Contracts 101 – Part 10: Legality of Object
Disclaimer: I’m not a lawyer and I have no claim that this advice should be taken as legal advice in replacement of seeking out professional help. What I hope to do is educate you over a series of small posts about what constitutes a contract and you should be able to figure out when you might need to see a real lawyer. Although this series is in the Australian context many of the principles apply in other countries.
Following from the first three elements of the contract – the agreement, consideration and capacity – the fourth element is legality of object which covers Common Law and Statutes involving illegal and void contracts, including restraint of trade… G. W. Plowman and Son Ltd v Ash (1964); Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978). Generally, illegal contracts will not be enforced by the court – including those contracts which contravene public policy, crimes or torts; contracts which promote sexual immorality; contracts which prejudice the status of marriage; contracts which involve trading with an enemy country, promote corruption, or pervert the course of justice; and contracts which involve the performance of illegal acts in a foreign and friendly state.
Contracts illegal by Statute include those which the government deems must include particular terms or details such as licenses or particular clauses. To this extent, it is important to be aware that certain contracts are unenforceable void contracts or they may even be downright illegal. However, for the illegal contract, the illegal factor must be fundamental to the contract… Yango Pastoral Co Pty Ltd v First Chicago Australia Ltd (1978). In the case of Yango Pastoral, in the previous hyperlink, Yango contested that due to First Chicago Australia Ltd being unregistered under Australian Statute that Yango should be able to not repay their loan. The court found that the illegality of being unregistered was not fundamental to the case of the loan and ordered Yango to repay the loan.
A restraint of trade is where one party is restricted in liberty by another party in the future… Petrofina (Great Britain) Ltd v Martin (1966). However, with regard to restraint of trade, if a contract is reasonable it may be upheld by the court. To this end it should be noted that restraint of trade contracts should be considered as void unless reasonable with consideration given to the interests of the parties and the interests of the general public – including geographical area and time duration. It is not the court’s intention to stifle honest economic development nor to stop people from earning a living.
So, where it is deemed reasonable, there may be grounds for restraint of trade within something like an employment contract. It may be fair to restrain an employee or contractor from soliciting work from your clients for the next 12 months… but it would be unreasonable to include a contract that enforces some condition such as that they may not be a web developer within the boundaries of Tasmania for the next five years. It is imperative that if such conditions are included into a contract then it can be justified as reasonable and in the public interest before it will be enforced by the court.
The takeaway point of the legality of object element of a contract is that we need to be careful with the nature of the contract. The court will not support anything that is grossly unfair or illegal, and it will not stifle trade, promote immoral behaviour or allow the public interest to be compromised. Therefore, before entering into a contract it is a wise move to pass it before lawyers who are in a position to assure the legality of the deal at hand.
While, at least in the web development industry, there is a tendency to write our own ad-hoc contracts with one-sided powers and constraints – be aware these may be unfair in the eyes of the court. Further, and more seriously, these self-authored contracts may have fundamental flaws that make them not only worthless to our business objectives but also put us at risk of having to defend ourselves within the costly court system if we are sued by the other party. So my advice is to stop treating contracts as flippant agreements where you get sub-contractors to sign on the dotted line. The truth is that you could lose your house, your marriage and your business if you get it wrong. One objective of this series is to impress upon the business owner the need for professional help from a trained lawyer when it is deemed appropriate. Contracts are critical business processes – so value them.
The next installment of Contracts 101 will include a brief discussion of the fifth element of the contract – possibility of performance.
Note: Resources used for this series are identified in the first installment – Contracts 101 – Part 1: Outline.
Installments in Contracts 101
- Contracts 101 – Part 1: Outline
- Contracts 101 – Part 2: Which Contract?
- Contracts 101 – Part 3: The Six Elements
- Contracts 101 – Part 4: The Agreement
- Contracts 101 – Part 5: The Offer
- Contracts 101 – Part 6: The Acceptance
- Contracts 101 – Part 7: Battle of the Forms
- Contracts 101 – Part 8: Consideration
- Contracts 101 – Part 9: Capacity
- Contracts 101 – Part 10: Legality of Object
- Contracts 101 – Part 11: Possibility of Performance
- Contracts 101 – Part 12: Genuine Consent
- Contracts 101 – Part 13: Promissory Estoppel
- Contracts 101 – Part 14: Ending the Contract
- Contracts 101 – Conclusion: Protect your Business
