Is an illegal contract void or enforceable?

Is an illegal contract void or enforceable?

The NSW Court of Appeal dismissed an appeal from a vendor to the sale of real property, in regards to a decision to enforce the purchaser’s claim for specific performance of a contract for sale.

The vendor in this instance argued that they were not required to perform as set out in the terms of the contract (transferring ownership of the property to the purchaser), as the contract was void for illegality.

The illegality was that the parties had entered into contract in such a way as to delay the payment of stamp duty. This was facilitated by special conditions in the contract which:

1. enabled the vendor to rescind the contract and at the same time enter a new contract, every three months; and,
2. provided the purchaser with a substantial discount on the purchase price on condition that the purchaser met all its obligations under the contract.

The original contract was dated 13 December 2013. The contract enforced was dated 13 June 2014.

Why illegality was held to not automatically void a contract

The Court gave a number of reasons for dismissing the appeal including:

1. The Taxation Administration Act 1996 (NSW) provides for the payment and collection of stamp duty but does not provide that an agreement is unenforceable because its purpose was to avoid the payment of stamp duty.
2. The delay in payment of stamp duty, the illegal purpose, was not essential to the bargain between the parties.
3. The purchaser should not be deprived of the benefit of the contract which it entered into, as such a penalty would be disproportionate to the alleged wrong.
4. If the contract was not enforced, the vendor would benefit from an unjustified windfall as the property could be resold at the current market price, rather than the 2013 price in the contract, given the vendor had not suffered any loss by reason of the purchaser’s alleged illegal conduct.

When examining whether an illegal contract is void or enforceable in the absence of express provision in existing law, the court will consider the essentiality of the illegality to the agreement between the parties. The implications of how the parties will be affected by voiding the contract also will be considered.

I trust this article is of interest if not immediately useful to you. If you have any questions, please do not hesitate to contact me.