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What is the Requirement of Common Law Legality in a Contract?

By 8 January 2014Business, Family Law
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A contract is an agreement, voluntarily entered into by 2 or more parties for the purpose of creating obligations on both parties. Contracts play a part in many areas of life, from multi-million dollar business deals to the purchasing of goods from the local shopping centre.

The Elements of a Contract

Generally a Contract must have the following elements to be valid:

  • A valid and binding agreement. This means there must be a valid offer and there must be acceptance of the offer. Acceptance can be oral, written or by way of conduct;
  • Consideration. Consideration can be anything of value promised to another, it can be in the form of money, a service, or a promise to undertake, or refrain from undertaking an action;
  • Capacity. The parties must have the capacity to enter into legal relations. The parties must be of legal age and of sound mind, note however that legal age may be waived in some cases, such as for the purchase of a necessity;
  • Intention. Both parties must intend upon, or expect the agreement to be legally binding;
  • Formalities. A contract is valid in whatever form (written, oral or both), provided all the elements for its validity are present. In some cases, contracts must comply with certain formalities, such as being written, otherwise it is unenforceable; and
  • Legal purpose. The contract must meet the requirement of both implied and express statutory legality, and for common law legality.

A contract that meets all these requirements is valid. When any of the elements mentioned is lacking, vitiated or irregular, the contract may become void, voidable or unenforceable.

In this article, we will explore what it means for a contract to be for a legal purpose, and provide examples of where contracts have been deemed to be for an illegal purpose.

Effects of Common Law Illegality in Contracts

In one of the more interesting cases of contracts for an illegal purpose is the case of Wilkinson v Osborne (1915) 21 CLR 89. The case rendered a contract void due to the agreement being illegal by reason of public policy.

The case essentially revolved around a contract for commission. The owners of a house named ‘Boorabil’ had placed the property up for offer to the Government of NSW for £30,000. The owners of the property had contracted with Wilkinson to negotiate on their behalf; Wilkinson was to receive a £1,000 commission on the successful sale of the property.

In an attempt to guarantee the purchase of the property, Wilkinson approached Osbourne and Jones, members of the Legislative Assembly and contracted with them to lobby the NSW Cabinet on his behalf for the sum of £250. Osborne and Jones were successful in their actions, and the property was acquired.

Osborne and Jones then attempted to recover their fee, to which Wilkinson refused the payment of. Litigation ensued and the case reached the High Court, with Wilkinson arguing that the contract was for an illegal purpose, and thus invalid.

The High Court unanimously found that the sale of bringing pressure to bear on a minister, by a parliamentary supporter was void as an act contrary to public policy.

Simply put, the kind of action that the contract encouraged was harmful to the public good.

Some Other Contracts Considered Void by the Common Law

The following contracts have also been considered void by reason of public policy:

  • Contracts with the intent to commit crimes and torts;
  • Contracts that intend to defraud a person;
  • Contracts to promote sexual immorality;
  • Contracts to promote corruption in public life;
  • Contracts to prejudice the administration of justice; and
  • Contracts to prejudice foreign relations or public safety.

As a general principle, courts will not assist parties in recovering property they have lost due to an illegal contract. There exist exceptions however, such as where one party is not guilty, or equally as guilty as another.

A contract is often far more complex than a person would first assume. The consideration of illegality is but one of many intricate considerations that must be made prior to a contract being drafted.  Often businesses are tempted due to cost or time to create their own contracts, however the cost of having a contract drafted professionally is often miniscule compared to the cost of litigation.