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Contracts tainted with illegality are unlikely to be enforceable

Contractors entering into a contract that is proved to be ‘tainted with illegality’ may find that the agreement is unenforceable and that they have no rights, since the contract may be void.

“A fundamental principle of English contract law is that, as a matter of public policy, you cannot found a legal action on something illegal in which you have participated,” explains Roger Sinclair of contractor legal specialist Egos. “If a court finds a contract to be illegal, then it will be unenforceable.”

So, if a contractor and another party colluded to create an agreement that was based on an illegal act, then the contract cannot be enforced.

If a contractor did try to enforce such a contract, perhaps using the courts to recover unpaid fees from a non-paying client or fight an early termination, they may find that the contract would be treated by the courts as void, as if it had never been formed.

The legal principle underpinning ‘tainted with illegality’

According to Sinclair, the legal doctrine underpinning the principle is summarised by the Latin phrases ex turpi causa non oritur actio and ex dolo malo non oritur actio.

These loosely translate into ‘from a dishonourable cause / wrongful act does not arise’. The idea is that the courts should not encourage lawbreaking by then enforcing a contract that is actually dependent on illegality, or an illegal act.

A fundamental principle of English contract law is that, as a matter of public policy, you cannot found a legal action on something illegal in which you have participated

Roger Sinclair, Egos

“A contract which cannot be performed without doing something illegal is void. One bank robber can't sue the other for his share of the proceeds,” says Sinclair.

“In the past, this has been held to include contracts 'tending to promote sexual immorality'. In 1866 a coach owner who hired his coach to a prostitute, knowing that she would use it to attract custom, tried to sue for the hire charges, and lost the case for this reason.”

“In 1725 a Mr Everet commenced a partnership action in the High Court against a Mr Williams. He claimed that the partnership was 'to deal with several gentlemen for divers watches, rings, swords, canes, hats, cloaks, horses, bridles, saddles and other things to the value of £200 and upwards' which 'might be had for little or no money, in case they could prevail on the said gentlemen to part with the said things'.

“It was only as the case progressed that it became clear that both parties were highwaymen. The court was less than impressed; both later ended up hanged. And a few years later, one of the solicitors involved was transported for robbery!”

Illegal ‘as formed’ and illegal when performed

“What this means in practice is that, if a contractor and client had created a contract that was based on something illegal, and the contractor or client wanted to take action based on that contract, then neither party would actually be able to enforce any rights it might appear to have under the contract.”

A contract can be illegal ‘as formed’, as in the above case, but it can also be illegal when it is performed, that is, if one or both of the parties intend to perform an apparently lawful contract, in an unlawful way.

In the latter example, one of the parties might deliver their contractual obligations in an unlawful way. In this case, the party committing the illegal act may as a result have no rights under the contract, even though the other ‘innocent’ party would have the original rights they were granted by the contract.

How contractors might be affected

Sinclair highlights that might be occasions when a contractor might encounter the principle, and not necessarily to their benefit: “If, for example, an employee colluded with their employer to become a contractor for the purposes of being paid gross (thus evading tax) and possibly also denying the worker employment rights, in a situation where the reality and substance of the relationship remained that of employment, then the contract between the client and contractor would be tainted with illegality.

“What that could mean in practice is that if the client started paying late, or not paying at all, then the contractor may find they have no rights to recover the debt. If the contractor was terminated early or without notice, they would similarly have no rights to take action over what would normally be a breach of contract, because the contract itself is effectively void.”

Should the contractor attempt to pursue the client through the courts, and the evidence points to the original contract having been formed for the purposes of unlawfully evading tax, which is an illegal act, then the contract would be deemed to be unenforceable.

Reducing the risk of entering into a contract tainted by illegality

Some examples of illegal acts that will result in a contract being tainted with illegality and therefore unenforceable will be obvious, such as contracting with a former employer for tax evasion purposes. However, the law is complex and other examples may not be so obvious.

Sinclair concludes: “Contractors who encounter a proposed arrangement which they don’t fully understand, or when they are unsure of the purpose of a particular part of the agreement, especially where their suspicions are aroused, should seek professional legal advice to make sure nothing untoward is being proposed.”

Published: 30 September 2014

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