Chapter-VIII

ILLEGALITY AND PUBLIC POLICY AS DEFENCES

8.1 Introduction

A contract that is expressly or implicitly prohibited by statute is illegal. In this

context, ‘statute’ includes the orders, rules and regulations that ministers of
the Crown and other officials are so frequently authorized by Parliament to
make.

If the contract in fact made by the parties is expressly forbidden by the statute,
its illegality is undoubted. Express statutory prohibition of contracts is by no
means uncommon. So Parliament may provide in pursuance of a policy of
controlling credit that no contract of hire purchase shall be entered into,
unless at least 25 percent of the cash prize is paid by way of an initial
payment.1 Where it is alleged that the prohibition is implied, the court is
presented with a problem the solution of which depends upon the construction
of the statute. What must be ascertained is whether the object of the
legislature is to forbid the contract. In pursuing, this enquiry a variety of tests
has been applied. For instance, if the sole object of the statute is to increase
the national revenue, as for instance by requiring a trader to take out a license,
or to punish a contracting party who fails to furnish or furnishes incorrectly
certain particulars, the contract that he may have made is not itself
prohibited.2 On the other hand, if even one of the objects is the protection of
the public or the furtherance of some other aspect of public policy, a contract
that fails to comply with the statute may be implicitly prohibited.3 But no one
test is decisive, for in every case the purpose of the legislature must be
considered in the light of all the relevant facts and circumstances. 4

1
Stonehedge Finance Ltd. V. Phillips (1965) 1 All ER 513.
2
Learoyd v. Bracken (1894) 1 QB 114.
3
Victorian Daylesford Syndicate v. Dott (1905) 2 Ch 624 at p 630.
4
St. John Shipping Corpn v. Joseph Rank Ltd. (1957) 1 QB 267 at pp 285-287
266
8.2 Contracts Illegal at Common Law on Grounds of Public Policy

Certain types of contract are forbidden at common law and are therefore
prima facie illegal. The first essential to an understanding of this head of the
law, which has been clouded by much confusion of thought, is to discover if
possible the principle upon which the stigma of illegality is based. The
present law is the result of a development that stretches back to at least
Elizabethan times5, but its foundations were not effectively laid until the
eighteenth century. What the judges of that period were at pains to emphasize
was that they would not tolerate any contract that in their view was injurious
to society.6 Injury to society, however, is incapable of precise definition, and it
is not surprising that the particular contracts found distasteful on this ground
were described in somewhat vague and indeterminate language. To give a few
examples, nobody would be allowed ‘to stipulate for inequity’,7 no contract
would be enforced that was ‘contrary to the general policy of the law’,8 or
‘against the public good’, 9 or contra bonos mores10 or which had arisen ex
turpi causa.11

It seems justifiable to infer from such expressions as these that the judges
were determined to establish and sustain a concept of public policy.
Contractual freedom must be fostered, but any contract that tended to
prejudice the social or economic interest of the community must be forbidden.

Not unnaturally a principle stated in such sweeping terms as these has its
disadvantages. It is imprecise, since judicial views will inevitably differ upon
whether a particular contract is immoral or subversive of the common good;
there is no necessary continuity in the general policy of the law, for what is
anathema to one generation seems harmless to another; and the public good

5
Pollock’s Principles of Contract 13th edn. at 1950, Stevans London at p. 291.
6
Fifoot Lord Mansfield at pp. 122-125.
7
Collins v. Blentern (1767) 2 Wils KB 341 at p 350.
8
Lowe v. Pars (1768) 4 Burr 225
9
Supra note 7 ,at p 350.
10
Girardy v. Richardson (1793) 1 Exp 13
11
Holman v. Johnson (1775) 1 Cowp 341 at p 343.
267
affects so many walks of life that the causes of action that can be said to arise
ex turpi causa must in the nature of things very greatly in their degree of harm
to the community.

It is this variation in the degree of harm done that requires emphasis, for the
word ‘illegal’ has been, and still is, used to cover a multitude of sins and even
cases where little, if any, sin can be discovered. The list of ‘illegal’ contracts
includes inter alia agreements to commit a crime or a tort, to defraud the
revenue, to lend money to an alien enemy, to import liquor into a country
where prohibition is in force, to procure a wife for X in return for a reward, to
provide for a wife if she should ever separate from her husband and finally an
agreement in restraint of trade between master and servant or between the
seller and buyer of a business, such as that by which a servant promises not to
work in the future for a trade rival of his present employer. If these contracts
are scrutinized in the order given, it will be seen that the improbity which they
reveal is a constantly diminishing factor and that it is entirely absent from the
agreement in restraint of trade. There is nothing disgraceful in a master and
servant coming to such an agreement, and the only complaint that their
conduct invokes is the possible economic inexpedience of allowing a
workman to restrict his freedom to exploit his skill as and where he will.

Common sense suggests that the consequences at law of entering into one of
these so-called illegal contracts should vary in severity according to the
degree of impropriety that the conduct of the parties discloses. It is obvious
that an agreement to commit a crime cannot be put on the same footing as an
undertaking by a servant that he will not later enter the employment of a rival
trader. The former is so transparently reprehensible judged by any standard of
morals that it must be dismissed as illegal, with the result that both parties
must be excluded from access to the courts and denied all remedies; but the
latter should certainly not attract the full rigour of the maxim ex turpi causa
non oritur actio, with its implication that it can originate no rights or
liabilities whatsoever. The parties have done nothing disgraceful, they have
268
not conspired against the proprieties and, although they cannot be allowed to
enforce such part of the contract as is tainted, it would be unjustifiable to
regard them as outcasts of the law unable to enforce even the innocent part of
their bargain. To describe their contract as illegal as a whole is an abuse of
language. Speaking of the contract in restraint of trade, for instance, Farwell
LJ said, ‘it is not unlawful in the sense that it is criminal or would give any
cause of action to a third person injured by its operation, but it is unlawful in
the sense that the law will not enforce it’.12 In the eighteenth century, when
the principle of public policy was taking root and the instances of unsavoury
bargains were comparatively simple, it was perhaps not strange that the
judges should have used somewhat exaggerated language in rejecting
contracts that revealed wickedness, but in the complex conditions of today the
indiscriminate use of the term ‘illegal’ is, to say the least, confusing.

Modern judges have in fact taken a more realistic view of this part of the law
and have concluded that the so-called illegal contracts fall into two separate
groups according to the degree of mischief that they involve.13 Some
agreements are so obviously inimical to the interest of the community that
they offend almost any concept of public policy; others violate no basic
feelings of morality, but run counter only to social or economic expedience.
The significance of their separation into two classes, as we shall see, lies in
the different consequences that they involve.

That the various contracts traditionally called illegal do not involve similar
consequences was stressed by Somervell U, in the following passage:14

In Bennett v. Bennett, it was pointed out that there are two kinds of illegality
of differing effect. The lust is where the illegality is criminal, or contra bonos
mores, and in those cases, which I will not attempt to enumerate or further
classify, such a provision (sic), if an ingredient in the contract, will invalidate

12
Northern Western Salt Co. v. Electrolytic Alkali Co. (1912) 107 Lt 439 at p 444.
13
Bennett v. Bennett (1952) 1 KB 249.
14
Goodinson v. Goodinson (l954) 2 QB 118 at pp 120-121.
269
the whole, although there may be many other provisions in it. There is a
second kind of illegality which has no such taint; the other terms in the
contract stand if the illegal portion can be severed, the illegal portion being a
provision which the court, on grounds of public policy, will not enforce. The
simplest and most common example of the latter class of illegality is a
contract for the sale of a business which contains a provision restricting the
vendor from competing in or engaging in trade for a certain period or within a
certain area. There are many cases in the books where, without in any way
impugning the contract of ask, some provision restricting competition has
been regarded as in restraint of trade and contrary to public policy. There are
many cases where not only has the main contract to purchase been left
standing but part of the clause restricting competition has been allowed to
stand.

Assuming, then, that contracts vitiated by some improper element must be

divided into two classes, how are the more serious examples of ‘illegality’ at
common law to be distinguished from the less serious? Which of the contracts
that have been frowned upon by the courts are so patently reprehensible-so
obviously contrary to public policy-that they must be peremptorily styled
illegal? Judicial authority is lacking, but it is submitted that the epithet
‘illegal’ may aptly and correctly be applied to the following six types of
contract:

• A contract to commit a crime, a tort or a fraud on a third party.

• A contract that is sexually immoral.
• A contract to the prejudice of the public safety.
• A contract prejudicial to the administration of justice.
• A contract that tends to corruption in public life.
• A contract to defraud the revenue.

There remain three types of contract which offend ‘public policy’, but which
are inexpedient rather than unprincipled.

270
 • A contract to oust the jurisdiction of the courts.
• A contract that tends to prejudice the Status of marriage.
• A contract in restraint of trade.

If the word ‘illegal’ is to be reserved for the more reprehensible type of

contract, another title must be chosen to designate those which fall within the
second degree of public policy, and which for that reason have been treated -
with comparative leniency by the courts. The most appropriate title seems to
be ‘void’, since these contracts are in practice treated by the courts as void
either as a whole or at least in part. In Bennett v. Bennett Denning LJ
described covenants in restraint of trade as ‘void not illegal’.

They are not ‘illegal’, in the sense that a contract to do a prohibited or

immoral act is illegal. They are not ‘unenforceable’, in the sense that a
contract within the Statute of Frauds is unenforceable for want of writing.
These covenants lie somewhere in between. They are invalid and
unenforceable.15

The word ‘void’ used as a descriptive title certainly has its disadvantages. It is
already applied to a number of disparate contracts and is not applied to them
in any uniform sense or with uniform results. At common law it has long been
used to indicate the consequences of mistake; by statute it has been used with
dubious results in wagering transactions and in contracts made by infants. But
linguistic precision cannot survive the complexity of life. A continental jurist
has said that unlike typical sciences where there is no interim stage legal
science the effects of disobeying a legal rule may be graded to suit the
individual situation.

Thus, the difference between an act that is valid and an act that is void is
unlike the difference between ‘yes’ and ‘no’, between effect and no-effect. It
is a difference of grade and quantity. Some effects are produced, while others

15
(1952) 1 KB 249 at p 260.
271
are not.16

For better or for worse, then, it has been decided for the purposes of this book
to describe the three less serious types of ‘illegal’ contracts as contracts void
at common law on grounds of public policy.

Some general observations must be added upon the doctrine of public policy
in the current law.17

Since public policy reflects the mores and fundamental assumptions of the
community, the content of the rules should vary from country to country and
from era to era. There is high authority for the view that in matters of public
policy the courts should adopt a broader approach than they usually do to the
use of precedents.18

Such flexibility may manifest itself in two ways: by the closing down of
existing heads of public policy and by the opening of new heads. There is no
doubt that an existing head of public policy may be declared redundant. So in
the nineteenth century it was stated that Christianity was part of the law of
England and that accordingly a contract to hire a hail for a meeting to promote
atheism was contrary to public policy19 but fifty years later this view was
decisively rejected.20

More contrary surrounds the question of whether the courts still retain
freedom to recognize new heads of public policy. It has been denied that any
such freedom exists21 and Lord Thankerton said that the task of the judge in
this area was ‘to expound and not to expand’, the law. 22 It may be thought
surprising however that in this of all areas, the courts should abrogate their
function of developing the common law. To some extent the discussion is

16
64 LQR 326.
17
Lloyd Public Policy (1953); Winfield 42 Harvard L Rev 76.
18
Nordenfelt v. Maxim Nordenfelt Guns and Ammunition Co. (1894) AC 535.
19
Cowan v. Milbourn (l867) LR 2 Exch 230.
20
Bowman v. Secular Society (1917) AC 406.
21
Janson v. Driefintein Consolidated Mines (1902) AC 484 at p. 491.
22
Fender v. St. John Mildmay (1938) AC 1 at p. 23.
272
artificial since much development may take place within the existing heads
but it is difficult to assert that new circumstances cannot arise which do not
fall readily into any of the recognized heads. Courts have responded to this
challenge in the past by the development of new heads23 and it is thought that
they will, in exceptional circumstances, do so again.

This question would be relevant, for instance, if it were argued that contracts
involving racial, religious or sexual discrimination were contrary to public
policy. It is arguable that the Court of Appeal’s decision in Nagle Feilden24
represents recognition of such a possibility and there is some Australian
authority too.25 Undoubtedly any such argument would raise important
questions, in particular whether the existence of legislation in this area26
should be regarded as relevant either as (a) delimiting precisely the area of
reprehensible discriminatory conductor (b) (preferably) as a legislative signal
that discrimination is against the public interest.27 Canvassed head of public
policy has involved the validity of contractual provisions, which attempt to
allocate some of the risks of inflation by tying repayment of debts to foreign
currencies. In Treseder-Griffin v. Co-operative Insurance Society Ltd.,28
Denning LJ expressed the opinion, obiter, that such provisions were contrary
to public policy but this view was not followed by Browne-Wilkinson J in
Multiservice Bookbinding Ltd. v. Marden,29 a decision approved in its turn by
Lord Denning MR in Staffordshire Area Health Authority v. South
Staffordshire Waterworks Co.30 In none of these cases was any weight
attached to any argument based on novelty.

A final observation may be made as to the way in which the courts determine
the content of public policy. Apart from reliance on previous precedents, this

23
Neville v. Dominion of Canada News Co. Ltd. (1915) 3 KB 556.
24
(1966) 2 QB 633, (1966) 1 All ER 689.
25
Newcastle Diocese (Church Property Trustees) v. Ebbeck (1960) 34 ALJR 413.
26
Race Relations Act, 1968; Equal Pay Act, 1970.
27
Blathwayt v. Baron Cawley (1976) AC 397 at pp. 425-426
28
(1956) 2 QB 127 (1956) 2 All ER 33.
29
(1979) Ch 84 (1978) 2 All ER 489
30
(1978) 3 All ER 769, (1978) 1 WLR 1387.
273
is done by a priori deduction from broad general principles. It is not the
practice in English courts for the parties to lead sociological or economic
evidence as to whether particular practices are harmful and it is doubtful to
what extent such evidence would be regarded as relevant if it were adducted.31

8.3 The Consequence of Illegality

8.3.1 The Relevance of the State of Mind of the Parties

Whether the parties are influenced by a guilty intention is inevitably material

in estimating the consequences of an illegal contract. Its materiality may be
stated in three propositions.

First, if the contract is illegal in its inception, neither party can assert that he
did not intend to break the law. Both parties have expressly and clearly agreed
to do something that in fact is prohibited at common law, as for example,
where a British subject agrees to insure an alien enemy against certain rides.
The position is the same if the parties have agreed to do something that is
expressly or implicitly forbidden by statute.32 In both these cases, the contract
is intrinsically and inevitably illegal, and, so far as consequences are
concerned, no allowance is made for innocence. The British subject, for
instance, may well be ignorant that it is unlawful to contract with an alien
enemy, but none the less he will be precluded by the maxim ignorantia juris
haud excusat frora relying upon his ignorance.33 The very contract is
unlawful in its formation.

Secondly, if the contract is ex facie lawful, but both parties intend to exploit it
for an illegal purpose, it is illegal in its inception despite its innocuous
appearance. Both parties intend to accomplish an unlawful end and both are
remediless. This is true, for instance, of an agreement to let a flat if there is a
common intention to use it for immoral purposes.

31
Texaco Ltd. v. Mulberry Filling Station (1972) 1 All ER 513.
32
Re Mahmood and Ispahani (1921) 2 KB 716.
33
Waugh v. Morris (1873) LR 8 QB 202 at p. 208.
274
Thirdly, if the contract is lawful in its formation, but one party alone intends
to exploit it for an illegal purpose, the law not unnaturally takes the view that
the innocent party need not be adversely affected by the guilty intention of the
other.34 This has been frequently stressed by the judges. In one case in 1810,
for instance, the plaintiffs, acting on behalf of a Russian owner, had insured
goods on a vessel already en route from St Petersburg and had paid the
premium. The contract was made after war had broken out between Russia
and England, but the fact was not known, and could not have been known to
the plaintiffs. The ship was seized by the Russians and taken back to St
Petersburg. The plaintiffs succeeded in an action for the recovery of the
premium.35 Lord Ellenborough, after remarking that the insurance would have
been Illegal in its inception had the plaintiffs known of the outbreak of war,
said:

“But here the plaintiffs had no knowledge of the

commencement of hostilities by Russia, when they effected
this insurance; and, therefore no fault is imputable to them
far entering into the contract; and there is no reason why they
should not recover lack the premiums which they have paid
for an insurance from which, without any fault imputable to
themselves, they could never have derived any benefit.” 36

Whether a party is innocent or guilty in this respect depends upon whether ‘he
is himself implicated in the illegality’,37 or more precisely whether he has
participated in the furtherance of the illegal intention.38 If, for instance, A lets
a flat to B, a woman whom he knows to be a prostitute, the very contract will
be unlawful if he knows that B’s object is to use the premises for immoral
purposes,39 but this will not be the case if all that he is aware of is B’s mode
of life, for a reasonable person might not necessarily infer that the purpose of

34
Oom v. Bruce (1810) 12 East 225.
35
Ibid.
36
Id at p 226.
37
Scott v. Brown, Doering, McNab & Co. Ltd. (1892) 2 QB 724 at p. 728.
38
In Re Trepca Mines Ltd. (No. 2) (1963) Ch 199, (1962) 3 All ER 351.
39
Girardy v. Richardson (1793) 1 Esp 13.
275
the letting was to further immorality.40 Even a prostitute must have a home.

Perhaps the best known case on this subject so far as illegality at common law
is concerned, is Pearce v. Brooks,41 where the facts were as follows:

The plaintiffs agreed to supply the defendant with a new

miniature brougham on hire until the purchase money should
be paid by installments during a period that was not to exceed
twelve months. The defendant was a prostitute and she
undoubtedly intended to use the carriage, which was of a
somewhat intriguing nature, as a lure to hesitant clients. One
of the two plaintiffs was aware of her mode of life, but there
was no direct evidence that either of them knew of the use to
which she intended to put the carriage. The jury, however,
found that the purpose of the woman was to use the carriage
as part of her display to attract men and that the plaintiffs
were aware of her design. On this finding, Bramwell B gave
judgment for the defendant in an action brought against her
to recover a sum due under the contract.

It was held on appeal that there was sufficient evidence to support the finding
of the jury. The Court of Exchequer Chamber was satisfied on the evidence
that the plaintiffs were not only aware of the defendant’s intention, but were
even guilty of some complicity in her provocative scheme.

In order to emphasize the distinction between innocence and guilt that affects
this branch of the law, the precise consequences of an illegal contract will
now be detailed under two separate heads, namely: the consequence where a
contract is illegal in its inception; the consequence where a contract lawful in
its inception is later exploited illegally or is illegally performed.

8.3.2 The Consequence Where the Contract is Illegal in its Inception

The general principle, founded on public policy, is that any transaction that is
tainted by illegality in which both parties are equally involved is beyond the
pale of the law. No person can claim any right or remedy whatsoever under an

40
Crisp v. Churchill (1794)
41
(1886) LR 1 Exch 213.
276
illegal transaction in which he has participated. 42 Ex turpi causa non oritur
actio. The court is bound to veto the enforcement of a contract once it knows
that it is illegal, whether the knowledge comes from the statement of the
guilty party or from outside sources. 43 Even the defendant can successfully
plead the turpis causa, and though this ‘defence is very dishonest’44 and
‘seems only worthy of the Pharisee who shook himself free of his natural
obligations by saying Corban,’45 it is allowed for the reasons given by Lord
Mansfield in Holman v. Johnson:

The objection, that a contract is immoral or illegal as between plaintiff and

defendant, sounds at all times very ill in the mouth of the defendant. It is not
for his sake, however, that the objection is ever allowed; but it is founded in
general principles of policy, which the defendant has the advantage of,
contrary to the real justice, as between him and the plaintiff, by accident, if I
may say so. The principle of public policy is this: ex dolo malo non oritur
actio. No Court will lend its aid to a man who founds his cause of action upon
an immoral or an illegal act. If, from the plaintiffs own stating or otherwise,
the cause of action appear to arise ex turpi causa, or the transgression of a
positive law of this country, then the Court says he has no right to be assisted
is upon that ground the Court goes; not for the sake of the defendant, but
because they will not lend their aid to such a plaintiff. So if the plaintiff and
defendant were to change sides, and the defendant was to bring his action
against the plaintiff, me latter would then have the advantage of it; for where
both are equally in fault potior est conditio defendentis.46

The practical application of this general principle must now be stated in some
detail.

A contract that is illegal as formed and is therefore void ab initio is treated by

42
Gordon v. Metropolitan Police Chief Comr. (1910) 2 KB 1080 at p. 1098.
43
Re Mahmood and Ispahani (1921) 2 KB 716 at p. 729.
44
Thomson v. Thomson (1802) 7 Ves 470 at p. 473.
45
Sinclair v. Brougham (1914) AC 398 at p. 346.
46
(1775) 1 Cowp 341 at p. 343.
277
the law as if it had not been made at all.47 It is totally void, and no remedy is
available to either party. No action lies for damages, for an account of profits
or for a share of expenses. Thus, in the case of an illegal contract for the sale
of goods, the buyer, even though he has paid the price, cannot sue for non-
delivery; the seller who has made delivery cannot recover the price. A servant
cannot recover arrears of salary under an illegal contract of employment.48 In
the case of an Illegal lease, the landlord cannot recover the rent or damages
for the breach of any other covenant.49 The position is the same not only
where a contract is prohibited at common law on grounds of public policy, but
also where its very formation is prohibited by statute. An apt illustration is
afforded by Re Mahmoud and Ispahani50 where the facts were these:

The plaintiff agreed to sell linseed oil to the defendant, who refused to take
delivery and was sued for non-acceptance of the goods. A statutory order
provided that no person should buy or sell certain specified articles, including
linseed, unless he was licensed to do so. Before the conclusion of the contract,
the defendant untruthfully alleged that he held a licence and the plaintiff, who
himself was licensed, believed the allegation.

Once it was established that each party was forbidden by statute to enter into
the contract, the court had no option but to enforce the prohibition even
though the defendant relied upon his own illegality. The honest belief of the
plaintiff that the defendant held a licence was irrelevant.

Again, an award made by an arbitrator in respect of a prohibited contract will

be set aside by the court.51 A builder who does work at a cost exceeding the
sum authorised by statute cannot recover the excess,52 and if, having done
both authorised end unauthorized work, he receives payment under the

47
Mogul SS Co. v. McGregor, Gow & Co. (1892) AC 25 at p 39.
48
Miller v. Karlinski (1945) 62 TLR 85.
49
Alexander v. Rayson (1936) 1 KB 169.
50
(1921) 2 KB 716.
51
David Taylor Son Ltd. v. Barnett Trading Co. (1953) 1 All ER 843.
52
Bostel Bros Ltd. v. Hurlock (1949) 1 KB 74, (1948) 2 All ER 312.
278
contract generally, he cannot appropriate the sum to the unlawful work.53

In all cases where a contract is illegal in its formation, neither party can
circumvent the rule ex turpi causa non oritur action by pleading ignorance of
the law.54

Although a contract is illegal in its formation and therefore void, the Court of
Appeal has now held that the ownership of goods may pass to the buyer trader
an illegal contract of sale even if both parties are in pari delicto.55 This
decision requires to be examined with some particularity.

Since an illegal contract is totally void, the inescapable conclusion would

seem to be that the ownership of movables cannot pass by virtue of the
contract itself if this arises ex turpi causa and if both parties to it are in pari
delicto. Nil posse creari de nilo.56

If, therefore, the ownership is to pass at all, this must be effected by some
independent rule of law extraneous to the so-called but abortive contract. It is
true that in the case of a gift the ownership of goods may be transferred by
delivery, provided that this is what the parties intend. But since this intention
is one of the decisive elements of the transaction, it would seem logical to
insist that it must be disregarded if it is tainted by illegality.57 In 1960,
however, Lord Denning, giving the opinion of the Privy Council in Singh v.
Ali58 expressed a view which it is respectfully suggested goes beyond
previous statements of the law.

There are many cases which show that when two persons agree together in a
Conspiracy to effect a fraudulent or illegal purpose-and one of them transfers
property to the other in pursuance of the conspiracy-then, so soon as the

53
A Smith & Son (Bognor Regis) Ltd. v. Walker (1952) 2 QB 319, (1952) 1 All ER 1007.
54
J M Allan (Merchandise) Ltd. v. Cloke (1963) 2 QB 340.
55
Belvoir Finance Co. Ltd. v. Stapleton (1971) 1 QB 210.
56
Lucretius De Rerum Natura i 155.
57
Simpson v. Nicholls (1838) 3 M & W 240.
58
(1960) AC 167.
279
contract is executed and the fraudulent or illegal purpose is achieved, the
property (be it absolute or special) which has been transferred by the one to
the other remains vested in the transferee, its illegal origin ... The reason is
because the transferor, having fully achieved his unworthy end, cannot be
allowed to turn round and repudiate the means by which he did it-he cannot
throw over the transfer.59

8.4 Distinction between Illegal Contracts and Void Contracts

A void contract is one which has no legal effect. An illegal contract though
resembling the void contract in that it also has no legal effect as between the
immediate parties, has this further effect and even transactions collateral to it
become tainted with illegality and are, therefore, in certain circumstances not
enforceable.60

Unless the statute specifically provides that a contract contrary to the

provisions of the statute would be void the contract would remain binding
between the parties and could be enforced between the parties themselves.61
In the absence of any mandatory provisions obliging eviction in case of
contravention of the provisions of an Act, a lease in violation thereof would
not be void and the parties would be bound, as between themselves, to
observe the conditions of the lease. The parties to such a lease cannot assail it
in a proceeding between themselves.62

8.5 Proof of Illegality

The rules of evidence that govern the proof of illegality, whether the contract
is illegal by the statute or at common law, may be summarized as follows:

Firstly, where the contract is ex facie illegal, the court takes judicial notice of
the fact and refuses to enforce the contract, even though its illegality has not

59
Id at p. 176.
60
Rajat Kumar Rath v. Govt. of India, AIR 2000 Ori 32.
61
Nutan Kumar v. 2nd Additional District Judge, AIR 2002 SC 3456.
62
Nanakram v. Kundalrai, AIR 1986 SC 1194: (1986) 3 SCC 83.
280
been pleaded by the defendant.

Secondly, where the contract is ex facie lawful, evidence of external

circumstances showing that it is in fact illegal will not be admitted, unless
those circumstances have been pleaded.

Thirdly, when the contract is ex facie lawful, but facts come to light in the
course of the trial tending to show that it has an illegal purpose, the court
takes judicial notice of the illegality notwithstanding that these facts have not
been pleaded. But it must be clear that all the relevant circumstances are
before the court.63

8.5.1 The Effect of Illegality

There is, however, an important qualification which must be made to this

general principle. A party to a contract will not be held to be innocent if he
has full knowledge of the facts which constitute the illegality, but yet is
ignorant of the law, for ignorantia juris haud excusat. In J.M. Allan
(Merchandising), Ltd. v. Cloke,64 the plaintiffs sued the defendants for money
payable in respect of a roulette table hired to the defendants and designed for
the playing of ‘Roulette Royale’, a game which was unlawful by virtue of the
Betting and Gaming Act 1960.65 At the time they entered into the hiring
agreement, neither party knew that the game was illegal, and the plaintiffs
pleaded that they had no ‘wicked intention to break the law’. The Court of
Appeal rejected this plea and held that ignorance of the law was no answer to
the charge of illegality.

In this case, the parties intended that the subject-matter of the contract should
be used for an unlawful purpose (the playing of ‘Roulette Royale’) and this
was the only purpose for which it could be used. But where the contract is
capable of lawful performance and is in fact lawfully performed, although the

63
North Western Salt Co. Ltd. v. Electrolytic Alkali Co. Ltd. (1914) AC 461.
64
(1963) 2 QB 340.
65
8 & 9 Eliz. II, c. 60.
281
parties contemplated that it should be performed in an illegal manner, it will
be material to inquire whether or not they were ignorant of the law. In Waugh
v. Morris:66

The defendant chartered a ship belonging to the plaintiff to take a cargo of

hay from Trouville to London. It was subsequently agreed that the bay should
be unloaded alongside ship in the river, and landed at a wharf in Deptford
Creek. Unknown to the parties an Order in Council (made before the charter-
party was entered into) had forbidden the landing of French hay in order to
prevent the spread of disease among animals. The defendant, on hearing this,
took the cargo from alongside the ship without landing it, and exported it,
thus avoiding a breach of the Order in Council. The return of the vessel was
delayed, and the plaintiff sued for damages arising from the delay.

The defendant pleaded as a defence that the contract of charter-party

contemplated an illegal act, the landing of French hay contrary to the Order in
Council. This defence did not prevail:

Where a contract is to do a thing which cannot be performed without a

violation of the law it is void, whether the parties knew the law or not. But we
think, that in order to avoid a contract which can be legally performed, on the
ground that there was an intention to perform it in an illegal manner, it is
necessary to show that there was the wicked intention to break the law; and if
this be so, the knowledge of what the law is becomes of great importance.

Accordingly the contract was held to be valid and the plaintiff recovered
damages for the delay.

8.5.2 Contracts Unlawful ‘per se’

If a contract is expressly or by implication forbidden by statute or by public

policy, then it is void and unenforceable, though the parties may have been

66
Hindley & Co. Ltd. v. General Fibre Co., Ltd., (1940) 2 K.B. 517.
282
ignorant of the facts constituting the illegality and did not intend to break the
law. Such contracts are unlawful per se and the intention of the parties is
irrelevant.

An example of a contract forbidden by statute has been given in Re Mahmoud

and Ispahani67 where the plaintiff, who was ignorant of the fact that the
defendant had no licence to purchase linseed oil, was unable to recover
damages for non-acceptance in face of a statutory prohibition. An example of
a contract forbidden by public policy is one which necessarily involves
intercourse with an alien enemy in time of war. No rights of action will arise,
even though one party at the time of the agreement is ignorant of the fact that
war has broken out or that the other party has the status of an enemy. 68 The
agreement itself is prohibited and cannot be enforced in any way.

It is clear that considerable difficulty may be experienced in deciding whether

a particular statute or head of public policy renders the contract unlawful per
se or merely prevents a guilty party from suing on it. But the modern
tendency is to hold that a contracting party cannot be cast from the seat of
judgment unless he participated in the unlawful intention. The state of mind
of the parties is the crucial factor. Unless it is clear that the legislature
intended, or public policy demands, that the contract be prohibited altogether,
the innocent party can sue on the agreement. Moreover, even if the contract is
one which is unlawful per se, the innocent party is not necessarily without
remedy. If he has been induced to enter into the contract by the representation
or promise of the other that it is lawful, then he can recover damages for fraud
if there is fraud,69 or for breach of a collateral warranty if he prove such to
have been given,70 provided that he himself has not been guilty of culpable

67
(1921) 2 KB 716, at p. 305; Chai Sau Yin v. Liew Kwee Sam, (1962) AC 304; Harse v. Pearl Life
Assurance Co. (1904) 1 KB 558.
68
Sovfracht (v/o) v. Van Udens Scheepvart en Argentuur Maatschappij (N.V. Gebr.) (1943) A.C.
203.
69
Burrows v. Rhodes, (1899) 1 Q.B. 816.
70
Strongman (1945) Ltd. v. Sincock, (1955) 2 QB 525, at pp. 536, 539.
283
conduct on his part disabling him from that remedy.71 So in Strongman Ltd. v.
Sincock72 a builder recovered damages for the breach of a collateral assurance
by his client that he would obtain the necessary licenses to enable the work to
be carried out, even though a contract to build without a licence was
absolutely prohibited by statute.

8.5.3 Benefit from Illegal Contract

It is sometimes said to be a rule of law that no person can take any benefit
from a contract, either directly or through his personal representatives, when
that benefit results from the performance by him of an illegal act.73 In
Beresford v. Royal Insurance Co., Ltd.:74

R insured his life with the defendant Company for £ 50,000. A few minutes
before the policy was due to lapse, he committed suicide. The policy
contained a term avoiding it in the event of suicide within a year of its
commencement, hut the suicide occurred after the policy had run for some
years.

The House of Lords held that the insurance company had agreed to pay in this
event, but that the claim was contrary to public policy as the deceased’s
personal representatives could not obtain any benefit from the assured’s
illegal act. This case would certainly not be followed at the present day, for
suicide is no longer a crime,75 and the rule itself is probably too widely stated.
It is submitted that it will only apply where the statute or head of public
policy is such as to require that the offender be deprived of the fruits of his
illegal act;76 and even then the benefit will be recoverable unless it is
something to which, but for the illegality, he would have had no right or

71
Askey v. Golden Wine Co., Ltd., (1948) 2 All ER 35.
72
(1955) 2 QB 525.
73
Re the Estate of Crippen, (1911) p. 108, at p. 112; Archbolds (Freightage), Ltd. v. Spanglett, Ltd.
(1961) 1 QB 374, at p. 388.
74
(1938) AC 586.
75
Suicide Act, 1961 (9 & 10 Eliz. II, c. 60).
76
Marles v. Philip Trant & Sons, Ltd. (1954) 1 QB 29, at p. 39.
284
title.77

8.6 Recovery of Money or Property transferred under an Illegal

Contract

It is scarcely surprising that the Courts will refuse to enforce an illegal

agreement at the suit of a person who is himself implicated in the illegality.
But it is also a rule of English law that money or property transferred by such
a person cannot be recovered. In the colourful words of Wilmot C.J.: ‘All
writers upon our law agree in this, no polluted hand shall touch the pure
fountains of justice. Whoever is a party to an unlawful contract, if he bath
once paid the money stipulated to be paid in pursuance thereof, he shall not
have the help of a court to fetch it back again.’78

This principle is expressed in the maxim in pari delicto potior est conditio
defendentis and it may be illustrated by the case of Parkinson v. College of
Ambulance, Ltd.:79

The secretary of a charitable organization promised the plaintiff that lie would
secure for him a knighthood if he would make a sufficient donation to the
organization’s funds, in consideration of this promise, the plaintiff paid over £
3,000 and promised more when he should receive the honour. The knighthood
never materialized, and the plaintiff sued for time return of his money.

It was held that the action must fail as it was founded upon a transaction
which was illegal at common law.

But there are exceptional cases in which a man will be relieved of the
consequences of an illegal contract into which he has entered-cases to which
the maxim just quoted does not apply. They fall into three classes: (a) where
the illegal purpose has not yet been carried into effect before it is sought to

77
St. John Shipping Cpn. v. Joseph Rank, Ltd., (1957) 1 QB 267, at p. 292.
78
Collins v. Blantern (1767) 2 Wilson 341, at p. 350.
79
(1925) 2 KB 1
285
recover the money paid or goods delivered in furtherance of it; (b) where the
plaintiff is not in pari delicto with the defendant; (c) where the plaintiff does
not have to rely on the illegality to make out his claim.

8.7 The Concept of Public Policy

The concept of public policy is illusive, varying and uncertain. It has also
been described as ‘untrustworthy guide’, ‘unruly horse’ etc. The term ‘public
policy’ is not capable of a precise definition and whatever tends to injustice of
operation, restraint of liberty, commerce and natural or legal rights: whatever
tends to the obstruction of justice or to the violation of a statute and whatever
is against good morals can be said to be against public policy. The concept of
public policy is capable of expansion and modification.80

In Gherulal Pathak v. Mahadeodas Maiya,81 the Supreme Court observed:

“Public Policy’ is a vague and unsatisfactory term, and

calculated to lead to uncertainty and error, when applied to
the decision of legal rights; it is capable of being understood
in different senses it may, and best for the common good of
the community; and in that sense there may be every variety
of opinion, according to education habits, talents and
dispositions of each person, who is to decide whether an act
is against public policy or not. To allow this to be a ground of
judicial decision, would lead to the greatest uncertainty and
confusion. It is the province of the statesman and not the
lawyer, to discuss, and of the legislature to determine what is
best or public good and to provide for it by proper
enactments. It is of the province of the judge to expound the
law only; the written from the statutes, the unwritten or
common law from the decision of our predecessors and of our
existing Courts, from text writers of acknowledged authority,
and upon the principles to be clearly deducted from them by
sound reason and just inference; not to speculate upon what
is the best, in his opinion, for the advantage of the
community. Some of these decision may have no doubt been
founded upon the prevailing and just opinions of the public
good; for instance, the illegality of the covenants in restraint

80
P. Rathinam v. Union of India, AIR 1994 SC 1844: (1994) 3 SCC 394.
81
AIR 1959 SC 781.
286
 of marriage or trade. They have became a part of the
recognized law, and we are therefore bound by them, but are
not thereby authorised to establish as law everything which
we may think for the public good, and prohibit everything
which we think otherwise.”

Prof. Winfield in his Essay on Public Policy in the English Common Law82
stated:

“Public policy is necessarily variable. It may be variable not

only from one century to another, not only from one
generation to another but even in the same generation.
Further it may vary not merely with respect to the particular
topics which may be included in it, but also with respect in
the rules relating to any two particular topic… This
variability of public policy is a stone in the edifice of the
doctrine and not admissible to be flung at it. Public policy
would be almost useless without it.”

In Pandeleton v. Greener,83 it had been held that:

“Public policy’ is in its nature so uncertain and fluctuating,

varying with the habits and fashions of the day, with the
growth of commerce and usage of trade, that it is difficult to
determine its limits with any degree of exactness. It has never
been defined by the Court, but has been let loose and free
from definition in the same manner as fraud.”

8.8 Agreements Opposed to Public Policy

A corporation and a shipping company entered into a contract for three years
for manning, running, operating, repairing and maintenance on hire of three
vehicles. One of the clauses of the contract gave right to the- corporation to
terminate the contract after expiry of one year without assigning any reasons.
On being challenged the termination of the contract by the company, it was
held that the stipulation was not unconscionable or opposed to public policy.84

The object of assignment of the Government land in favour of the lessee is to

82
42 Harvard Law Policy 76.
83
17 ALR 317.
84
Oil and Natural Gas Corp. Ltd. v. Streamline Shipping Co., AIR 2002 Born 420.
287
provide him right to residence. If any such transfer is made contrary to the
policy, it would be defeating the public purpose. Thus when there is no
express prohibition in indenture of lease for such bequest without prior
permission of Government, such a bequest cannot be held to be illegal though
it was against public policy as object of assignment of Government law in
favour of lessee was to provide him right of residence.85

It is correct that any person or company is lawfully entitled to purchase shares

of another company in open market, but if the transaction is done
surreptitiously with a malafide intention by making use of some public
financial institutions as a conduit in a clandestine manner, such deal or
transaction would be contrary to public policy and illegal.86

Where A and B arrived at an agreement that though both of them would

submit tenders, the tender which A would submit would be for a higher
amount and B would draw a cheque for Rs.15,000 in favour of A for not
competing with it, held that the agreement was not void nor was opposed to
public policy.87 If the Court finds that the parties were acting together with a
view to perpetrate fraud and did not in fact perpetrate that fraud, and that there
is no difference in the degree of the plaintiff and defendant’s guilt, the duty of
the Court is to dismiss the claim.88

When the object of the agreement to postpone the registration of the deed of
lease is obvious enough from the circumstances and to conceal the actual
savai amdani of the village and so as to reduce the assessment of the Land
Revenue, it was held that this would defeat the provisions of the Registration
Act, Transfer of Property Act and Stamp Act and was thus opposed to public
policy.89

85
State of West Bengal v. Kailash Chandra Kapur, AIR 1997 SC 1348.
86
S.R. Nayak v. Union of India, AIR 1991 SC 1420.
87
Jai Ram and Sons v. Kahna Ram Hans Raj, AIR 1963 HP 3.
88
Vilayat Hussain v. Misran, AIR 1923 All 504: 21 ALJ 303 (DB).
89
Chagan Lal v. Kashiram, AIR 1923 Nag 76: 71 IC 33.
288
Where a case put forward in the trial Court was that the agreement in question
was void as being opposed public policy, it was held that in revision the
contention that the revision was void as being fraudulent on the same facts
could be raised as the other party was not misled.90

The defendant under the terms of his licence was forbidden to sell his rice to
other wholesale merchants in the port on entry than those who were approved
by the Collector. The plaintiff, a wholesale merchant, contracted to purchase
rice and paid the price. The rates agreed upon were much higher than the
controlled rates. Held that plaintiff who was a merchant must have known that
he could not purchase the rice except by permission from Government. The
contract was void and the plaintiff can base no claim upon it.91

It is a paramount public policy that Courts are not lightly to interfere with
freedom of contract.92 The Court cannot invent a new head of public policy.93
Public policy is a vague and perhaps unsatisfactory term, a treacherous
ground for legal decision and a very unsuitable and treacherous foundation on
which to build. At the same time, it has been and will be a just ground for it
legal decision and the Court has to give a decision whether a particular
contract militates against public policy.94

A threat to prosecute of itself is not illegal. Where there is a just and bona fide
debt actually existing, and there is a good consideration for giving a security
and the transaction between the parties involves a civil liability as well as
possibly a criminal act, a threat to prosecute does riot necessarily vitiate a
subsequent agreement by the debtor to give security for a debt which he justly
owes to his creditor.95

Though the object of the contract is lawful in itself it would be unlawful if it

90
Atumal Ramoomal v. Dipchand Kessumal, AIR 1939 Sind 33.
91
Janu Sait v. Ramaswami Naidu, AIR 1923 Mad 626.
92
Bansi Dhar v. Ajudhia Prasad, AIR 1925 Oudh 120: 82 IC 333 (DB).
93
Bhagwant Genuji Girme v. Gangabisan Ramgopal, AIR 1940 Bom 369: 42 BLR 750 (DB).
94
Mafizuddin Khan Choudhary v. Habibuddin Sheikh, AIR 1957 Cal 336 (DB).
95
London and Lancashire Insurance Co. Ltd. v. Binoy Krishan Mitra, AIR 1946 Cal 218.
289
cannot be achieved without violation of law or without doing something
immoral or opposed to public policy. A contract to do a thing which cannot be
performed without violation of law is void, whether the parties knew the law
or not. Likewise the object of the contract may be lawful in law but its
fulfillment may offend against the well-settled notions of public policy.96 The
Courts must not invent a new head of public policy. The Courts ought to be
very cautious in deciding a question of public policy. With the development
of public opinion and morality the doctrine must be applied with necessary
variation.97

Agreements tending to injure the public service are always considered to be

opposed to public policy. Therefore, any agreement which is in conflict with
the public good or public policy in respect of public service is illegal and
void.98 Public Policy does not remain static in any given community. Public
policy would be almost useless if it were to remain in fixed moulds for all
time.99

When the delimitation of municipal area was to be done, the State

Government agreed to keep certain area leased to a company excluded from
limits of the municipality, it was held that the agreement with the company
could not be enforced since it was opposed to public policy.100

The appointment of a servant for a term or laying down the terms of service
and conditions under which he could be discharged cannot be said to be
applicable by the doctrine of public policy.101 Where a party admits that he
has made a fictitious transfer of his property to another, with a view to effect
fraud, but asks to have his act undone, the Court would refuse relief and
would leave the party to the consequence of their misconduct dismissing the

96
Gulabchand Ghambirmal v. Kudilal Govindram, AIR 1959 MP 151.
97
Abdul Rahim v. Raghunath Sukul, AIR 1931 Pat 22: 12 PLT 614 (DB).
98
Venkatareddi v. Venkatachalam, AIR 1964 AP 465: (1964) 1 Andh WR 113.
99
Associated Cement Companies Ltd. v. State of Rajasthan, AIR 1981 Raj 133.
100
Rederiaktiebolaget Amphirite v. King, (1921) 3 KB 587.
101
Gholam Hossain Shah v. Altaf Hossain, AIR 1934 Cal 328.
290
claim when the suit was brought by the real owner to get back possession of
his property and refusing to listen to the defence when he set it up in
opposition to the person whom he has invested with the legal title.102

An agreement was entered into between the parties whereby one party was
required to use his influence with the minister. Such an agreement is void
because it tends to corrupt or influence the decision-making machinery. 103 In
Montesfoire v. Menday Motor Components Co. Ltd.,104 it was stated:

“A contract may be against public policy either from the

nature of the acts to be performed or from the nature of the
considerations. In my judgment it is contrary to public policy
that a person should be hired for money or valuable
consideration when he has access to persons of influence to
use his position and interest to procure a benefit from the
Government.”

In the same case, it was further held:

“While I do not go the length of holding that the defendants

were bargaining with the plaintiff that they should receive an
office under the Crown, I agree with the remarks of Coltman
J., in the case of Hopkins v. Prescottl,105 that where a person
undertakes for money to use his influence with the
Commissioner of Taxes to procure for another party the tights
to sell stamps, if the contract were not void for statute, it
would be void at common law as contrary to public policy. It
is well settled that in judging the question one has to look at
the tendency of the acts contemplated by the contract to see
whether they tend to be injurious to the public interest. In my
judgment, a contract of the kind has a most pernicious
tendency. At a time when public money is being advanced to
private firms for objects of national safety it would tend to
corrupt the public service and to bring into existence a class
of persons somewhat like those who in ancient times of
corrupt politics were described as ‘Carryers’, men who
undertook for money to get titles and honours for those who
agreed to pay them for their influence.”

102
Dhirendra Kumar Bose v. Chandra Kanta Roy, AIR 1923 Cal 151.
103
Ratanchand Hirachand v. Askar Nawaz Jung, AIR 1972 AP 112.
104
(1918) 2 KB 241: 87 LJKB 907.
105
(1847) 4 CB 578.
291
A contract which had been entered into with the obvious purpose of
influencing the authorities to procure a verdict in favour of was a “carrier”
contract. To enforce such a contract although it tends to injure public weal is
not only to abdicate one’s public duty but to assist in the promotion of a
pernicious practice of procuring decisions by influencing authorities when
they should abide by law.106

An auction sale was conducted by the corporation. One of the clauses of the
auction empowered the corporation to charge interest of balance amount of
consideration from date of auction. It was held that as contracts entered into
by Government corporations are subject to fundamental rights and are in
furtherance of directive principles of State Policy, the clause was unlawful.107

A person who asks an agreement or conveyance to be declared invalid on

account of its being opposed to public policy must prove the grounds which
would bring it within the meaning of this section.108 If it is shown that there
was an agreement between the parties that a certain consideration should
proceed from the accused person to the complainant in return for the promise
of the complainant to discontinue the criminal proceedings that dearly is a
transaction which is opposed to public policy.109

If in a given subject it is patent that public policy is likely to make indelible

dents on it, then the Courts themselves ought to raise the questions touching
on public policy, even ii none of the parties does so. Public policy which is
often described as unruly horse should be carefully handled lest any improper
riding of it should take the Courts to difficult and unexplored heights and
regions.110 The plea that agreement is a nullity being opposed to public policy
can be raised even by a person who had earlier consented to the agreement. 111

106
Rattan Chand Hira Chand v. Askar Nawaz Jung, (1991) 3 SCC 67.
107
Sudist Narain Thakur v. Bihar State Financial Corp., AIR 2004 Jha 91.
108
Subbayyan Chettiar v. T.R. Ponnuchami Chettiar, AIR 1941 Mad 727.
109
Ouseph Poulo v. Catholic Union Bank Ltd., AIR 1965 SC 166: (1964) 7 SCR 745.
110
M. Kesava Gounder v. D.C. Rajan, AIR 1976 Mad 102.
111
Union Carbide Corp. v. Union of India, AIR 1992 SC 248.
292
In Corpus Juris Scandum,112 it is stated:

“An illegal contract or agreement, such as one involving

illegality of the subject matter, one invoking the unlawful sale
or exchange of intoxicating liquors or a subletting, subleasing
or hiring out of convicts, held under lease from the State, in
violation of statute, or stifling a prosecution for public
offence, or one which is opposed to public policy, cannot
constitute or effect an accord and satisfaction.”

After all, by consent or agreement parties cannot achieve what is contrary to

law and a decree merely based on such agreement cannot furnish a judicial
amulet against statutory violation The true rule is that the contract of the
parties is not the less a contract, and subject to the incidents of a contract,
because there is super added the command of the Judge.113

Under section 20 of the Civil Procedure Code, the Courts in India have
jurisdiction to entertain the suit and if the agreement provides that they would
submit to the jurisdiction of the English Cow the agreement itself would be
void under section 23 of the Contract Act and would also be void being
opposed to public policy.114

An agreement by which a man binds himself to associate for the whole of his
life only with a certain body of is fellow-men and to abstain completely from
associating with another body is one which ought not to be enforced and for
the breach of which no penalty can be claimed.115

Where an agreement to purchase agricultural land, before the commencement

of the Land Ceiling Act came into being, was entered into, and the suit for
specific performance was filed and the said Act was repealed before judgment
was rendered in suit, it was held that specific performance could not be
refused since the agreement was not against public policy. It was further held

112
Vol. 1, at p. 473.
113
State of Punjab v. Amar Singh, AIR 1974 SC 994.
114
Rajendra Sethia v. Punjab National Bank, AIR 1991 Del 285.
115
Lal Khan v. Kimman Khan, AIR 1924 Oudh 404: 80 IC 560.
293
that the Act did not prohibit purchase of land by surplus holder.116

In the field of private International law, Courts refuse to apply a rule of

foreign law or recognize a foreign judgment or a foreign arbitral award if it is
found that the same is contrary to the public policy of the country in which it
is sought to be invoked or enforced.117 The defence of public policy which is
permissible under section 7(1)(b)(ii) of the Foreign Awards (Recognition and
Enforcement) Act should be construed narrowly. To the same effect is the
provision of the Protocol & Convention Act of 1937 which requires that the
enforcement of the foreign award must not be contrary’ to public policy or the
law of India.118

When an employee though promoted in a stop-gap arrangement was

continued in the said post, he was entitled to salary of promotional post and to
be considered for regular promotion and the agreement that he would not
claim higher salary’ on being promoted by stop-gap arrangement is not valid
and cannot be enforced under the provisions of this section.119

A contract for manning, running, operating, repairing and maintenance on

hire for three vehicles was entered into between the parties. The contract inter
alia provided that the employer shall have the right to terminate the contract
after expiry of one year without assigning any reasons. It was held that such a
stipulation was not unconscionable or opposed to public policy.120

It would be contrary to public policy to allow a husband to contract a

marriage with the wife to consummate the marriage, beget a child from her
and then turn round to argue- that the respondent was not his wife but the wife
of ‘R’ because the divorce granted to her was bad for want of jurisdiction of

116
Neiyam Venkataramanna v. Mahankali Narsimhan, AIR 1994 AP 244.
117
Renusagar Power Co. Ltd. v. General Electric Co., AIR 1994 SC 860.
118
Ibid.
119
Secretary-cum-Chief Engineer, Chandigarh v. Hari Om Sharma, AIR 1998 SC 2909.
120
Oil and Natural Gas Co. Ltd. a. Streamline Shipping Co., AIR 2002 Born 420 (DB).
294
the Court granting the same.121

The House of Lords in G v. M relying upon the book Law Relating to

Estoppel by Representation by Spencer and Bower, stated.122

“I think I perceive that phraseology is like this, and nothing

more than this, that there may be conduct on the part of the
person seeking this remedy which ought to estop that person
from having it, as for instance, any part from which the
inference ought to be drawn that during the antecedent time
the party has, with a knowledge of the facts and of the law,
approbated the marriage he or she afterwards seeks to get rid
of, or has taken advantages and derived benefits from the
matrimonial relation which it would be unfair and inequitable
to permit him or her, after having received them to treat as if
no such, relation had ever existed.”

8.8.1 Agreement opposed to Public Policy

An agreement shall be held to be against public policy if:

• Judgment-debtor is required to pay a part of his salary to decree-

holder.123
• Amount had been paid for securing-seat in medical college and not as
loan.124
• It is for influencing ministers of the Government.125
• The father is required to give up entirely-the custody and control of his
child to mother.126
• It relates to transfer of decree with object to defraud other creditors. 127
• It is for alienation of swastivachanam service inam lands.128
• The partner who holds the non-transferable contract for carrying mails
to transfer it to the other partner or to continue the contract for the

121
Deva Prasad Reddy v. Kamini Reddy, AIR 2002 Kant 356 (DB).
122
(1885) 10 App Cas 171.
123
Post Master General, Bombay v. Chenmal Mayachand, AIR 1941 Bom 389.
124
N.V.P. Pandian v. M.M. Roy, AIR 1979 Mad 42.
125
Ratanchand Hirachand v. Askar Nawaz Jung, AIR 1976 AP 112.
126
Victor Juston Walter v. Marie Josphine Walter, AIR 1928 Cal 600.
127
K. Shrirama Row v. K. Bapayya, AIR 1924 Mad 189.
128
Neti Anjaneyalu v. Verugopal Rice Mills, AIR 1922 Mad 197.
295
 other after dissolution of partnership.129
• It involves transfer of ration documents in contravention of the Act.130
• It is to alienate that which is in the nature of personal grant and without
permission of the Tehsildar as required by the term of that grant.131
• It confers exclusive perpetual right to perform religious services for the
whole village.132
• The purpose is to waive the benefit conferred by section 60(i), Civil
Procedure Code.133
• It is of service which in substance amounts to nothing but serfdom.134
• It is a contract of insurance effected by a person on the life of another
when he has no insurable interest in the life.135
• It concerns partnership agreement authorizing one partner having
licence to sell country liquor to sell English wine.136
• It tends to injure the public service.137
• A formation of dealership is made by dealer in cloth with license under
Madras (Dealers) Control Order.138
• It is for child marriage.139
• Execution of decree of divorce is obtained from foreign Court by
husband whose marriage was solemnized in Goa.140
• It provides for a premium over and above the standard rent.141
• Comprised in a suit between landlord and tenant in contravention of

129
Bhurmal Ramkaran v. Goduram MangaIchand Jat AIR 1943 Nag 260.
130
Pisupati Rama Rao v. Tadepalli Papayya, AIR 1954 Andhra 51.
131
Ganesa Naicken v. Arumugha Naicken, AIR 1954 Mad 811 (DB).
132
Revashanker Shamji v. Velji Jagjivan Kukama, AIR 1951 Kutch 56.
133
M. & S.M. Rly. a. Rupchand Jitaji, AIR 1950 Born 155.
134
Sitaram Deokaran v. Baldeo Jairam, AIR 1958 MP 367.
135
Mani Shanker Someshwar Pandya v. Allianza Und Stuttagarter Labens Versicherungs
Bank, AIR 1941 Lah 33.
136
Brij Lalv. Rajeshwar Parshad, (1969) 71 Pun LR 122.
137
Venkatareddi v. Peda Venkatachalam, AIR 1964 AP 465.
138
V. Basavayya v. N. Kottayya, AIR 1964 AP 145.
139
Maheswar Das v. Sakhi Dei, AIR 1978 Ori 84.
140
Joao Gloria Pires v. Ana Joaquina Rodrigues e Pires, AIR 1967 Goa 113 (DB).
141
Baboolal v. Prem Lata, AIR 1974 Raj 93.
296
 rules and curtailing the powers of District Magistrate.142
• Tenant contracting himself out of rights conferred by statute solemnly
enacted for benefit of tenants.143
• Public corporations enter into contracts whereby performance of their
duties to public is prevented or unduly restricted.144
• It is sub-letting of phone in contravention of conditions.145
• The compromise decree divides amount of pension between parties to
suit.146
• It is a contract to serve on Rs. 2 per month for 112 months.147
• Certain area leased to a company is excluded from limits of the
Municipality.148
• A firm had its only business of running a school and that school was
handed over by one of the partners illegally to another society without
consent of other parties.149
• A person belonging to scheduled caste was granted distributorship of
cooking gas under special quota which was his only source of
livelihood and as such was not in a bargaining position in respect of the
clause about termination of agency on 30 days’ notice.150
• Waiver of protection to agriculturist under section 60(1), Civil
Procedure Code.151
• If it lends to injure public interest or public welfare.152

Even fit is permissible for Courts to evolve a new head of public policy under
extra-ordinary circumstances giving rise to incontestable harm to the society,

142
Krishna Khanna v. Addl. District Magistrate, AIR 1975 SC 1525.
143
Varada Bongar Raju v. Kirthali Avatharam, AIR 1965 AP 86.
144
UPSEB v. Lakshmi Devi Sehgal, AIR 1977 All 499 (DB).
145
Maaladi Seetharama Sastry v. Naganath Kawlwar, AIR 1968 AP 315.
146
Baldeo Jha v. Ganga Prasad Jha, AIR 1959 Pat 17.
147
Sitaram Deokaran v. Baldeo Jairam, AIR 1958 MP 367.
148
Associated Cement Companies Ltd. v. State of Rajasthan, AIR 1981 Raj 133.
149
Abhai Singh v. Sanjay Singh, AIR 1989 All 214.
150
Shyam Gas Co. v. State of U.P., AIR 1991 All 129 (DB).
151
Duggirala Balarama Krishnayya v. Arokapudi Jagannadha Rao, AIR 1983 AP 136.
152
Rattan Chand Hira Chand v. Askar Nawaz Jung, (1991) 3 SCC 67.
297
wager is not one of such instances of exceptional gravity, for it has been
recognized for centuries and has been tolerated by the public and the State
alike.153

A Court is not bound to pass a decree on the basis of a mere admission of

claim by the defendant Order 12 Rule 6, Civil Procedure Code is only an
enabling provision. It is the duty of the Court to see whether the plaintiff is
entitled to a decree on the basis of the averments in the plaint and admission
of defendant and as to whether the suit is meant to defeat the provisions of
Stamps Act, Registration Act, Transfer of Property Act or any other law
concerning public revenue or is against the public policy.154

8.8.2 Opposed to Public Policy: What is Not

An agreement of lease between landlord and tenant for letting and occupation
of building in contravention of the provisions of U.P. Urban Buildings Act is
not void and is enforceable. A decree for ejectment of the tenant can be
passed in favour of the landlord on the basis thereof. Further, section 13 of the
said Act provides that a person who occupies, without any allotment letter
shall be deemed to be an unauthorized occupant of sub premises. Such a suit
would not be on the agreement between the parties and thus would not be hit
by principles of public policy.155

Sub-letting is not an act forbidden or prohibited by law. The tenant may sub-
let the premises depending on the term of the contract between him and the
landlord or the consent of the landlord to the tenant to sub-let the premises. It
is only the absence in writing of the consent of the landlord which makes the
subletting by tenant a ground for ejectment. 156

A lease for life created in favour of the lessee or tenant is not inconsistent

153
Gherulal Parakh v. Makadeodas Maiya, AIR 1959 SC 781.
154
Shisbpal v. Vikram, 1999(1) RCR 628:1999 (122) Pun LR 136.
155
Nutan Kumar v. 2nd Additional District Judge, AIR 2002 SC 3456.
156
Mohar Singh v. Deen Dayal Gupta, 1996 (3) DRJ 760.
298
with the provisions of the Bombay Rent Act. Lease for life or condition of the
life tenancy of the lease deed or a tenancy cannot be said to be contrary to the
provisions of law.157

When it was merely an agreement between two parties under which the
defendant assigned certain copyrights in favour of the plaintiff and there was
not obligation towards the public, then such an agreement could not be said to
be violate of public policy since the assignment of copyright was permissible
under Copyrights Act. 158

When an agreement between the landlord and tenants i.e., the plaintiffs
provided that the petition for eviction brought against the tenant and
substances of whom the plaintiffs are included would not be contested, and
that nevertheless, even if an order of eviction is obtained in that proceeding,
no effort would be made to evict the tenant, it cannot be said that there was
anything illegal or against public policy in the matter of that agreement. There
is no law prohibiting the landlord to allow his tenant to continue in possession
even after getting an order for eviction, may it be on higher rent.159

An agreement between A and B to purchase property at an auction sale jointly

and not be bid against each other at the auction is perfectly legal, though the
object may be to avoid competition between the two. But if there is an
agreement between all the competing bidders at the auction sale, be it of the
Court sale or revenue sale or sale by the Government of its property or
privilege to peg down the price and purchase property and the knock out
price, it will be unlawful and opposed to public policy.160

Where residential plots were agreed to be allotted at reserve price by the

Improvement Trust and according to the scheme of the rules, the price of the
plots could not be less than the cost price of the land to the Trust, the clause in

157
Manharlal Mohalal Zuberi v. Indulal Vadilal Mehta, 1996 (1) Guj LR 82.
158
Prentice Hall India Pvt. Ltd. v. Prentice Hall Inc., AIR 2003 Del 236.
159
M.K. Usman Koya v. C.S. Santha, AIR 2003 Ker 191.
160
Gurmuk Singh v. Amar Singh, (1991) 3 SCC 79.
299
the agreement for enhancement of price on account of enhanced
compensation awarded to the original owners as a result of reference made by
the Trust under section 18 of the Land Acquisition Act, was not contrary to
the rules nor was opposed to public policy.161

An entrepreneur after having availed benefit of rebate for initial period of five
years on the ground of its being an expanding unit, is not entitled to further
rebate on the ground of being a new undertaking. It was held that granting of
further rebate would be against public interest and it would also be against
public policy as no Government department can run without funds. 162

If the creditor lays down certain conditions with a view to secure his debt in
accordance with law, then it cannot be said that the same are opposed to
public policy. 163 The demand of higher charges/tariff for electricity consumed
beyond legally fixed limit is reasonable deterrent measure providing
appropriate sanction not as harsh as disconnection of supply of energy
altogether and cannot be opposed on the ground of public policy. 164

The petitioner received a certain sum of money from the respondent, for
securing admission of the respondent’s son in a M.B.A. course, on the
representation that the sum had to be paid by way of capitation fees. The
petitioner was unable to secure admission for the respondent’s son and issued
a cheque for the amount received. The cheque was dishonoured. Held that the
sum in question was given by the respondent to the petitioner for the payment
of capitation fees, and the transaction could not be declared void as contrary
to public policy. 165

8.9 Defences

Illegality will generally prevent both parties from enforcing a tainted

161
Vipul Rai Sharma v. Ludhiana Improvement Trust, AIR 1992 P & H 42.
162
Rathi Gases Ltd. v. Rajasthan State Electricity Board, AIR 1995 Raj 139.
163
Central Bank of India v. Multi-Block Pvt. Ltd., AIR 1997 Bom 109.
164
Jiyajeerao Cotton Mills Ltd. v. M.P. Electricity Board, AIR 1989 SC 788.
165
R. Siwaraj v. Loganathan, 1996 (85) Com Cas 71.
300
transaction or seeking other relief, including restitution of benefits transferred
under it.

A contract or other transaction may be illegal in three ways. First, statute may
expressly prohibit both the formation and the performance of the contract.
This will be the case where, for example, the statute provides: ‘No action
shall lie…’ Secondly, statute might impliedly prohibit enforcement of the
contract. In Phoenix General Insurance Co. of Greece SA v. Halvanon
Insurance Co. Ltd. 166

(i) Where a statute prohibits both parties from concluding or performing a

contract when both or either of them have no authority to do so, the
contract is impliedly prohibited… (ii) But where a statute merely
prohibits one party from entering into a contract without authority,
and/or imposes a penalty upon him if he does so (i.e. a unilateral
prohibition) it does not follow that the contract itself is impliedly
prohibited so as to render it illegal and void. Whether or not this statute
has this effect depends upon considerations of public policy in the light
of the mischief which the statue is designed to prevent, its language,
scope and purpose, the consequences for the innocent party, and any
other relevant considerations.

Thirdly, the transaction may be illegal where it contemplates the commission

of a crime at common law, or another act which the common law deems to be
contrary to public policy.

8.9.1 The Scope of the Prohibition of Restitutionary Claims

The true scope of the in pari delicto principle in relation to restitutionary

claims is difficult to state. The question is, when does illegality preclude the
restitutionary claim? In identifying exception to the in pari delicto principle,
does this create a new ground for restitution? Birks argues that where the

166
(1988) QB 216.
301
parties are held not be in pari delicto, the ground for restitution can usually be
found elsewhere in the law of restitution, usually in case of vitiated
voluntariness such as mistake or compulsion.

8.9.2 Mistake

In Oom v. Bruce,167 the plaintiff entered into an insurance policy for goods to
be carried from Russia to England. The contract was made after the
commencement of hostilities between the two countries but before the
plaintiff had knowledge of the fact, and after the ship had sailed and been
seized and made to return to Russia. The plaintiff sought to recover the
premium paid. The contract was presumably illegal at common law on the
basis that it involved trading with the enemy. The Court of King’s Bench
stressed that the plaintiff had no knowledge of the circumstances giving rise
to the illegality. Accordingly, Lord Ellenborough CJ held ‘there is no reason
why they should not recover back the premiums which they have paid for an
insurance from which, without any fault imputable to themselves, they could
never have derived any benefit.’

Induced mistake caused the transfer in Hughes v. Liverpool Victoria Legal

Friendly Society,168 where the plaintiff was fraudulently persuaded by a
representative of the insurer that a life insurance policy, in which he had no
insurable interest, was valid. Upon the plaintiff discovering the policy was
illegal and void, she claimed recovery of the premiums paid. Phillimore LJ
stated the principle:

Where an illegal contract of insurance is entered into, and the assured is

ignorant of the law and is induced to enter into it by the fraudulent
misrepresentation of the law by the agent of the assurance company, the
parties are not in pari delicto and the assured may recover the premiums paid.

167
(1810) 12 East 255, 104 ER 87.
168
(1916) 2 KB 482.
302
The unsatisfactory earlier decision of Harse v. Pearl Life Assurance Co. 169
insists that an innocent misrepresentation would not suffice. This is probably
not good law. The leading case is Kiriri Cotton Co. Ltd. v. Dewani.170 This
case requires reinterpretation in the light of Kleinwort Benson Ltd. v. Lincoln
City Council.171

8.9.3 Duress and Imposition

The facts of Smith v. Bromley,172 are reminiscent of the fiction of Fanny

Burney. A lady was imposed upon by her brother’s chief creditor to pay an
extra sum to him, before he would sign a certificate of discharge releasing the
brother from bankruptcy. The money was paid and the defendant creditor
signed the discharge. The lady then sought recovery of the £40 she had paid.
The Court of King’s Bench awarded her restitution. Lord Mansfield stated:

“If the act is in itself immoral, or a violation of the general

laws of public policy, there, the party paying shall not have
this action; for where both parties are equally criminal
against such general laws, the rule is, potior est condito
defendentis. But there are other laws which are calculated for
the protection of the subject against oppression, extortion,
deceit & c. If such laws are violated, and the defendant takes
advantage of the plaintiff’s condition or situation, there the
plaintiff shall recover.”

That case was followed in Smith v. Cuff,173 on similar facts. Lord

Ellenborough CJ commented that the parties were never equally guilty ‘when
one holds the rod, and the other bows to it’.

8.9.4 Failure of Consideration

174
In Parkinson v. College of Ambulance Ltd., the plaintiff somewhat
foolishly paid £3,000 foolishly paid £3,000 to the defendant charity, relying

169
(1904) 1 LB 558.
170
(1960) AC 192.
171
(1999) 2 AC 349.
172
(1760) 2 Doug 696, 99 ER 441.
173
(1817) 6 M & S 160, 105 ER 1203.
174
(1925) 2 KB 1.
303
upon a representation by the secretary of the charity that a knighthood would
be forthcoming in return. Unsurprisingly, the representation turned out to be
fraudulent and Mr. Parkinson sought restitution from the charity. This was
held to be a case where the parties were in pan delicto, because even if the
secretary of the charity was more at fault, the plaintiff had made a contract
which he ought never have entered into. One can have more sympathy for the
plaintiff in Berg v Sadler & Moore.175 The plaintiff was on the stop list of the
Tobacco Trade Association as a result of a breach of their price-fixing rules.
He attempted to obtain cigarettes using the name of a friend. The money was
paid, but when the defendant suppliers discovered the true purchaser they
refused to supply the cigarettes or return the purchase price. The plaintiff’s
claim for restitution was rejected by the Court of Appeal. The Court stridently
held that it amounted to an attempt to obtain goods by false pretences, and
accordingly the Court refused to lend its aid to the plaintiff (but happily lent
its aid to the anti-competitive practice of the trade association).

There is a paucity of authority of situations where a party has recovered on

the ground of failure of consideration on the basis that he was not equally
guilty in respect of the illegal transaction. Perhaps an example is Hermann v
Charlesworth,176 in which the plaintiff was a single lady desirous of getting
married. She agreed to pay the defendant marriage advertising agent £250 if
an introduction arranged by the defendant led to matrimony. The plaintiff paid
£52, of which £47 would be returned if no marriage followed within nine
months. Various introductions led to nothing, and the plaintiff claimed the
return of her money. The Court of Appeal held that the transaction was illegal
(which must be of interest to the numerous dating agencies which ro1iferate
these days). Collins MR acknowledged that the plaintiff had had the benefit of
a number of introductions, but was prepared to treat these as actions taken by
the defendant in his own interest in order to improve his chances of winning

175
(1937) 2 KB 158.
176
(1905) 2 KB 123.
304
what was characterized as a wager. Collins MR felt that equity was not
precluded from ordering the recovery of money under an illegal transaction
simply because the defendant had incurred and taken some steps towards
performance in carrying out his side of the contract. The case is explicable
either on the ground of failure of consideration (and a very beneficial
interpretation of failure of consideration at that), or on the basis that the
plaintiff fell within the protected class of vulnerable people, whom the policy
of outlawing marriage-brokering contracts was aimed at protecting. Compare
Birks, 210.

8.9.5 Restitution Prohibited if it is Tantamount to Contractual

Enforcement

An important principle is that restitution is impermissible where an award

would be equivalent to the enforcement of the illegal contract. In Taylor v
Bhail,177 the headmaster of a school which had suffered storm damage, agreed
to award a contract to the plaintiff builder on the basis that the builder would
inflate his estimate by £1,000 in order that the defendant could pocket the
additional £1,000 recouped from the school’s insurers. The work being done,
the plaintiff claimed alternatively upon the contract, or for a quantum meruit
in respect of work done. The ground of restitution was not identified, hut was
presumably failure of consideration or free acceptance. The Court of Appeal
refused to enforce either the contractual or the restitutionary claim.

Millett LJ held that the transaction was illegal. Whereas the defendant was
enriched at the plaintiff’s expense, it could not be said to be unjust because of
the illegality of the transaction into which both entered. Further, the existence
of the illegal contract excluded recourse to the law of restitution. This is an
application of the primacy of contract principle. To have succeeded, the
plaintiff should have repudiated the contract. But this could have been done
only if there had been no partial performance of the illegal purpose. It was

177
(1996) CLC 377.
305
now too late to withdraw (at 383). This decision may take the primary of
contract argument too far.

More recently, in Mohamed v. Alaga & Co.178 the plaintiff entered into a fee-
sharing agreement with the defendant solicitor, whereby the plaintiff would
refer asylum-seekers to the solicitor in return for a proportion of the fees
contrary to the Solicitors’ Practice Rules. The plaintiff again claimed
alternatively under the contract or in restitution. The Court of Appeal would
not enforce the illegal contract. However, the plaintiff was allowed to pursue
a quantum meruit claim, sounding in restitution, as he was apparently
unaware of the illegality of the transaction. These recent decisions of the
Court of Appeal are difficult to reconcile. Presumably in the latter case the
award of reasonable remuneration would not have been equivalent to
contractual enforcement.

8.9.6 Proprietary Claims under Illegal Transactions

This is the province of the law of property, but will be briefly discussed here.
The leading cases are Tinsley v Milligan179 (1994) 1 AC 340 and Tribe v
Tribe.180 In Tinsley v Milligan, the plaintiff, aged 19, and the defendant, aged
38, were lesbian lovers. They purchased a property in the sole name of the
plaintiff, but on a common understanding that they would be joint beneficial
owners. The house was in the plaintiff’s name in order to enable the defendant
to make fraudulent claims upon the Department of Social Security (DSS). The
money obtained by the fraud contributed only in a small way to the
acquisition of the equity in the home. Subsequently the defendant repented of
the fraud and disclosed this to the DSS. The parties quarreled and the plaintiff
moved out. The plaintiff claimed possession of the property, asserting sole
ownership. The defendant counterclaimed for a declaration that the property
was held in equal shares. The House of Lords by a majority held for the

178
(1999) 3 All ER 699.
179
(1994) 1 AC 340.
180
(1996) Ch 107.
306
defendant. The claimant was entitled to vindicate her interest in the property,
whether legal or equitable, if she was not forced to plead or rely on any
illegality, even though it transpired that the title relied upon was acquired in
the course of carrying through an illegal transaction. On the facts there was no
evidence to rebut the presumption of the resulting trust over the property.

Lord Goff of Chieveley and Lord Keith of Kinkel dissented. Lord Goff, with
Lord Keith agreeing, insisted that a court of equity would not assist a claimant
who does not come with clean hands. Lord Browne-Wilkinson gave the main
speech of the majority. It was clearly established at law that property in goods
or land can pass under or pursuant to an illegal contract.181 The same should
apply in equity given that there was now a single law of property. All that was
necessary in this case was for the defendant to plead the common intention
that the property should he shared between them and that she had contributed
to the purchase price. Only in the reply, and during cross-examination of the
defendant, would any illegality emerge. This did not preclude the claim. The
party claiming title could recover as long as she did not need to plead or rely
upon the illegal acts.

In Tribe v. Tribe, the plaintiff transferred shares to his son with the intention
of deceiving his creditors. The illegal purpose was never carried into effect,
but the son refused to re-transfer the share. Tue Court of Appeal held that the
father was entitled to lead evidence to rebut the presumption of advancement,
without relying upon illegality. Millett LJ, in the leading judgment, pointed
out that if the transfer had been to a nephew or friend the presumption of
resulting trust would have arisen. There the burden of proof that the transfer
was intended to be by way of gift was upon the transferee. Given that the
transferee was the son the presumption of advancement applied placing the
burden of proving that the transfer of shares was not intended as a gift upon
the father. Millett LJ relied upon Tinsley v Milligan,182 and in particular on

181
Bowmakers Ltd. v Barnet Instruments Ltd. (1945) KB 65.
182
(1994) 1 AC 340.
307
Lord Browne-Wilkinson’s recognition of the existence of the doctrine of
locus poenitentiae. Millett U concluded:

The locus poenitentiae is not therefore an exclusively contractual doctrine

with no place in the law of restitution. It follows that it cannot be excluded by
the mere fact that the legal ownership of property has become lawfully vested
in the transferee. It would be unfortunate if the rule in equity were different. It
would constitute a further obstacle to the development of a coherent and
unified law of restitution.

The locus poenitefltiae operated to mitigate the harshness of a primary rule

prohibiting enforcement of illegal transactions. However, the plaintiff must
have withdrawn from the transaction before any further steps were taken.
Millett LJ concluded by summarizing the present law:

(1) Title to property passes both at law and in equity even if the transfer is
made for an illegal purpose. The fact the title has passed to the
transferee does not preclude the transferor from bringing an action for
restitution.

(2) The transferor’s action will fail if it would be illegal for him to retain
any interest in the property.

(3) Subject to (2) the transferor can recover the property if he can do so
without relying on the illegal purpose. This will normally be the case
where the property was transferred without consideration in
circumstances where the transferor can rely on an express declaration
of trust, or a resulting trust in his favour.

(4) It will almost invariably be so where the illegal purpose has not been
carried out. It may he otherwise where the illegal purpose has been
carried out and the transferee can rely on the transferor’s conduct as
inconsistent with his retention of a beneficial interest.

308
(5) The transferor can lead evidence of the illegal purpose whenever, it is
necessary for him to do o provided that he has withdrawn from the
transaction before the illegal purpose has been wholly or partly carried
into effect.

8.10 Public Policy Precluding a Restitutionary Claim

Public policy may preclude a restitutionary claim. This is a distinct question,

short of a finding that a transaction is illegal. The source of the public policy
may be statute, or common law. Gaff and Jones argue for a general principle
183
that public policy may bar a restitutionary claim: There is a general
principle that restitution will not be allowed if it would in effect enforce a
transaction which statute or common law prohibits. This is one explanation of
the failure of the common law claim in Sinclair v Brougham.184 The House of
Lords held that the policy of ultra vires prohibited the depositors’ claims at
common law. To allow the common law claim would be indirectly to sanction
the ultra vires borrowings by the building society. This was the explanation
given by Lord Goff of Chieveley of Sinclair v Brougham in Westdeutsche
Landesbank Girozentrale v Islington Landon Borough Council.185 In contrast,
the majority of the House of Lords held that the-decision on the common law
claim in Sinclair v Brougham was wrong, and that the money could be
recovered in restitution. Presumably the majority of the House of Lords in
Westdeutsche did not think that the allowance of a restitutionary remedy
would have the indirect effect of enforcing an ultra vires contract.

The question also arises in respect of contracts which are unenforceable for
want of formality. The leading modern discussion is that of the High Court of
Australia in Pavey & Matthews Ply Ltd v Paul.186 The High Court held that
the enforcement of a restitutionary quantum meruit would not frustrate the

183
Lord Goff of Chieveley and Gareth Jones, The Law of Restitution, 5th edn, London:
Sweet and Maxwell, 1998 at pp. 67-72.
184
(1914) AC 398.
185
(1996) AC 669, at p 688.
186
(1987) 162 CLR 211.
309
policy of a statute prohibiting enforcement of a binding contract not reduced
to writing, by the builder. Where the work had been completed the claim was
maintainable. Mason and Wilson JJ attempted to identify the purpose behind
the statutory provision. It protected the building owner against claims where
the contract failed properly to identify the work, even where the building was
completed. However, the statutory protection did not extend to a case where
the building owner requested and accepted work but declined to pay for it
purely on the grounds of non-compliance with the statutory formalities. Such
a contention was ‘Draconian’, and could not have been the intention of the
legislature. Deane J, delivering the leading judgment, could identify no
statutory intention to penalise the builder. It is submitted that the dissenting
judgment of Brennan J is to be preferred. Recourse to restitution would
frustrate the policy of the statute which was to render such obligations
unenforceable, This was particularly soon the facts of Pavey, where the oral
unenforceable contract was to pay a reasonable rate. The enforcement of the
restitutionary quantum meruit exactly imitated the enforcement of the
contract. In the case, Ibbetson has observed:187

“The more profitable approach - in reality the whole crux of

the problem - is to determine whether the purpose at the base
of the statutory prohibition of the contractual action would be
frustrated by the allowance of the restitutionary remedy.”

A different problem has arisen in the context of industrial action, where

statute confers an immunity from actions in respect of civil wrongs. In
Universe Tankships Inc. of Monrovia v. International Transport Workers’
Federation, The Universe Sentinel,188 the ITF had blacked a vessel flying
under a flag of convenience at Milford Haven. Causes of action in tort against
the ITF were within the scope of the immunity granted by sections 13 and 14
of the Trade Union and Labour Relations Act, 1974. A claim in restitution for
the return of a contribution to the UFF’s welfare fund under duress was

187
(1998) 8 OJLS 312, at p 326.
188
(1983) 1 AC 366.
310
allowed by a majority of the House of Lords. Lord Diplock, in the leading
majority speech, stressed the autonomy of the claim for money had and
received on the basis of illegitimate pressure. It was not dependent upon the
existence of any tort. Accordingly the statutory immunities were not directly
applicable to the claim in restitution. However, that was not the end of the
statute’s role in the dispute. Lord Diplock observed:

“Nevertheless, these sections ... afford an indication, which

your Lordships should respect, of where public policy requires
the line should be drawn between what kind of commercial
pressure by a trade union upon an employer in the field of
industrial relations ought to be treated as legitimized despite the
fact that the will of the employer is thereby coerced, and what
kind of commercial pressure in that field does amount to
economic duress that entitles the employer victim to
restitutionary remedies.”

The majority held that there was no public policy bar to recovering restitution,
by analogy with the Trade Unions and Labour Relations Act, 1974, because
on the facts of a particular dispute the pressure complained of was
insufficiently connected with the terms and conditions of the employment of
the crew under section 29.

The Universe Sentinel was replayed in Sweden in Dimskal Shipping Co. SA v

International Transport Workers’ Federation.189 The blacking of the ship was
lawful by Swedish law. However, the majority of the House of Lords held
that the governing law was a proper law of contract which was English law.
Accordingly, sums paid were recoverable in restitution on the grounds of
economic duress.

It is not necessary for present purposes to explore the basis of this decision. It
appears to bear some affinity to the principle underlying those cases in which
the courts have given effect to the inferred purpose of the legislature by
holding a person entitled to sue for damages for breach of statutory duty,

189
Evia Luck (No. 2) (1992) 2 AC 152.
311
though no such right of suit has been expressly created by the statute
imposing the duty. It is enough to state that, by parity of reasoning, not only
may an action of restitution be rejected as inconsistent with the policy of a
statute such as that under consideration in The Universe Sentinel,190 but in my
opinion the claim that a contract is voidable for duress by reason of pressure
legitimized by such a statute may likewise be rejected on the same ground.

It is submitted that the approaches of Lords Diplock and Goff provide model
guidance on how judges should reason by analogy from statutory prohibitions
and statutory immunities. The immaturity of the law of restitution has had the
unfortunate consequence that, whereas statute often provides for the
consequence of certain transactions or acts, the question of the recovery of
benefits transferred is not explicitly addressed. The courts will need to be
sensitive to whether recovery in restitution is consistent with the scheme of
the legislation, and that allowing recovery does not frustrate the policy behind
the statute.

190
(1983) 1 AC 366.
312