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 part of a restraint may be severed if (1) it can be removed without adding to or modifying the wording of what remains (the "blue pencil" test), (2) the remaining terms are still supported by adequate consideration (in practice a live issue only where the employee, not the employer, seeks severance), and (3) its removal would not generate any major change in the overall effect of all the post-employment restraints, which the employer must establish (Tillman v Egon Zehnder Ltd [2019] UKSC 32 at [84]-[87], applying Beckett Investment Management Group Ltd v Hall [2007] EWCA Civ 613).

Common traps

• Don't apply Tinsley's reliance test — it's overruled; use the Patel trio.
• Illegal performance by one party: two steps. First construe the statute: does it make the contract, or the relevant claim, unenforceable expressly or by necessary implication? If so, innocence does not override that statutory result. In Re Mahmoud and Ispahani, the seller's ignorance of the buyer's lack of a licence did not save a contract prohibited by the legislation. A criminal penalty for one party's conduct does not by itself establish that the contract is prohibited (Okedina v Chikale [2019] EWCA Civ 1393, [12], [16]-[18], [23]-[24], discussing St John Shipping and Archbolds).
• If the statute does not prohibit enforcement, apply the common-law illegality principles, including the Patel policy and proportionality analysis above. An innocent party who did not know of the other's illegal performance can normally enforce; knowing participation in illegal performance can bar a claim. Okedina [13], [59]-[62] applies that distinction and explains that Patel did not require earlier applications to be reconsidered unless inconsistent with its principles. Enforcing the innocent party's contract does not excuse the other party's statutory offence.
• 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.

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