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Avoidance of contracts: Illegality

Overview

Corrupt deal - shaking hands with moneyIllegality is a highly complex area of contract law. It deals with both criminal conduct, conduct prohibited by statute (even if not criminal) and conduct regarded as contrary to public policy.

In some cases it will be simple to determine whether or not an illegal contract exists and will be rendered void; for example, a contract whereby A agrees to pay B $1m if B kills C will be clearly be considered illegal and void.

In other cases it will be more difficult. For example, will a transport contract be considered an 'illegal' contract if the car used for the transport of goods speeds while on its journey, or if the driver (or the car) is unregistered?

Given the increasing volume of laws and regulations (certainly well beyond anything envisaged at the time contractual rules relating to illegality were formulated), minor transgressions are not likely to render contracts unenforceable.

 

Statutory illegality

Statutory illegality is the most common form of contractual illegality. It encompasses contracts which are:

  • directly prohibited by statute (eg, cartel contracts)
  • entered into for an illegal purpose (eg, to kill or injure another person or burn down a building)
  • performed illegality (eg, speeding whilst driving in the course of performing a contract)
  • otherwise made void by statute (eg, certain unfair terms in consumer contracts).

Different rules and consequences attach to each. See, eg:

 

Common law illegality and contracts which are contrary to public policy

Common law illegality encompasses a broader range of conduct, including

  • contracts prejudicial to the administration of justice
  • contracts promoting corruption in public life
  • contracts prejudicing the status of marriage
  • contracts promoting sexual immorality and contracts in restraint of trade.

It is not always easy to classify these types of contract and what constitutes conduct that is contrary to 'public policy' varies with the prevailing morality of the relevant jurisdiction.

See eg:

 

Consequence of illegality

Where conduct is classified as illegal or contrary to public policy it is generally held to be unenforceable; there are, however, some exceptions to that rule and, in some cases, it may be possible to sever the offending terms and enforce the remainder of the contract.

In some cases a contract tainted by incidental illegality might be considered unenforceable rather than void so that proprietary interests might pass notwithstanding the unlawful conduct.

See eg: