Illegality

Illegality is a highly complex area of contract law. It deals with both criminal conduct, conduct prohibited by statute (even if not criminal) and conduct regarded as contrary to public policy.

In some cases it will be simple to determine whether or not an illegal contract exists and will be rendered void; for example, a contract whereby A agrees to pay B $1m if B kills C will be clearly be considered illegal and void.

In other cases it will be more difficult. For example, will a transport contract be considered an 'illegal' contract if the car used for the transport of goods speeds while on its journey, or if the driver (or the car) is unregistered?

Given the increasing volume of laws and regulations (certainly well beyond anything envisaged at the time contractual rules relating to illegality were formulated), minor transgressions are not likely to render contracts unenforceable.

Statutory illegality

Statutory illegality is the most common form of contractual illegality. It encompasses contracts which are:

• directly prohibited by statute (eg, cartel contracts)

• entered into for an illegal purpose (eg, to kill or injure another person or burn down a building)

• performed illegality (eg, speeding whilst driving in the course of performing a contract)

• otherwise made void by statute (eg, certain unfair terms in consumer contracts).

Different rules and consequences attach to each. See, eg:

• Yango Pastoral Company Pty Ltd v First Chicago Australia Ltd (1978) 139 CLR 410 ➤

• Gnych v Polish Club Limited (2015) 255 CLR 414 ➤
  (Also at ➤ Jade. See also ➤ High Court blog on this case)

• Nelson v Nelson (1995) 184 CLR 538 ➤

• Fitzgerald v F J Leonhardt Pty Ltd (1997) 189 CLR 215
  

Common law illegality and contracts which are contrary to public policy

Common law illegality encompasses a broader range of conduct, including

• contracts prejudicial to the administration of justice

• contracts promoting corruption in public life

• contracts prejudicing the status of marriage

• contracts promoting sexual immorality and

• contracts in restraint of trade.

It is not always easy to classify these types of contract and what constitutes conduct that is contrary to 'public policy' varies with the prevailing morality of the relevant jurisdiction.

See eg:

• A v Hayden (1984) 156 CLR 532 (High court) ➤
  (administration of justice)

• Wilkinson v Osborne [1915] HCA 92; (1915) 21 CLR 89 (High Court) ➤
  (corruption in public life)

• Andrews v Parker (1973) Qd R 93
  See: EK Teh, 'Case note: Extra-marital cohabitation not immoral' (1973) 4(2) University of Tasmania Law Review 201-206 ➤ (contracts prejudicial to the status of marriage)

Consequences of illegality

Where conduct is classified as illegal or contrary to public policy it is generally held to be void or unenforceable (which will depend on the nature of the illegality and, int he case of statutory illegality, the interpretation of any statutory provisions relating to the effect of the conduct). There are also various exceptions that have developed (particularly where one party may be unaware of the illegality) and it may also be possible - consistent with public policy - to sever the offending terms and enforce the remainder of the contract.

In some cases a contract tainted by incidental illegality might be considered unenforceable rather than void so that proprietary interests might pass notwithstanding the unlawful conduct.

See eg:

• Nelson v Nelson (1995) 184 CLR 538 [1995] HCA ➤

• Equuscorp Pty Ltd v Haxton (2012) 246 CLR 498; [2012] HCA 7 ➤

• South Australian Cold Stores Ltd v Electricity Trust of South Australia (1965) 115 CLR 247 ➤

• Fitzgerald v F J Leonhardt Pty Ltd [1997] 189 CLR 215 (13 May 1997) ➤

• Brooks v Burns Philp Trustee Co Ltd (1969) 121 CLR 433 ➤ (severance)

• Thomas Brown & Sons Ltd v Fazal Deen (1962) 108 CLR 391 ➤ (severance)

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Last updated: 18 October 2019