The law provides a framework in which contracts can operate.
Parties must perform within the terms of the contract as a failure to do so will result in a breach.
However, when a contract involves illegality, matters are dealt with differently.
For the law to uphold illegal contracts would be contrary to the integrity of the legal system to help those who engage in criminal conduct.
What is an Illegal Contract?
Contracts with regard to certain types of subject matter are prohibited. For example, buying and selling organs online.
Contracts are illegal because they commit wrongs, whether that be criminal or civil.
Illegality is not confined to these areas as it also includes a range of other matters of public policy.
There are several sources of illegality:
- All contracts expressly or impliedly prohibited by statute are illegal.
- Illegality at formation: contracts which are created with the intention of committing an illegal act.
- Illegal purpose: the contract has been created to achieve an unlawful/illegal goal.
- Illegality when performed: Contracts which are created with no illegal intention, but on performance are illegal.
The subject matter of the agreement must relate to an illegal purpose that violates the law.
Consequences of illegality in contracts:
The principle of illegality is often raised in an action for breach of contract, as a possible defence.
The usual laws surrounding contracts tend to not apply.
As a general rule – “Ex turpi cause non oritur actio”, no action arises from a base (or disreputable) cause, but this is not always the case.
Judicial remedies can be withheld because of the illegality of the contract.
The consequences will not always be a denial of remedy.
Considerations to be made
The courts approach illegality in a multifactorial approach (Patel v Mirza  UKSC 42) by weighing three matters.
Their main focus to explore is whether there may be inconsistency damaging to the integrity of the legal system. (Stoffel v Grondona  UKSC 42).
- Consider the policy underlying the prohibition which gives rise to illegality.
What would be the impact to leave things as they stand rather than granting the relief sought by the claimant?
- Matters of public policy which may be affected by the decision to deny relief/remedy to a party. Would doing so render other policies unimportant?
Taking into account any other relevant public policies which may be rendered ineffective or less effective by the denial of the claim. (Hounga v Allen  UKSC 47)
- The last consideration is only revenant if balancing policy considerations suggest a denial of the claim.
Whether denial of relied will be proportionate to the nature and degree of the illegality involved. In some cases illegality may be such a tenuous connection that it is disproportionate to hold the entire transaction to be unenforceable.
ABOUT GAD Commercial
Gregory Abrams Davidson Solicitors specialise in commercial and corporate law, including illegality of contracts.
We have been advising clients on contractual issues such as illegality for over 40 years. We have helped our clients navigate their way through difficult and onerous contractual situations.
Should you require any assistance with such matters, please contact us to discuss in confidence on a no obligation basis.