Illegal Contracts Lecture 6

Exceptions to general rule   Where the parties are not in pari delicto, i.e. not equally at fault, the “innocent” party may recover. This may arise where:   The contract is prohibited by statute in order to protect the class of person to which the claimant belongs. A party has been induced to enter an illegal contract by fraudulent misrepresentation, or where an ignorant man enters an illegal contract under the influence of a cleverer man.  Hughes v Liverpool, etc Friendly Society [1916] 2 KB 482 Hughes v Liverpool, etc Friendly Society   In 1908 and 1909 one Thomas effected with the defendants in their industrial branch five policies on the lives of others. Shortly afterwards Thomas determined not to keep the policies up, and he accordingly ceased paying the premiums and burnt the policies. At the end of 1910 one of the defendants' agents brought five duplicate policies to the plaintiff, who had no insurable interest in the lives in question, and induced her to take up the policies by the representation, which the jury found to be fraudulent, that by paying the arrears due on premiums and keeping them up everything would be all right. Thomas had not assigned the policies and did not ask for the duplicate policies, nor was he aware of what the agent was doing. The plaintiff, having discovered that the policies were illegal and void, sued to recover the premiums which she had paid. Held, that the parties were not in pari delicto, and that the plaintiff was entitled to recover, her right not being affected by ss. 23 and 36 of the Assurance Companies Act, 1909, which imposed a penalty upon a friendly society issuing such a policy.  Where the illegal purpose has not yet been carried out, a party who is truly repentant may recover.  A party seeking to take advantage of this rule must show that his repentance is genuine, and that he is not repudiating the contract for mere reasons of convenience: Bigos v Bousted [1951] 1 All ER 92 Bigos v Bousted  In 1947 the defendant was anxious to send his wife and daughter abroad for the sake of the daughter's health. Owing to the restrictions on English currency which were then in force he was unable to obtain from the Treasury what he considered an adequate allowance to enable them to stay abroad sufficiently long for the visit to be of benefit to the daughter, and, on 25 August 1947, he entered into an agreement with the plaintiff, in contravention of the Exchange Control Act, 1947, s 1(1), whereby the plaintiff agreed to make available £150 worth of Italian money for the wife and daughter in Italy within a week and the defendant promised to repay her with English money in England. As security for his promise, the defendant deposited with the plaintiff a share certificate for 140 shares in a company. On 28 August the defendant's wife and daughter went to Italy, but the plaintiff failed to make any Italian money available for them, and on 13 October they returned to England, sooner than they would have returned if they had had the money. The defendant then asked the plaintiff to return to him his share certificate, but she refused to do so. In an action by the plaintiff to recover the sum of £150 from the defendant on the ground that she had made a loan to him of that sum, the defendant denied the loan, set out the true facts of the transaction, and counterclaimed for the return of the certificate. The plaintiff abandoned her claim at the commencement of the hearing of the action, but the defendant proceeded with his counterclaim and contended that, although the contract was an illegal one, as it was still executory he was allowed a locus poenitentiae, and, therefore, he was entitled to claim the return of the certificate.  Held - The reason that the illegal transaction was not carried out was due, not to any repentance on the part of the defendant, but to the frustration of the contract by the plaintiff, and, therefore, as the agreement relating to the deposit of the share certificate was one which sprang from the main illegal agreement and was tainted with the same illegality as that which attached to that agreement, and as the parties were in pari delicto at the time of making the agreement, the defendant was not entitled to seek the aid of the court to recover the certificate.  Where a contract is apparently lawful in its actual formation, but there is an illegal purpose known to one party and not to the other, the innocent party may recover: Cowan v Milbourn (1867)   The defendant contracted to let rooms to the plaintiff; afterwards, discovering that they were intended to be used for the delivery of lectures maintaining that the character of Christ is defective and His teaching misleading, and that the Bible is no more inspired than any other book, he refused to allow the use of them, but did not assign this as a reason for his refusal. In an action for breach of the contract. Held, first, that the publication of such doctrines was blasphemy, and that therefore the purpose for which the plaintiff intended to use the rooms was illegal, and the contract one which could not be enforced at law. Secondly, that the defendant was entitled to justify his refusal on this ground, notwithstanding his having assigned a different reason.  Where a party to an illegal contract can frame his claim without reliance on the contract.  Bowmakers v Barnet Instruments [1945] KB 65  The appellants hired machine tools from the respondents under three written agreements. The tools were the property of one Smith, who sold them to the respondents in order that the appellants might ultimately obtain possession of the tools provided the hire-payments were made regularly to the respondents. After making only some of the agreed payments, the appellants converted the tools to their own use by selling them. The respondents, thereupon, terminated the contract and claimed the return of the tools or, alternatively, damages for conversion. For the appellants it was contended: (i) that the sale between Smith and the respondents was illegal in that it contravened the Control of Machine Tools Order 1940, resulting in the agreements between the appellants and the respondents being affected by the illegality arising from the original sale; (ii) that the respondents' claim, therefore, should not be entertained on the ground of public policy. The respondents, whilst not relying on the hiring agreements, claimed that the property in the tools still remained in them at the date of the conversion.  Held - (i) whether or not the agreements for sale were illegal, the respondents' right to their own property was unaffected. (ii) no question of public policy therefore arose.  Where the purpose for which a statute makes an agreement illegal is to protect a particular class or persons, a member of that class may be able to recover property transferred under the agreement, notwithstanding the illegality.  Kiriri Cotton Co Ltd v Dewani [1960] AC 192 Kiriri Cotton Co Ltd v Dewani   In May, 1953, the tenant, in order to obtain a sub-lease of a flat at Kampala, Uganda, paid a premium to the landlord. The sub-lease was granted. By the Uganda Rent Restriction Ordinance, s 3(1)a no owner or lessee of a dwelling-house or premises could let such dwelling-house or premises at a rent which exceeded the standard rent; and by s 3(2), any person who, in consideration of (inter alia) the sub-letting of a dwelling-house or premises asked for, solicited or received a premium, whether before or after the grant of a tenancy was guilty of an offence and liable to a fine. There was, however, no provision in the ordinance enabling a premium to be recovered back. No standard rent had been fixed for the flat because it was a new flat, and there was no evidence to show that the premium was extortionate. Neither party thought that there was anything illegal in the premium being received. The tenant claimed to recover the premium as being illegal because it was in contravention of s 3(2) of the ordinance.  Held - The duty of observing the law being placed by s 3(2) on the shoulders of the landlord for the protection of the tenant, the parties were not in pari delicto, and, therefore, though the illegal transaction was an executed transaction, the tenant was entitled at common law to recover the premium as money had and received to the use of the tenant.