Illegality and your workplace

Illegality in law

As many of my readers or listeners are those involved in small commercial enterprises, I thought it would be good to explore the doctrine of illegality. Illegality is a simple rule which is subject to many exceptions. At its core, it can completely void a contract in situations where a statute has made the action illegal.

Some may have taken this doctrine for granted believing it unquestionable that contracts for theft, drug dealing or murder were unenforceable in a contract of law. Clearly, illegal acts were the types of contracts that were intended to void with under this doctrine. However, as the society and regulatory standards have evolved so has the application of this principle extended. Leaving some enterprises, contractors and consumers at the mercy of legal interpretation.

Explaining the illegality doctrine

A statute may expressly or impliedly render a contract illegal therefore, requiring courts to make it inoperable leaving neither party with any remedy. Those who have already benefited from the contract will not have to pay back their benefits. However, just because a statute prohibits a contract does not always mean it is unenforceable. ACCC v Baxter found that; A law unilaterally prohibiting the action doesn’t void a contract. It is dependent on factors such as:

-    Language

-    Expertise of the parties

-    Scope

-    Purpose

-    Party intent

For example; if a statute prevents unlicensed homes from breeding animals it does not necessarily prevent a contract to purchase a pregnant dog. Ledlabratories Servier v Apotex Inc puts forward the statement that ‘the decision inevitably turns on their facts.’ The comment shows just how uncontrollable this doctrine can be when dealing with acts that lack the character of illegality.

A statute may encourage the courts to prohibit an action where:

-    There are a variety of public policy factors

-    On balance, it should not be enforced

The precedents in this area must be treated with the same level caution as the statutes because courts may approach the facts differently, leaving much ambiguity. The doctrine of illegality is an excellent example of the importance of courtroom advocacy. An advocate that is capable of disproving the fault of their party has effectively seduced the court for their party.

Applying the doctrine requires that consider ation for the following facts:

-    Prima facie appearance of statutory prohibition

-    Whether illegality applies to the formation or operation of the contract

-    Statutory construction weighed against public policy considerations

There is a vital difference between an illegality that prevents the formation or operation of a contract and one that has a close relationship with public policy. Courts will often consider contracts which are illegal formation or operation more favorably than those that contravene public policy. Mostly, the favorable consideration is because the doctrine is intended to prevent the degradation of law and justice amongst society. It is not designed to circumvent the commercial dealings of general businesses.

Additionally, if the fault between the parties is unequal then the term pari delicito (in equal fault) applies as the presence of fraud, undue influence or oppression prevents the fraudulent party from relying on an illegality defense.

Nelson and Fitzgerald v FJ two prominent precedents in this area support the finding by stating, a contract which is lawful and enforceable upon formation may be binding upon its operation but not those which are against public policy considerations.

If an agreement requires something illegal, it is different to if something illegal must be done to finalize the contract. The statement forms the hard rule of illegality from a Singapore Case; Tien Sew May v Boon Lay Choo. The underlying principle of the case is that while the defense of illegality and public policy isn’t ideal, it may make a contract enforceable if it is beneficial for the general public.

Essentially this means that the courts will enforce an illegal contract if  otherwise more people would suffer unjustly.

When the illegality involves fraud

The principle ex dolo malo non-oritur actio or no right of action can have its origin in fraud, is the underpinning principle of illegality. It means that the defendant will find favor over the plaintiff (the person bringing the action to court) was fraudulent or took part in some of the fraudulent act.

Where they are both equally at fault the courts will apply; potior est conditio defenditis or equal in responsibility better is the state of the possessor. That essentially means that the defendant will benefit more than the plaintiff if the courts see such a case. The holding was applied in Holman v Johnson by Lord Mansfield.

Characterizing the doctrine

This principle is unique as both parties are at fault and not just one. It arises to provide not individual justice but the continued efficacy of the legal system. Therefore, the courts must delicately balance between judging enforceability and not encouraging or frustrating a contract. There are several features that define the leniency and severity of the courts approach to illegal contracts.

The first is the Bowmakers rule; A party to illegality may recover through legal or equitable interest if a claim can establish without reliance on illegality their right to recover. The finding was also seen in part in a later case called Tinsley v Milligan.

Note, the manner in which illegality is articulated in court will alter whether the courts will view the doctrine as a defense, mitigating factor or fundamental limitation. That is essential because it will modify the impact that illegality will have.

The second important factor is windfall gains. Windfall gains is a term used to describe the unexpected benefit of one party at the expense of another. When the plaintiff is likely to receive a windfall gain despite both parties having had a hand in the illegality such as witnessed in Nelson v Nelson the court will not refuse relief as long as the claimant was mistaken or ignorant as to the circumstances which made the contract illegal. It must also be reasonable for them to be ignorant of it, i.e., Signatories to a lease under which a specialty legal statute has recently been enacted. This is interesting because it is one of the few exceptions to the general premise that ‘ignorance is no excuse under the law’.

Thirdly, it may still be the contract may still be enforced when the statute intended to protect a particular class of person for which the claimant is a member. For example, if a law wanted to protect small business construction companies it may continue to enforce the contract if it benefits the small construction company. 

Finally, where the contract's illegal purpose has not achieved the defense of illegality cannot be raised.

As you can see the doctrine of illegality is a very complex area, but with a highly restrictive application. It's nothing to worry about, but it's certainly worth looking into before you engage with any new contracts!