Illegality in Contracts (L23) Flashcards
What is the effect of illegality on a contract?
Makes a contract unenforceable.
Wider basis is application in public policy.
- “In a broad sense, any refusal to enforce a contract not related primarily to the merits of the parties to it may be said to be a decision derived from ‘public policy’.”
- (Professor R A Buckley, Illegality and Public Policy (2nd edn, 2009), p9).
Some contract terms are illegal as they are contrary to public policy.
- “A paction against the liberty of trade is illegal” (i.e. terms in restraint of trade).
- (Watson v Neuffert (1863) 1 M 1110, per Lord President Inglis).
What is the traditional approach to the consequences of illegality?
The traditional approach:
Ex turpi causa non oritur actio.
(neither party can enforce performance or claim damages for breach of an unlawful agreement).
In pari delicto potior est conditio possidentis.
(when parties have performed illegally but subsequently fall into dispute, the position of the possessor/recipient in retaining benefit of any contractual performance is stronger).
What is the new approach to the consequences of illegality, that the UKSC adopted in Patel v Mirza?
Judged by whether allowing a claim which is in some way tainted by illegality would be contrary to the public interest, because it would be harmful to the integrity of the legal system.
Adopts a wide, open-textured discretionary test involving a “trio” of considerations applied after balancing a range of factors
(Endorsed again by Grondona v Stoffel & Co).
What are the different categories of illegal contract?
Contract itself is illegal or contrary to public policy.
- E.g. Cuthbertson v Lowes.
Contract to do something illegal or contrary to public policy.
- E.g. Barr v Crawford.
Illegal manner of performance of lawful contract.
- E.g. Jamieson v Watt’s Trs.
What is the distinction between statutory and common law illegality?
Whether expressly or impliedly prohibited by statute relates to interpreting the intention of Parliament, by construing the relevant statute, its scope and purpose.
Whether illegal at common law relates to applying precedent and the determination of public policy by the courts in case-law.
What did the Lord Ordinary state in Cuthbertson v Lowes (1870) 8 M 1073?
‘Finds, as matter of law, that the said contract having been entered into in the terms aforesaid, is struck at by the provisions of the foresaid statutes, and cannot be enforced’.
What did Lord President Inglis say in the Inner House in the case of Cuthbertson v Lowes (1870) 8 M 1073?
‘The prohibition, or statutory nullity of the agreement is … to enforce a measure of public policy’.
‘A court of law cannot entertain an action for implement of a contract which the Legislature has expressly declared to be illegal’ so contract unenforceable.
But, on the facts, non-contractual remedy of recompense allowed: ‘market value’ recoverable in unjustified enrichment
Why was recovery not allowed in the case of Barr v Crawford 1983 SLT 481?
Lord Mayfield:
“The pursuer’s actings must be regarded as having been tainted with illegality” under a “corrupt agreement”.
“It is clear on the averments that the sum [of £10,000] was to be supplied … to save the license. The sum of £10,000 accordingly was supplied to Mrs Barr to achieve that purpose and was in fact a bribe.”
“There was in my view illegality because the payment made by Mrs Barr was a bribe made in the course of a dishonest intention thus tainting the transaction.”
What did Lord Mackay tell us about illegal contracts in the case of Jamieson v Watt’s Trustees 1950 SC 265?
Contract illegal and unenforceable because of unlicensed performance.
‘As to works or operations which are authoritatively pronounced “illegal” (and punishable by fine), in their actual execution, the Courts of both countries will not lend their aid in any manner whatever to enforce or empower them, or in any manner to give any validity to them’.
‘In any case of proper and full illegality, whether it is pronounced in matter of contract or in the matter of operation, there is no room for avoiding the bar to a Court’s aid by reason of the illicit character ….’
If performance of illegal contract occurs, can a non-contractual remedy provide relief?
Traditionally governed by in pari delicto principle:
If the parties are in pari delicto [both implicated in the wrongful conduct] then no remedy available (in pari delicto potior est conditio possidentis).
i.e. the position of the possessor who has received performance is preferred, and no recovery allowed.
If the parties are not in pari delicto a remedy may be available in unjustified enrichment.
But now English law has abrogated the in pari delicto rule in favour of the new structured discretion approach in Patel v Mirza. Will Scots law follow?
What was the decision in Patel v Mirza [2016] UKSC 42?
UKSC allowed a claim to restitution of the money paid, and held that the unlawful conduct of both parties and the illegality of the transaction did not provide a defence against the claim.
What was Lord Toulson’s rationale for the decision in Patel v Mirza?
The essential rationale of the illegality doctrine is that it would be contrary to the public interest to enforce a claim if to do so would be harmful to the integrity of the legal system.
What is necessary to consider in assessing whether the public interest would be harmed (Patel v Mirza test)?
- To consider the underlying purpose of the prohibition which has been transgressed and whether that purpose will be enhanced by denial of the claim;
- To consider any other relevant public policy on which the denial of the claim may have an impact and;
- To consider whether denial of the claim would be a proportionate response to the illegality, bearing in mind that punishment is a matter for the criminal courts.
Within the Patel v Mirza framework, which factors may be relevant?
- Seriousness of the conduct.
- Its centrality to the contract.
- Whether it was intentional.
- Whether there was marked disparity in parties’ respective culpability.
Policies promoting the integrity of the legal system explained.
Lord Toulson at para 99, Patel v Mirza:
“Looking behind the maxims [ex turpi & in pari delicto], there are two broad discernible policy reasons for the common law doctrine of illegality as a defence to a civil claim.
One is that a person should not be allowed to profit from his own wrongdoing.
The other, linked, consideration is that the law should be coherent and not self-defeating, condoning illegality by giving with the left hand what it takes with the right hand.”
