D. The Consequences of Illegality

AuthorJohn D. McCamus
ProfessionProfessor of Law. Osgoode Hall Law School, York University
Pages467-483

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1) Introduction

The determination that an agreement is either void at common law on grounds of public policy or void by reason of statutory illegality carries with it the conclusion that an action for damages for breach of the agreement cannot succeed. The parties to such agreements, however, may have conferred value on each other or may have suffered losses in reliance on the assumed enforceability of the agreement. In some instances at least, complete denial of relief for losses suffered or of the ability to recover the value of benefits transferred may be considered to work an injustice. Accordingly, we consider here whether claims, other

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than the claim for damages for breach of contract, might be available to vindicate the interests of parties in such circumstances.

The starting point for the analysis of this set of issues must be the famous statement of general principle offered by Lord Mansfield in Holman v. Johnson210in the following terms:

The principle of public policy is this: Ex dolo malo non oritur actio. No Court will lend its aid to a man who founds his cause of action upon an immoral or illegal act. If, from the plaintiff’s own stating or otherwise, the cause of action appears to arise ex turpi causa, or the transgression of a positive law in this country, there the court says he has no right to be assisted. It is upon that ground the court goes; not for the sake of the defendant, but because they will not lend their aid to such a plaintiff. So if the plaintiff and defendant were to change sides, and the defendant was to bring his action against the plaintiff, the latter would then have the advantage of it; for where both are equally at fault, potior est conditio defendentis.211In considering the types of remedies, other than enforcement of the agreement, that might be available to parties to illegal agreements, then, it must be determined whether there are other types of claims that are not properly said to be "founded" upon the illegal or immoral act. If the claim is so founded, and the parties are equally at fault, "potior est conditio defendentis," that is to say, in such circumstances, it is better to be in the position of the defendant. For a party who has transferred value to the other party under the illegal agreement, the most obvious type of claim to be considered would be a claim for restitution of the value of the benefit conferred. Alternatively, where the value transferred takes the form of a transfer of ownership of an asset, it may be considered whether the transferor’s interest in the asset has, indeed, been successfully transferred to the other party. If not, the transferor may retain ownership of the asset and be entitled to pursue proprietary relief in some form. To the extent that a party has suffered loss in reliance on the illegal contract, the possibility of pursuing claims in tort or with respect to a collateral agreement of some kind would hold out the only possible prospects for success. Each of these types of claims will be considered here.

As a preliminary point, however, it is useful to note that there exists a relationship or, indeed, a tension between the threshold issue of enforceability and these consequential issues. If, in cases of a transfer of

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value or reliance losses, it appears just to award some form of relief and, further, if these other types of claims are not available because of the illegality involved, the court may be tempted to hold that the agreement itself is not illegal in order to avoid an unjust result. This point may be illustrated by reference to the facts of Kingshott v. Brunskill,212the case involving the sale of ungraded apples by one farmer to another. It will be recalled that the Ontario Court of Appeal held that the contract was unenforceable because it contravened regulations designed to prevent the sale of ungraded apples to the public. The fact that the purchasing farmer who then graded the apples and sold them to the public has achieved a windfall benefit by virtue of a technical breach of the regulatory scheme appears to constitute an unjust enrichment at the expense of the farmer who initially owned the apples. If the initial selling farmer is unable to bring a successful restitutionary claim for the value of the apples transferred to the second farmer, it may appear that the only device available to the court to prevent such an unjust enrichment is to hold that the agreement itself is not illegal, thus enabling the first farmer to bring an action for the contractual price. Conversely, if the initial farmer is entitled to recover in a restitutionary claim the value of the apples transferred, the pressure to find that the agreement is an enforceable one is relieved. In such cases, it may be that the better solution to the problem rests on a greater willingness to award restitutionary relief in such circumstances.

A similar point may be made with respect to the question of proprietary relief. To the extent that parties who have transferred assets under an illegal agreement are unable to recover their value in a restitutionary claim, a court may be tempted to find that property in the asset has not passed thereby enabling the transferor to pursue a proprietary claim in order to avoid the unjust enrichment of the transferee. Holding that the property does not pass, however, will typically create a division between ownership and possession of assets with consequent risk of harm to third parties who may purchase the assets in question from a possessor who is unable to pass good title. Again, the better solution to the problem may be an increased recognition of the availability of restitutionary relief coupled with a determination that property in the asset passes to the transferee. As we shall see, there does appear to be some movement, in recent decades, in the direction of greater recognition of the availability of restitutionary relief for benefits conferred under illegal transactions.

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2) Restitution

The traditional view is that, generally speaking, the Holman v. Johnson principle applies to restitutionary claims with the result that restitutionary claims for the value of benefits conferred under illegal contracts are normally denied. To the extent that such relief is allowed, then, it comes by way of recognized exceptions to the general principle. Traditionally, there are four well-recognized categories of cases in which relief is allowed. In each category, the relationship of the plaintiff to the illegality in question is such that it may be said that the plaintiff and defendant are not equally at fault or, not in pari delicto, thus avoiding Lord Mansfield’s proscription that "where both are equally in fault, potior est conditio defendentis."213First, a party who is genuinely unaware of the factual circumstances leading to the illegality of the transaction may be permitted to recover value transferred to the other party in a restitutionary claim. One of the few illustrations of the point concerns an agreement that involved trading with the enemy.214The plaintiff had paid premiums on an insurance contract relating to goods en route from Russia. The agreement was unenforceable as a state of war existed between England and Russia at the time. The plaintiff was allowed to recover the premiums on the basis that he was not aware, at the time of contracting, of the outbreak of hostilities.

A second exception is applicable in situations where the statutory scheme that renders the transaction unenforceable is designed to protect persons in the position of the plaintiff. Where the plaintiff is a member of a class of persons intended to be protected from the actions of persons in the position of the defendant, it would be consistent with the objectives of the statutory scheme to allow restitutionary recovery of any benefits transferred by the plaintiff to the defendant. In the leading case, Kiriri Cotton Co. Ltd. v. Dewani,215a tenant had paid "key money" to a landlord in violation of rent control legislation designed, in part, to protect tenants from extra charges of this kind. The Privy Council awarded recovery of the "key money" on the basis that the plaintiff was a member of a protected class. Denial of relief in such circumstances would defeat the very purpose of the legislation. Similar results have been achieved in Canadian cases.216A third exception ap-

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plies in circumstances where the defendant has engaged in wrongful conduct such as fraud, oppression or undue influence.217In such cases, it appears not to be required that the technical prerequisites of a finding of fraud have been met. It is sufficient if the defendant’s conduct is wrongful and the plaintiff is not equally at fault.218Nor is it necessary in such a case to show that the plaintiff is entirely free of blame, provided that the plaintiff is less complicit than the defendant in the wrongful activity.219The fourth exception extends restitutionary relief to a party who, though initially in pari delicto with the other party, has made a timely decision to resile from the transaction. Such a party is said to have a locus poenitentiae or a place or position from which repentance is possible, thus clearing the way for a successful restitutionary claim. The precise boundaries of the doctrine of locus poenitentiae are obscured by two points of difficulty. First, although, as a matter of general principle, it is established that repentance must occur before the objects of the agreement have been substantially achieved, application of this principle to particular fact situations is a matter of some subtlety. Second, there exists some uncertainty on the question of whether the repentance must be genuine in the sense that a moral choice to resile from the contract must be made at a time when the achievement of...

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