Illegal contracts

How the law may come to the aid of those who sign up to and carry out work under contracts that prove to be illegal.

A local authority prosecuted two employees of a contractor client after they carried out building works to a listed building without listed building consent.
At the pre-contract stage, a meeting had taken place between the contractor and the owner. The contractor had asked whether listed building consent had been obtained. The contractor was assured by the owner's surveyor that this was "all being sorted". Of course, it was not.

The contractor started work and, three weeks later, the local authority served statutory notices pursuant to the Planning (Listed Buildings and Conservation Areas) Act 1990. All work stopped dead. Criminal proceedings were also brought under section 59 of the Criminal Justice Act 1991 against the owner and the contractor's men for the damage caused to the listed building. The contractor's ignorance of the law was no defence the fact that it was in breach was enough to secure a conviction.

The contractor sought payment for the work it had undertaken. The employer's response was to state that as the contract was illegal it did not have to pay and would not. Could the contractor recover?

The effects of illegality on a contract depend on the nature of the contract and the behaviour of the parties. No enforceable rights can, in general, accrue under an illegal contract because no court will aid those who found their cause of action on illegal acts. Furthermore, if the contract is illegal in the sense that it is only permitted under a licence, which is riot obtained, the general rule is that the contractor cannot recover for illegal work, even if ignorant of the illegality.

The courts distinguish between situations where the object of a contract is a deliberate infringement of the law, in which case the courts will not enforce the contract; and where the law has been broken through carrying into effect the terms of a contract, where the contract may be valid at the instance of the party who was ignorant of the breach, or who caused the breach innocently.

An innocent party will not generally be affected by the illegal intentions of the guilty party. It seemed, as the building contract was lawful in its formation, that the contractor had "clean hands", and this could provide it with a remedy.

A Court of Appeal judgment (1) said that where a statute merely prohibits a party from entering into a contract without authority and/or imposes a penalty on him if it does so, it does not follow that the contract itself is impliedly prohibited so as to render it illegal and void.

There was yet further help for the contractor. If a contract has been induced by misrepresentation, damages could be obtained for that misrepresentation and, allied to this, there may well be a claim for damages on the basis of a collateral contract. In Strongman (1945) Ltd v Sincock the defendant, an architect owner, engaged the plaintiff to undertake building work and agreed to obtain building licences. The architect allowed work in excess of the licence figure to be done and then refused payment for it.

In effect, his attitude was that if the contractor fell for his bluffing as to the licences, it deserved to lose its money. This went down badly with the Court of Appeal. Although it was held that the builder could not maintain a direct action for the balance of the monies, it could sue the architect on his undertaking to obtain the necessary licences unless it was itself blameworthy. Since it was agreed that the primary duty to obtain licences lay with the architect, it was held that it was not. The innocent builder was led into the unfortunate illegality by the misrepresentation of the architect.This brought a collateral contract into existence, under which the builder could sue the architect. It shows that the law will often seek to do right by a hoodwinked party.

Endnotes

1. Phoenix Insurance v Adas (1987) 2ALL ER 155