CONTRACTS – ILLEGALITY
If a contract is illegal (which may include immoral) it will not
be enforceable by the courts. Furthermore, one or more of the
parties to the contract may be subject to a fine or other
penalty. If a contract is illegal it is void but the courts will not
assist the parties to return to their pre-contract position unless
one of the parties is innocent. If a taxpayer and an accountant
enter a contract to unlawfully evade payment of tax by the
taxpayer, the courts will not assist the taxpayer in recovering
money paid to the accountant if the matter is brought to court.
However, if the taxpayer was innocent of any fraud, the court
will likely assist in recovering the money.
Even if a contract is not illegal it may be considered by a court
as void and therefore not enforceable. When a contract is
found to be void but not illegal, the courts will normally
attempt to return the parties to their position as it was prior to
the creation of the contract.
Contracts to perform, or plan to perform, actions prohibited
by the Criminal Code of Canada are illegal and not
enforceable by the courts. This includes criminal conspiracy.
Embezzlement of funds by an employee is sometimes followed
by employer and employee agreeing on payback of the stolen
money in return for employer’s agreement not to report the
crime. Such a contract would be unenforceable.
The Competition Act may affect some contracts.
Practices restricting competition include price fixing, ,
eliminating or reducing the number of competitors, allocating
markets, or reducing output in a way that restricts
competition. The Act may prevent mergers or take-overs if
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they are against the public interest. Agreements to prevent new
competition can also be illegal.
See article by Ian Jack, Financial Post, August 2, 2000, p. C 3,
“Heinz agrees to open up to competition”. The federal
Competition Bureau struck a deal with H.J. Heinz Co. whereby the company agreed to discontinue its practice of paying
retailers to refrain from stocking competitors’ baby food
products. Heinz commented that the deal should have no
impact on consumers. Does this suggest the law is of no benefit
to consumers? Or are the monopolist companies beyond the
law? Why did the Bureau not take the allegations to court and
ask for penalties?
Statute law other than criminal law can give rise to illegal or
void contracts. Workers’ Compensation legislation requires
employers and workers to report accidents and injuries
occurring in the course of employment. An agreement between
employer and employee to not report the accident and instead
to require the employer to provide the injured employee with
paid sick leave would give rise to a void contract if brought to
court.
Land use legislation usually requires a land owner A to obtain
the consent of the relevant planning authority to convey to
another party (B) part of his or her land holding. Without
consent of the planning authority, the contract will be void if
challenged in court.
Gambling contracts are not enforced by the courts at common
law unless permitted by statute. Gambling was traditionally
frowned on by the courts but is immensely popular with
contemporary governments as a means of taxing the poor.
Insurance contracts are an exception to wagering contracts.
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This is because it is assumed they are of benefit to the insured
(and presumably to the insurer). In a contract of life insurance,
the insured is presumed to have an interest in both not dying
prematurely or in providing money for dependants if she or he
does die prematurely. However, if a person does not have an
insurable interest in another’s life, the insurance policy will not
be permitted or will be void. Relatives, employers, and business
partners are examples of persons with an insurable interest in
an individual’s life.
Unlicensed professionals or tradespersons generally cannot
enforce a contract in trades and professions where a licence to
practice is required. This includes such professions as
physicians, dentists, engineers, architects and trades such as
electricians and plumbers, where provincial or municipal
licences are required to practice. If municipal licensing is
merely to generate revenue and not to protect the public from
unqualified tradespersons, the courts may consider the
contract void and attempt to return the parties to their precontractual position.
Where licensing is designed to protect the public from
unlicensed persons, payment for services rendered by an
unlicensed person will not be enforced in court. However,
payment for goods supplied by the unlicensed person may be
enforceable.
Legality at Common Law
We have looked at illegal or void contracts arising from
legislation. Some contracts are illegal or void at common law
by virtue of public policy. Contracts to obstruct justice will not
be enforced. See RBC v. Newell (1999), 147 D.L.R. (4th) 268
(N.S.C.A.) where Newell agreed to “assume all liability and
responsibility” for cheques on his account forged by his wife. If
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Newell did not agree to this, his wife would be prosecuted
criminally. The court found this to be an agreement to stifle
criminal prosecution. The contract was found to be illegal and
void.
Contracts to injure the state
This could involve sale of arms to a country with which
Canada is at war. In USA contracts with Cuba are likely to be
illegal.
Contracts to promote litigation.
A third party C pays A to sue B. This is likely to be against
public policy and illegal. Lawyers’ contingency fees are
excepted because they assist in access to courts. See also the
now defunct Charter Challenges Program.
Contracts injuring the public service.
Paying a public official to vote in a particular way is an illegal
contract. Can election campaign contributions by corporations
be seen in this light? See the recent alleged payment of an MP
to allow Stockwell Day to run for office in federal election.
Contracts unduly restraining trade
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