Vitiating elements - Illegality

Learning Outcomes

This article examines illegality in contract law for the SQE1 FLK1 exam, including:

• The classification of illegality as a vitiating element and how it affects contractual validity and enforceability in formation and performance contexts.
• Distinctions between statutory illegality and common law illegality, and how courts identify the relevant source of prohibition.
• The modern policy-based framework in Patel v Mirza, including the three-stage test of purpose, public policy and proportionality.
• How courts interpret statutes to decide whether Parliament intended contracts to be void, unenforceable, or merely subject to penal sanctions.
• The operation of severance and partial enforcement, including the blue pencil test and limits on judicial re-writing of covenants.
• The treatment of supervening illegality, its relationship with frustration, and the effect on accrued rights and future performance.
• The different consequences of illegality for contractual remedies, restitution, and unjust enrichment, especially where parties are not equally at fault.
• The position of innocent parties where the other party engages in unlawful performance, and when continued enforcement would undermine legislative purpose.
• Exam-focused strategies for analysing illegality problem questions, including issue-spotting, structuring answers, and avoiding common doctrinal pitfalls.

SQE1 Syllabus

For SQE1, you are required to understand the law relating to illegality as a vitiating element in contract law, with a focus on the following syllabus points:

• the distinction between illegality in formation and illegality in performance
• the effect of statutory illegality and the interpretation of relevant statutes
• the common law doctrine of illegality and public policy
• the consequences of illegality for contract enforceability and remedies
• the principle of severance and partial enforcement of contracts
• the modern approach to illegality, including the significance of Patel v Mirza
• restraint of trade: legitimate interests, reasonableness, and severance of overbroad covenants
• supervening illegality (frustration) and its effect on contractual obligations
• unjust enrichment and restitution where illegality is present

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What is the difference between illegality in formation and illegality in performance?
2. How does a court determine whether a contract is void due to statutory illegality?
3. What is the effect of Patel v Mirza on the approach to illegality in contract law?
4. When can a court sever an illegal part of a contract and enforce the remainder?

Introduction

Illegality is a vitiating element that can render a contract void or unenforceable. A contract may be illegal because it involves conduct prohibited by statute, or because it is contrary to public policy at common law. The consequences of illegality are significant: the contract may be void from the outset, or a party may be denied a remedy. The modern approach, especially after Patel v Mirza, requires a careful policy-based analysis. It is equally important to separate questions of enforcement (whether a claim on the contract will be denied) from questions of restitution (whether money or property conferred under an unlawful arrangement can be recovered), as courts may refuse to enforce but still allow recovery to prevent unjust enrichment.

Illegality in Formation and Performance

Illegality can arise at two stages: when the contract is made (formation) or during its performance.

Key Term: illegality in formation
Illegality in formation occurs when the contract’s purpose or object is unlawful from the outset, making the contract void.

Key Term: illegality in performance
Illegality in performance arises when a contract, lawful at formation, is performed in an unlawful manner or becomes illegal due to a change in law.

Illegality in Formation

A contract is illegal in formation if its very purpose is unlawful. This includes agreements to commit crimes, fraud, or acts expressly or impliedly prohibited by statute.

• The contract is void ab initio (from the beginning).
• Neither party can enforce the contract or claim restitution.
• The principle of ex turpi causa non oritur actio applies: no action arises from a dishonourable cause.

Common law examples include agreements to commit crimes or torts, contracts that corrupt public life (e.g., agreements to procure honours or public office for reward), agreements prejudicial to family life (such as contracts ousting the jurisdiction of the courts or agreements encouraging breakdown of marriage), and contracts promoting sexual immorality (though social attitudes to cohabitation have changed significantly and the courts are cautious about expanding these heads). Parliamentary regulation also plays a role: some statutes expressly declare certain contracts void, while others penalise conduct but do not invalidate the contract.

Where a statute itself declares that certain agreements are void, courts must give effect to that. Conversely, if the statute imposes penalties on conduct without expressly invalidating contracts, courts will consider whether Parliament intended to prohibit the making of such contracts.

Illegality in Performance

A contract may be lawful when made but become illegal if it is performed in a way that breaches the law, or if a supervening change in law makes performance illegal due to external events or legislative change.

• The contract may be unenforceable only to the extent of the illegal performance.
• Courts may sever the illegal part if the remainder can stand independently.
• If the illegal performance taints the whole contract, the entire contract may be void.

A critical distinction is between claims by the party who committed the illegality and claims by the innocent party. Where performance involves unlawful conduct by one party, the guilty party will often be barred from enforcing the contract if the statute or common law policy requires it. However, the innocent party who did not know of, and did not participate in, the illegality may still enforce or recover losses arising from breach, unless doing so would frustrate the legislative purpose or condone unlawful performance. If the innocent party subsequently learns of the illegality, they must cease performance and cannot accrue rights thereafter.

Supervening illegality can also frustrate the contract, discharging both parties from further performance. This occurs where a change in law or state of affairs makes continued performance unlawful (e.g., trading with the enemy during war).

Worked Example 1.1

A logistics company hires a carrier to transport goods. Unknown to the logistics company, the carrier uses a vehicle without the required licence for third-party carriage, committing a criminal offence during performance. The load is damaged. Can the logistics company sue the carrier for breach?

Answer:
Yes, the innocent logistics company can generally sue. The contract was lawful at formation and the illegality occurred in performance. Because the logistics company did not know of or participate in the offence, enforcement of its contractual rights does not undermine the purpose of the licensing law, which is served by penalising the carrier, not by depriving the innocent customer of remedies.

Worked Example 1.2

A haulage contractor, in performing a carriage contract, overloads a vessel contrary to statute but completes delivery. Can the contractor recover freight?

Answer:
The court will ask whether the statute’s purpose is to penalise the unlawful act (overloading) or to prohibit the making/enforcement of the contract. If the legislative purpose is punitive rather than invalidating contracts, the contractor may still recover freight (subject to penalties for the offence), since denying recovery may not further the statutory purpose.

Statutory Illegality

Statutory illegality arises when a contract breaches a statute. The effect depends on the wording and purpose of the statute.

Key Term: statutory illegality
Statutory illegality occurs when a contract is made or performed in breach of a statute, which may render the contract void, unenforceable, or illegal in part.

Courts consider:

• Whether the statute expressly prohibits the contract.
• Whether the statute implies prohibition, considering its purpose and policy.
• Whether the statute prescribes the effect of breach (e.g., void, unenforceable, or criminal penalty only).
• Whether denying enforcement or remedies would further the legislative purpose, or whether penalties and regulatory enforcement suffice.

If the statute is silent, the court interprets whether Parliament intended to invalidate the contract. Some enactments regulate conduct but expressly preserve contractual enforceability (e.g., modern gambling regulation), while others provide that agreements made in breach are unenforceable. Where contracts are performed in breach of statutory licensing regimes, courts will evaluate whether Parliament intended contracts entered without a licence to be void, or merely intended criminal/regulatory sanctions.

Key practical points:

• Illegality at formation due to statute will generally render the contract void and unenforceable by either party.
• Where illegality arises in performance, a fact-sensitive approach is adopted: the offender may be denied enforcement, but the innocent party may still have remedies unless they knew of and participated in the illegality.

Worked Example 1.3

A builder contracts to carry out work but does not have the required statutory licence. The statute prohibits unlicensed building work and makes it an offence. Can the builder enforce the contract?

Answer:
The builder cannot enforce the contract if the statute is interpreted as intending to prohibit contracts made without a licence. The contract is void for statutory illegality.

In contrast, where a statute regulates performance by imposing duties (for example, record-keeping or safety obligations) without expressly invalidating the agreement, courts often conclude that the legislative purpose is served by penalising breaches rather than treating the contract as unenforceable. The question is always whether denying remedies advances the statutory scheme.

Common Law Illegality and Public Policy

At common law, a contract may be illegal if it is contrary to public policy, even if not prohibited by statute.

Key Term: common law illegality
Common law illegality refers to contracts that are unenforceable because they are contrary to public policy, such as contracts to commit a crime, encourage immorality, or unduly restrain trade.

Examples include:

• Contracts to commit a crime or tort.
• Contracts prejudicial to the administration of justice (e.g., agreements to suppress or conceal crimes, or oust court jurisdiction).
• Contracts in unreasonable restraint of trade (e.g., overly restrictive non-compete covenants).
• Contracts encouraging sexual immorality (historic category applied cautiously by modern courts).
• Contracts damaging to the government (e.g., trading with the enemy in wartime).

The courts decide whether the contract is contrary to public policy, but are cautious in extending the doctrine. The focus is on established categories and incremental development, with Parliament taking the lead in regulating wider competition and market practices.

Restraint of trade requires close analysis:

• The clause is prima facie void unless justified.
• The proponent must show a legitimate interest to protect (e.g., trade secrets, client connections) and that the restraint is no more than reasonable in scope, duration, and geographic area.
• Reasonableness is judged at the time of contracting and by reference to the parties’ relationship (employment covenants are scrutinised more strictly than sale-of-business covenants).
• Courts may sever overbroad parts, provided the remainder is workable and it is not necessary to re-write the covenant.

Worked Example 1.4

An employment contract contains a clause preventing the employee from working in the same industry worldwide for five years after leaving. Is this clause enforceable?

Answer:
The clause is likely to be an unreasonable restraint of trade and contrary to public policy. The court may sever the excessive part and enforce the clause only to the extent that it is reasonable in duration and area.

The Modern Approach: Patel v Mirza

The Supreme Court in Patel v Mirza [2016] UKSC 42 established a flexible, policy-based approach to illegality. The court now considers:

1. The purpose of the law that has been broken.
2. Any other relevant public policies.
3. Whether denying the claim would be a proportionate response.

This approach replaces rigid rules with a discretionary analysis, focusing on justice and the integrity of the legal system. It distinguishes between enforcing an illegal contract (generally discouraged) and unwinding an illegal transaction to prevent unjust enrichment (often permitted). The emphasis is on coherence: the legal system should not both penalise unlawful conduct and simultaneously award gains under an unlawful contract, but it may restore money paid under such arrangements where appropriate.

Key Term: Patel v Mirza approach
The Patel v Mirza approach requires courts to weigh policy factors and proportionality when deciding whether to deny a remedy due to illegality.

Patel v Mirza also widened the scope for restitution where a contract is tainted by illegality, particularly where performance has not occurred or consideration has wholly failed. However, recovery may be denied where the seriousness of the illegality or other policy concerns outweigh unjust enrichment considerations (for example, in cases involving grave criminality). Where there has been partial performance, unjust enrichment principles are more complex; courts assess whether there has been a total failure of consideration or whether other restitutionary routes are available.

Worked Example 1.5

A party pays money under a contract for insider trading (a criminal offence). The illegal transaction is not completed. Can the payer recover the money?

Answer:
The court will consider the purpose of the prohibition on insider trading, the impact on public policy, and whether denying recovery is proportionate. In Patel v Mirza, the Supreme Court allowed recovery, as denying it would not serve the policy behind the prohibition.

Exam Warning

The effect of illegality is not always to make the contract void. The court may refuse to enforce the contract, deny a remedy, or allow restitution, depending on the circumstances and policy factors.

Severance and Partial Enforcement

Where a contract contains both legal and illegal terms, the court may sever the illegal part and enforce the remainder if:

• The illegal part can be removed without altering the fundamental nature of the contract.
• The remaining contract is supported by consideration.
• Severance does not change the overall effect of the contract.

Key Term: severance
Severance is the process by which a court removes an illegal part of a contract, allowing the lawful remainder to be enforced if the contract still makes sense.

The "blue pencil test" is used: the illegal part is struck out, and the contract must still be workable without rewriting or adding terms. Modern restraint of trade cases recognise severance to save otherwise reasonable covenants by deleting discrete words or phrases that make them too wide, especially in employment contexts. Severance is not permitted if it requires the court to add words, change the meaning of the remaining terms, or re-balance the parties’ bargain.

Examples where severance may be permitted:

• Removing a single overbroad activity (e.g., “or any other business”) where the remainder identifies specific legitimate activities to protect.
• Deleting an excessive geographic term where clear severable territories are listed.

Examples where severance will not be permitted:

• Where the illegal element is so intertwined with the covenant that deletion would involve re-writing the clause.
• Where severance would create a materially different restraint than the parties agreed.

Worked Example 1.6

A non-compete clause in an employment contract prohibits working for any competitor in the UK for three years. The court finds three years excessive but one year reasonable. What can the court do?

Answer:
The court may sever the excessive duration, enforcing the clause only for one year if the remainder of the clause is reasonable and the contract still makes sense.

Worked Example 1.7

A non-compete clause prohibits an ex-employee from engaging “in any capacity, directly or indirectly, in any business similar to or any interest in any business similar to” the employer’s. The words “or any interest in” make the restraint overbroad. Can the court delete those words and enforce the rest?

Answer:
Yes, if deleting the discrete words “or any interest in” leaves a workable and reasonable restraint aligned with a legitimate interest, and no re-writing or addition of words is needed. The remainder can be enforced if proportionate.

Consequences of Illegality

The consequences of illegality depend on the type and seriousness of the illegality:

• The contract may be void and unenforceable.
• The court may refuse to grant a remedy to either party.
• In some cases, restitution may be available to prevent unjust enrichment, especially where denying recovery would be disproportionate.

Restitution is more likely if the parties are not equally at fault, or if denying recovery would undermine the policy behind the prohibition. The court distinguishes between:

• Enforcement claims (e.g., damages for breach on an illegal contract), which will often be denied; and
• Restitutionary claims (e.g., recovery of money paid), which may be granted where doing so does not condone illegality.

Where illegality occurs in performance:

• If the claimant is the offending party, their claims may be barred, particularly if enforcement would frustrate the statutory purpose or allow the wrongdoer to benefit from unlawful conduct.
• If the claimant is an innocent party, remedies may still be available provided they did not know of, or participate in, the illegal performance. Once they become aware of the illegality, they must cease performance, and rights from that point onward do not accrue.

Where illegality supervenes (frustration):

• The contract is discharged for future performance; accrued rights up to the frustrating event remain unaffected subject to statutory adjustment.
• Courts balance public policy concerns and the parties’ allocation of risk; any clause purporting to require performance despite illegality is usually ineffective because public policy overrides party autonomy in this context.

Worked Example 1.8

A caravan hire agreement is made without any unlawful element at formation. The hirer plans to use the caravan to solicit prostitution, and the owner learns of this before delivery. Can the owner refuse delivery and avoid liability for breach?

Answer:
Yes. Although hiring a caravan is lawful, performance for an unlawful purpose taints the contract’s performance. Once the owner knows the unlawful purpose, they may refuse performance and will typically not be liable for breach. If the owner did not know of the unlawful purpose at formation, they could enforce payment up to the point of learning of the illegality; after that, no rights accrue.

Key Point Checklist

This article has covered the following key knowledge points:

• Illegality can arise in contract formation or performance.
• Statutory illegality depends on the purpose and wording of the statute.
• Common law illegality is based on public policy, such as restraint of trade or immorality.
• The modern approach (following Patel v Mirza) is policy-based and discretionary.
• Severance allows courts to enforce lawful parts of a contract if the illegal part can be removed without altering the contract’s substance.
• The consequences of illegality may include the contract being void, unenforceable, or partially enforceable.
• Innocent parties may retain remedies where unlawful performance occurred without their knowledge or participation.
• Supervening illegality may frustrate a contract, discharging parties from further performance.

Key Terms and Concepts

• illegality in formation
• illegality in performance
• statutory illegality
• common law illegality
• Patel v Mirza approach
• severance