Illegality

CON.09 — Illegality (Contract, FLK1)

Core idea. A contract may be unenforceable because its formation, purpose or performance offends the law or public policy. The court can refuse to enforce it, refuse restitution, or both.

Two broad categories

• Statutory illegality — a statute expressly or impliedly prohibits the contract (or its performance). Express prohibition voids it; implied prohibition depends on construing the statute's purpose.
• Common law / public policy illegality — contracts to commit a crime/tort/fraud, oust the court's jurisdiction, defraud HMRC, prejudice the administration of justice, or that are sexually/morally immoral. Restraint of trade clauses are prima facie void unless reasonable in the parties' interests and the public interest.

The modern test — the Patel v Mirza [2016] UKSC 42 "trio of considerations". Patel swept away the rigid Tinsley v Milligan "reliance" rule. Where a claim is tainted by illegality, ask whether allowing it would harm the integrity of the legal system, weighing:

1. the purpose of the rule that was broken (would denying the claim further it?);
2. any other relevant public policy that might be defeated by denial;
3. proportionality — is denial a proportionate response? (consider seriousness, centrality of the illegality, intention, disparity in culpability).

Restitution. Patel confirmed a claimant can generally recover money paid under an illegal contract where the illegal purpose was not carried out, or where recovery serves the Patel policy balance — restitution prevents unjust enrichment and need not "reward" the wrongdoer.

Effect / severance. An illegal contract is usually unenforceable in whole. But an offending clause (e.g. an unreasonable restraint) may be severed under the "blue-pencil test" if removable without rewriting or changing the contract's nature (Tillman v Egon Zehnder [2019] UKSC 32).

Common traps

• Don't apply Tinsley's reliance test — it's overruled; use the Patel trio.
• Innocent party: where only one party knows of/intends the illegality, the innocent party may still enforce.
• Illegality at formation vs illegality only in the mode of performance — the latter does not always bar a claim.
• Distinguish illegality from a contract merely void for other reasons (e.g. mistake) — illegality engages public policy and may bar restitution.
• Restraint-of-trade clauses are about reasonableness, not automatic illegality.