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!
