Even if you have complied with all the formalities and requirements of a valid contract, the law may still refuse to enforce an illegal contract. A contract may be illegal because it is prohibited by statute or because it infringes a rule of public policy.
Contracts prohibited by statute
A failure to comply with all statutory requirements will not necessarily render a contract illegal. For example, a contract for land which is not in writing as required by statute will be unenforceable but not illegal. Contracts are illegal when they are expressly or impliedly prohibited by statute. Whilst express prohibition is generally clear, implied prohibition exists where the object of the statute can only be achieved by holding a particular class of contract prohibited.
For example, contracts designed to defeat the operation of a statute are illegal. Thus, if an employment contract excludes the requirement of compulsory insurance (a statutory requirement under worker’s compensation legislation), the provision is illegal.
Contracts which infringe public policy
Contracts which infringe some definite and governing community standard may also be found to be illegal and unenforceable. Public policy is always subject to change as courts have to consider shifting standards of behaviour in the community. The clearest example is a contract entered into with the purpose of committing a legal wrong such a crime or tort, so long as there is proof of intent to break the law at the time the contract was made. Other common examples include contracts that prejudice the administration of justice, corrupt public life, injure foreign relations, purport to oust the jurisdiction of the courts or are sexually immoral.
It is not always clear whether the effect on a contract which infringes public policy is to make the contract void or render it illegal. A contract will generally only be described as illegal if the impropriety is great – usually the commission of a criminal offence.
What are the consequences of having an illegal contract?
The distinction between an illegal contract or one that is simply void is important when considering the consequences of an illegal contract. Generally, courts will not assist parties seeking to enforce an illegal contract. However, this is qualified by many complex rules beyond the scope of this article.
If you require any assistance with the avoidance of or remedying of illegal contracts, please don’t hesitate to contact us.