Frustrated? Illegal Contracts …

Illegal Contracts

English law promotes the concept of freedom of contract – that parties are free to agree a contract on any terms.

Naturally, this freedom is restricted in certain respects, the most noticeable of these being in illegal contracts. If that law prohibits making the contract, then the contract is considered to be ‘frustrated’ and is void and unenforceable. This is exactly what happened in the High Court case of RTA (Business Consultants) Ltd v Bracewell [2015] EWHC 630 (QB).

The Facts of the Case

This case concerned RTA (Business Consultants) – (the Claimant) – who had agreed to act as agents in the sale of a business (including the relevant property) owned by the Bracewell (the Defendant).

The Money Laundering Regulations 2007 (SI 2007 No 2157) require that all persons and companies who wish to conduct ‘estate agency work’ are registered with the Office of Fair Trading. Unfortunately, as estate agency was not the Claimant’s main line of work, they were not aware of this provision and therefore were not registered.

The parties fell into dispute and the Claimant subsequently issued proceedings against the Defendant to recover its fees. The Defendant – who had by this time become aware that the Claimant was not properly registered – sought to defend the action on the basis that the Claimant had been prohibited by the Money Laundering Regulations from entering into the contract and therefore it was void on the grounds of illegality.

The Result

The court found in favour of the Defendant. While noting that no-one had suggested the Claimant had committed a crime or regulatory offence, or behaved badly in any way, the contract was nonetheless prohibited by law, so it could not create legal rights. The court noted that the decision might seem unjust, but that it was well established authority. Indeed the Supreme Court had previously discussed this very issue in Les Laboratoires Servier v Apotex Inc [2014] UKSC 55. In Les Laboratoires the Supreme Court noted that the concepts of Justice and Illegality may sometimes conflict, and where it did, it was the court’s duty to uphold the supreme authority of the law, even if the decision was unjust.

Consequences

This decision is of particular relevance to the regulated professions (i.e. the legal profession, accountants, surveyors). It highlights once again the importance of ensuring that all contracts are compliant with relevant regulatory statues. If they are not, they are likely to be illegal contracts and therefore void and unenforceable.

Do you have a dispute over a commercial contract? If so the experienced commercial litigation team at Levi Solicitors can help you.