Understanding the effects of illegal contracts
COURTS generally enforce agreements entered into by parties.
Their duty is not to write the contract for the parties, but to enforce what the parties agreed.
Even where the terms and conditions may be onerous and burdensome against one party, the courts generally enforce what the parties agreed.
However, the contract must be lawful. A contract that seeks to break the law or encourage one of the parties to commit a criminal offence or immoral act is unlawful.
An illegal agreement which has not yet been performed either in whole or in part will never be enforced by the court.
The court has no equitable jurisdiction to grant relief to a plaintiff seeking to enforce a contract prohibited by law. It will refuse to enforce a contract which is illegal, even though no objection to the legality of the contract is raised by the parties.
This rule is absolute and admits no exception. It is based on the principle that the court cannot aid a party to defeat a clear intention of a statute; that courts of justice cannot give validity to that which the legislature has made illegal and void; and that the courts will not allow to be done either indirectly or directly what the legislature has forbidden.
The principle which emerges from the decided cases is that courts will not enforce an agreement prohibited by law. An order of the court having the effect of enforcing the illegal contract concluded by the parties cannot be allowed to stand.
For example, a sale agreement that seeks to evade the payment of stamp duty is contrary to the Stamp Duties Act. Because of that, the sale will be regarded by the court as void for being in contravention of the law.
For example, where parties enter into two agreements of sale, with one of the agreements stating the correct purchase price and the other understating the price in order to reduce the capital gains payable, the the first agreement was two times higher than the price of the second agreement.
The second agreement was in order for the parties to use it for purposes of paying a smaller amount of capital gains tax and stamp duties. When the deal turned sour, the purchaser sought an order to enforce the first agreement. He did not disclose the second agreement. The court refused to assist him on the basis that the agreement was illegal and therefore void. The general rule is that courts will discourage illegal transactions, but the exceptions show that where it is necessary to prevent injustice or to promote public policy, the courts will not rigidly enforce the general rule. Where a party to an illegal contract does not seek to enforce the illegal contract, but to obtain relief from the consequences of the illegal contract, the courts have, in order to prevent an injustice or to satisfy the requirements of public policy, or avoid a situation where one party is unjustly enriched at the expense of the other, intervened and granted relief from the rigid application of the rule.
The oppressive effect of the blind application of the rule is illustrated in the case of Brandt v Bergstedt,1917, C.P.D. 334. The plaintiff had sold his cow to the defendant on a Sunday in contravention of an ordinance which prohibited any form of trading on a Sunday.
When he sought payment for the cow, the court did not give him assistance. The defendant had raised the defence, among others, that he was not obliged to pay because the sale was prohibited by statute. The result was an unjust enrichment of the defendant by the rigid application of the rule.
This is why in suitable cases, the courts will relax the rule and order restitution to be made. They will do so in order to prevent injustice and unjustly enriching one of the parties to the illegal agreement, on the basis that public policy should properly take into account simple justice between man and man.
A failure by the court to assist one of the parties might, far from deterring illegality, prove to be to the advantage of some unscrupulous members of the society.
Parties should avoid entering into illegal agreements because the courts will not come to their aid when the deal turns sour.
Thieves cannot seek the court’s assistance on how they should share their loot!
Trust Maanda is a legal practitioner and a partner at Maunga Maanda And Associates. He writes in his personal capacity. He can be contacted on +263 772432646.