The validity of a contract can be challenged for a number of reasons such as public policy, illegality,  mistake, duress and undue influence, lack of capacity, or lack of authority.

Public policy

Certain contracts are unenforceable for reasons of public policy, including those that are:

• Illegal;
• Damaging to good government, in relation to both domestic (for example, the sale of public offices, contracts and honours (Parkinson v College of Ambulance Ltd [1925] 2 K.B. 1)) or foreign affairs (for example, trading with the enemy);
• Interfere with the machinery of justice, for example, maintaining an action in which you have no interest without just cause or excuse (McFarlane v EE Caledonia Ltd (No.2), [1995] 1 W.L.R. 366);
• Damaging to marriage or morality.

The doctrine of restraint of trade provides that individuals and organisations should be free to carry on their trade or business in whatever manner they see fit. Any restraint upon this freedom is void unless it is reasonable. Restraints are commonly found in employment contracts (restrictive covenants prohibiting an employee from carrying on activities during or after his employment) and in business and share purchase agreements (restrictive covenants preventing the seller from competing with the business he is selling). They have also been held to apply to joint venture agreements (Dawnay Day & Co Ltd and Another v D’Alphen and Others, [1997] IRLR 442, Court of Appeal). To be valid such restraints must be reasonable in the circumstances, bearing in mind factors such as the period of time during which they will apply and the geographical area to which they will relate. Clauses in restraint of trade are more rigorously enforced where the parties are in a commercial as opposed to an employment relationship.A clause in a contract which purports to be a liquidated damages clause when in reality it is a penalty clause (because when determined objectively, it is not a genuine pre-estimate of loss) has also been found to act as a restraint of trade and is therefore unenforceable (Taylor Stuart & Co. v Timothy Croft, Chancery Division, 7 May 1997).There are cases where a contract has been declared against the public interest but which do not fall within these categories.Where a contract is against public policy (or illegal), it may be possible to sever the offending part of it.

Illegality

Contracts illegal at common law

Some contracts are illegal at common law. These include:

• Contracts to commit crimes or civil wrongs.
• Contracts involving sexual immorality.
• Contracts tending to promote corruption in public life.
• Contracts for trading with the enemy in wartime.
• Contracts directed against the welfare of a friendly foreign state.
• Contracts prejudicial to the administration of justice.
• Contracts illegal by statute

Some statutes specifically prohibit certain types of contract, for example, under the Competition Act 1998, contracts that fix prices are unlawful.

Illegal as formed and illegal performance

An illegal contract may be:

• Illegal as it is formed, that is, it cannot be performed without an illegal act.
• Illegal as performed, that is, a party does something illegal in the course of performance of a contract.

Consequences of illegality

As a general rule a contract that is illegal as formed will be void and unenforceable by either party to the transaction and any property transferred is not recoverable. If the purpose of the contract is illegal, then it is not relevant that the parties did not know that it was illegal.Illegal performance of a lawful contract (that is, where one party commits a criminal offence in the performance of its part of the contract) allows the innocent (but not the guilty party) to enforce the contract. For example, in the case of Archbols (Freightage) Ltd v S. Spanglett ([1961] 1QB 374), a party who did not know that a van that was used to carry goods under the contract was not licensed, could sue on the contract. The Law Commission has published a consultation paper (Illegal Transactions: The Effect of Illegality on Contracts and Trusts, Consultation Paper No 154, 21 January 1999) which considered whether the involvement of one or both of the parties to the contract in illegal activities should have an impact on their usual rights and remedies and whether the courts should have a structured discretion whether to enforce it. The Commissioners have not yet reached any conclusions. A party may be able to recover if it can find establish its case without relying on the contract, for example by suing in tort rather than contract.Where a contract is illegal, it may be possible to sever the offending part of it.

Duress and undue influence

A contract will generally only be valid if it has been entered into freely and voluntarily.

Duress

Where a party to a contract is induced by duress (actual or threatened violence or unlawful restraint), it is voidable by the injured party. The threat can be to the person (Barton v Armstrong [1976] A.C. 104), to property (Maskell v Horner [1915] 3 K.B. 106) or of an economic nature, for example, a threat to terminate a contract (North Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1979] Q.B. 705).

Remedies

A contract entered into under duress is voidable, not void. The party alleging duress can choose to affirm the contract or rescind it, provided there are no equitable bars to rescission. It is not essential to show that the stronger party has benefited from the contract – all that is required is for the party seeking to avoid the contract to show that he did not act of his own free will because of the influence exerted by the other party.

Undue influence

Equity will set a contract between parties who are in a relationship of trust and confidence aside, if it is entered into as a result of an abuse of that relationship. Relationships of trust and confidence include fiduciary relationships such as doctor and patient, solicitor and client and trustee and beneficiary. There is a presumption of undue influence where the parties are in a relationship of trust. The relationship of husband and wife can also give rise to this presumption if, for example, the wife relies and acts on the advice of her husband in all financial matters (per Lord Browne-Wilkinson in Barclays Bank v O’Brien [1994] AC 180) but in Royal Bank of Scotland v Etridge (No 2) ([2002] 2 A.C. 773) the House of Lords noted that the presumption of undue influence by a husband on a wife was not irrebuttable. If a wife could show that she had placed trust and confidence in her husband and that the transaction was not explicable in the ordinary way, she could rely on the presumption to shift the burden of proof onto the person trying to enforce the contract. The fact that a husband and wife’s interests are bound up together means that the giving of a guarantee by a wife may not necessarily be to her disadvantage so as to be explicable only on the basis that it had been procured by his undue influence.

For more information contact David Vaughan-Birch.