C. Statutory Illegality

• Author: John D. McCamus
• Profession: Professor of Law. Osgoode Hall Law School, York University
• Pages: 459-467

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Agreements that are in conflict with a statutory scheme of some kind may be considered to be illegal and unenforceable at common law. Where a statute specifically provides that a particular type of agreement is unenforceable,¹⁶⁸of course, the agreement in question is plainly unenforceable. In such a case, a court has no discretion to exercise on the question of enforceability. The issue is authoritatively resolved by the statute. Such provisions do not appear to be common, however, and in the more typical case, the issue of statutory illegality arises in the context of a statute that does not plainly determine the question of enforceability but, rather, creates a prohibition or a set of regulatory requirements that appear to render either the formation or the performance of a particular agreement inconsistent, in some fashion, with the statutory scheme. Where the statute is silent on the point, then, courts are evidently required to exercise judgment as to whether the contract in question should be determined to be illegal and unenforceable. The analytical method applied by the courts in resolving such questions has evolved over time. Under the earlier or traditional doctrine, courts were inclined to assume that a contract that was in conflict with a statutory scheme in some fashion was necessarily illegal and void. A more modern approach has emerged in recent decades in which the courts take a more flexible approach and consider whether enforcement of the contract would be consistent with, or on the other hand, subvert the policies underlying the statutory enactment. If enforcement of the agreement would undermine the policy objectives of the statutory scheme, courts refuse to enforce the agreement in question. On the other hand, where enforcement would not subvert those objectives, courts exercise a discretion to enforce the agreement. Enforcement is often justified on the basis that the courts ought to exercise restraint in interfering with the rights conferred by the ordinary law of contracts, on the basis that non-enforcement imposes a penalty on the contract-

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ing party that is out of proportion with the gravity of the statutory conflict, or on the basis that enforcement is necessary in order to prevent the unjust enrichment of one party at the expense of the other.¹⁶⁹The rigidity of the traditional approach may simply reflect a judicial desire for certainty of contractual doctrine typical of an earlier era. Alternatively, it may be that the traditional approach crystallized in an era preceding the modern growth of the regulatory apparatus of the state that now touches on many aspects of both commercial and private life. However the emergence of the modern approach may be explained, it appears to be increasingly accepted that the traditional approach is capable of producing unjust results and needs to be supplanted by a more modern and flexible approach. As one judge observed, "[M]odern judicial thinking has developed in a way that has considerably refined the knee-jerk reflexive reaction to a plea of illegality."¹⁷⁰The modern view, as characterized by another judge, has two characteristics. First, the modern approach "rejects the understanding that simply because a contract is prohibited by statute it is illegal and, therefore, void ad initio."¹⁷¹The second distinguishing feature "is that enforceability of a contract is dependent upon an assessment of the legislative purpose or objectives underlying the statutory provision."¹⁷²A central feature of the traditional approach to the analysis of statutory illegality is an overly broad conception of an interpretive principle concerning the implicit statutory prohibition of agreements. Courts were inclined to assume that if the making or performance of a contract involved a failure to comply with a statutory prohibition or regulation, the contract itself was implicitly prohibited by the statute. This aspect may be illustrated by the decision of the Supreme Court of Canada in a nineteenth-century authority, Bank of Toronto v. Perkins.¹⁷³

The Court in that case was required to consider the effect of a provision of the Banking Act¹⁷⁴that prohibited banks from lending money

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on the security of an interest in land. The plaintiff bank sought to enforce such an arrangement. The claim was dismissed by the Supreme Court, however, on the basis that the transaction must be taken to be implicitly avoided by the statutory provisions. Strong J. reasoned as follows: "Whenever the doing of any act is expressly forbidden by statute, whether on grounds of public policy or otherwise the English courts hold the act, if done, to be void, though no express words of avoidance are contained in and of itself."¹⁷⁵On this approach, then, it was unnecessary for the court to reflect on the policy reasons underlying the statutory prohibition and determine whether avoidance of the transaction is an appropriate means of carrying out those policies. The bank had argued that the prohibition was not based on considerations of public policy but, rather, related to the internal management of the bank, relying on American authority suggesting that the transaction should be considered enforceable. Strong J., however, rejected the attempt to rely on American authority that in his view "admits considerations of the policy of an enactment as influencing its interpretation to an extent to which the decisions of the English courts are distinctly opposed."¹⁷⁶The principal English authority relied upon by Strong J. for this proposition, Cope v. Rowlands,¹⁷⁷is another well-known nineteenth-century illustration of the traditional approach. This case involved a claim by an unlicensed stockbroker to enforce a contract for the supply of services in buying and selling stock. The statute requiring the licence created an offence of unlicensed dealing but was silent as to the effect of the statute on service contracts entered into by unlicensed brokers. The claim was dismissed, however, on the basis that it is "clear that a contract is void if prohibited by a statute, though the statute inflicts a penalty only, because such a penalty implies a prohibition."¹⁷⁸Under the traditional view, then, the fact that one of the parties is engaged in the commission of a prohibited act leads more or less directly to the conclusion that the contract itself is, by implication, rendered unenforceable by the statute.

The traditional approach has been applied in numerous Canadian authorities.¹⁷⁹Nonetheless, it also is recognized that the doctrine, if zealously applied, can lead to unjust results. The leading illustration of

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the phenomenon is Kingshott v. Brunskill,¹⁸⁰a decision of the Ontario Court of Appeal involving the sale of ungraded apples from one farmer to another. The sale of ungraded apples was prohibited by provincial regulation, an obvious instrument of consumer protection that was designed to prevent the sale of ungraded apples to the public. In this case, however, it was established that the parties expected that the purchasing farmer would grade the apples before resale to the public and this is, indeed, what occurred. Nonetheless, the Court of Appeal held that the selling farmer’s claim for the purchase price was precluded by the fact that the contract involved the commission of an illegal act. The result of the case appears to effect a substantial unjust enrichment of the purchasing farmer. Given the fact that the transaction did not offend the underlying purpose of the regulation, there would appear to be no harm and...