A contract can be ‘illegal’ because it is prohibited by legislation or it infringes a rule of public policy.
Prohibited by Legislation
In order for a contract to be ‘illegal’ because it is prohibited by legislation, the contract must be expressly or impliedly prohibited by legislation. An example might be a contract for gambling where parliament has prohibited and/or regulated such contracts.
It is important to remember that a failure to comply with a legislative requirement impacting upon a certain type of contract does not necessarily mean that the contract is automatically illegal. It may be that the contract is rendered void, voidable or unenforceable. For example, contracts for sale of land must be in writing but a failure to comply with this requirement does not mean the contract is ‘illegal’.
Infringes Public Policy
A contract may also be illegal because it infringes a rule of public policy. An example may be where a contract involves the commission of a criminal offence.
Another example may be a contract that prejudices the administration of justice.
Impact of a contract being ‘illegal’
Generally speaking, if a contract is void and/or illegal, any action on the contract will not be possible.
Illegality can impact on the rights and remedies of the parties to the contract. A court may refuse to grant relief to an illegal contract on the ground of, for instance, public policy.
If some but not all of the terms or conditions of a contract are illegal, the court may ‘sever’ the illegal terms or conditions but not deem the ‘non-illegal’ terms or conditions to be illegal.
A term or condition which is partially legal and partially illegal may be severable so as to allow the enforcement of the legal part of the term or condition.
It is important to obtain legal advice in relation to all of these matters. Please feel free to contact us for an obligation free discussion.
By Steve McAuley, Accredited Specialist – Commercial Litigation; telephone: (02) 9633 1826; facsimile: (02) 9687 8114; email: firstname.lastname@example.org
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