Illegality Termination.
Illegality and Termination of Contract
1. Meaning of Illegality in Contract Law
In contract law, illegality refers to a situation where the object, consideration, or performance of a contract is forbidden by law or contrary to public policy. When a contract becomes illegal, the law refuses to recognize or enforce it.
Illegality may arise at the time of formation of the contract or during its performance, and in many cases it leads to termination or discharge of the contract.
Under principles derived from statutes like the Indian Contract Act, 1872, agreements whose object or consideration is unlawful are void and cannot be enforced by courts.
2. Illegality as a Mode of Termination (Discharge) of Contract
A contract may be terminated due to illegality when its performance becomes unlawful after it has been formed. This is sometimes referred to as supervening illegality, and it operates similarly to the doctrine of Doctrine of Frustration.
A contract may terminate due to illegality in the following situations:
Change in Law
War between Countries
Government Prohibition
Subsequent Statutory Illegality
When any of these situations arise, the contract becomes void and unenforceable from the moment illegality arises.
3. Types of Illegality
(A) Initial Illegality
If the contract is illegal from the beginning, it is void ab initio.
Example:
An agreement to commit fraud or smuggling goods is illegal at the time it is made.
(B) Supervening Illegality
A contract that was valid when formed but later becomes illegal due to change in law or circumstances.
Example:
A contract to export goods becomes illegal when the government bans exports.
4. Effects of Illegality on Contract
Contract becomes void
No legal remedy available to parties
Courts refuse enforcement
Collateral transactions may also become void if closely connected
The principle generally followed by courts is “ex turpi causa non oritur actio” (no action arises from an immoral cause).
5. Important Case Laws on Illegality
1. Everet v Williams
Facts:
Two highway robbers entered into a partnership to share profits from robbery. One partner later sued the other for accounts.
Judgment:
The court refused to enforce the agreement because it involved illegal activity.
Principle:
Courts will not enforce contracts founded on illegal acts.
2. Taylor v Caldwell
Facts:
A music hall was rented for concerts but was destroyed by fire before the event.
Judgment:
The court held the contract discharged due to impossibility.
Principle:
Although primarily about frustration, it established the concept that contracts terminate when performance becomes impossible or unlawful.
3. Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd
Facts:
A contract to supply machinery to a Polish company became impossible when war broke out and Poland was occupied.
Judgment:
The contract became void due to supervening illegality caused by war.
Principle:
War between countries can make performance illegal.
4. Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd
Facts:
A seller of a business agreed not to compete worldwide.
Judgment:
The court upheld the agreement partly because the restraint was reasonable.
Principle:
Agreements are illegal if they are unreasonable restraints of trade.
5. Pearce v Brooks
Facts:
A carriage owner hired a carriage to a prostitute knowing it would be used to attract clients.
Judgment:
The court refused to allow recovery of hire charges.
Principle:
Contracts connected with immoral activities are illegal.
6. Holman v Johnson
Facts:
Goods were sold knowing they would be smuggled into England.
Judgment:
The court held that a plaintiff cannot base a claim on an illegal act.
Principle:
Courts will not assist a party who relies on illegality.
6. Distinction Between Void and Illegal Agreements
| Basis | Void Agreement | Illegal Agreement |
|---|---|---|
| Nature | Not enforceable by law | Forbidden by law |
| Punishment | No punishment | May involve penalties |
| Effect on collateral transactions | Collateral agreements may remain valid | Collateral agreements also become void |
7. Conclusion
Illegality is a significant ground for termination or discharge of contracts. A contract may be illegal either from its inception or due to subsequent events, such as change in law or government action. Courts refuse to enforce such agreements to protect public policy and uphold the rule of law.
The principles established through landmark cases such as Everet v Williams, Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd, and Pearce v Brooks clearly demonstrate that no legal rights arise from illegal agreements.
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