observed the following in Scott v Brown.

No court ought to enforce an illegal contract or allow itself to be made the instrument of enforcing obligations alleged to arise out of a contract or transaction which is illegal, if the person invoking the aid of the court is himself implicated in the illegality. It matters not whether the defendant has pleaded the illegality, or whether he has not. If the evidence adduced by the plaintiff proves the illegality, the court ought not to assist him.

Where monies have been paid or properties transferred in furtherance of an illegal contract, such monies and property are generally not recoverable. This is covered under the in pari delicto rule. In the Somali case of Mohammed v Farah Hussein Jama, the appellant brought an action against the respondent to recover money paid under an agreement to buy cigarettes. It was revealed in evidence that the object of the agreement was to smuggle cigarettes into the Somali republic. The court held that the appellant could not recover his money as the contract was tainted with illegality.

A case to examine to properly know the significance of an illegal contract is Everet v Williams. The plaintiff, an armed robber, sued the defendant, his partner in multiple armed robberies, for refusing to provide the numerous booties they got from their robberies valued at over 2,000 pounds so that it could be shared as per their partnership agreement. The court declared the writ to be scandalous and impertinent, the plaintiff’s solicitors were attacked for contempt and each fined 50 pounds, and both the plaintiff and the defendant were executed.

However, there are some exceptions to the principles in the consequences of an illegal contract. There are some instances where the court will assist the plaintiff in an illegal contract and grant some sort of relief. They include the following.

1. If the plaintiff can show that the purpose of the statute or rule of public policy violated is to protect him from the defendant.
2. Where there is a fiduciary relationship between the parties and the plaintiff is the beneficiary.
3. Where the claim can be based on a ground other than the illegal contract.
4. Where the plaintiff repents before the contract is performed.

Where the contract is lawful at the inception

Where the contract originally created was legal, but was performed in an illegal manner, the party that performed the contract in an illegal manner shall be unable to sue on the contract, while the innocent party shall be able to sue as long as he is not tainted by the illegality. If A pays B to buy a car from him, and B obtains the car buy stealing it, A shall be allowed to sue on the contract while B shall not be allowed to. However, A shall also be unable to sue on the contract if he knew of the illegality and condoned it. One case which shows the enforceability of the contract by the innocent party is Thirwell v Oyewunmi.

Contracts void at common law

Three contracts fall under this category.

1. Contracts that are sexually immoral.
2. Contracts to oust the jurisdiction of the courts.
3. Contracts in restraint of trade.

a. Contracts that are sexually immoral

The question of what constitutes sexual immorality will to some extent vary from society to society. However, there have been some fairly consistent social attitudes to some aspects of sexual conduct and transaction. Thus, a prostitute cannot sue for her fees, and neither is any action maintainable to recover lodgings knowingly let for prostitution. In Upfill v Wright, a landlord let a flat to a woman, the defendant, knowing she was the mistress of the man who was paying the rent. When she defaulted on payment and he sued, the court held that the contract was void for immorality.

Also, in the case of Bowry v Bennel, it was held that the prices of clothes specifically sold to enable a prostitute carry on with her trade were not recoverable.

b. Contracts to oust the jurisdiction of the courts

The principle was summarized by Lord Denning L.J. in Lee v Showmen when he said the following.

It is a well-known principle that parties cannot contract to oust ordinary courts from their jurisdiction. They can of course agree to leave questions of law, as well as question of facts, to the decision of the domestic tribunal. They can indeed make the tribunal the final arbiter on the question of fact, but they cannot make it the final arbiter on a question of law. They cannot prevent its decision from being examined by the courts. If parties should seek by their arrangement, to take law out of the hands of the court and put it in the hands of a fortunate tribunal, without any recourse at all to the courts in case of error, then the agreement is to that contrary to public policy and void.

An agreement by a wife with her husband not to apply to court for maintenance is an ouster of a court’s jurisdiction. In Bennett’s case, the wife separated from her husband and agreed not to bring maintenance action against her husband in respect of their children. The husband failed to carry out his own part of the agreement and the wife sued. It was held that the agreement to not apply to court for maintenance was void and unenforceable. Another case where this principle was stated is Bello & Dairo v Alowonle.

It should be noted that agreements to first resort to an arbitration tribunal before going to a court are lawful, and do not classify as ouster clauses.

c. Contracts in restraint of trade

In the early times, contracts which regulated business competition were regarded as void. The court was inflexible, but later came to recognize that the inflexible attitude might defeat the purpose it sought to serve. In 1711, the courts began to uphold contracts in restraint of trade. In Mitchell v Reynolds, the court decided that a contract in restraint of trade was prima facie valid if it was supported by adequate consideration and not extended over the entire country. Since then, the rules have changed in three respects.

• Restraints are no longer prima facie valid. They are prima facie void but can be enforced if they are reasonable and not contrary to public interest.
• It is no longer essential that consideration should be adequate.
• The rule that restraint of trade must not be general no longer applies.

In Nordenfelt v Maxim Nordenfelt Gunned Ammunition Co., the owner of a business sold it to a company and entered into an agreement not to carry out such business for 25 years except with the permission of the company. The court held that the covenant was valid even though it was of a general nature for the following reasons.

• It protected the interest sold.
• Nordenfelt received a large sum of money.
• The wide area over which the business operation of the company extended necessitated a wide restraint clause.
• Since the company was transferred from a foreigner to an English company, it was in the public interest in that it secured for England the inventions of a foreigner and increased the British trade.

The modern position of the law concerning contracts in restraint of trade was applied in Leonataritis v Nigerian Textile Mills Ltd. where it was stated that a contract in restraint of trade is valid if:

1. It is reasonably necessary to protect the interest of the person in whose favour it is imposed,
2. It is not unreasonable as regards the person restrained, and
3. It is not injurious to the public.

In deciding the question of reasonableness, the court must have regard to the following.

1. The nature of the business, trade or occupation,
2. The area over which the restraint is to be imposed, and
3. The length of time for which it is to continue.

Restraints imposed on employees are never reasonable unless it is established that that there is some proprietary interest owned by the master which requires protection against the activities of the employer. The court must ascertain the nature of the master’s business and the servant’s employment. It must be shown that the servant is in a position in which his activities would injure the business of the master.

In Mesropkholonpikiaan v Metal Furniture (Nig) Ltd., the plaintiff, a Lebanese, had his appointment wrongly terminated and went home. He returned to Nigeria after an interval and took up a job with another company. The plaintiff brought a claim of 500 pounds against the defendants for wrongful dismissal. The defendant denied the charge and instead counter-claimed for 2,550 from the plaintiff for a restraint clause in his service agreement with the defendant. The clause contained a covenant by the plaintiff not to work for any company carrying on a business similar to the defendant’s within a radius of 800 miles from Lagos and for a period of five years. The defendant accused the plaintiff of returning to Nigeria within a year to take up a similar position in V.B.B., a firm carrying out similar business and whose premises were located only two miles from the defendant’s. The court held that even if the contract was not void for duress, it was not enforceable in that instance because V.B.B. made their furniture with wood and plastic, unlike the defendant that used metals, and the defendant had failed to show that the plaintiff was employed to perform a similar task.

Legal consequences of contracts void at common law

Where the entire agreement is void, the contract as a whole is not enforceable. However, where the void part is merely a part of a larger contract, the remaining part of the contract would be valid and enforceable. For example, where in a contract of employment, there is an unreasonable covenant restraining the employee’s future activities, the rest of the contract will remain valid and enforceable even though such a covenant would be void. And so the employee would be able to sue for his wages and for wrongful dismissal. One other fundamental difference between a merely void contract and an illegal contract is that property transferred under a void contract is recoverable.

Where a contract contains partly valid terms and partly void terms, the void terms in certain circumstances can be extracted from the contract and the valid terms enforced. This is known as the doctrine of severance. It should be noted that severance is only possible when the contract is void, and not when it is illegal. Even in the case of void contracts, severance may only be applied where the void part is not a significant part of the contract. In Goldsoll v Goldman, the seller of an imitation jewelry business agreed not to deal in jewelry, both real and imitations, in the United Kingdom, United States, France, Spain, etc. The business sold was only operative in London, and so the court used the doctrine of severance to hold that the restraint was only applicable in United Kingdom.

Also, it should be noted that the court will not rephrase the words of the contract. In severing the contract, the court would only try to remove the words which are void as they are. If A asks B not to practice a trade “anywhere in the world again” after selling his business to A, even though the business is only operative Lagos, there can be no severance to make the covenant apply only to Lagos. There can only be severance if the clause was “Lagos and anywhere else”, in which “and anywhere else” would be extracted to give other parts of the contract effect. In Baker v Hedgecock, a master tailor got his foreman cutter to promise not to carry out any business whatsoever within one mile of the master’s shop after leaving his service. It was held that the entire promise was void because it could not be severed to leave only the tailoring aspect.

Also, severance will not be possible where the void part serves as substantial consideration in the contract. In Hopkins v Prescott, the plaintiff agreed to sell his business to the defendant and introduce the defendant to two public officers, and the defendant was to pay the plaintiff 300 pounds in consideration of both promises. The entire agreement was unenforceable as the introduction of the defendant to the two public officers was likely to promote corruption in public life and so void. It could not be severed because it was a substantial part of the consideration.