7

Unfair, Illegal, and Immoral Contracts

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A. Introduction 109
B. Inequality between Performance and Counterperformance 110
C. Undue Restraints on Personal or Economic Freedom 117
I. Basics 117
II. Long-​term contractual relationships 118
III. Non-​compete agreements 119
IV. Partial invalidity 121
D. Breach of the Law 122
E. Restitution of Benefits Conferred 125

A. Introduction
When parties to an agreement have thought about the matter, seriously intend to bind
themselves, and are unaffected by mistake, deceit, or duress, the contract is normally
binding. But if the agreement is that A is to pay B for giving perjured evidence on his
behalf, neither party would be able to claim either for performance or for damages for
non-​performance. However committed a legal system may be to the principle of free-
dom of contract, it is bound to deny enforcement to a contract which conflicts with
the law or good morals or offends ‘public policy’ or is ‘contraire aux bonnes moeurs ou
à l’ordre public’.
Legislative provisions in this area are necessarily rather vague.1 Some continental
civil codes do no more than distinguish between contracts which are illegal and those
which are immoral,2 to which the Dutch Civil Code adds contracts in breach of pub-
lic order.3 The French Code civil used to deal with the present problem in relation to
the concept of cause. This was abandoned in the course of the recent reform of French
contract law,4 and arts. 1128 and 1162 now simply provide that a contract must have
‘un contenu licite’ and must not derogate from ‘l’ordre public’.5
The codal texts on contracts which conflict with good morals, public order, or legal
prescriptions are all what German lawyers call ‘general clauses’, which need to be
fleshed out by reference to court decisions. That is why commentators who try to put

1 See A von Mehren in Int.Enc.Comp.L. vol. VII ch 1, 37ff.

2 See §§ 134, 138 BGB; § 879 ABGB; art. 20(1) OR; arts. 174, 178 Greek Civil Code. It is noteworthy
that Swiss law draws a distinction between contracts which are illegal or immoral (art. 20 OR) and those
which are in breach of art. 27(2) Civil Code, which provides that ‘no one may alienate his liberty or
restrict it to a degree inconsistent with law or morals’. On this distinction, see the details in E Bucher,
Berner Kommentar vol. I part II/​2 (1993) art. 27 ZGB mn. 92 and 162ff.
3 Article 3:40(1) and (2) BW. 4 See above, pp. 51f.
5 As to contracts that are illegal or immoral, the Dutch and Portuguese Civil Codes have also aban-
doned the link with cause: see art. 3:40(1) and (2) BW, art. 280 Portuguese Civil Code.

European Contract Law. Second Edition. Hein Kötz, Oxford University Press (2017). © Hein Kötz 2017
DOI: 10.1093/oso/9780198800040.003.0007
110 Unfair, Illegal, and Immoral Contracts

the cases into some sort of order invariably add that the categories they adopt are nei-
ther exhaustive nor mutually exclusive.
Contracts which until quite recently were regarded as offensive may now be per-
fectly acceptable. This is especially the case with respect to contracts where it is uncer-
tain if they contravene generally accepted principles of family life or sexual morals.
Contracts whereby a party in an unmarried partnership could promise to pay the
other a certain sum of money if the partnership were to end would previously have

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been unthinkable. Similarly, contracts concerning payment of a sum of money or
maintenance between a married man and a woman to whom he was not married.
Today, such contracts are held to be valid if the judge can determine that the promise
was based on laudable motives, namely with the aim of securing the maintenance of
the other partner after the end of a long-​term relationship, or as an expression of grati-
tude to that partner for support or care provided.6
A comparison of different legal orders shows that the very same contract can be
treated as invalid in some jurisdictions as a breach of statutory provisions, but in oth-
ers as invalid because provisions contravene (unwritten) rules on good morals or pub-
lic policy. For these specified reasons, a contract can sometimes be found to be ‘void’
or ‘invalid’, while it is described as ‘unenforceable’ in other legal systems. Often a con-
tract will be deemed void by one legal order, whereas the very same contract will be
treated elsewhere as valid, but under certain circumstances one party will be able to
challenge or cancel obligations arising from the contract because of an allegation of
fraud or duress. Both solutions can be found in the PECL. Pursuant to art. 4:109(1),
a party may avoid a contract if the other party knowingly exploits the weak position
of the other, thereby benefiting from an unfair or excessive advantage. On the other
hand, pursuant to art. 15:101 a contract is ‘of no effect’ if it is ‘contrary to principles
recognised as fundamental in the laws of the Member States of the European Union’,
and under art. 15:102 PECL also where a contract infringes a mandatory applicable
rule of law.7
Here we shall deal with circumstances where there is an evident inequality between
performance and counterperformance, and it is thus doubtful whether the contract is
void for that reason alone or due to other additional reasons. Secondly, we will look
at cases where validity turns on whether the contract improperly restricts personal or
economic liberties. Finally, special problems can arise where the formation or execu-
tion of a contract infringes some statutory provision.

B. Inequality between Performance and Counterperformance

The question of whether a balance between performance and counterperformance can
determine the validity of a contract has been the subject of debate in Europe for many

6 See, for example, Civ. 22 Oct. 1980, Bull.cass. 1980.I. no. 269; Civ 11 Feb. 1986, Bull.cass. 1986.I. no. 21;
BGH 31 Mar. 1970, BGHZ 53, 369; BGH 12 Jan. 1984, [1984] NJW 2150: BG 17 Jan. 1983, BGE 109 II 15. See
also the case law discussed in GH Treitel, The Law of Contract (13th edn, by E Peel, 2011) no. 11-​040.
7 See H MacQueen, ‘Illegality and Immorality in Contracts’ in A Hartkamp et al. (eds), Towards a
European Civil Code (4th edn, 2011) 555.
 Performance and Counterperformance 111

centuries. Classical Roman law had no such requirement, and recognised the validity
of a contract of sale whatever the relationship between the price and the true value of
the goods. It was only in the later Roman period, according to the Corpus Iuris,8 that
an ordinance was promulgated—​there is some doubt whether it dates from the third
or only the sixth century ad—​which gave the seller of land the right to resile from the
contract if the price agreed was less than half its true value. Socio-​political consider­
ations were clearly behind this innovation: peasants impoverished by the Emperor’s

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brutal taxing policies were to be protected from selling their fields for a song to city
capitalists eager to safeguard their wealth from inflation.9
It was not until the Middle Ages that the idea that all contracts must show a bal-
ance between performance and counterperformance was fully accepted. Thomas
Aquinas and other fathers of the Church maintained that the two sides of a contract
must be balanced, and that to pay less than a fair price or iustum pretium was a sin.
What was ordained by Christian morality was seen by natural lawyers as standing to
reason: a contract could be avoided for laesio enormis. Unfortunately, the principle
of equivalence proved rather difficult to apply in practice. Could the buyer prevent
the avoidance of the contract by paying a supplement? Was it only the seller of land
who could avoid the deal by invoking laesio enormis, or could the seller of goods
do so too? Did the buyer have a comparable right if the price was too high? What
about contracts of lease and employment? Above all, how was the ‘just price’ to be
ascertained?
The civil codes of the early nineteenth century differed in the extent to which they
adopted the doctrine of laesio enormis. The Austrian ABGB went furthest: under
§ 934, either party may resile from a contract if the value of his performance exceeds
that of the other’s by more than half (Verkürzung über die Hälfte). This right is not
available to a party dealing as a business,10 nor to a seller who was fully aware of the
value of the property, and, for example, sold it cheap to a friend (Freundschaftspreis),
nor to a buyer who said when he was buying the property that he was paying ‘an
exceptional price out of particular predilection for it’ (§ 935).
The French Code civil is more hesitant. According to art. 1168, the general prin-
ciple is that a contract is valid despite the inequality of performance and counter-
performance. However, the law may provide otherwise. It does so in art. 1674 ff: if
the price paid for land is less than seven-​t welfths of its true value at the time of the
contract, the seller has two years in which to avoid the sale. Rescission is excluded if
it appears from the context that the sale was an ‘aleatory transaction’, or that it was
really intended as a gift to the buyer. The buyer can forestall rescission by offering
to pay the difference between the agreed price and 90 per cent of the current mar-
ket value—​but can keep the other 10 per cent so as not to be entirely deprived of the

8 C. 4.44.2.
9 On this, and what follows, see R Zimmermann, The Law of Obligations, Roman Foundations of the
Civilian Tradition (1990) 259ff. with references to the extensive literature on the history of laesio enormis.
See also von Mehren (n 1) vol. VII ch 1, 83ff.
10 § 351a Austrian Commercial Code.
112 Unfair, Illegal, and Immoral Contracts

benefit of the bargain (art. 1681). The practical application of this article has not been
trouble-​free.11
Such rules do not figure in more recent civil codes: they were rather out of place in
an economy increasingly dominated by liberalism. In an acquisitive bourgeois soci-
ety founded on freedom of contract, establishment, and competition, it was an article
of faith that people were sufficiently businesslike and judicious to look after them-
selves. Thus, any rule that allowed the judge to avoid a contract because of substantial

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inequality was paternalistic and prejudicial to legal certainty. The drafters of the BGB
accordingly believed right up till the last moment that they need do no more than
include a general clause to the effect that contracts were void if they conflicted with
the law or with good morals (§ 138(1) BGB). In the end, however, the sense prevailed
that unequal contracts are suspect and unjust, and a second element was added. Thus
§ 138(2) BGB combines the tests of ‘procedural’ and ‘substantive’ fairness, and renders
a contract void if (a) performance and counterperformance are ‘clearly disproportion-
ate’, and (b) one of the parties exacted the contract ‘through exploiting the predica-
ment, inexperience, lack of judgement or significant indecisiveness’ of the other party.
Most other civil codes in Europe have adopted this solution.12 The Italian Codice
civile alone adheres to a mathematical formula: the disadvantaged party, which can
rescind only if it entered the contract out of a stato di bisogno, must show that what it
gave was worth twice as much as what it was to receive (art. 1448).13 By contrast, the
Dutch Civil Code makes no reference to any imbalance between performance and
counterperformance, but allows a contract to be avoided for ‘abuse of the situation’ if
the other party improperly induced the claimant to enter the contract when the other
party was or should have been aware of the claimant’s predicament, dependency, inex-
perience, fecklessness, or naivety (art. 3:44(4)).14
International sets of rules require a party to have secured an ‘excessive benefit’ or
a ‘grossly unfair advantage’ and that—​similar to § 138(2) BGB—​the disadvantaged
party was in economic distress, had urgent needs, lacked bargaining skill, or was in
some other specific predicament that the other party knew or ought to have known
about, and took advantage of.15 German law is moving more towards the position that
merely a ‘gross disparity’ (grobes Missverhältnis) between performance and counter-
performance suffices for the invalidity of the contract. In effect, this signals a reawak-
ening of the old doctrine of laesio enormis. With respect to contracts of sale, such a
gross disparity has indeed been found if a good is sold for less than half or more than
double its market value. In such a case, even if there is no exploitation of predicament

11 See the details in J Ghestin, Traité de droit civil, La formation du contrat (1993) no. 555ff; B Starck,
H Roland, and L Boyer, Droit civil, Obligations, Contrat et quasi-​contrat, Régime général (5th edn, 1995)
nn 806ff.
12 § 879(2) no. 4 ABGB; art. 21 OR; art. 179 Greek Civil Code; § 31 Nordic Contract Law; art. 282
Portuguese Civil Code. See also art. 388 Polish Civil Code.
13 See It. Cass. 28 June 1994, republished in part in ZEuP 1997, 475 with note by C Becker.
14 See Hoge Raad 29 May 1964, [1965] NedJur 104: A vendor, whose age-​related inexperience was taken
advantage of, may rescind a contract for the sale of real property even if the agreed price was reasonable.
15 See art. 4: 109 PECL; art. 3.2.7 PICC; art. II.-​7:207 DCFR; art. 30(3) CEC; art. 51 CESL. There is
agreement that a contract concluded under such circumstances is not void per se, but can be voided or
challenged by the disadvantaged party.
 Performance and Counterperformance 113

pursuant to the requirements of § 138(2) BGB, the disadvantaged party can still assert
that the contract is void pursuant to § 138(1). It is true that the advantaged party must
have acted ‘with reprehensible attitude’, but such an attitude can be assumed even if
the advantaged party had no knowledge of the gross disparity.16
The French Code civil contains no rule comparable to § 138(2) BGB, but the courts
reach much the same results in practice by allowing the advantaged party to impugn
the contract on the ground of ‘violence’. Under art. 1143 Code civil, it is to be consid-

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ered as a case of violence if one party exploits the ‘état de dépendance dans lequel se
trouve l’autre partie’—​by reason of that party’s old age, ill health, youthful inexperi-
ence, or some other weakness—​and in this way obtains an advantage from that party
which is ‘manifestement excessif ’. Where the price agreed is so derisory that the deal
can be described as un véritable scandale or a prix dérisoire, the courts may be able to
help the disadvantaged party by holding the contract void on the ground that the price
is ‘illusoire ou dérisoire’ (art. 1169 Code civil).17
English law also lacks a general principle that would allow a party to escape from
an obviously disadvantageous contract entered into owing to a crisis or other trans-
actional handicap of which the other party has taken advantage. Instead, it has a
scattering of rules which—​under various preconditions—​give the weaker party pro-
tection analogous to that provided in continental systems. Thus a party may some-
times invoke economic duress if it was in a situation of particular difficulty when it
entered the prejudicial deal, such as where the party only agreed to a disadvantageous
modification of a contract because the other party had threatened to breach the con-
tract otherwise and, under the circumstances, such threat is deemed unconscionable
(see ­chapter 10).18
Some older decisions, dating back to the eighteenth century, allowed a party to
rescind a disposition when the party’s inexperience or perplexity had led it to part
with valuable property for a trivial sum, or mortgage it on leonine terms. Typical was
the case where a young man of good family, but no income of his own, sold his rights
of succession for a trivial amount in order to cover his living expenses or meet his
gambling debts. Such grounds for holding a contract invalid can, at a pinch, be found
in a modern context, as in Cresswell v. Potter,19 where a telephone operator on the
brink of divorce was naïve enough to give up her share in joint property in return for
her husband’s promise to release her from further liability under the mortgage.

16 See BGH 19 Jan. 2001, BGHZ 146, 298; BGH 19 July 2002, [2002] NJW 3165; BGH 29 June 2007,
[2007] NJW 2841. The assumption that they have acted with a ‘reprehensible attitude’ can be refuted by
the advantaged party if it can be shown that the parties had relied on an (erroneous) expert report. For
criticism of this, see T Finkenauer, ‘Zur Renaissance des laesio enormis beim Kaufvertrag’ in Festschrift
H.P. Westermann (2008) 183; R Bork, Allgemeiner Teil des Bürgerlichen Gesetzbuchs (4th edn, 2016) mn.
1193, 1199.
17 In some cases of this type, the contract has been held invalid for dol. See, for example, Civ. 20 April
1966, Bull.cass. 1966.I. no. 224; Civ. 23 Jan. 1969, Bull.cass. 1969.I. no. 21; Civ. 30 May 2000, Bull.cass.
2000.I. no. 69; Civ. 3 April 2002, Bull.cass. 2002.I. no. 108.
18 See Req. 12 Jan. 1931, Gaz Pal 1931.1.441; Paris 22 Mar. 1952, Gaz Pal 1952.2.102. Occasionally, the
courts have allowed the disadvantaged party to attack the contract on the ground of erreur; see Ghestin
(n 11) nos. 513, 579, 586, 588.
19 [1978] 1 WLR 255; and compare Backhouse v. Backhouse [1978] 1 All ER 1158, 1165f.
114 Unfair, Illegal, and Immoral Contracts

The important English institution of undue influence gives grounds for avoiding a
contract where a party can show that, although there was no duress, the contract was
concluded following undue pressure or on the basis of false information provided by
the other party. Such proof is not required if there is a relationship of special trust on
the basis of which one party could expect the other party to give loyal and complete
advice. The courts have found such a relationship of special trust, for example, in the
relationship between child and parent, ward and guardian, patient and doctor, peni-

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tent and confessor, and client and lawyer or other professional adviser. When under
a contract made between parties to such a relationship a benefit has been conferred
by the reliant party which ‘calls for an explanation’ or ‘is not readily explicable by the
relationship of the parties’, the presumption is that it results from ‘undue influence’.20
In general, no such relationship of special trust exists between spouses. However, the
courts try to help in a different way. Take the most obvious example, where a wife has
given a bank a guarantee to cover her husband’s business liabilities, or for the same
reasons she has given the bank a charge against a property which she owns or co-​
owns. There is a presumption that the transaction—​if it ‘calls for an explanation’ or
evidently does not reflect the interests of the woman—​came about due to the undue
influence of her husband. This presumption is rebuttable by the bank, which must
then show that it took reasonable steps to ensure that the decision was made freely by
the wife. In practice, this means that the bank must explain to the wife that it will only
undertake the transaction after she has provided a written statement from a lawyer
documenting that, in the absence of her husband, she had been fully informed about
the possible consequences of the pending transaction.21
There is debate as to whether the English legal rule set out above can be turned into
a general principle: A contract would always be void when it resulted in a grave dis-
advantage for one party, which had only agreed to the contract because its bargaining
power was substantially less than that of the other party. This was the view taken by
Lord Denning in Lloyd’s Bank Ltd. v. Bundy.22 In this case, a customer who wanted an
extension of credit told the bank that his father, who owned a small farm, would pro-
vide security. An official of the bank called upon the father in the company of the son,
and without giving any further information about the son’s financial situation or any
opportunity to obtain independent advice, procured the father to take out a charge
against his farm, which was virtually his only asset. When the bank sought posses-
sion of the farm, the Court of Appeal rejected its claim. Two of the judges based this

20 See Treitel (n 6) no. 10-​013ff. In continental systems, one often finds texts which seek to guard against
such conflicts of interest. Thus parents and guardians, as statutory agents, are like all other agents pro-
hibited from entering Insichgeschäfte, ie transactions in which they act as both agent and beneficiary. On
this, see below, pp. 303f. See also arts. 907, 909 Code civil, whereby contracts and testamentary disposi-
tions made during a fatal illness are void if made in favour of an attendant doctor or priest. Transactions
are also void if made by a resident in a residential home for senior citizens in favour of the personnel: see
arts. L.331-​4 and L.443-​6 French Code de l’action sociale et des familles; BGH 9 Feb. 1990, BGHZ 110, 235;
BayObLG 28 June 1991, [1992] NJW 55. See in detail, AP Bell, ‘Abuse of a Relationship: Undue Influence
in English and French Law’ (2007) 15 ERPL 555.
21 Royal Bank of Scotland v. Etridge (No. 2) [2001] 4 All ER 449; see also Barclays Bank v. O’Brien [1994]
1 AC 180 and Treitel (n 6) no. 10-​013ff.
22 [1975] QB 326 (CA).
 Performance and Counterperformance 115

on undue influence, since the father had been a customer of the bank for very many
years and the circumstances were such that he could expect it to give him full infor-
mation and advice. But the third judge, Lord Denning, adduced a general principle of
law in support of the same conclusion. After recounting all the various ways in which
English law had protected the weaker party from disadvantageous contracts, he said:
Gathering all together, I would suggest that through all these instances there runs a

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single thread. They rest on inequality of bargaining power. By virtue of it, the English
law gives relief to one who, without independent advice, enters into a contract on
terms which are very unfair or transfers property for a consideration which is grossly
inadequate, when his bargaining power is grievously impaired by reason of his own
needs or desires, or by his own ignorance or infirmity, coupled with undue influences
or pressures brought to bear on him by or for the benefit of the other.23
Not everyone in England agrees that it would be desirable to replace the traditional
rules by any such general principle: the House of Lords has cold-​shouldered the pro-
posal,24 but many writers have endorsed it.25
In France, too, there have been cases where a person has agreed to answer for the
debts of a member of the family without really considering or understanding the liabil-
ity. In one instance before the Paris Cour d’Appel, a seventy-​three-​year-​old widow
‘de situation très modeste, sans instruction particulière ni connaissance des affaires’
had given a bank a guarantee of the debts of her son-​in-​law, whose speculations in
land were to prove disastrous. When he owed the bank 1.4 million francs, it sued the
widow. She could not possibly pay, and the court—​having found that there was ‘une
disproportion frappante entre la pauvreté des ressources de veuve Silly et l’énormité du
cautionnement souscrit par elle’ and that owing to her inexperience in law and in busi-
ness she had no idea what she was letting herself in for—​concluded that her guarantee
could be avoided for error as to its content.26 Today, such cases are usually covered by
art. L. 341-​4 Code de la consommation: if a ‘natural person’ has taken on an obligation
by way of guarantee that is ‘manifestement disproportionné à ses biens et revenues’, the

23 Ibid at 339.
24 See National Westminster Bank v. Morgan [1985] 1 All ER 821, 830 (per Lord Scarman). In this deci-
sion, Lord Scarman doubted ‘whether there is any need in the modern law to erect a general principle of
relief against inequality of bargaining power. Parliament has undertaken the task—​a nd it is essentially a
legislative task—​of enacting such restrictions upon freedom of contract as are in its judgment necessary
to relief against [such] mischief.’ Such laws are enacted where there is a need, for example, to protect con-
sumers against disadvantage from credit agreements (see Consumer Credit Act 1974, s. 140 A and B) or
from unfair contract terms (see Unfair Contract Terms Act 1977; Unfair Terms in Consumer Contracts
Regulations 1999; and below, pp. 140ff.).
25 See, for example, H Beale, ‘Inequality of Bargaining Power’ [1986] OJLS 123; S Thal, ‘The Inequality
of Bargaining Power Doctrine’ [1988] OJLS 17; S Smith, ‘In Defence of Substantive Fairness’ (1996) 112
LQR 138; E McKendrick, Contract Law (8th edn, 2009) no. 17.4 and 7; contra Treitel (n 6) no. 10-​046.
In other Common Law jurisdictions, such as Canada and Australia, the development is clearly in this
direction, and in the US § 2-​302 UCC provides that a court may refuse to enforce a contract or clause in
a contract which it finds ‘unconscionable’; Restatement (Second) of Contracts § 208 is to the same effect.
26 Paris 18 Jan. 1978, JCP 1980.II.19318, n. P Simler. See also the decision of the court of Bordeaux 6
Dec. 1977, ibid.: guarantees of a notary’s debts given by his wife and parents-​in-​law were void for ‘défaut
de cause et erreur substantielle’ where they had had no conception of the extent of his liability. See also
Civ. 25 May 1964, D.P. 1964, 626 and HR 1 Jun. 1990, [1991] NedJur 3293. In cases of this type, the con-
tract may also be void on the ground of violence (art. 1143 Code civil).
116 Unfair, Illegal, and Immoral Contracts

bank cannot enforce the guarantee where the person is not aware of the extent of the
liabilities.27
In such cases, German courts invoke § 138 BGB. Subsection (2) of this provision,
as mentioned above, is admittedly inapplicable since it is impossible for performance
and counterperformance to be ‘clearly disproportionate’ in the case of a guarantee,
where there is no counterperformance at all. Instead, one looks to subsection (1) and
asks if the guarantee is morally offensive. Usually it is not, since even adults whose

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experience of business is slight are bound to know that there are considerable risks in
giving a guarantee.28 It may be otherwise when a bank obtains a guarantee from one
of the debtor’s relatives, such as a spouse, fiancée, parent, or child. The guarantee is
valid in such a case where it is also beneficial to the guarantor—​an example would be
where the guarantor would be co-​owner of a property to be purchased with the credit
for which the guarantee is being given. But where there is no such benefit, § 138(1)
BGB renders the guarantee void if the relative is thereby ‘greatly overstretched’. Such
is the case, for example, if it is likely that the creditor will not even be able to meet
regular interest payments for the loan. In such a case, there is a practically irrefutable
presumption that the relative took on the guarantee because of an ‘emotional bond’ to
the debtor and that these circumstances have been used by the creditor to its advan-
tage in an objectionable manner.29 One argument against this approach by the courts
is that it only speaks to guarantors without assets, and not guarantors who have some
assets and thus will not be ‘greatly overstretched’ by their liability. Above all, the cru-
cial issue should be whether or not the guarantor has exercised the freedom of choice
in a responsible manner. Of course, there will be considerable doubt if the guarantor
assuming the liability is related to the debtor. But it would be preferable if the courts
followed the English approach. They would then start from the view that in these cases
there is a presumption that the guarantee has come about because of undue influence
from the debtor. But they would also recognise that the creditor can rebut this pre-
sumption by showing, firstly, that it informed the family member about the need to
be advised by an independent lawyer and, secondly, that it took on the guarantee only
after a lawyer’s written statement of such advice has been submitted. In such a case,
the creditor may assume considered and independent decision-​making on the part of
the guarantor.30

27 See also § 25d of the Austrian Consumer Protection Law: under this, the judge may ‘reduce or even
waive in its entirety’ the liabilities of a consumer arising from a guarantee (or from another form of inter-
cession) if ‘under all the circumstances the liability is out of all proportion to the financial abilities’ of
the consumer. The circumstances that the judge can take into account include the benefit flowing to the
consumer from the performance of the creditor and ‘the imprudence, predicament, inexperience, agita-
tion or dependence of the intercessionary to the debtor when the liability was assumed’.
28 The guarantor must also issue the guarantee in writing (see above, c­ hapter 5.B), and if undertaken as
a consumer as part of a doorstep contract, such guarantee may also be subsequently recalled (see below,
­chapter 11.B.I).
29 See, for example, BGH 18 Sept. 1997, BGHZ 136, 350; BGH 14 Nov. 2000, BGHZ 146, 37; BGH 14
May 2002, BGHZ 151,34; BGH 14 Oct. 2003, BGHZ 156, 302; BGH 25 Jan. 2005, [2005] NJW 971 (settled
case law).
30 For a historical legal and comparative history of the issue, see also N Jansen, ‘Seriositätskontrollen
existentiell belastender Versprechen’ in R Zimmermann (ed), Störungen der Willensbildung bei
Vertragsschluß (2007) 125. Also G Wagner, ‘Materialisierung des Schuldrechts unter dem Einfluß von
 Undue Restraints 117

There is also great debate about whether a contract that offends ‘good morals’ or
contravenes ordre public is always void per se, or whether a judge may modify, reduce,
or reform the contract, thus maintaining its validity with a modified content.31 What
is the position, for example, if a party insists on an unconscionably high or low price,
or accepts a guarantee that ‘greatly overstretches’ the debtor? Can the judge reduce
or raise the purchase price to a reasonable level, or so restrict the scope of the guar-
antee that the guarantor can meet the resulting liabilities with available means? The

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answer is clearly no if the party is known to have blatantly exceeded the boundaries
of what was legally legitimate. In such cases, the total invalidity of the contract (also)
has another deterrent effect: all parties must weigh up the risk of the contract being
invalid and thus be discouraged from concluding such contracts. This aim would not
be served if the judge were to be free to amend the contract, as then ‘the worst-​case
scenario for a party disadvantaging the other party in an immoral manner would
be for the court to impose a reasonable and conscionable solution.’32 However, there
have been cases where deterrence played no part, such as where a party had a good
reason to seek the advantageous contract and held the agreement to be valid because
the boundaries of legitimacy were unclear. Such cases could provide good grounds
for arguing that the contract should be revised instead of quashed, at least if rules of
constructive interpretation indicate that the parties would have agreed on a certain
‘reformed’ version of the contract if they had recognised that the contract was invalid.

C. Undue Restraints on Personal or Economic Freedom

I. Basics
A society based on the principles of individual rights and freedom of trade is bound
to discountenance contracts that unduly restrict another’s personal or economic

Verfassungsrecht und Europarecht—​Was bleibt von der Vertragsfreiheit?’ in K Blaurock and B Hager
(eds), Obligationenrecht im 21. Jahrhundert (2010) 13, 30ff.
31 This problem also arises where a contract includes provisions by which there is an ‘excessive’ restric-
tion on a party’s freedom of contract, an ‘excessive’ disadvantaging of the party’s legal status, or an
‘excessive’ contravention of statutory provisions designed to protect the party’s position. The overriding
question is whether the impact of the ‘excess’ may be reduced in order to maintain the validity of the con-
tract. On this, see pp. 121, 143. The matter is different if the party relying on the invalidity of the contract
states a willingness to accept the contract if the terms are amended to its advantage. International rules
allow for contractual amendment in such cases. See art. 4:109(2) PECL: a party can avoid a contract if
its weakness has been exploited by the other party, thereby giving that party an unfair or excess benefit.
Upon the request of the disadvantaged party, the judge may ‘if it is appropriate adapt the contract in
order to bring it into accordance with what might have been agreed had the requirements of good faith
and fair dealing been followed.’ Similarly, art. 3.2.7(2) and (3) PICC; art. II.-​7: 207(2) and (3) DCFR.
Those legal orders that recognise laesio enormis permit the perpetuation of the contract, provided that
the advantaged party is prepared to allow its own performance to be adapted so that there is a balance
with the performance of the other party. See art. 1450 Codice civile; art. 1674 Code civil; § 947 ABGB.
Pursuant to art. 3:54(2) BW, at the request of one party, instead of declaring a contract to be void due to
exploitation of the circumstances, the judge may adapt the contract so as to balance out the disadvantage.
See, in the same sense, BG 26 June 1997, BGE 123 III 292 and the comparative note by P Pichonnaz (1999)
7 ZEuP 140.
32 BGH 21 March 1977, BGHZ 68, 204, 207; BGH 14 Nov. 2000, BGHZ 146, 37, 47f; BGH 17 Oct. 2008,
[2009] NJW 1135.
118 Unfair, Illegal, and Immoral Contracts

freedom. Thus, if a borrower promises a lender not to move house or change jobs
without the lender’s written permission, nor to take out further loans or dispose of any
of his property, the borrower is not bound by his promise.33 Equally invalid is a trans-
action whereby a person transfers so much of his property to another as virtually to
deprive himself of the capacity and ability to make any future dispositions.34
While the principal concern in such cases is the public interest in the citizen’s free-
dom of trade, profession, and artistic activity, there is also an element of protecting the

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economically weaker or inexperienced party from disadvantageous agreements. This
can be seen in Schroeder Music Publishing Co. v. Macaulay.35 The plaintiff songwriter
assigned to the defendant publisher the copyright in all the songs he might compose
in the following ten years, all for the sum of £50. The House of Lords held this con-
tract void as being in ‘undue restraint of trade’, as it improperly restricted the plain-
tiff’s freedom of artistic expression. Relevant considerations were that the defendant
was not obliged to publish any of the plaintiff’s songs, and that whereas the publisher
could terminate the contract at any time, the songwriter could not. Most material,
however, was the consideration that the plaintiff, who was only twenty-​one years old
and still struggling for artistic recognition, clearly had less bargaining power than
the defendant.36 Restriction of artistic freedom was also involved in a case before the
Bundesgerichtshof in 1956,37 in which an author had promised to offer the defendant
publisher all his future works for possible publication. Although the plaintiff had the
right to go elsewhere if the defendant declined to publish or offered less favourable
terms, the Bundesgerichtshof held that the author’s contract involved a ‘one-​sided bur-
den that constrained his economic and personal freedom to an unacceptable extent’.
This was because even if the relationship of mutual trust collapsed, the author would
still be bound to offer his works to the defendant, and it would seriously restrict his
freedom to deal with other publishers if the defendant could pick out the best works
and insist on publishing them himself.

II. Long-​term contractual relationships

In some situations, the return on one party’s capital investment depends on the other
remaining bound to the contract for a considerable time. Typical of such contracts
is where the operator of a petrol station or public house agrees for an oil company
or brewery to be the exclusive supplier of oil or beer for a period of several years.

33 Horwood v. Millar’s Timber & Trading Co. [1917] 3 KB 305.

34 See BGH 9 Nov. 1955, BGHZ 19, 12: here a contract was invalidated whereby a building contractor
assigned his future fee to a bank which had already, through superior economic power, taken a transfer
of the rest of the debtor’s estate and thereby ‘removed all ability to make independent economic or mer-
cantile decisions’ (p. 18). On assignment of all future fees, see below, pp. 341ff.
35 [1974] 3 All ER 616 (CA). See also BG 23 May 1978, BGE 104 II 108, 116ff, where a very similar con-
tract was held void for conflicting with art. 27(2) Swiss Civil Code (n 2).
36 See especially the speech of Lord Diplock at pp. 623f. The decision is criticised by M Trebilcock,
‘An Economic Approach of the Doctrine of Unconscionability’ in B Reiter and J Swan (eds), Studies in
Contract Law (1980) 379, 396f. He particularly stresses that music publishers would be discouraged from
concluding further such contracts, thus potentially depriving young songwriters of an opportunity to
earn a living. A suitable comprise might have been to hold such contracts valid, but limit their duration.
37 BGH 14 Dec. 1956, BGHZ 22, 347, 354.
 Undue Restraints 119

Here a different approach may be taken: to invalidate such long-​term arrangements

would disadvantage operators of petrol stations and public houses, since they have
very little capital themselves and need the companies to provide them with stock
or loans for investment. Even in such cases, however, the obligation must not be of
undue duration. The House of Lords accepted a period of five years for a solus agree-
ment between a petrol station and an oil company, but regarded twenty-​one years
as too long.38 The Bundesgerichtshof accepted five years without question, and would

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be prepared to endorse longer periods.39 By contrast, where a petrol station operator
had terminated the solus agreement after twenty-​five years, the oil company was not
allowed to insist on a clause whereby it had an option to continue the agreement on
the terms offered to the operator by another supplier: to enforce such a clause ‘would
limit the petrol station operator’s economic independence and freedom to trade in an
unacceptable manner’.40 There may be another reason for the invalidity of such con-
tracts: they may constitute an unacceptable restraint on competition in conflict with
the competition rules of national or European law (arts. 81ff. of the Treaty of Rome,
now arts. 101ff. TFEU).

III. Non-​compete agreements
An undertaking not to compete with the other party could, if held valid, involve an
unacceptable restriction of economic freedom. Such non-​compete agreements often
figure in contracts of employment, since employers are afraid that employees may
leave to join a competitor, or set up a business of their own, and then make contact
with the employer’s customers or exploit the special skills or information they gained
in their previous job. On the other hand, a non-​compete agreement may have a seri-
ous impact on an employee’s ability to work—​often their only source of income. The
employer’s greater bargaining power also means that agreements often favour the
employer’s interests at the expense of the employee. Accordingly, employment law
upholds such non-​compete agreements only in special circumstances, and they are
often laid down by statute or in collective bargaining agreements. Thus, art. 2125 of
the Italian Codice civile provides that a non-​compete agreement is only valid if it is
made in writing, is restricted in scope, duration, and locality, with the further con-
dition that the employee must be paid something extra for agreeing to it.41 Courts in
France and England have evolved somewhat similar rules.42

38 Esso Petroleum Co. v. Harper’s Garage (Stourport) Ltd. [1968] AC 269.

39 See BGH 9 June 1969, BGHZ 52, 171, 176. Twenty years is accepted by the courts as the outside
limit for contracts for the exclusive supply of beer. But everything depends on the circumstances of the
particular case—​for example, whether the obligation extends to the whole or only part of the publican’s
requirements for drinks, whether a minimum order is required, and how much the brewery has invested.
See BGH 14 Jun. 1972, [1972] NJW 1459; BGH 17 Jan. 1979, [1979] NJW 865; BG 21 June 1988, BGE 114 II
159; OGH 13 Oct. 1983, SZ 56 no. 144; OGH 21 Mar. 1991, [1992] JBl 517.
40 BGH 31 Mar. 1982, BGHZ 83, 313, 319.
41 The non-​compete agreement must not exceed three years, or five years in the case of senior manage-
ment. See the comparable rules for employees in §§ 74ff. HGB, arts. 340ff. OR, art. 2125 Codice civile (for
employees), § 90a HGB, art. 418d OR, art. 1751 bis Codice civile (for commercial representatives).
42 See Treitel (n 6) no. 11-​056ff.
120 Unfair, Illegal, and Immoral Contracts

When a business is sold, it is very common for the seller to promise not to enter into
competition with the buyer. Such a covenant benefits the seller as well as the buyer, for
the buyer will pay more for the business in confidence that the seller will not compete,
solicit former customers, or try to profit from special familiarity with sources and
outlets. This consideration identifies the viewpoint from which the validity of such a
clause must be judged: it should not limit the seller’s freedom to compete beyond what
is needed to maintain the value of the business being sold and its goodwill (clientele,

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sources of supply, distributors, and so on).43 It follows that a clause which prohibits
competition without limit in space or time can only be upheld under very exceptional
circumstances.
Such an exceptional case occurred in Nordenfelt v. Maxim Nordenfelt.44 Here the
seller of an arms and munitions factory covenanted not to engage in a similar activ-
ity anywhere in the world for a period of twenty-​five years. This restraint was upheld
because the seller’s business connections were worldwide: ‘He had upon his books
almost every monarch and almost every State of note in the habitable globe.’ The
buyer thus had a reasonable interest in preventing the seller engaging in such business
anywhere in the world. In general, however, limitations in terms of time, space, and
type of activity are essential. In another case, the managing director of a business had
promised on leaving it not to establish or engage or participate in any similar busi-
ness within twenty-​five kilometres for a period of ten years. The Bundesgerichtshof
held that the period of the restraint was excessive, since any advantage the director
could have drawn from his previous business relationships would have evaporated
long before, and the firm would suffer no more from his engaging in competition then
than it would if a total newcomer entered the market.45
Similar rules apply when a professional such as an attorney, accountant, or con-
sultant engineer agrees not to compete for a period after leaving a partnership. The
Bundesgerichtshof upheld a promise by an accountant that for two years he would not
make contact with any firms he had advised in the three years prior to his departure.46
Yet agreements which inhibit competition generally, rather than just addressing
business with previous clients, are treated more severely. Thus the Cour de cassation
released a consultant engineer from his undertaking not to give advice in his special-
ist field anywhere in the world for a period of five years, the engineer then being forty-​
five years old and at an age when ‘il n’est plus temps pour lui de se reconvertir utilement

43 Here one must also consider the compatibility of the clause with national or European competi-
tion law. See BGH 3 Nov. 1981, [1982] NJW 2000: here the non-​compete clause in the sale of a busi-
ness was unobjectionable under § 138 BGB, but possibly in conflict with § 1 Act against Restraints of
Competition (GWB).
44 [1894] AC 535.
45 BGH 13 March 1979, [1979] NJW 1605. The decision in Com. 19 Jan. 1981, D.S. 1982.I.R.204, n. Y
Serra, is apparently much more generous: it upheld a contractual restraint on competition by the seller
of a grocery business who had promised not to compete for twenty years within twenty kilometres of the
business sold.
46 BGH 26 March 1984, BGHZ 91, 1, 6ff; see also BGH 9 May 1968, [1968] NJW 1717. To like effect is
Bridge v. Deacons [1984] AC 705 (PC): a solicitor can validly covenant that for five years after leaving the
partnership he will not accept retainers from clients he had advised during his last three years in the
partnership. See also Soc. 12 June 1986, D.S. 1987.Somm. 264, n. Y Serra: covenant valid whereby a lawyer
engaged by a conseil juridique promises for three years not to advise prior clients.
 Undue Restraints 121

dans une autre branche d’activité, notamment dans celle d’un ingénieur conseil’.47 A
fortiori, the seller of a legal practice cannot validly bind himself never to compete any-
where at all.48

IV. Partial invalidity
A restraint on competition which is greater than is permissible—​namely too wide in

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scope, duration, or geographical area—​generally does not invalidate the whole contract,
but is the clause itself void in its entirety or can it be reduced to an acceptable level? In
Mason v. Provident Clothing & Supply Co. Ltd.,49 an employee had promised that after
leaving employment he would not compete with the company for a period of three years
‘within 25 miles of London’. The House of Lords considered this geographical restriction
to be too wide, but as the defendant had set up in business in the very same part of London
in which he had been employed, it was argued that the prohibition, even if reduced to
cover the district where the employee had worked, would still entitle an injunction. The
House of Lords rejected the argument:
It would in my opinion be pessimi exempli if, when an employer had exacted a cov-
enant deliberately framed in unreasonably wide terms, the Courts were to come to his
assistance and, by applying their ingenuity and knowledge of the law, carve out of this
void covenant the maximum of what he might validly have required. . . . The hardship
imposed by the exaction of unreasonable covenants by employers would be greatly
increased if they could continue the practice with the expectation that, having exposed
the servant to the anxiety and expense of litigation, the Court would in the end enable
them to obtain everything which they could have obtained by acting reasonably.50
In many cases, however, courts have held otherwise. The Bundesgerichtshof once had a
case in which a publican refused to honour an exclusive supply contract with a brew-
ery after it had been running for ten years. The contract purported to bind him for
twenty-​four years, and though the court held this void for immorality, it reduced the
period to sixteen years and made the publican pay the agreed penalty of 15 per cent
of the estimated throughput of beer for each of the remaining six years.51 English
courts also have occasionally reduced restrictive covenants to a permissible level.52

47 Paris 7 Feb. 1980, JCP 1981.II.19669, n. O Edwards.

48 BGH 28 Apr. 1986, [1986] NJW 2944. 49 [1913] AC 724.
50 Lord Moulton, ibid., at 754f. So, and for the same reasons, BGH 28 Apr. 1986 (n 48); BGH 15 Mar.
1989, [1989] NJW-​R R 800. Contrast OLG Zweibrücken 21 Sept. 1989, [1990] NJW-​R R 482, where the
parties had expressly agreed that if their clause were invalid it should be replaced by one ‘which approxi-
mated to it as closely as possible in economic effect’: the court reduced a covenant without limit of time
to one for five years and upheld the claim.
51 BGH 16–​17 Sept. 1974, [1974] NJW 2089. See also BG 5 Oct. 1965, BGE 91 II 372; BG 27 July 1970,
BGE 96 II 139; and BG 21 June 1988 (n 39): in the last case, a clause for the exclusive supply of beer ‘in
perpetuity’ was reduced to twenty years, on the ground that that was the period the parties would have
agreed on ‘had they been conscious of the invalidity of perpetual contracts’. However, the contract will
be struck down in toto if, in addition to containing an unduly long restriction on competition, it also has
other substantive flaws, such as standard terms conflicting with the applicable law; see, for example, BGH
27 Feb. 1985, [1985] NJW 2693, 2695.
52 See, for example, Goldsoll v. Goldman [1915] 1 Ch. 292 (CA); T. Lucas & Co. v. Mitchell [1974] Ch.
129; Attwood v. Lamont [1920] 3 KB 571; as well as Treitel (n 6) no. 11-​158ff. See also BGH 26 March
122 Unfair, Illegal, and Immoral Contracts

The picture in France is similar. An employee who had promised not to work for a
competitor in the same field during the ten years following his departure, a manifestly
excessive period, nevertheless took a position with a competitor in the same city on
the very day he left the plaintiff’s employment. He was held liable, for ‘une clause de
non-​concurrence . . . ne doit être annulée que dans la mesure où elle porte atteinte à la
liberté du travail en raison de son étendue dans le temps et dans l’espace et quant à la
nature de l’activité de l’intéressé’.53

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The question of whether a restrictive covenant can be reduced to an acceptable level
in this way is often said to depend on whether the objectionable part can be ‘severed’
without affecting the balance of performance and counterperformance envisaged by
the parties when they made the contract. Sometimes it is argued that the judge should
not take the place of the parties to force a ‘new’ contract on them. But the princi-
pal consideration must be whether the policy underlying the prohibition of undue
restrictions on economic activity is better advanced by reducing the clause in question
or striking it out altogether. Thus, if a party has exacted a manifestly excessive non-​
compete agreement without making any real attempt to render the restriction reason-
able, there is much to be said for quashing the clause, for to hold otherwise might run
counter to the deterrent aim of the policy.

D. Breach of the Law

In order to carry through their economic social and legal policies, all modern welfare
states enact laws prohibiting certain types of conduct or permitting them only subject
to an official licence or consent. If a contract is formed or executed in breach of such
rules or regulations, is it valid or void?
The matter is put beyond doubt if the statute itself declares the contract void. Thus
§ 1 of the German Act against Restraints of Competition (GWB) states that contracts
between undertakings are void if they are apt to ‘have as their object or effect the pre-
vention, restriction or distortion of competition’. Likewise, if a law forbids an insur-
ance company, unless appropriately authorised, to ‘carry on . . . insurance business’,
defined as ‘the business of effecting and carrying out contracts of insurance’, a policy
issued by a company with no such authorisation is void and any claim will be denied.
This is hard on the insured if he had no reason to doubt the validity of the policy, but
the court has no choice in the matter. It can hardly order the insurer to pay the insured
sum, for that would be to require it to ‘carry out’ the contract and do what the legisla-
ture has expressly forbidden it to do.54

1984 (n 46) 6f. Here the court upheld a clause insofar as it restrained the defendant from contacting the
plaintiff’s customers but struck it down to the extent it restrained him from general competition. Swiss
decisions are to the same effect, see BG 5 Oct. 1965, BGE 91 II 372 (temporal and geographical restraints
on a travelling salesman).
53 Soc. 21 Oct. 1960, JCP 1960.II.11886; Soc. 1 Dec. 1982, Bull.cass. 1982.V. no. 668; Soc. 25 Jan. 1984,
Bull.cass. 1984.V. no. 31. See also Ghestin (n 11) no. 915.
54 Bedford Insurance Co. v. Instituto de Resseguros do Brasil [1985] QB 966; Phoenix General Insurance
Co. v. Halvanon Insurance Co. Ltd. [1988] QB 216.
 Breach of the Law 123

More often statutes do not allude to the question whether contracts formed in
breach of their provisions are valid or not; they simply provide that the infringer
shall be punished, have its licence withdrawn, or suffer some other sanction. Here the
judge must construe the statute in order to discover whether its unexpressed inten-
tion was that contracts formed in breach of it should be void. Thus § 134 BGB provides
that contracts which infringe a statute are void ‘unless the statute leads to a different
conclusion’.55

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If the statutory prohibition is directed at both parties and both of them have
breached its terms in forming the contract, one must generally conclude that the con-
tract is invalid.56 For example, if a law provides that both parties to a sale of goods of
a certain type must have a licence, the contract of sale is void if the seller is the only
party to have one. Indeed, even if the buyer had fraudulently represented that he had
a licence, he may defend a claim for damages for non-​acceptance on the ground that
the contract is void, ‘however shabby it may appear to be’.57 In Germany, where the
Clandestine Employment Act58 seeks to combat operations on the black economy by
making it an offence both for the unregistered person to render a service and for the
customer to pay for it, the courts infer that if both parties are deliberately flouting the
law, their contract is void, and neither performance nor damages for non-​performance
can be claimed by either party.59
But often only one of the parties is breaking the law by entering the contract. Here
the question is whether the aim of the law can be achieved by simply applying the
sanctions expressly laid down in it, or whether in addition the contract should be
invalidated:
Where a statute merely prohibits one party from entering into a contract . . . it does
not follow that the contract itself is impliedly prohibited so as to render it illegal
and void. Whether or not the statute has this effect depends on considerations of
public policy in the light of the mischief which the statute is designed to prevent, its

55 Likewise art. 3:40(2) BW.

56 The conclusion will be the same where only one party was in breach, but the other knew of it. For
example, if a haulage firm supplies for the carriage of a heavy load a vehicle that by law may not be used
for that purpose, the cargo-​owner who knew of this has no contractual claim for damage to the cargo.
See Ashmore Benson Pease & Co. Ltd. v. A. V. Dawson Ltd. [1973] 2 All ER 856.
57 Re Mahmoud and Ispahani [1921] 2 KB 716 (CA): ‘If an act is prohibited by statute for the public
benefit, the Court must enforce the prohibition, even though the person breaking the law relies on his
own illegality’ (at 729). It is a different question whether the seller in such a case may claim damages from
the buyer for deceit, or whether the buyer can claim his money back if it has already been paid. The Court
of Appeal was not concerned with these questions, since the seller’s claim had been the subject of arbitra-
tion, and the only question put by the arbitrator to the court was whether or not the contract was valid.
58 Gesetz zur Bekämpfung der Schwarzarbeit of 31 May 1974 (BGBl. 1974 I 1252, as amended BGBl.
1982 I 110). Compare the French rules against travail dissimulé: art. L 8221-​1ff Code du travail. The main
aim of such laws is to put an end to the activities of craftsmen who fail to register and thus escape official
control, pay no taxes and social security charges, do not respect the laws about accident prevention, and
take on foreign employees without permission—​a ll of which enables them to underbid firms which are
properly registered.
59 BGH 23 Sept. 1982, BGHZ 85, 39. Here again it is another question whether performance rendered
pursuant to the void contract can be reclaimed or, if not, its value. See below, pp. 125ff.
124 Unfair, Illegal, and Immoral Contracts

language, scope and purpose, the consequences for the innocent party, and any other
relevant consideration.60
If, for example, court officials (huissiers) are forbidden to engage in remunerated activ-
ity outside of their employment, it is doubtful whether they may claim the agreed
commission from a person for whom they illicitly negotiate a deal. The law is certainly
designed to deter huissiers from such activities and it would clearly serve this aim if

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their claim were denied. On the other hand, the aim of the law might be achieved by
applying disciplinary sanctions in proportion to the offence and the gain to be made
from the forbidden transaction. If one also accepts that the principal purpose of the
law is to preserve the ‘dignité professionnelle’ of the huissier rather than to protect the
client from obtaining an undeserved bonus by not paying for the service, one can
understand why the Cour de cassation upheld the contract and allowed the huissier to
claim his commission.61 The decision is the same where a transaction is carried out by
an unlicensed freight forwarder62 or real estate broker,63 or if an accountant illicitly
acts as a broker for profit,64 or a haulage firm carries goods belonging to a customer
in a vehicle licensed only to carry its own.65 In another case, a contract for the con-
struction of a dwelling was upheld although the builder was unregistered but this fact
was not known to the customer. Admittedly, the customer could not demand that the
unregistered builder complete the job that he had partly performed, but could claim
that the unregistered builder have it completed by a properly registered builder, or else
claim for the cost of retaining a registered builder to complete the job.66
It is clearly open to a court to hold that, in view of the meaning and purpose of the
enactment, a contract must be held void even if only one of the parties broke the law in
entering or executing it. Thus, where an architect illegally promised to pay the plain-
tiff for introducing a client, the plaintiff’s claim for the fee was dismissed although he
had broken no law.67 This is so particularly when the law infringed by one party was
intended for the protection of the other. For example, if only banks may lawfully con-
duct leasing business, a customer may disregard a leasing contract made with a firm of

60 Phoenix General Insurance Co. (n 54) per Kerr LJ at 176. To the same effect is BGH 23 Oct. 1980,
BGHZ 78, 263, 265. Such a flexible solution can also be found in art. 15:102 PECL. The most important
consideration is whether the effects of the infringement upon the contract are expressly prescribed by the
mandatory rule. Where the mandatory rule does not expressly prescribe the effects, the contract may be
declared to have full effect, to have some effect, to have no effect, or to be subject to modification. This
turns in particular on the purpose of the rule which has been infringed, whether the party claiming
invalidity belongs to the category of persons for whose protection the rule exists, and any sanction that
may be imposed against the infringer under the rule infringed. A similar approach is taken under art.
3.3.1(3) PICC; art. II. -​7:302(3) DC FR.
61 Civ. 15 Feb. 1961, Bull.cass. 1961.I. no105; Civ. 21 Oct. 1968, D.S. 1969, 81.
62 Com. 11 May 1976, JCP 1976.II.18452, n. R Rodière (freight forwarder obtains a valid lien, arising out
of the contract, on the goods of the principal).
63 BGH 23 Oct. 1980, BGHZ 78, 269 (the agent may claim the commission).
64 BGH 23 Oct. 1980, BGHZ 78, 263 (tax adviser can claim the agreed fee).
65 Archbolds (Freightage) Ltd. v. Spanglett Ltd. [1961] 1 QB 374 (CA): the carrier could not defend a
claim for the value of the goods which had been stolen by arguing that the contract of carriage was
void, but could he have claimed the agreed sum for the carriage if they had been duly delivered? St John
Shipping Corp. v. Joseph Rank [1957] 1 QB 267 held that he could: the carrier’s claim for freight was
granted although the captain had committed an offence by overloading the vessel.
66 BGH 19 Jan. 1984, BGHZ 89, 369. 67 Amiens 9 Feb. 1976, JCP 1977.IV.45.
 Restitution of Benefits Conferred 125

any other kind because the law is designed to protect ‘non seulement l’intérêt général et
celui des établissements de crédit, mais aussi celui des crédit-​preneurs’.68 By contrast, a
building society empowered by law to accept only first mortgages was able to enforce a
second mortgage, since the aim of the law was to protect the society and its members,
not its debtors.69

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E. Restitution of Benefits Conferred
Neither party to a void contract can demand performance from the other, nor can dam-
ages be claimed for non-​performance. It is another question, however, whether any bene­
fits conferred in pursuance of the void contract may be reclaimed, and the question is
especially delicate when both parties were actuated by an immoral purpose. The Roman
jurists discussed many such cases. No claim could be brought by a person who bribed a
judge70 or gave hush money to a person who caught him in flagrante delicto71 or paid for
immoral services:72 ‘I replied that no restitutionary claim lay for money paid when both
payer and recipient had an immoral purpose, and that where the parties were equally
guilty the possessor should prevail.’73
This venerable rule has managed to survive—​in many countries it is enacted
law,74 while in others it is applied by the courts75—​but in modern conditions its
application is becoming increasingly difficult.

68 Com. 19 Nov. 1991, n. J Mestre in (1992) 91 Rev trim civ 381. Different is Civ. 13 Oct. 1982, Bull.cass.
1982.I. no. 286: here the defendant obtained a perfectly normal loan of FF 600,000 from the plaintiff
which was not lawfully entitled to give credit of this kind, not being registered as a bank. The Cour de
cassation held that the plaintiff’s breach of the law ‘ne portant atteinte qu’à l’intérêt général et à celui de la
profession du banquier . . . n’est pas de nature à entraîner la nullité du contrat de prêt’.
69 Nash v. Halifax Building Society [1979] 2 All ER 19. 70 Paul D. 12,5,3.
71 Ulpian D. 12,5,4 pr. 72 Ulpian D. 12,5,4,3.
73 Papinian D. 12,7,5 pr. For historical details and a comparative view, see Zimmermann (n 9) 863ff.
74 See § 817 sent. 2 BGB; art. 66 OR; § 1174 ABGB; art. 2035 Codice civile. Dutch law is different: benefits
conferred pursuant to an invalid contract may in principle be reclaimed even if the nullity results from
infringement of the law or morals. But under art. 6:211 BW a court may reject the claim in restitution if
decency and fairness so require. On this, see HR 28 June 1991, [1992] Ned Jur 787. This solution has the
merit of allowing the judge to weigh openly the reasons for and against the claim for restitution. A similar
flexibility has been proposed in England: in Tinsley v. Milligan [1992] Ch. 310 (CA), [1993] 3 All ER 65 (HL)
two parties who had both contributed to the purchase of a house on the basis that it should belong to them
in equal parts registered it in the name of the plaintiff alone in order that the defendant could dissimulate
her wealth and so claim higher social security benefits. When the parties fell out, the plaintiff sought pos-
session of the house which was in her name alone, and the defendant counterclaimed for an order that the
house be sold and that half of the proceeds be paid to her. Both the Court of Appeal and the House of Lords
allowed the counterclaim, though with dissents in each instance, even though the counterclaimant had
used the transaction in an attempt to defraud the social security authorities and secure herself an illegal
benefit. In the Court of Appeal, Nichols LJ applied what he called the ‘public conscience test’: ‘The court
must weigh, or balance, the adverse consequences of granting relief against the adverse consequences of
refusing relief. The ultimate decision calls for a value judgment . . . Balancing these considerations I have
no doubt that, far from it being an affront to the public conscience to grant relief in this case, it would be an
affront to the public conscience not to do so. Right-​t hinking people would not consider that condemnation
of the parties’ fraudulent activities ought to have the consequence of permitting the plaintiff to retain the
defendant’s half-​share of this house. That would be to visit on the defendant a disproportionate penalty,
in the circumstances as they are now’ (at 319–​21). The House of Lords reached the same conclusion, but
decisively rejected the ‘public conscience’ test. For further details, see McKendrick (n 25) no. 15.18.
75 French courts are rather given to using the formula nemo auditur propriam turpitudinem alle-
gans, which is rather wider and prompts commentators to ask whether it may not apply to claims for a
126 Unfair, Illegal, and Immoral Contracts

As long as cases involved parties who had flouted basic moral precepts or conspired
to do something punishable by law it seemed reasonable enough to deny restitution
‘als Strafe für die Betätigung verwerflicher Gesinnung’ (punishment for putting dis-
graceful intentions into action)76 or to justify its denial as protecting the dignity of
the court: ‘No court will lend its aid to a man who founds his cause of action upon an
immoral or illegal act.’77 In Germany also, it was said that restitution must be denied
‘in order to protect the state from abusive invocation of its jurisdiction by deliberate

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criminals’78 and Larombière wrote that in these cases ‘la Justice se voile dans un mou-
vement d’indignation et de dégoût’.79
But such rhetorical flourishes no longer carry much weight now that most cases
involve infringement of provisions of a rather technical and administrative nature,
designed to implement the state’s social or economic policies. Indeed often one, or
even both, of the parties may have been unaware at the time of the contract that
any infringement was involved. As we have seen, an infraction does not necessarily
make the contract void in such cases (above, pages 122ff.), but if it does, and claims
for performance or damages for non-​performance are therefore excluded, it may not
be necessary to go further and exclude claims for the restoration of what has been
rendered. In both cases, the solution should depend on the purpose behind the law
infringed, but even if its purpose requires the contract to be avoided, the question
remains whether it is better served by allowing the recipient to keep what has been
received, or allowing the performer to reclaim it. The same is true when the contract
is invalid by reason of an offence against good morals or public policy rather than
infringement of the law. Here too, the judge must not only consider the actual con-
sequences in this case of a decision either way, but also ask quite openly whether the
denial of the restitutionary claim will advance the public interest in dissuading citi-
zens from entering into such contracts.80
Have the courts developed rules and standards to assist them in the inquiry as
to whether the public interests to be protected tip more in favour of allowing or of

declaration that the contract is void or to claims in delict. See P le Tourneau, Juris-​classeur civil art. 1131
à 1133 (Règle ‘nemo auditur’) no. 34ff.
76 The courts in Germany often use this phrase. See, for example, RG 8 Nov. 1922, RGZ 105, 270, 271
and BGH 31 Jan. 1963, BGHZ 39, 87, 91. The idea of punishment is clearly inappropriate, since for one
thing the ‘punishment’—​t he denial of restitution—​can be entirely out of proportion to the seriousness
of the infraction and because furthermore the ‘punishment’ leads to the enrichment of the complicitous
defendant who can retain what was transferred even when his conduct was much more deplorable and
therefore more deserving of ‘punishment’ than the claimant’s. It would be more logical to allow the state
to claim the benefit transferred and so deny it to both parties; this was done in the Prussian ALR (1794),
§ 172f. I 16 and in art. 411f. Polish Civil Code.
77 Holman v. Johnson (1775) 1 Cowp. 341, 98 Eng.Rep. 1120, per Lord Mansfield.
78 Supreme Court for the British Zone 10 Dec. 1950, OGHZ 4, 57, 60.
79 Théorie et pratique des obligations (2nd edn, 1885) i, 333, cited by Ghestin (n 11) no. 931.
80 Thus Treitel (n 6) no. 11-​127: the ‘general rule’ is that benefits rendered in performance of an illegal
contract cannot be reclaimed, but ‘It would be better if the law did not adopt a “general rule” but asked
in relation to each type of illegality whether it was recovery or non-​recovery that was the more likely to
promote the purpose of the invalidating rule.’ The same approach is taken by art. 15:104 PECL whereby
restitution of services performed under a contract turns on whether or not this is justified on the grounds
on which the validity of the contract itself depends. Similarly also art. 3.3.2.(2) PICC.
 Restitution of Benefits Conferred 127

rejecting the restitutionary claim? One such rule is surely that restitution should be
allowed if the defendant is the person primarily responsible for the illegality or immor-
ality, and the claimant is relatively innocent or in need of protection. In England, the
saying is that the claim for restitution should only be denied when the parties are ‘in
pari delicto’. If the defendant deceived the claimant into believing the contract licit,
or took advantage of the claimant’s predicament, inexperience, or fecklessness, or the
claimant belonged to a class which it was the purpose of the rule infringed to pro-

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tect, then the parties are not ‘in pari delicto’ and restitution should be allowed. The
French courts operate very largely on the principle that restitution should be denied
only in cases of ‘égale culpabilité’, and should be granted to a claimant ‘paraît moins
coupable que l’autre’.81 Nor is this principle unknown to the German courts. Applying
§ 817 sentence 2 BGB, they deny restitution only when the claimant’s conduct in ren-
dering performance was deliberately and consciously illegal or immoral, but not, for
example, when the claimant made a forbidden payment because of a crisis and ‘by rea-
son of this difficulty unwillingly acceded to the demands of the economically super-
ior’ defendant.82
All courts therefore allow tenants to reclaim premiums illegally demanded by a
landlord for granting a lease.83 Likewise, a buyer can reclaim instalments when the
minimum down-​payment required by the law was not made, and this is so even if the
buyer paid them ‘en pleine connaissance de cause’, knowing the law quite as well as the
seller. Here the law was passed to protect the buyer, and this aim would be frustrated
if buyers were barred from reclaiming any payments made under the void contract.84
Naturally, the buyer must restore what had been received from the seller, insofar as
the buyer is still in possession. This point was overlooked by the Swiss Bundesgericht
in a case where a loan made by a bank was illegal (under a law in force at that time)
because a prior loan to the customer was still outstanding. After holding the second
loan invalid for breach of the law, the Bundesgericht denied the bank’s claim for the

81 See C Larroumet, Droit civil, vol. III: Les obligations, Le contrat, Effets (6th edn, 2007) no. 581.
There is special need for the differentiation in accord with the degree of culpability in cases where the
reasons for the invalidity of the contract are not known to one party, which is therefore ‘innocent’. In
such circumstances, both the ‘innocent’ and the ‘non-​innocent’ party may assert the contract to be
invalid (see Civ. 7 Oct. 1998, D. 1998, 563 = JCP 1998.II.10202, n. MH Maleville = JCP 1999.I.114, n. C
Jamin). If it is the non-​i nnocent party that asserts the claim for restitution, such claim may be denied
on the basis of the rule ‘nemo auditur’; in addition, the party may also be liable for other damages
under the law of tort.
82 RG 24 Oct. 1919, RGZ 97, 82, 84. The claimant was accordingly allowed to reclaim the part of the
price which was illegal. So too BGH 23 Nov. 1959, LM § 817 BGB no. 12, where a merchant could reclaim
the interest paid on a loan void for immorality. Admittedly, he himself had acted immorally in paying
the excessive interest, since as a merchant he must have known that his conduct would accelerate his
financial collapse and prejudice his other creditors, but he had displayed no ‘deplorable attitude’ since it
was only his economic difficulties which led him to enter the contract. Compare BG 21 Nov. 1950, BGE
76 II 346, 369ff: a criminal who has paid hush money can reclaim it despite art. 66 OR if he paid only in
response to blackmail: it is an abuse of right under art. 2 Swiss Civil Code to invoke art. 66 OR in order
to refuse repayment of hush money.
83 RG 10 Jan. 1930, RGZ 127, 276, 279; Gray v. Southouse [1949] 2 All ER 1019; Kiriri Cotton Co.
v. Dewani [1960] AC 192 (PC).
84 See Com. 11 May 1976, Bull.cass. 1976.IV. no. 162.
128 Unfair, Illegal, and Immoral Contracts

return of the capital paid out.85 This decision went too far. The financial sanctions on
the bank for breach of the law were already stringent, and it was quite unnecessary to
deny its claim to restitution and give the customer an undeserved bonus. Furthermore,
the purpose of the law was to cool the economy rather than to protect the borrower,
and leaving the borrower with the money had just the opposite effect.
French commentators often note that while restitution is denied in the case of
immoral contracts, it is generally allowed where the contract is merely illegal.86

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Although it is not always easy to distinguish a contrat immoral from a contrat seule-
ment illicite, there is a grain of truth in this. When the legislature enacts ‘technical’
prohibitions to control and regulate the economy, its purpose is often enough met by
refusing to enforce the contract which infringes them, thereby rendering immate-
rial any requirements for performance or payment of damages. There is no need to
refuse restitution to a party who has paid more than the lawful rent or price, or paid
money to somebody to carry out a transaction which is unauthorised or in breach
of exchange control regulations.87 Nevertheless, it all comes back to the purpose of
the prohibition and the circumstances of the particular case. Factors in favour of
allowing the restitutionary claim are that the defendant has abused the claimant’s
trust, or that the claimant was unaware that exchange control regulations were being
breached88 or that the law infringed was of a purely technical nature—​namely, not
one of those laws which ‘by reason of their intrinsic meaning or long duration must
have entered the general consciousness so that their familiarity may be presumed’.89
However, the Swiss Bundesgericht once refused a claim for the return of money paid
illegally for a supply of gold: ‘Morally displeasing’ though it was that the defendant
should be able to keep the money, deterrence from illicit transactions could only be
achieved by refusing to hear any claim a participant might make.90 But the situation
may not always be so. While a contract for black market services is void if both par-
ties were aware of its illegality,91 deterrence may be sufficiently achieved by holding
that the agreed remuneration cannot be claimed by the performer, who may in any
case be punished and made to pay back taxes. On the other hand, the purpose of the

85 BG 21 Dec. 1976, BGE 102 II 401, 411f. The decision has been severely criticised. It would have been
better to allow the bank to recover the money lent under the second loan, at least after the agreed period.
German courts decide in this way when a loan has been made on terms which are usurious and accord-
ingly immoral. The effect of § 817 sent. 2 BGB is that the bank cannot claim interest for the period of the
loan, but can recover the capital at the end of the agreed period. The leading case is RG 30 June 1939, RGZ
161, 52, 57ff. and subsequent decisions.
86 See, for example, Starck, Roland, and Boyer (n 11) no. 937ff; J Carbonnier, Droit civil: Les obligations
(22nd edn, 2000) no. 49. This is explicit in Aix 28 Mar. 1945, Gaz.Pal. 1945.2.12; Colmar 4 Jan. 1961, Gaz.
Pal. 1961.1.304. The commentators all agree, however, that this is simply a rule of thumb.
87 Civ. 18 June 1969, JCP 1969.II.16131, n. P.L.; see also Angers 2 Apr. 1952, JCP 1952.II.6953.
88 Shelley v. Paddock [1980] 1 All ER 1009 (CA). It is different if both parties know that the proposed
transaction infringes exchange control regulations: see Bigos v. Bousted [1951] 1 All ER 92.
89 RG 16 May 1919, RGZ 95, 347, 349.
90 The Bundesgericht allows an exception only when the claimant was deceived by the defendant. See
the decision to this effect of 27 Jan. 1948, BGE 74 II 23. See also OLG Hamm 22 May 1986, [1986] NJW
2440: a person who runs a bar without the proper licence, and pays money to the defendant to ensure that
the true licence-​holder keeps quiet, cannot reclaim the money unless the defendant has taken advantage
of the economic plight or inexperience of the plaintiff so that, as the English judges might say, the parties
are not ‘in pari delicto’.
91 See text to n 59 above.
 Restitution of Benefits Conferred 129

law is not met if the customer can keep the benefit of the services rendered without
paying anything to the black market service provider. The customer should pay the
objective value of those services, which will be rather less than the contract price
in view of the fact that the customer has no come-​back should the services prove
defective.92
In English law, a restitutionary claim may be allowed if the transaction was not fully
executed. This ‘locus poenitentiae’, as it is called, gives the claimant an incentive to

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back out of the objectionable transaction. The rule is not easy to apply in practice, for
it is not clear how far the transaction must remain unexecuted, or whether it is enough
that it remained unexecuted not because the claimant thought better of it, but because
the defendant was no longer minded to perform or was prevented from doing so by
external circumstances.93
Other English decisions hold that restitution should be granted if the claimant can
formulate his claim without mentioning the forbidden transaction. For example, if
the claimant has pledged, hired out, or deposited property which he owns, or has
sold goods with reservation of title, the claimant can claim on the basis that the
property is his and that the defendant has sold or used it without his consent; then it
is the defendant who has to raise the point that the goods were handed over pursu-
ant to a forbidden transaction. The courts here tend to give judgment for the claim-
ant, who is simply relying on ownership and therefore appears to be ‘innocent’.94
French courts do much the same when they grant immediate possession to a land-
lord who has let premises for use as a brothel,95 as do the German courts in hold-
ing that a claim for possession by an owner cannot be defeated by § 817 sentence
2 BGB.96 Yet in such cases the decision should depend not on whether or not the
claimant can assert ownership, but rather on whether granting or rejecting the
claim for restitution better advances the purpose of the law infringed or the public
interest in the repression of immoral dealings. To this extent it is irrelevant whether
the plaintiff’s illicit conduct took the form of letting an asset or lending money, or
whether or not ownership in the asset illicitly sold passed to the buyer. The true rea-
son behind the general practice of preventing the lessee of a brothel from defeating
the landlord’s claim for possession on the ground that both parties were guilty of
immoral conduct is not that the landlord can rely on his ownership but because, as
the Bundesgerichtshof correctly holds, if this defence were upheld the lessee could
continue to use the premises for a purpose discountenanced by the law, and the
result would be a ‘legalisation of the brothel business’.97

92 See BGH 31 May 1990, BGHZ 111, 308, 312ff. 93 See Treitel (n 6) no. 11-​136ff.
94 See Bowmakers Ltd. v. Barnet Instruments [1945] KB 65, and on it Treitel (n 6) no. 11-​139ff.
95 See for example Paris 16 Mar. 1926, S. 1926.2.76; Nancy 8 June 1934, D.P.1935.2.33, n. Voirin.
96 Thus when an owner has delivered property of his to the defendant in circumstances of illegality or
immorality, he can claim damages if the defendant damages the thing or, if he uses it, the objective value
of such use. See BGH 14 June 1951, [1951] NJW 643; BGH 8 Jan. 1975, BGHZ 63, 365, 368f.
97 BGH 20 May 1964, BGHZ 41, 341, 343ff. The decision could hardly be different when demand is
made for immediate repayment of a loan to set up a brothel. Here there is no question of the lender
relying on his ownership, but the claim must be granted because otherwise the defendant could use the
money to run the brothel without even having to pay interest on it.
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