What exactly is a contract?

Simply put, a contract can be described as a legally binding oral or written agreement
which exchanges any combination of goods, services, money and property. It is a
common misconception that a contract may only be in written form, as oral or conduct
agreements can be just as credible in contract formation. A contract is unique in that
unless certain exceptions apply, parties are free to agree to whatever terms they choose,
this is known as the ‘freedom of contract’.
You may unknowingly enter hundreds of contracts a year, for example, in buying
groceries from a supermarket, you have entered into a contract for the exchange of
money in return for goods. This is an example of a very simple contract, but contracts can
be extremely complex, owing to the parties’ freedom to agree to whatever terms they see
fit.
What are the sources of contract law?
Contractual relations are between individuals, and therefore contract law is a form of civil
law. The dominant source of contract law is common law, whereby the previous decisions
of the courts form part of the current law. There are also various statutory provisions which
support contract law, one example which will be discussed later in this guide is the Unfair
Contract Terms Act 1977.
What is contract law and what does it aim to do?
Contract law aims to provide an effective legal framework for contracting parties to resolve
their disputes and regulate their contractual obligations. The law of contract is mostly self-
regulatory, with the majority of contracts requiring no intervention. The courts make no
consideration for whether the contract was fair or not; if it was agreed, it should be
enforced. Despite this, on some occasions, the courts are willing to depart from the
principal of contractual freedom. This is often where there has been an abuse of
bargaining power by one contracting party

Breach Of Contract Examples Cases: Everything You Need to Know

Breach of contract examples of cases can include any scenario in which one or more
parties that are legally bound to uphold the terms of a contractual agreement fail to meet
their obligations. 3 min read

Breach of contract examples of cases can include any scenario in which one or more
parties that are legally bound to uphold the terms of a contractual agreement fail to meet
their obligations. In these cases, it is usually warranted for the other involved parties to
pursue legal action for sustained damages or in an effort to enforce the execution of the
original agreement.

Essential elements of a contract in Malaysia

Part A: Write an essay on the essential elements of a contract in Malaysia.
A contract is a legally binding agreement. It is not always easy to establish whether the
basic requirements of a contract, such as offer and acceptance, the necessity or
otherwise of consideration, the capacity of the parties, the reality of their consent, and so
on, exist. Dicey and Morris lay down a simple rule, [1] that ‘the formation of a contract is
governed by that law which would be the proper law of the contract if the contract was
validly concluded’. In Malaysia, the essential elements of a contract are Offer,
Acceptance, Intention to create legal relations, and Consideration.
Offer.
In order for a contract to be created, one of the parties must make an offer to the other
party. A person who makes an offer is known as an offeror. A person to whom an offer is
made is known as an offeree. An offer is made when an offeror proposes a set of terms
to an offeree, with the intention that if the proposed terms are accepted they wil create a
binding contract between the two parties. By accepting the terms proposed, the offeree
would aso agree to become legally bound by them. This acceptance would therefore form
a contract. As a contract is a legally binding agreement, neither an offer nor an
acceptance should be made without a willingness to accept the legal consequences.
Invitation to treat.
An invitation to treat is not an offer, it is only an invitation to make an offer. An offer shuld
not be made by a person who is not fuy prepared to take legal consequences of its being
accepted. But a response to an invitation to treat cannot result in a binding contract.
A court decides whether or not one of the parties has made an offer by looking at what it
thinks that both of the parties intended. All the circumstances of the case will be
considered in reaching this decision.
Advertisement can amount either to offers or to invitations to treat. If an advertisement is
an offer then a person who accepts the offer makes a contract with the person who
advertised. If an advertisement is only an invitation to treat then it cannot be accepted in
such a way that a contract is thereby formed.
Offer of a unilateral contract.
In a unilateral, or one-sided, contract, one party, known as the offeror, makes a promise
in exchange for an act (or abstention from acting) by another party, known as the offeree.
If the offeree acts on the offeror’s promise, the offeror is legally obligated to fulfill the
contract, but an offeree cannot be forced to act (or not act), because no return promise
has been made to the offeror. After an offeree has performed, only one enforceable
promise exists, that of the offeror.
A unilateral contract differs from a Bilateral Contract, [2] in which the parties exchange
mutual promises. Bilateral contracts are commonly used in business transactions; a sale
of goods is a type of bilateral contract.
Reward offers are usually unilateral contracts. The offeror (the party offering the reward)
cannot impel anyone to fulfill the reward offer. An offeree can sue for breach of contract,
however, if the offeror does not provide the reward after the offeree has fulfilled the
contract’s requirements.
Goods in shops.
Customers who buy goods in shops make contracts to buy those goods. A display of
goods in a shop window does not amount to an offer to sell the goods displayed. The
display is ony an invitation to treat.
Acceptance.
Offeree who receive the offer from the offeror menas he or she already accept the offer
that has been made to him or her. Acceptance is simply some indication by the person
receiving the offer that the offer is accepted. The acceptance must be clear and absolute
and without conditions attached. The objective bystander must be able to determine that
the offer has been accepted.
The acceptance must be made before the offer has expired. Most offers contain a time
limit within which the offer can be accepted. Once the offer has expired, it can not be
accepted unless the person making the offer has renewed it. If there is no time limit by
which the offer must be accepted, then the law requires the offer be left open for
acceptance for a reasonable period of time. What exactly is a reasonable period of time
will depend upon the particular circumstances of each case. The offer must be accepted
before it is withdrawn. An offer can be withdrawn before acceptance unless one of the
terms of the offer is that it will remain open for acceptance until a specified time. On
occasion, the circumstances of the dealings between the parties may be such that the
law would impose a term on the parties to keep the offer open for acceptance for a
reasonable period of time.
Acceptance of an offer to enter into a unilateral contract.
Unilateral contracts are usually accepted by conduct. There is no acceptance until the
relevant act has been completely performed. For an example – If Nadia says to Elaiza
that she will give Elaiza RM30 if Elaiza cleaned her room, Elaiza woud not be entitled to
the money until the job is finished, and could not do a half-way job and ask for RM 15.
Acceptance must be unconditional.
An acceptance must accept the precise terms of an offer.
Offer and Acceptance made over the internet.
As there have been no significant decisions by the courts as to when a contract is
concluded over the internet. There are two main ways in which such contract might be
formed. First, a contract could be made by exchange of emails. Second, a customer might
visit a website and buy goods or services described there.
Temination of offers.
As soon as an offer is accepted, a contract is created. However, an offer which has been
made might cease to exist in many ways, and once an offer has ceased to exist, it can no
longer be accepted. The terminations include:
Revocation – It is called off by the offeror.
Refusal – Offeree refuses an offer then, as far as that offeree is concerned, the offer is
terminated and cannot later be accepted.
Lapse of time – Offer will end when the time limit expires.
Intention to create Legal Relations.
The acceptance of an offer will create a contract ony if the offeror and offeree appeared
to intend to create a legally binding agreement. It is therefore said that it is a requirement
of a contract that there must be an intention to create legal relations.
In deciding whether or not there was an intention to create legal relations, the court takes
an objective view of the parties’ intentions. The court does not ask what the parties
actually intended, but looks at what they appeared to the reasonable person to intend.
Agreements made in business or commercial context.
If an agreement is made in a business or a commercial context, there is a presumption
that the parties did intend to make a contract. As this is only presumption, it is not a cast-
iron rule but only a starting point. It will therefore be up to the party who is claiming that
there was no intention to create legal relations to introduce evidence to show that the
presumption was not correct. It might be possible to do this, but if the presumption is not
rebutted, then there will be a contract.
Agreements made in a social or domestic context.
Social agreements are made between friends. Domestic agreements are made between
the members of a family. When either a social or a domestic agreement or made, the
courts begin with the presumption that the parties do not intend to make a contract. A part
who claims that such an agreement is a contract, will need to introduce evidence to show
that thisis what both parties appeared to intend. This may well be possible.
Consideration.
Consideration is usually described as being something which represents either some
benefit to the person makin a promise, [3] or some detriment to the person to whom the
promise is made, [4] or both.
Promisor an Promisee.
In Most contracts, two promises will be exchanged, so each party is both a promisor and
a promisee. In a contract case, the claimant will often be arguing that the defendant has
broken the promise made to the claimant, and therefore the claimant will usually be the
promise, and the defendant will be the promisor.
Consideration need not benefit the promisor.
Consideration need not benefit the promisor – so there can be consideration where the
promisee suffers some detriment at the promisor’s request, but this gives no particular
benefit to the promisor. Another way in which consideration can be given by the promisee
without benefiting the promisor is where contracts are made for the benefit of third party.
Executory Consideration.
Consideration is executory when there is an exchange of promises to perform acts in the
future. For example, A promises to deliver widgets to B at some future date and B
promises to pay A for the widgets when he receives the shipment. If A does not deliver
the widgets to B, B can sue A for breach of contract.
Executed Consideration.
When a promise is made in exchange for an act, when that act is performed, it is executed
consideration. Using the example above, if A timely delivers the widgets to B, A’s
consideration becomes executed.
Past Consideration. [5]
Every contract requires an offer, acceptance, and consideration. Consideration is the
exchange of benefit and detriment (e.g., the making of a promise in exchange for an
act). If a party voluntarily acts and then the other party makes a promise, the act is said
to be “past consideration” (since the act was already performed and not made
in exchange for the promise).
For example, A gives B a ride to the market and back home again. When A delivers B
to his house, B promises to give A some gas money. A cannot sue B to enforce B’s
promise since the consideration (A’s act of giving B a ride) occurred before B’s
promise. A gave B the ride without expecting anything in return. (A did not give B a ride
in exchange for B giving A gas money.)
QUESTION:
Part B: Explain the factors that may make a contract voidable.
ANSWER:
Contracts which impose a continuing liability on aminor are avoidable by the minor. This
means that the contracts are valid, except that the minor has the option to avoid the
ontract or call the contract off. A minor who is to avoid these types of voidable contract
must do so either before reaching the age of 18 or within a reasonable time of having
reached the age of 18. The main types of contracts voidable by a minor are contracts of
partnership, contracts to buy shares and contracts to take a lease of property.
There are several factors make cause a contract to be voidable [6] . Contracts are
voidable when the consent of one of the parties to the contract is caused by:
Coercian (under section 15);
Fraud – unless it is fraud by silence under section 17 and the party on whom the fraud
was perpetrated had the means of discovering the truth with ordinary diligence (s 17);
Misrepresentation – unless the party whose consent was caused by the
misrepresentationhad the meansof discovering the truth with ordinary diligence (s 18);
Undue influence – Under section 16;
Both parties to the contract (promisor and promisee) intend that time should be of the
essence of the contract and the contract was not performed in the specified time (s 56);
A party to the contract (promisor/promisee) refuses to perform or has disabled him/herself
from performing his/her promise in its entirety (s 40).

Definition of Breach of Contract

When parties involved in a contract, whether that contract is established orally or in
writing, fail to uphold their part of the agreement, it's possible to determine them to be in
breach of contract. There are a number of ways in which a breach of contract might occur
but the most common include:

Failing to deliver services or goods

Failing to complete a job
Failing to pay in a timely manner
Providing services or goods that are subpar
In simple terms, a breach of contract happens when promises are broken or somebody
fails to provide things that are included in the terms of the agreement.
The formal definition of a breach of contract includes the following:

Unjustifiably failing to adhere to the terms of a contractual agreement.

Violating an agreement by failing to perform or interfering with another party's ability to
meet their obligations under the contract.
Breach of contract is among the most common reasons behind lawsuits in the United
States and can occur in a number of ways. Established laws offer a variety of ways to
remedy a breach that are designed to make things right for the injured party. These court-
ordered remedies are not designed to act as a punishment for the party guilty of a breach
of contract, however. Rather, they are meant to act as a means to restore the injured
party to the position they would have been in if the breach had never happened.

There are a number of forms a breach of contract might take, such as:

A partial breach of contract

A material breach of contract
An anticipatory breach of contract
A specific performance breach of contract
Breach of Contract Elements
To successfully pursue a lawsuit for breach of contract, certain elements need to exist
including:

Proof that a valid contract exists

Proof that the contract's terms have been breached
Actual losses or damages
In other words, this means that there must be a contract in place that can be validated in
court. However, it's not a requirement for the contract to be in writing. Oral contracts can
just as easily be held up in court. There are three things that need to be established to
prove that a valid contract is in place:

A contractual offer
Acceptance of the terms of the agreement
Considerations have been received
In examples of breach of contract cases, an offer includes discussions regarding the
agreement to provide services or goods in exchange for something of value. It is also
necessary to demonstrate an intention to enter into the agreement with one another.
Acceptance refers to the act of agreeing to the terms associated with the exchange
outlined in the agreement. While it's not necessary for a contract to be in writing for it to
be held up in court, it is usually easier to prove that the agreement has been accepted
due to the fact that a legal document exists which specifies the terms each party has
agreed to.

Consideration refers to products, services, or some other thing of value that each involved
party has received (or intended to receive) as a result of the contract. If one party
promises to provide something without getting anything back in return, however, it tends
to look like a gift. This is important to note because gifts cannot be enforced as
considerations and this may prevent the ability to successfully pursue legal action for a
breach of contract.

Additionally, past agreements that were written to cover the provision of services or goods
are not considered to be a valid contract. The contract needs to be agreed upon before
an exchange happens for it to hold up in court. A breach of contract happens when the
terms of a contract are not adhered to. It is important to note that not every term of the
contract will be taken literally. For legal action to be warranted, a breach of contract must
actually decrease the overall value of the agreement. This is what is known as a "material
breach of contract."

If you need help with a breach of contract case, you can post your legal need on
UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its
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Unenforceable Contract: Everything You Need to Know
An unenforceable contract is a written or oral agreement that will not be enforced by
courts.3 min read
Unenforceable Contract
An unenforceable contract is a written or oral agreement that will not be enforced by
courts. There are many different reasons that a court may not enforce a
contract. Contracts may be unenforceable because of their subject matter, because one
party to the agreement unfairly took advantage of the other party, or because there is not
enough proof of the agreement.
What are the Requirements for Enforceable Contracts?
To understand why a contract might not be enforced, it is important to first understand the
requirements of a valid, enforceable contract. An enforceable contract is a legally binding
agreement between two or more people or business entities. The people or entities
entering into the agreement are called the “parties” to the contract. With a few exceptions,
contracts do not need to be in writing to be enforceable but oral contracts are more difficult
to prove.
A legally binding enforceable contract requires an offer to enter into an agreement,
acceptance of that offer, consideration, and no defenses for not enforcing the
agreement. Consideration is an exchange of promises to do or not do something. One
of the most common forms of consideration is money. In a common enforceable contract,
one party promises to pay another party money in exchange for a promise that the party
receiving the money will receive a service.
Some common defenses to enforcing a contract are lack of capacity, duress, undue
influence, misrepresentation, nondisclosure, unconscionability, public policy, mistake,
and impossibility. If these exist an otherwise valid contract may be unenforceable.
Lack of Capacity
All parties to a contract must have legal capacity to enter into the agreement. Parties
who are under 18 years old, who are mentally impaired, who are intoxicated on drugs or
alcohol, or who otherwise do not fully understand what they are doing when they agree
to a contract may lack capacity. If all parties do not have legal capacity, the agreement
may not be enforced.
Duress, Undue Influence
If one party uses an unfair advantage during contract negotiations to pressure the other
party into entering into a contract, the contract will not be enforced. The pressure used
must be extreme for a contract to be considered unenforceable because of duress or
undue influence. For example, if one person uses a threat of violence to get the other
person to sign a contract that contract will not be enforced.
Misrepresentation, Nondisclosure, and Fraud
Courts do not look favorably upon persons who use trickery to get another to enter into
an agreement. A contract may be deemed unenforceable if one party obtains the other
party’s agreement by making false or misleading statements or omitting important
information during discussions about entering into the agreement.
Unconscionability
A contract is considered unconscionable when something about its terms or how it was
formed are so unfair that it would “shock the conscience” if it were enforced. A contract
is not unconscionable just because one party had more bargaining
power. Employment contracts, for example, are routinely found enforceable even though
the employer usually has more power to shape the terms of the agreement. Contracts
have been found unconscionable in situations where a very sophisticated business took
advantage of a barely literate, uneducated consumer.
Depending on the circumstances, a court might decide the entire agreement is
unenforceable or might just strike the parts it considers unconscionable from the
agreement and enforce the rest of the contract.
Public Policy, Illegality
Courts won’t enforce contracts that agree to something against the law or the best interest
of the public. For example, courts will not enforce an agreement to purchase illegal drugs.
Nor will courts enforce a landlord-tenant agreement that requires a tenant to agree to live
in conditions that do not meet health and safety code requirements. The purpose of public
policy and illegality grounds for non-enforcement is to protect society as a whole.
Mistake
Not all mistakes make a contract unenforceable but some will. Mistakes can be
“unilateral,” where only one party makes a mistake about the contract or
“mutual.” Contracts are more likely to be considered unenforceable where the mistake is
mutual but sometimes even a unilateral mistake can serve as a basis for not enforcing a
contract. Only mistakes that are important to the agreement and impacted its creation or
performance in a significant way can make a contract unenforceable.
Impossibility
Sometimes a contract that was valid when formed becomes impossible to carry out and
for this reason will be unenforceable. Impossibility that is the fault of one party usually
does not make a contract unenforceable.
If you would like help drafting an enforceable contract, you can post your legal need on
Counsel’s marketplace where experienced attorneys, averaging 14 years of legal
experience, are waiting to help you.
Rescissible Contract: Everything You Need to Know
A rescissible contract is one that was entered into legally by the contracting parties but
has resulted in economic damage to one of the parties or an outside party. The court can
therefore rescind, or set aside, the contract for equitable reasons.3 min read
A rescissible contract is one that was entered into legally by the contracting parties but
has resulted in economic damage to one of the parties or an outside party. The court can
therefore rescind, or set aside, the contract for equitable reasons.
What Types of Contracts Are Rescissible?
Valid contracts can be legally rescinded under certain circumstances. Types of contracts
that are rescissible under Article 1381 include:
 Any contracts entered into by guardians when their wards suffer lesion by more
than one-fourth of the items that are the object thereof.
 A contract agreed to in representation of an absentee, if the absentee suffered the
lesion mentioned above.
 Any contracts relating to fraud of creditors when the creditors cannot collect what
is owed to him or her in any other manner.
 Anything in litigation if it was entered into by the defendant without the knowledge
or approval of the litigants themselves or a competent judicial authority.
 Any other type of contract the law declares subject to rescission.
Under Article 1382, if one party is unable to pay debts owed, the injured party can rescind
the contract. Rescission is only necessary to the extent that it is required to cover
damages. The offending party must return the items that were the subject of the contract,
along with interest. Therefore, rescission can only occur if the person can return what he
or she is required to return.
If those things that are the subject of the contract are in the legal possession of a third
party who wasn't acting in bad faith, rescission won't take place. In this situation, the
injured party can demand reimbursement of damages from the person or persons who
caused the loss.
What Must Occur Before a Contract Entered Into in Fraud of Creditors Can Be
Rescinded?
To rescind a contract for fraud of creditors:
 Credit must exist prior to the contract's creation.
 There must be an element of fraud, or at least the intent to commit fraud, to the
creditor seeking rescission.
 Creditors cannot legally collect their credit.
 The object in dispute cannot be in the hands of a third party who hasn't acted in
bad faith.
How Defective Contracts Are Classified
Defective contracts can be classified in several ways:
 Voidable and Annullable Contracts: These can be defective if one party was
incapable of giving consent or if consent was granted by mistake, threat, violence,
fraud, or undue influence.
 Unenforceable contracts: These are contracts that can't be enforced for a variety
of reasons.
 Void or Inexistent Contracts: These have no legal effect because they don't
legally exist.
Other defective contracts include those that are partially ineffective and partially valid.
They don't fall under any of the above classifications, are only ineffective with respect to
certain persons, but can be effective to other parties. These are known as Relatively
Ineffective Contracts.
Distinctions in Defective Contracts
Contracts become defective typically by:
 Defect itself
 Damage or prejudice
 Effect
 Remedy
Contracts that are void due to defect itself include:
 Void contracts that are caused by illegality or lack of essential elements.
 Voidable contracts that are defective because of their methods of consent.
 Rescissible contracts that are caused by damages or lesion to one of the contract
parties or another third party.
 Unenforceable contracts that lack authority, capacity, or both parties' consent.
 Contracts that are not compliant with the Statute of Frauds or entered into on
behalf of another party without their authority.
Void contracts cannot be ratified, but voidable contracts can be ratified in some
circumstances. Rescissible contracts might be subject to convalidation, but not official
ratification. Unenforceable contracts are also subject to ratification in some cases.
Under Article 1410, void contracts cannot be cured by prescription, but voidable ones
can. Rescissible contracts can also be cured by prescription while unenforceable ones
cannot.
Obligations Created by Contract Rescission
Rescinding a contract creates something called mutual restitution. Mutual restitution is
not applicable if a creditor received nothing from the contract and the thing owed is
already in possession of a party in good faith. It is subject to indemnification only if two
more alienations of liability exist from the first party in violation.

5.4.2 Illegality Lecture

Statutory prohibition of contracts
A contract may be prohibited by a statute either expressly or impliedly. This is an
important distinction to make as whether or not a party may enforce the contract is
dependent on this.
Express Prohibitions
If a statutory prohibition expressly prohibits a type of contract or term, there is no question
as to the illegality of the contract. Neither party will be able to enforce the contract,
irrespective of the innocence of either or both parties - Re MahMoud and Ispahani [1921]
2 KB 716.
Implied prohibitions
Implied prohibitions are much more difficult to identify, and there are two tests the courts
may apply to determine whether the contract made is impliedly prohibited. The tests
applied and the decisions made are very fact dependent.
In order to determine whether an implied prohibition is operable, the court must ascertain
whether the objective of the legislation is to forbid the contract. Here is the first rule:
1. If the sole object of the statute is to increase national revenue, the contract itself is
not illegal
This rule covers examples such as statutes which requires individuals to have a licence
to trade in a particular area or with particular goods.
It should be noted that the above must relate to the sole object of the statute. If there are
other objectives, such as public policy, this rule will not operate.
2. Does the statute contemplate that the prohibited act will be done in the
performance of a contract?
This is a confused concept best examined with an example. Take a fictitious act which
has these provisions:
Section 1 – It is a criminal offence to…
1. Sell chickens
2. Keep chickens as pets
Option (a) will always involve a contract, therefore it is clear that the statute would
contemplate this prohibited act would take place in the performance of a contract, and
would therefore be an implied illegal contract.
Option (b) may involve a contract, but more often than not, will not. You may purchase a
chicken for the purpose of keeping it as a pet, but you would not contract with somebody
to keep a chicken as a pet. Therefore, the statute does not contemplate this prohibited
act to take place in the performance of a contract, and would not be an implied illegal
contract.
Contracts which are not illegal, but have been performed in an illegal manner
A contract may well be legal, but the way in which one party has undertaken their
obligations amounts to illegality.
Whether the contract is legal or not is dependent on whether the ‘innocent’ party is aware
of the illegal performance of the contract or is involved in it - Ashmore, Benson, Pease &
Co Ltd v A V Dawson Ltd [1973] 1 WLR 828
The general rule above may be restricted where the purpose of the legislation is not
undermined by the illegal performance - Anderson Ltd v Daniel [1924] 1 KB 138
Recent case law has added more complexity to this area of law - ParkingEye Ltd v
Somerfield Stores Ltd [2012] EWCA Civ 1338.
The court held that when deciding whether the illegal performance would render the
contract unenforceable they would consider these things:
1. The object and intent of the party attempting to enforce the contract;
2. The gravity of the illegality in the context of the claim; and
3. The nature of the illegality.
Each situation will be fact-dependant. Just remember to apply these factors and come to
a well-reasoned conclusion.
The effect of statutory penalties
In some cases, the performance of an illegal contract will be subject to a statutory penalty.
The courts have held that where the penalty is proportionate and sufficient to the breach,
the contract is enforceable by either party - St Johns Shipping Corporation v Joseph
Rank [1957] 1 QB 267.
Common law prohibition of contracts – Public Policy
Contracts may be prohibited via the common law, on grounds of public policy or morality.
There is a lot of uncertainty in this area, and the when the court can prevent a contract
from operating is often unclear. The courts approach this area of law with a consideration
of the common values of society – if the contract breaches common values of society it
will be void for common law illegality.
Contracts to commit crimes
The case of Bigos v Boustead [1951] 1 All ER 92 confirms a contract which includes an
obligation to commit a crime will be illegal. Furthermore, a criminal or criminal’s estate
may not benefit from the crime (Beresford v Royal Insurance Co Ltd [1938] 586).
Contracts which prevent the administration of justice
Despite the law of contract mostly being self-regulatory, in the event of a dispute, the
courts will intervene. Contracts which preclude parties to the contract accessing justice,
or prevent the courts interfering with a contract, may be illegal on the ground that they
prevent the administration of justice. See Hyman v Hyman [1929] AC 601 and Scott v
Avery (1855) 5 HL Cas 811.
Contracts which are sexually immoral
Sexually immoral contracts refer to those relating to contracts for sexual acts or services
- Pearce v Brooks(1865) LR 1 Ex 213.
However, this approach has evolved along with societies views - Sutton v Mishon de
Reya [2003] EWHC 3166 (Ch).
Contracts which involve public corruption
Some contracts are invalid because they involve corruption - Parkinson v College of
Ambulance Ltd [1925] 2 KB 1.
Common law prohibition of contracts – restraint of trade
To ensure there is a continuing freedom of contract, contracts that restrain trade can be
void for illegality - Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894]
AC 535.
In assessing whether the restraint on trade is enforceable, the courts will focus on whether
the contract between the two parties is reasonable, and if the limitation would not be in
the public’s interest.
Is the contract reasonable?
In Herbert Morris Ltd v Saxelby [1916] AC 688, the courts identified general presumptions
for deciding whether or not a contract may be illegal due to a disproportionate restraint
on trade.
 1. Employment contracts that restrict former employees from being employed by
competitors would not normally be valid
2. Employment contracts that prevent the loss of trade secrets or stealing of custom
would normally be valid
3. Terms in a contract for the sale of a business preventing the seller setting up
another business in competition with the purchaser’s business are normally valid
Once one of these presumptions has been identified, the duration and the geographical
extent of the limitations made by the contract will be considered. These limitations should
not be disproportionate. Some further case examples can be found below:
Mason v Provident Clothing & Supply Co Ltd [1913] AC 724
Home Counties Dairies Ltd v Skilton [1970] 1 WLR 526
Reasonableness as to the public interest is a further important consideration for the
courts. The public interest consideration will be invoked where a contract will have an
effect on the competitive structure of a certain market - Herbert Morris Ltd v
Saxelby [1916] AC 688.
Exclusivity dealing contracts
Exclusivity dealing contracts, also known as ‘tie agreements’, are those between parties
at different stages in a commercial chain which force a closer ties between the parties
than a mere contract - Esso Petroleum Co Ltd v Harper’s Garage (Stourport) Ltd [1968]
AC 269.
Exclusive service agreements
An exclusive service agreement is similar to an exclusive dealing contract, but instead it
relates to where a person provides services for only one recipient.
These contracts do not usually involve a contract of employment, only a contract of
restriction. Generally, these courts will apply the same rules as those for contracts of
employment – that generally these agreements are not valid, dependent on the
geographical restraint and duration of the term.
See Creig v Insole [1978] 1WLR 302 and Eastham v Newcastle United Football Club
Ltd [1964] Ch 413.
The court will also take into consideration whether the individual subject to the contract
has been treated fairly, has undertaken independent legal advice, and whether they have
been taken advantage of. Their age, the fairness of the contract, and the duration of the
contract will be helpful in assessing this - Proactive Sports Management Ltd v
Rooney [2011] EWCA Civ 1444.
The effect of illegality
The case of Holman v Johnson(1775) 1 Cowp 341 is authority for the general principle of
illegality – that the illegal contract will be unenforceable. Dependent on the circumstances,
one or none of the parties may enforce the contract, and on occasion only part of the
contract will be unenforceable.
Severable illegal contracts
The courts have the power to enforce a contract, but only when the illegal parts of the
contract have been removed. There is a three-part test to apply when attempted to sever
parts of the contract - Sadler v Imperial Life Assurance Co of Canada Ltd(1988) IRLR
388:
1. The ‘blue pencil’ test – can the illegal provision be removed without modifying the
words of the remaining terms. If it still makes sense, the illegal provision can be
removed.
2. The remaining terms following the ‘blue pencil’ rule must be supported by
consideration
3. Following the blue pencil rule, the contract must continue to be the same sort of
contract that the parties entered into in the first place. It cannot be changed to the
extent that it changes the character of the contract.
The final requirement is a question of fact, and can be difficult to assess - Attwood v
Lamont[1920] 3 KB 571.
Collateral contracts
Where there is one illegal contract, but there is a collateral contract that allows a recovery
of all or part of the contract, this may be enforceable, but only if providing for a remedy
under the collateral contract is not equal to enforcing the illegal contract - Fisher v
Bridges(1854) 3 El & Bl 642.
A collateral contract must have the effect of protecting an innocent party to whom a
promise or misrepresentation has been made.
Claims based on an illegal contract
The general rule is any claim based upon an illegal contract is invalid, unless the claim is
related to an unrelated part or transaction of the contract which the illegality does not
affect - Euro-Diam Ltd v Bathurst [1990] 1 QB 1.
Recovery under illegal contracts
The final assessment to make when considering an illegal contract is whether or not any
money or property may be recovered subject to the contract.
Both parties are guilty
When both parties are guilty in relation to the illegal contract, the general rule
from Holman v Johnson (1775) 1 Cowp 341 is that there can be no recovery of any kind
of money or property.
This rule has been challenged as being contrary to Article one of the Human Rights Act
– ‘no one shall be deprived of his possessions except in the public interest’ - dismissed
in Shanshal v Al-Kishtaini [2001] EWCA Civ 264.
One party unfairly induced into the illegal contract
If both parties are guilty of entering an illegal contract, but one party has been forced into
the contract as a result of duress or undue influence, the contract will not be enforced,
but the victim may successfully recover money or property they have passed subject to
the contract - Hughes v Liverpool Victoria Legal Friendly Society [1916] 2 KB 482.
One party withdraws from the contract
If one party withdraws prior to the illegal part of the contract coming into effect, the
doctrine of locus poenitentiae comes into effect. The result of this is that the party who
withdrew may recover any money or property subject to the contract. The fact one party
has withdrew will suffice – Tribe v Tribe [1996] Ch 107.
There has been some debate as to when the withdrawal from the contract must occur
- Kearley v Thomson(1890) 24 QBD 742 is the correct approach.
The withdrawal from the contract needs to be voluntary - Bigos v Boustead [1951] 1 All
ER 92.