General
Illegal Contracts
The general position is that the law enforces agreements, which have been freely entered. It does usually not regulate the terms and conditions of agreements. Some agreements are not enforceable because they promote an illegal purpose, contemplate or involve unlawful performance or because they are deemed to be against public policy.
Contracts which are unlawful by statute are wholly illegal and will not be enforced at all. They may constitute an offence or an element of an offence.
In contrast, contracts which are void on the grounds of public policy may be enforceable if the offending part can be excised or severed. The contravention of public policy is less serious than the doing of that which is specifically unlawful by statute.
Some agreements are entirely void and cannot be enforced at all. In other cases, the innocent party may be able to avoid the agreement, but the other party may be bound by it.
Commission of Unlawful Act
Some contracts are not enforced because they involve the commission of an illegal act or because they are to be undertaken in an illegal manner.
Agreements to commit a crime or civil wrong are void. An agreement to undertake a crime or indeed some civil wrongs constitute the criminal offence of conspiracy. A contract which has as its direct or indirect object the commission of a crime or civil wrong is also unlawful and a conspiracy.
The courts will not make orders to require parties to do acts which are prohibited by law. Where the legal effect of the order would be to require a party to do an unlawful act it is improper and against public policy, for the court to make an order in those terms.
The courts will not enforce a contract, the performance of which requires an unlawful act, even if this is not apparent from the terms of the contract. Persons are not allowed to benefit from the own wrongdoing.
No Insurance of Unlawful Act
Contracts which allow a person to benefit from his own wrongdoing are usually unenforceable at common law. An insurance contract which covers the consequences of crime is not enforced. This would, otherwise, encourage the commission of a crime. Likewise, an insurance contract which purports to cover a person against the consequences of his own unlawful act is likely to be unenforceable.
In order to rely on this principle, the insurance company must show to a high standard of proof, that the policyholder was guilty of wrong doing. The issue may arise where the policyholder has not been found guilty of committing the alleged crime. Something higher than proof on the grounds of probability is likely to be required
Agreements Defrauding Revenue
An agreement to defraud the Revenue Commissioners is void. Where, for example, parties agree to sell at a particular price, but declare a lower price in order, to reduce tax liability, the courts are likely to refuse to enforce the contract. Where, for example, a contract understates the price of land and money is paid “under the table”\’ in order to reduce stamp duty or capital gains tax, the entire agreement is ineffective.
Where parties engage in tax evasion in a way that is incidental to their relationship, the court is unlikely to enforce their claims. They may take the view that the entire arrangement is tainted with illegality. Where an employer and employee under declare income to evade tax liability, the courts may refuse to hear an employment dispute.
The question of illegality and fraud on the Revenue need not be raised by the parties. Where the court discerns a means, structure or method which is designed to conceal facts from the Revenue for the purpose of tax evasion, it may refuse to enforce the agreement.
More generally, if the court finds that the contract is tainted with illegality, it may refuse to enforce the agreement entirely.
Limits to Non- Enforcement
Where the claim is not linked to the illegality and the claimant has not actively participated or acquiesced in it, then the court may take the view that the agreement is not wholly tainted with illegality. In this case, it may enforce the contract.
If both parties to the contract are party to the illegality, the agreement will not be enforced at all. The seller cannot force the buyer to buy nor can the buyer compel the seller to sell. The loss will lie where it falls
The Unfair Dismissal legislation was changed so as not to deny an employee redress for unfair dismissal in these circumstances. The Revenue Commissioners, must, however, be informed in such cases.
Where a party has agreed to an arrangement whereby he will benefit at the expense of the Revenue, the agreement is generally unenforceable by both parties. The Employment Appeals Tribunal formerly refused to enforce unfair dismissal claim by employees, where there was a knowing evasion of tax in the salary arrangements.
The Unfair Dismissals Act as amended now provides that where the dismissal of an employee is an unfair dismissal and a term or condition of the contract contravened any provision of the income tax of social welfare acts, the employee shall, notwithstanding the contravention be entitled to redress. The Revenue or Department of Social Protection must be informed.
Unlawful Void by Regulatory Legislation
Where a particular course or transaction is unlawful, then contracts which provide for it, will be void.
There are many instances of regulatory legislation, which prohibits particular conduct including contracts related to such conduct. The regulatory legislation usually renders void contracts to that which is prohibited. In many cases, the prohibition will be clear. In other cases, the conduct may be legal, but be subject to regulation.
Sometimes, the legislation will specifically provide that a contract is not valid unless the relevant party is licensed or unless particular formalities are followed. For example. consumer credit agreements by unlicensed lenders cannot be enforced by them.
Unless specified, it is a matter of interpretation as to whether the legislation requires that contracts involving a breach of statute are rendered void. The extent of the breach and the nature of the contract will be relevant.
Legislation Sometimes Confirms the Position
In some (relatively few) cases, the legislation specifically prescribes that a contract is not valid (or less commonly) is valid, where some unlawful element is present. More commonly, statutes do not specify whether contracts concerning the matter concerned, are invalid. If the contract relates to or involves doing the very matter that is prohibited, it will be usually invalid.
The Consumer Information Act 1978 / Consumer Protection Act 2007 provides that contracts for the supply of goods and services are not rendered void by reason of a contravention of the consumer information requirements of the legislation.
Powers of Bodies
Contracts may be unlawful in the sense that they are outside the powers of a particular public body. Most entities constituted by law, such as public bodies, semi state, and other state sponsored entities are usually established with powers that are limited to their functions.
Where the legislation limits powers, transactions outside those powers are not inherently illegal. However, the law limits the capacity of the public body to undertake transactions outside its functions and remit.
Until 1st December 2016 all companies were required to have objects clauses. Since that date, the requirement no longer applied to ordinary limited companies.
Some companies remain subject to this requirement. Designated activity companies (DAC)s and public limited companies remain subject to the principal. Such Companies may not validly enter contracts which are outside of their statutory powers. There are, very strong protections for outsiders when they deal with these companies. They are protected when dealing in good faith with a company without actual knowledge of the limitation on their powers.
Interpreting Legislation for Effect on Contracts I
It is a matter of interpretation as to whether a particular breach of the legislation invalidates contracts in the sector concerned. The court must interpret what the legislation intended, in considering whether it affects the validity of the contract concerned.
The courts will generally look to see who is intended to be benefited by the legislation. For example, there may be a requirement for the business to be licensed and regulated.
Where the legislation itself is designed to protect the public, such as against unlicensed service providers, then it is unlikely that the provider can enforce the contract. If the illegality relates to undertaking the haulage business itself, the contract is likely to be invalidated. An unlicensed business operator will not usually be entitled to enforce the contract.
Generally, the customer/consumer, being the party intended to be protected, can enforce the contract.
Interpreting Legislation for Effect on Contracts II
The courts look at the purpose behind the legislation. Generally, the purpose is to protect the public. The courts will look to see whether there is a connection between what is unlawful and the contract. If the legislation regulates the activity in some other way, then non-compliance is unlikely to be sufficient to make the contract unenforceable by the business.
An example sometimes given in this context, is of regulatory legislation which provides for the permissible conditions of carriage of goods. If for example, there is some minor illegality, such as overloading a vessel or vehicle, it is unlikely that the statute intended to invalidate the contract for the carriage of the goods.
Protection of the Public
An important factor in interpreting legislation in this context is whether the statute was passed to protect the public or a part of the public.
An example of a statute passed to protect the public is that which prohibits pyramid schemes. A pyramid promotional scheme is a scheme by which a person gives consideration in money or money’s worth, or gives a gift in money or money’s worth, for an opportunity to receive compensation derived primarily from the introduction of other persons into the scheme rather than from the supply or consumption of a product.
The Pyramid Selling Act has been re-enacted in the Consumer Protection Act, 2007. It declares that agreement between a scheme promoter and another person is, to the extent it requires or provides for payment of money or money’s worth in respect of a pyramid promotional scheme, void and has no effect, and no action lies in any court for the recovery of such money or money’s worth under or pursuant to such agreement.
Licensing Requirement
The statute may provide that a carrier may not carry on business without a licence. In this case, the court is more likely to interpret the legislation as prohibiting the carrier from recovering monies for its services.
The legislation is aimed at prohibiting unlicensed hauliers. It is unlikely to be interpreted so as to deprive the customer of his contractual rights so that the customer can enforce the contract
If a business requires to be licensed, and the court interprets that such licensing is for the protection of the public, the unlicensed operator is usually unable to enforce a contract for the provision of the relevant service.
Incidental Illegality
In many cases, the invalidity will relate to an incidental matter and not to the core contractual obligation itself. It is ultimately a matter of interpretation of the statute as to whether the prohibition invalidates a contract involving incidental illegality in that regard.
There are many schemes of legislation which regulate businesses in an incidental way. The fact that a business is carried out in some incidental way which is not compliant with legislation, is not generally sufficient to invalidate a contract.
If an operator is licensed, but there is a breach of licensing conditions, e.g. loading or vehicle weight by a licensed haulier, is unlikely to mean that a contract to carry the goods is invalid. It is ultimately a matter of interpretation of the reason and purpose of the legislation
For example, the fact that goods are carried in a lorry that is not compliant with standards in some minor respect, would not be enough to invalidate a contract for the carriage of goods in the vehicle. The fact that a ship or truck is marginally overloaded in breach of legislative requirements, is unlikely to be intended as prohibiting the enforcement by the carrier of all contracts for carriage of goods in it
Modern Approach
In Quinn v IBRC, the Supreme Court, following the broad approach of the UK courts, modernised and restated the law on the effect of illegality on the validity of a contract. Fundamentally, whether a contract, illegal by statute, is void or voidable depends on the public policy purpose of the statute
The Court held that proper approach which provides the greatest level of certainty involves consideration of the public policy purpose of the statute. This determines whether any contract which contravenes the statute must be held to be void or voidable. The proper approach is specific to the statute, not the case.
The Supreme Court Test
Clarke J writing for a unanimous Court (here) set out the issues to be considered:
1. Whether the relevant legislation expressly states that contracts of a particular class or type are to be treated as void or unenforceable.
2. Where, however, the relevant legislation is silent … the court must consider whether the requirements of public policy … and the policy of the legislation concerned, … gleaned from its terms, … require that, in addition to whatever express consequences are provided for in the relevant legislation, an additional sanction or consequence in the form of treating relevant contracts as being void or unenforceable must be imposed.
3. In assessing the criteria … the court should assess at least the following matters: –
3(a) Whether the contract in question is designed to carry out the very act which the relevant legislation is designed to prevent
3(b) Whether the wording of the statute itself might be taken to strongly imply that the remedies or consequences specified in the statute are sufficient to meet the statutory end.
3(c) Whether the policy of the legislation is designed to apply equally or substantially to both parties to a relevant contract or whether that policy is exclusively or principally directed towards one party. Therefore, legislation which is designed to impose burdens on one category of persons for the purposes of protecting another category may be considered differently from legislation which is designed to place a burden of compliance with an appropriate regulatory regime on both participants.
3(d) Whether the imposition of voidness or unenforceability may be counterproductive to the statutory aim as found in the statute itself.
4. The aforementioned criteria or factors are, for reasons which will become apparent, sufficient to resolve this case. However, the following further factors may well be properly taken into account in an appropriate case:-
4(a) Whether, having regard to the purpose of the statute, the range of adverse consequences for which express provision is made might be considered, in the absence of treating relevant contracts as unenforceable, to be adequate to secure those purposes.
(b) Whether the imposition of voidness or unenforceability may be disproportionate to the seriousness of the unlawful conduct in question in the context of the relevant statutory regime in general.
5. Doubtless other factors will come to be defined as the jurisprudence develops.
References and Sources
Irish Textbooks and Casebooks
Clark, R. Contract Law in Ireland 8th Ed. (2016) Ch. 14, 15
Friel, R. The Law of Contract 2nd Ed, (2000)
McDermott, P. Contract Law (2001) 2nd Ed (2017) Ch. 15
Enright, M. Principles of Irish Contract Law (2007)
Clark and Clarke Contract Cases and Materials 4th Ed (2008)
English Textbooks and Casebooks
Poole, J. Casebook on contract law. (2014) 12th edition
Stone and Devenney, The Modern Law of Contract 10th Ed (2015)
McKendrick, Contract Law 10th Ed (2013)
Chen-Wishart, Contract Law 5th Ed (2015)
Anson, Reynell, Beatson, J., Burrows, Cartwright, Anson’s law of contract. 29th Ed (2010)
Atiyah and Smith, Atiyah’s introduction to the law of contract. 6th Ed.
Chen-Wishart, M. (2015) Contract law. 5th Ed.
Cheshire, Fifoot and Furmstons, Furmstons and Fifoot Cheshire, Fifoot and Furmston’s law of contract. OUP.
Duxbury, Robert (2011) Contract law. 2nd Ed.
Halson, Roger (2012) Contract law. 2nd Ed.
Koffman & Macdonald’s Law of Contract. 8th Ed. (2014)
O’Sullivan, Hilliard, The law of contract. 6th Ed. (2014)
Peel, and Treitel, The law of contract. 13th Ed. (2011).
Poole, J.Casebook on contract law. 12th Ed. (2014).
Poole, J. Textbook on contract law. 12th Ed. (2014)
Richards, P Law of contract. 10th Ed. (2011)
Stone, R. The Modern law of Contract. 10th Ed. (2013)
Treitel, G. H. An outline of the law of contract. 6th Ed (2014).
Turner, C Unlocking contract law. 4th Ed. (2014).
Upex, R. V., Bennett, G Chuah, J, Davies, F. R. Davies on contract. 10th Ed. (2008).
UK Casebooks
Stone,Devenney, Text, Cases and Materials on Contract Law 3rd Ed (2014)
McKendrick, Contract Law Text, Cases and Materials 6th Ed (2014)
Stone, R, Devenney, J Cunnington, R Text, cases and materials on contract law. 3rd Ed (2014)
Burrows, A. S. A Casebook on Contract. 4th Ed.
Beale, H. G., Bishop, W. D. and Furmston, M. P. Contract: cases and materials. 5th ed. (2008)
Blackstone’s Statutes on Contract, Tort & Restitution 2017 (Blackstone\’s Statute Series)
UK Practitioners Texts
Chitty on Contracts 32nd Edition, 2 Volumes & Supplement (2016)
The above are not necessarily the latest edition.