Illegal and unenforceable contracts

At the end of this chapter, you should be able to:

Identify the categories of contract that are illegal and unenforceable

Appreciate how the law has evolved in this area

Understand the impact on the agreement where it is found to be void

Understand how the rules operate where a restraint of trade clause is used

Analyse a problem involving a restraint of trade clause and apply the relevant law

Essential Definition: Illegal Contract

An illegal contract is an agreement that has been made for an illegal purpose and, consequently, breaks the law. Contracts are illegal if the performance or creation of the agreement will cause the parties to engage in activity that is illegal.

An illegal contract is void ab initio, and the contract will be treated as though it has never existed. In a legal context, void means ‘of no legal effect’. An action, document or transaction which is void is of no legal effect whatsoever. The law treats it as if it had never existed or happened. The term ‘void ab initio’ means that something is invalid from the outset. Ab initio is Latin for ‘from the beginning’.

The principle is underpinned by the principle ex turpi causa non oritur actio (an action cannot arise from a bad cause). Thus, it follows that because the contract never existed, no action can be taken for breach of contract, and, as a general rule, the law will not allow recovery of benefits conferred by such a contract.

Contractual illegality is aptly summarised in Lord Mansfield’s classic statement of law in Holman v Johnson ¹ that no court will lend its aid to a person:

who founds his cause of action upon an immoral or an illegal act. If, from the claimant’s own stating or otherwise, the cause of action appears to arise ex turpi causa, or the transgression of a positive law of this country,216there the court says he has no right to be assisted. It is upon that ground the court goes; not for the sake of the defendant, but because they will not lend their aid to such a claimant.

This area of contract law represents an area where the courts will interfere with the contracting parties’ freedom to agree the main body and constituent elements of their contract. Such contracts concern areas where an agreement has been made but where the law does not approve of the subject matter.