Illegality and public policy

Illegality and public policy occupy a different position from the vitiating doctrines studied in Weeks 6 to 8. Misrepresentation, mistake, duress and undue influence normally ask whether a party's consent was defective, or whether it would be unjust to hold a party to an apparent bargain. Illegality asks a more public question: whether the court should withhold its ordinary assistance because the transaction, the claimant's conduct, or the enforcement sought would compromise the coherence and integrity of the legal system.

The doctrine is therefore not a single rule. It is a family of rules and principles operating at several points. Some contracts are expressly or impliedly prohibited by statute. Some are not prohibited in their formation but are performed in an unlawful manner. Some are objectionable at common law because they offend public policy, the most important first-year example being unreasonable restraint of trade. Some claims are barred not because the contract is itself void, but because the claimant must rely on criminal, tortious or otherwise unlawful conduct to establish the claim, or because granting relief would stultify a statutory purpose.

The modern starting point is Patel v Mirza [2016] UKSC 42. It rejected the mechanical reliance test associated with Tinsley v Milligan and replaced it, for most civil claims, with a structured public-policy assessment. Lord Toulson identified three relevant inquiries: the purpose of the prohibition transgressed; other relevant public policies which may be affected by denial of the claim; and whether denial would be a proportionate response. That framework is not a licence for intuitive moralism. It requires careful identification of the policy source, the remedy sought, and the relationship between the illegality and the claimant's cause of action.

For Durham first-year Contract, this topic is examined because it tests legal method. It draws on formation, terms, statutory interpretation, remedies, restitution and public law values. A strong answer must avoid two extremes. The first is to say simply that illegal contracts are void. That is too crude. The second is to treat Patel as an unfettered discretion. That is equally wrong. The court does not ask whether the claimant is attractive; it asks whether enforcement would be inconsistent with the legal system's own commitments.

In problem questions, the sequence matters. Identify the contract and the relief sought. Identify the alleged illegality: statute, crime, tort, regulatory breach, fraud on the revenue, corruption, sexual immorality in older cases, or restraint of trade. Ask whether the contract is prohibited at formation, merely illegally performed, or only connected with unlawful conduct. Then apply Patel unless a more specific rule governs. In essay questions, the best answers explain the movement from formalism to policy and assess whether the modern approach has gained coherence at the cost of certainty.

The classical common-law expression of illegality is Lord Mansfield's statement in Holman v Johnson that no court will assist a claimant who founds the cause of action on an immoral or illegal act. The maxim ex turpi causa non oritur actio supplied the rhetorical foundation: from a dishonourable cause no action arises. Its purpose was not to punish the claimant. The defendant was not favoured because he deserved protection. Rather, the court refused to be made the instrument of illegality. This remains the organising idea, though its implementation has altered substantially.

Historically the law developed by categories. Contracts to commit crimes, contracts involving corruption, contracts prejudicial to the administration of justice, contracts defrauding the revenue, champertous agreements, and unreasonable restraints of trade were treated as void or unenforceable. The categories reflected social and economic assumptions of their periods. Some, such as restraint of trade, remain central. Others, such as older cases on sexual morality, must now be approached with caution because the underlying public policy has altered.

The nineteenth-century common law combined freedom of contract with suspicion of restraints upon economic liberty. Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd remains the leading authority. It held that a restraint is prima facie void unless reasonable between the parties and consistent with the public interest. The case illustrates a recurrent feature of public policy: the law may uphold a serious restriction where it is ancillary to a legitimate transaction, such as the sale of a business, but it will not enforce a restriction merely because the parties chose to agree to it.

Twentieth-century illegality doctrine became increasingly technical. Courts distinguished between contracts prohibited by statute and contracts merely affected by unlawful performance. They also developed the reliance test: if the claimant had to plead or rely on illegality to make out the claim, the claim failed; if the claimant could establish the claim without relying on illegality, it might succeed. Tinsley v Milligan is the best-known example. A house was bought in joint names but the arrangement was made to facilitate social security fraud. The claimant succeeded because she could rely on the presumption of resulting trust without pleading the illegal purpose. The outcome was widely criticised as arbitrary: liability turned on pleading form and property presumptions rather than on the gravity of the illegality or the purpose of the rule infringed.

At the same time, other cases used a more purposive approach. In St John Shipping v Joseph Rank, an overload of cargo made the shipowner liable to a statutory penalty, but did not prevent recovery of freight. Devlin J refused to infer that Parliament intended every contract performed in breach of the statute to be unenforceable. That reasoning anticipated the modern concern with statutory purpose.

Patel v Mirza marks the present settlement. It does not abolish the older cases; rather, it supplies a more principled method for asking whether enforcement would damage the integrity of the legal system. For Durham purposes, the historical movement is examinable because it shows why a purely formulaic answer is insufficient. The doctrine moved from categorical moral condemnation, through technical reliance rules, towards a structured inquiry into public policy, statutory purpose and proportionality.

1. Illegality is concerned with the court's role, not simply the parties' fault. The central question is whether granting the contractual or restitutionary remedy would be inconsistent with the purposes of the law. The defendant does not acquire a windfall because he is virtuous. The court withholds relief where enforcement would contradict public policy, undermine a statutory scheme, encourage unlawful conduct, or bring the administration of justice into disrepute.

1. Distinguish illegality in formation from illegality in performance. A contract to commit a crime, to pay a bribe, to obstruct justice, or to defraud the revenue is ordinarily unenforceable because its object is unlawful. By contrast, a lawful contract may be performed unlawfully. In that case the question is more nuanced. A delivery contract is not automatically unenforceable because the carrier breached road traffic regulations during performance. The court asks whether the statute or policy in question requires contractual invalidity or denial of the claim.

1. Statutory illegality depends on construction. Some statutes expressly state the civil consequence of contravention. Competition Act 1998, s 2(4), for example, provides that an agreement prohibited by the Chapter I prohibition is void. Where a statute is silent, the court must infer whether Parliament intended unenforceability. Relevant matters include the purpose of the statute, the class protected, whether the statute imposes a penalty, whether civil invalidity would further or frustrate the statutory scheme, and whether denial of relief would be disproportionate. It is never enough merely to identify a statutory breach.

1. Common-law public policy categories remain important. The principal contractual category for first-year study is restraint of trade. A restraint is prima facie void unless the party seeking enforcement shows that it protects a legitimate interest and is reasonable between the parties and in the public interest. Legitimate interests include protection of trade secrets, confidential information, customer connection, workforce stability in some contexts, and goodwill on the sale of a business. Mere protection from competition is not enough. Reasonableness is judged by scope, duration, geography and the parties' relationship.

The landmarks reveal the doctrine's movement from maxim to method.

Holman v Johnson supplies the classical maxim. The court refused to assist a claimant whose cause of action was founded on illegality. Its continuing importance lies less in the specific facts than in Lord Mansfield's explanation that the objection is grounded in public policy rather than solicitude for the defendant. The maxim remains a warning: the court is not a collection agency for unlawful ventures.

Nordenfelt is the foundation of restraint of trade. The House of Lords rejected an absolute hostility to all restraints and adopted a reasonableness inquiry. The doctrine protects both private and public interests: the promisor's economic liberty, the promisee's legitimate commercial interests, and the public interest in competition and labour mobility. Later cases refine rather than replace this structure.

Alexander v Rayson illustrates agreements structured to deceive public authorities. A landlord divided what was in substance one agreement into separate documents to conceal the true rent. The Court of Appeal refused enforcement. The case is a reminder that illegality may arise from the transaction's purpose and design, not merely from its express promise.

St John Shipping v Joseph Rank is indispensable for the distinction between unlawful performance and contractual invalidity. The shipowner carried cargo in excess of statutory load-line limits. The breach attracted a penalty, but the contract of carriage was not unenforceable. Devlin J's reasoning is important because it rejects the simplistic proposition that every statutory breach contaminates the contract. The court asks whether the statute intended civil invalidity.

Tinsley v Milligan represents the older reliance approach. It produced a formally coherent but morally arbitrary outcome: the claimant succeeded because she could establish her beneficial interest without pleading the fraudulent purpose. The decision dominated illegality analysis for two decades but came under sustained academic and judicial criticism.

Les Laboratoires Servier v Apotex shows the Supreme Court's dissatisfaction with formalism before Patel. The court emphasised that the illegality defence is not a general power to punish immoral conduct. The foreign patent infringement alleged in that case did not supply a sufficiently relevant illegality defence to the English claim. The case narrowed the defence and prepared the ground for a more principled account.

Patel v Mirza is now the leading authority. It concerned money paid under an agreement to profit from anticipated inside information. The insider dealing did not take place. The claimant sought restitution of the money. The Supreme Court allowed recovery and rejected the reliance test. The new structured approach asks whether enforcing the claim would damage the integrity of the legal system, having regard to the purpose of the prohibition, countervailing policies and proportionality.

Hounga v Allen, though not a contract claim in the strict sense, is significant because it shows the illegality doctrine's sensitivity to competing statutory policies. A domestic worker employed unlawfully because of immigration irregularities was allowed to pursue a discrimination claim. Denial would have undermined the policy against racial discrimination and would not have furthered immigration control in any proportionate way. Contract students should use the case carefully: it does not mean illegality is irrelevant, but it confirms that public policy can point towards, not away from, relief.

See practice questions section below.

See further reading section below.