Can an Illegal Contract Ever Be Enforced?

Introduction

As a general rule, contracts are enforceable. After all, the very purpose of a contract is to create legally binding rights and obligations between parties. However, one important exception exists: an illegal contract is unenforceable.

This principle is absolute. An illegal contract cannot be enforced by either party, regardless of whether one or both parties have already performed in terms of the agreement.[1] While the law may, in certain circumstances, provide alternative remedies to reverse an unjust enrichment, these remedies do not amount to enforcement of the illegal contract itself.

What is an Illegal Contract?

A contract may be illegal if its conclusion or enforcement is contrary to public policy, good morals (contra bonos mores)[2], the common law, or legislation. Importantly, we are not referring to agreements that are merely defective because they fail to comply with statutory formalities. An illegal contract is void from the outset and cannot be enforced by either party.

For example:

1. A contractor agrees to pay a municipal official R50,000.00 to ensure that a tender is awarded to him. The agreement is illegal because it involves bribery and corruption.

2. A person agrees to pay another person to vandalise a competitor's property. The agreement is plainly illegal because its purpose is the commission of a criminal offence.

3. Two parties agree that a portion of the purchase price of a business will be concealed from SARS in order to reduce their tax liability. Because the agreement is designed to defeat the operation of the law, it may be regarded as illegal and unenforceable.

Illegality is not limited to criminal conduct. An agreement may also be illegal where legislation prohibits a particular activity or transaction, even though neither party commits a criminal offence.

In the above examples, if the agreement is found to be illegal, neither party will be able to enforce it.

In other words, if Person A pays Person B for poached rhino horn and Person B absconds with the money without delivering the horn, Person A cannot approach a court to compel delivery or claim contractual damages. Our courts will not enforce an illegal agreement.

Does That Mean A Party Is Always Without Remedy?

Not necessarily.

The fact that an illegal contract is unenforceable does not automatically mean that a party who has performed under the agreement is left without recourse.

Consider the following example:

A homeowner pays R100,000.00 to a contractor to perform work that, unbeknownst to the homeowner, may only lawfully be performed by a licensed operator. The contractor falsely represents that he holds the necessary licence. After receiving payment, the contractor performs no work and disappears with the money.

In these circumstances, the homeowner did not knowingly participate in the illegality. It would be unfair to allow the contractor to retain the money simply because the agreement itself is unenforceable.

In certain circumstances, a party who has performed under an illegal contract may therefore be entitled to recover what was paid or transferred. This remedy is known as the condictio ob turpem vel iniustam causam.

The purpose of the claim is not to enforce the illegal contract, but rather to reverse an unjust enrichment that has occurred as a result of the illegal transaction.

To succeed with such a claim, a plaintiff must generally prove:

• a transfer of money or property to the defendant;

• that the agreement or its performance was illegal;

• that the defendant was enriched at the plaintiff's expense; and

• that the enrichment was unjustified.

Recovery is not always guaranteed, however.

The Par Delictum Rule

In such proceedings, a defendant may rely on what is known as the par delictum rule, which is based on the principle that a court should not assist a person who willingly participated in illegal conduct.

If the defendant can show that the plaintiff knowingly participated in the illegality, the par delictum rule may prevent the plaintiff from recovering what was transferred. The courts are generally reluctant to assist a party who willingly participates in unlawful conduct.[3]

Conclusion

The lesson is simple: a signature alone does not make an agreement enforceable. Where a contract is illegal, our courts will refuse to enforce it, regardless of whether one or both parties have already performed. While the law may sometimes provide an enrichment remedy to prevent injustice, parties who enter into illegal agreements do so at considerable risk and often without the protection they expected to enjoy.

[1] See Jajbhay v Cassim 1939 AD 537; Chevron SA (Pty) Limitedv Wilson t/a Wilson’s Transport 2015 (10) BCLR 1158 (CC); Panamo Properties (Pty) Ltd and another v Nel NO and others [2015] 3 All SA 274 (SCA).

[2] See Sasfin (Pty) Ltd v Beukes [1989] 1 All SA 347 (A), 1989 (1) SA 1 (A); Mostert and Others v Nash and Another (604/2017) [2018] ZASCA 62; [2018] 3 All SA 1 (SCA); 2018 (5) SA 409 (SCA) (21 May 2018); African Dawn Property Finance 2 (Pty) Ltd v Dreams Travel and Tours CC and Others (2011 (3) SA 511 (SCA); [2011] 3 All SA 345 (SCA)) [2011] ZASCA 45; 234/10 (30 March 2011).

[3] See MCC Bazaar v Harris and Jones (Pty) Ltd 1954 (3) SA 158 (T); Bhyat’s Departmental Store (Pty) Ltd v Dorklerk Invetments (Pty) Ltd 1975 (4) SA 881 (A); Afrisure CC and Another v Watson NO and Another (522/2007) [2008] ZASCA 89; [2009] 1 All SA 1 (SCA); 2009 (2) SA 127 (SCA) (11 September 2008).

Fraser Stockley

BCom Law; LLB

Partner at Le Roux Vivier Attorneys

Disclaimer: The views expressed in this article are those of the author(s) and do not necessarily reflect the views of the firm. This content is provided for general information only and does not constitute legal advice. While every effort is made to ensure accuracy, the law may change and its application depends on the specific facts of each matter. Readers should seek professional legal advice before acting on any information contained herein. The firm and the author(s) accept no liability for any loss or damage arising from reliance on this content.