Vitiating elements - Illegality

Learning Outcomes

After studying this article, you will be able to identify when a contract is affected by illegality, distinguish between statutory and common law illegality, explain the modern approach to illegality following Patel v Mirza, and apply the principles of severance. You will also be able to analyse the consequences of illegality for contract enforceability and remedies, as required for the SQE1 exam.

SQE1 Syllabus

For SQE1, you are required to understand the law relating to illegality as a vitiating element in contract law. This article covers 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

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.

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.

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.

  • 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.

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).

If the statute is silent, the court interprets whether Parliament intended to invalidate the contract.

Worked Example 1.1

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.

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.
  • Contracts in unreasonable restraint of trade.
  • Contracts encouraging sexual immorality.

The court decides whether the contract is contrary to public policy, but is cautious in extending the doctrine.

Worked Example 1.2

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.

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.

Worked Example 1.3

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.

Worked Example 1.4

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.

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.

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.

Key Terms and Concepts

  • illegality in formation
  • illegality in performance
  • statutory illegality
  • common law illegality
  • Patel v Mirza approach
  • severance
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Pleased to share that I have successfully passed the SQE1 exam on 1st attempt. With SQE2 exempted, I’m now one step closer to getting enrolled as a Solicitor of England and Wales! Would like to thank my seniors, colleagues, mentors and friends for all the support during this grueling journey. This is one of the most difficult bar exams in the world to undertake, especially alongside a full time job! So happy to help out any aspirant who may be reading this message! I had prepared from the University of Law SQE Manuals and the AI powered MCQ bank from PastPaperHero.

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Senior Associate at Trilegal