The basic rule is that the courts will not enforce an illegal contract or a contract affected or “tainted” by illegality. Damages, injunctions, and orders for performance will not be granted. Restitution will not be available. This principle applies with even greater force where the party who seeks the court’s assistance is implicated in or has participated in the illegality.
Where both parties are equally at fault, the contract will not be enforced. No order will be made for the return of monies paid or for the payment of unpaid money. The results may be arbitrary. In effect, the gain or loss falls where it lies. The status quo remains. A person in possession of an asset or money is left with it. The loss or benefit usually lies where it falls.
Unlawful in Itself
Where the contract is by its very terms unlawful, it is said to be illegal on its face. It is unlawful from its inception. Its consideration may be the very thing that is prohibited. In this case, the state of mind and the relative guilt or innocence of the parties is irrelevant. This is even, if a wholly innocent party may be denied his reasonable expectations.
Where by a statute, a transaction is prohibited unless a license is held, some cases have held that the transaction may be invalidated, if the license is not held. This may be so even if the apparent licence holder has misled the other party to believe that he had a license.
If an agreement is illegal on its face, the courts will take cognisant of it and will not enforce it, notwithstanding that the issue is not raised by either party. If it is not illegal on its face, but the court discerns the illegality in the course of the case, it is likely to refuse to enforce the contract.
Weaker Party may be Protected
Where a contract is specifically to do something unlawful, it is usually entirely unenforceable. If, however, the legislation is intended to protect an innocent party, that person may be entitled to enforce the contract.
If the person seeking the remedy has not actively participated in the illegality and has received no benefits, the court may uphold the contract and allow him to enforce it.
If his participation is acquiescence on the part as a weaker party (e.g. an employee in a wrongful dismissal case) which he was not in a practical position to challenge, then the court may be prepared to allow him to enforce the contract, particularly if the claim is unrelated to the particular illegality.
Unlawful Means of Performance I
The position becomes more complex where the contract is not illegal by its terms or “on its face”. There is a distinction in treatment between contracts that are inherently unlawful and lawful contracts which one party intends to perform unlawfully. A contract, which is itself unlawful, cannot be enforced.
Where both parties to the contract intend to perform an apparently lawful contract, unlawfully, neither may enforce it. Although the contract is lawful on its face, the court will not give effect to the contract if it discerns the unlawful context or method of performance.
Where one person intends to perform the contract in an unlawful way, it may be enforceable by the innocent party. If there are two methods of performing the contract, one lawful and one unlawful, it will not be readily presumed that the unlawful method of performance was intended by both parties. If one party claims a joint intention to perform unlawfully, he must clearly prove this was on.
Where a loan is advanced for the purpose of the performance of an unlawful contract, the loan itself may be unlawful, if the lender has knowledge of the purpose. Similarly, if the loan is made to pay off an illegal loan, it may be unlawful, if this is known to the lender.
Unlawful Means of Performance II
Where a contract relates to a lawful matter, which is intended to be performed illegally, of which both parties are aware, the court is likely to refuse to enforce it. Even if one party does not raise the issue of illegality, the court may not enforce the claim, if it becomes aware of the illegality in the manner of performance.
Where a contract is lawful, but one person intends to perform it in an unlawful way, that party may be unable to enforce, while the innocent party may enforce it. If both parties are equally at fault, the contract may be entirely unenforceable.
Where one party intends to perform a contract unlawfully which is capable of being performed lawfully, it is likely to be enforceable at the behest of the person who does not intend or know about the unlawful performance.
The burden of proving illegality lies on the person who raises it. If there is a regular and apparently valid contract, clear evidence will be required to show that there is some unlawful underlying secondary transaction, for example, for the purpose of defrauding the Revenue.
The courts may be prepared to allow restitution in respect of an unlawful contract. The unlawful contract is of no effect so that there may be a total failure of consideration in respect of monies paid.
The Courts will not, however, allow a remedy in restitution to enforce a contract “through the back door” which is unlawful or is to be performed illegally. The restitution remedy is only available where the parties are not equally at fault.
Where one party is not aware of the facts which cause the contract to be unlawful, restitution may be allowed in that party’s favour. If despite the illegality, the court interprets that the law was made for the benefit of a class, including the claimant and the parties were not equally at fault, recovery may be allowed.
Where restitution is sought, the party seeking it must act equitably. If in the circumstances the parties are equally at fault, recovery will not be allowed. If for example a loan is unlawful and the borrower granted security, he may be obliged to repay the monies advanced on the basis that a windfall should not be permitted.
If the parties are not equally at fault, the “innocent” party may be entitled to restitution of monies paid. Where the benefit of the illegality accrues to one person only, this may point to the parties not being equally at fault.
Where the legislation is designed to protect a particular party to the contract, rather than the other, the innocent party may be entitled to enforce the contract or to restitution
Fraud and Duress
Where a contract is illegal, but one party has been forced to enter it by fraud. pressure on undue influence, he may be entitled to restitution.
Parties who have been subjected to fraud, duress, oppression or undue influence may be allowed to recover, notwithstanding the illegality of the transaction. The claimant must not be equally at fault and must have been induced or caused to enter the contract by the fraud or breach of fiduciary duty of the other.
Where the illegality arises from duress or attempts to extricate oneself or another, from danger, they may be excused and recovery may be permissible.
Where a contract has been entered on foot of a fraudulent misrepresentation, there may be recovery on the basis of the tort / civil wrong of deceit. This claim does not need to rely on the contract. The court may nevertheless consider the conduct and relative culpability of the parties, but to a lesser extent than in a claim based on a contract.
Recovery by Proprietary Rights
In some cases, one party may be entitled to recover assets or monies which have been paid, on the basis of an independent right. This right may be a property right.
Where property in goods has passed and the underlying contract is invalid, it may be possible to recover them, on the basis of property rights. In this case, the loss will not lie where it falls. The court may, however, refuse to give assistance where the whole arrangement of the transaction is tainted with illegality.
Where property or assets are held by another party, it is generally possible to recover them by virtue of the claimant’ title. An action for trespass and recovery is available to the owner of goods against a person who unlawfully detains them. Such a claim may be allowed, even though it appears that the goods came into the defendant’s possession by reason of an illegal contract. There is support for the view that in some circumstances, this may be permitted even if the claimant was party to illegality to some extent.
It may be possible in some cases to recover monies paid on the basis of a trust, where a party has contributed towards the purchase price of property put in the name of another for an unlawful purpose. For example, the courts have upheld a resulting trust in respect of a share of the property arising from contributions, made for the purpose of qualifying for social security benefits.
If the contract is tainted by illegality, but one party repents before it is performed, he may be able to recover property transferred. If the transaction is illegal from the outset, but it has not yet been performed, the innocent party who repents and repudiates the agreement may recover assets transferred. The repentance must be made before performance. Once performance of the unlawful promise commences, it is too late to repent.
A 1995 case has extended the principle to allow repentance up until the point in time when the dishonest intention has been wholly or partly carried into effect. The repentance need not be in the sense of actual remorse. In some cases, repentance will never be enough. Where a person has entered out a contract to commit a crime, it is unlikely that repentance would be in any way sufficient to allow restitution.
This principle encourages persons to withdraw from unlawful an arrangement before it is implemented. The repentance must be timely. It will be too late to do so, once a substantial part of the agreement has already been implemented.
In some cases, one party may be entitled to recover assets or monies which have been paid, on the basis of a collateral contract, which is not affected by the illegality. It may be possible for the court to find a separate collateral contract which is not tainted with illegality.
Where, for example, a person gives a collateral assurance that he will obtain the necessary licence, thereby misleading an innocent party into entering a prohibited contract, that party may be entitled to recover loss by fraud, breach of promise or warranty, provided that he was not guilty of culpable negligence. The approach is controversial as its effect may be to enforce the contract “through the back door”.
Scope of Severance
Where part of the agreement is void and of no effect, the question arises as to whether the entire agreement is affected or whether that part only is void so that the rest may stand. Where a contract is illegal or contrary to public policy, the courts may in some cases, sever the offending clauses from the contract, while leaving the rest to stand. In those cases, the court enforces the contracts but removes the unlawful term.
Severance is only allowed in relation to a clause, which will stand alone, having been severed. The offending parts must be capable of being severed, without tainting the entire contract.
Severance may take place within the wording of a covenant or clause itself. This is the so-called blue-pencil test. Severance is only allowed, if and to the extent, the remaining words can stand sensibly and without changing the agreement.
Where Severance Available
Severance is more readily allowed, in the case of contracts that are void as being against public policy. A restriction, in a contract which is in restraint of trade, may be capable of severance. Similarly, contracts that affect the jurisdiction of the courts may be severed from the remainder of the agreement.
There must be one or more promises which are legal and others which are illegal. If there are both lawful and unlawful considerations which are interdependent, then severance will not be possible.
It is not clear to what extent severance applies to illegal contracts, as opposed to those which are void, as against public policy. Some courts take the view that severance is not allowed, where the statute prohibits the contract entirely. Severance is not available where the illegal promise is a substantial part of the consideration.
Outside of the above, there is support for the view that severance of illegal contract is permitted in some cases. Severance may be allowed in relation to statutory illegality and the breach of regulatory rules. It is only allowed, however, if it accords with the principles underlying the legislation.
Modern Approach I
In Quinn v IBRC, the Supreme Court, following the broad approach of the UK courts, modernised and restated the law on the effect of illegality on the validity of a contract. Fundamentally, whether a contract, illegal by statute, is void or voidable depends on the public policy purpose of the statute
The Court held that proper approach which provides the greatest level of certainty involves consideration of the public policy purpose of the statute. This determines whether any contract which contravenes the statute must be held to be void or voidable. The proper approach is specific to the statute, not the case.
Clarke J writing for a unanimous Court (here) set out the issues to be considered:
1. Whether the relevant legislation expressly states that contracts of a particular class or type are to be treated as void or unenforceable.
2. Where, however, the relevant legislation is silent … the court must consider whether the requirements of public policy … and the policy of the legislation concerned, … gleaned from its terms, … require that, in addition to whatever express consequences are provided for in the relevant legislation, an additional sanction or consequence in the form of treating relevant contracts as being void or unenforceable must be imposed.
Modern Approach II
Clarke J in Quinn v IBRC elaborated the tests as follows;
3. In assessing the criteria … the court should assess at least the following matters: –
3(a) Whether the contract in question is designed to carry out the very act which the relevant legislation is designed to prevent
3(b) Whether the wording of the statute itself might be taken to strongly imply that the remedies or consequences specified in the statute are sufficient to meet the statutory end.
3(c) Whether the policy of the legislation is designed to apply equally or substantially to both parties to a relevant contract or whether that policy is exclusively or principally directed towards one party. Therefore, legislation which is designed to impose burdens on one category of persons for the purposes of protecting another category may be considered differently from legislation which is designed to place a burden of compliance with an appropriate regulatory regime on both participants.
3(d) Whether the imposition of voidness or unenforceability may be counterproductive to the statutory aim as found in the statute itself.
4. The aforementioned criteria or factors are, for reasons which will become apparent, sufficient to resolve this case. However, the following further factors may well be properly taken into account in an appropriate case:-
4(a) Whether, having regard to the purpose of the statute, the range of adverse consequences for which express provision is made might be considered, in the absence of treating relevant contracts as unenforceable, to be adequate to secure those purposes.
(b) Whether the imposition of voidness or unenforceability may be disproportionate to the seriousness of the unlawful conduct in question in the context of the relevant statutory regime in general.
5. Doubtless other factors will come to be defined as the jurisprudence develops.
References and Sources
Irish Textbooks and Casebooks
Clark, R. Contract Law in Ireland 8th Ed. (2016) Ch. 14, 15
Friel, R. The Law of Contract 2nd Ed, (2000)
McDermott, P. Contract Law (2001) 2nd Ed (2017) Ch. 15
Enright, M. Principles of Irish Contract Law (2007)
Clark and Clarke Contract Cases and Materials 4th Ed (2008)
English Textbooks and Casebooks
Poole, J. Casebook on contract law. (2014) 12th edition
Stone and Devenney, The Modern Law of Contract 10th Ed (2015)
McKendrick, Contract Law 10th Ed (2013)
Chen-Wishart, Contract Law 5th Ed (2015)
Anson, Reynell, Beatson, J., Burrows, Cartwright, Anson’s law of contract. 29th Ed (2010)
Atiyah and Smith, Atiyah’s introduction to the law of contract. 6th Ed.
Chen-Wishart, M. (2015) Contract law. 5th Ed.
Cheshire, Fifoot and Furmstons, Furmstons and Fifoot Cheshire, Fifoot and Furmston’s law of contract. OUP.
Duxbury, Robert (2011) Contract law. 2nd Ed.
Halson, Roger (2012) Contract law. 2nd Ed.
Koffman & Macdonald’s Law of Contract. 8th Ed. (2014)
O’Sullivan, Hilliard, The law of contract. 6th Ed. (2014)
Peel, and Treitel, The law of contract. 13th Ed. (2011).
Poole, J.Casebook on contract law. 12th Ed. (2014).
Poole, J. Textbook on contract law. 12th Ed. (2014)
Richards, P Law of contract. 10th Ed. (2011)
Stone, R. The Modern law of Contract. 10th Ed. (2013)
Treitel, G. H. An outline of the law of contract. 6th Ed (2014).
Turner, C Unlocking contract law. 4th Ed. (2014).
Upex, R. V., Bennett, G Chuah, J, Davies, F. R. Davies on contract. 10th Ed. (2008).
Stone,Devenney, Text, Cases and Materials on Contract Law 3rd Ed (2014)
McKendrick, Contract Law Text, Cases and Materials 6th Ed (2014)
Stone, R, Devenney, J Cunnington, R Text, cases and materials on contract law. 3rd Ed (2014)
Burrows, A. S. A Casebook on Contract. 4th Ed.
Beale, H. G., Bishop, W. D. and Furmston, M. P. Contract: cases and materials. 5th ed. (2008)
Blackstone’s Statutes on Contract, Tort & Restitution 2017 (Blackstone’s Statute Series)
UK Practitioners Texts
Chitty on Contracts 32nd Edition, 2 Volumes & Supplement (2016)
The above are not necessarily the latest edition.
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