Illegal Contracts Remedies
Illegality & Restitution
At least in the case of some types of illegality, assets transferred under an illegal contract may be, nonetheless, validly transferred. Restitution is not allowed for contracts which are prohibited by illegality. To do otherwise would undermine the prohibition.
Where as a matter of public policy, a statute is interpreted as being for the benefit of a particular vulnerable party, the benefits may be recoverable by that innocent party. The courts will interpret whether the parties are equally at fault or so-called in pari delicto.
The innocent party may recover assets transferred under a void contract where the policy of law is protective of a weaker party. In these cases, counter restitution by the innocent party is not necessary.
The principle appears to apply to statutory and common law illegality. It appears that where the statute or common law is interpreted as protecting one person, that total failure of consideration/ performance is not required.
Some cases suggest that counter restitution may not be required in this case. This has occured in some cases, under the Moneylenders Act, the predecessor of consumer credit legislation, by reason of the protective intent of the statute.
Void Contracts
There is a claim for quantum meruit or quantum valebat for benefits provided under a void contract, unless it is intended that the goods or services are to be provided gratuitously. Accordingly, where the contract is void as opposed to voidable, the remedy is measured by value of benefits in kind (quantum meruit or quantum valebat) , rather than by reference to the contract.
Where a contract is void, there is a total failure of consideration in the sense that the obligation, (the contractual promise) is not valid. A ultra vires contract may fall into this category.
The party who seeks restitution, must be able to give counter-restitution, which is a significant practical limitation. In relation to void contracts, restitution may be made by payments in money. It appears that in the case of voidable contracts, restitution in kind must be made.
Voidable Contracts
Most defects in contract formations, such as those caused by misrepresentation and misstatement cause the contract to be voidable. The courts seem to lean towards voidability as against voidness, as it is less disruptive.
In the case of a voidable contract, the “innocent” party may set aside a voidable contract only if he restore the pre-contract position. This is more onerous than is the case, in relation to void contracts, where restitution may be made by payments in money. It appears that in the case of voidable contracts, restitution in kind must be made.
An asset acquired pursuant to a void or voidable contract, may have been resold, so that the immediate buyer cannot return it to the seller who has been “guilty” of misstatement or misrepresentation. Similarly, the nature of the asset acquired may have been changed, so that this it is not capable of being returned and the change in nature and value may not be compensated, by money alone.
Counter-Restitution
In the case of voidable contract, the person who wishes to avoid the contract must make counter restitution. Where a person can return substantially what he has obtained, restitution is usually allowed.
Presumptively, goods transferred must be returned. This may be a significant limitation on the ability to obtain restitution. A set off for reduction in value or a cash payment to give credit may be required.
If a person has caused another to enter a contract by fraud or misrepresentation, and the thing concerned has been thereby depreciated because of it, restitution will be allowed notwithstanding the failure to give it back in its original state.
The requirement for full restitution in-kind presumptively applies and may be relaxed in certain cases. There is an exception where the reason why the asset cannot be returned is due to the very feature or matter which is misrepresented. This is so, even if the representation is innocent. The person who makes a representation in relation to the very thing which causes the asset to deteriorate and change in nature, bears the risk.
Similarly, where what cannot be returned is minor and incidental, there will be sufficient counter restitution. An allowance may be required to make up the difference.
Failure of Consideration
The failure of consideration requirement does not apply to void contracts in the same way that it applies voidable contracts and most other cases of restitution. The courts of equity more readily allow reinstatement and the restoration of the original position on terms, in the case of a void contract.
Historically, the requirement for total failure of consideration applied to void contracts. The courts looked to whether a substantial benefit had been received and it this was so, restitution would not be available.
The modern position is that the failure of consideration may include the failure to obtain a valid counter promise rather than non-receipt of actual counter performance. Monies paid under void contract may be recovered, notwithstanding partial performance.
This has the effect of allowing restitution more readily, where the apparent contract is a nullity, by reason for example, that it is made outside corporate powers. The courts of equity more readily allow reinstatement and the restoration of the original position on terms, in the case of a void contract.
Effect of Absence of Contract
Where the contract is void, then any limitation on the sum recovered under the contract will not apply on the basis that the contract is of no effect. This position follows logically from there being no contract. Although the circumstances that made the contract void vary considerably, the courts take the logical position that there is no contract, and that the ostensible contract should not govern the value of what is recovered.
In some cases, the absence of contract may be due to factors which go to the heart of consent and bargain. Here the rejection of the putative contract is readily understandable. Where the failure is more technical in nature and less obvious, such as where the contract is outside the powers of a corporate body, the abandonment of the contract may seem intuitively less obvious.
The failure of consideration goes to the heart of void insurance and guarantees where, quite literally nothing is received so that the negation of the contract is obvious. More incongruous is the case of loan agreements, where an entity has borrowed monies outside of its powers. The modern position makes the monies recoverable on restitutionary principles, without reference to the terms of the contract.
Voidable and Avoidance
Where contracts are voidable, restitution requires that the contract be first avoided. It appears in principle, that once this is done, the monies paid may be recovered on a restitutionary basis.
Likewise quantum meruit of quantum valebat are available where services or benefits have been provided under a voidable contract. Similar issues to those which arise in other contexts of restitution, arise with regard to the transfer of title and possession of assets.
In the case of duress caused by threats of violence, the contract is likely to be void. In other cases involving a lesser degree of pressure or influence, the contract is more likely to be voidable. In this case he will be obliged to make counter-restitution and may loose the right to restitution if this is not possible.
However, policy issues may arise. If a person is forced to accept services under threat, he is unlikely to be required to pay or allow a reasonable sum, in order to get his money back.
Minors
The total failure of consideration principle appears to apply to minor’s contracts. The taking of any benefit by the minor appears to preclude him from recovery on the basis of restitution. It has been argued that this is anomalous, and does not give proper protection to minors. It would appear reasonable that given the protective objective of the statute, that restitution should be available, with the minor giving counter restitution for what he has received.
Even where property is transferred, case law suggests that unless there is a total failure of consideration, the minor may not undo the transfer. Cases have held that partial use of a vehicle for a period was sufficient to prevent total failure occurring. Once again this approach seems to be inconsistent with the protective purpose of the statute.