In today’s society, a dense network of laws and regulations presides all people’s actions. Moreover, it is so extensive that any number of activities – including contracts – is capable of breaking the law. The legal remedies for these infringements have remained tied to a society of the past, more or less remote, and are not appropriate for our times. Thus, it is even more important to reconsider the rules for contracts
that violate legal rules in such a context. This article, by examining illegal contracts in a comparative perspective,[1] seeks to highlight the importance of mitigating the principle of equivalence between illegality and nullity (even if not all violations of the law result in nullity) before discussing the need to disregard the ex turpi causa non oritur actio [2] as a general rule. After a brief outline of what defines a fluid category of illegal contracts, this contribution compares more
flexible approaches to contractual illegality, which considers different factors and supplies different remedies, with more rigid ones, a sort of “automatism” between illegal contract and a specific remedy, which principal argument in its favor is generally seen as the predictability and certainty of the case law output. It is a multi-step process composed of various types of steps that may be summarized as follows. First, the court must interpret both the contract and the mandatory rule.
The issues surrounding such interpretation have been so thoroughly explored that the complexity of the hermeneutic activity is now well-known, and its results are not always linear. Secondly, since mandatory law and contract are two hierarchically ordered sets of rules, it must be ascertained whether the content of the contract can be adapted in such a way as not to conflict with the content of the mandatory rule. If it is found that the contract cannot be saved by interpretation,
hetero-integration (another relevant general issue) or partial nullity, then it must be examined whether nullity (the doctrine of “virtual nullity” or “impliedly prohibited contract” comes into play) is the adequate remedy for the policy purposes pursued by the mandatory rule. If the court determines that the contract is, in fact, null and void, it is then necessary to verify whether the consequent remedy of soluti retentio
[3] is adequate, or whether this remedy is too severe to provide an appropriate and proportionate solution. Rulings characterized by balance and proportionality between the remedies, the circumstances of the case and the
interests at stake, is the outcome of complex operations that require an appropriate legal apparatus and presuppose that the judge has many “arrows available for his bow.” Not only: the necessary predictability of the law implies that, if on the one hand there is flexibility and elasticity, on the other hand the criteria that guide the award choices are known. This article proceeds by extending the field of investigation to the Western Legal Tradition
(WTL)[4] viewpoint by discussing distinct national laws and soft law instruments. The survey also considers the
influence of different “legal formants,”[5] as well the discrepancy between “law in the books” and “law in action.”[6] The research area is limited to the last steps of the
process mentioned above and the two said scenarios. In the first scenario (i.e., the one related to contracts that infringe mandatory rules when the effect of the infringement is not provided), the flexible approach is played by model laws – such as the Draft Common Frame of Reference, UNIDROIT Principles of International Commercial Contracts, and the Principles of European Contract Law – that focus on proportionality between the infringement committed and the legal remedy. The
more rigid approach is “interpreted” by Art. 1418 (1) of the Italian civil code (hereinafter “c.c. It.”), according to which the court must choose between two extremes: the contract is either valid or null and void.[7] The second scenario is precisely the one related to the action of restitution when the parties of an illegal contract are in pari delicto.[8] The automatic denial of restitution represents the rigid approach. An automatism of such kind may be found in the Italian civil code establishing that restitution is unavailable if the contract is
immoral.[9] Instead, flexible approaches adopted in different national laws attempt to identify fair proportionality between remedies and different
factors.[10] Two relatively recent decisions highlight these two divergent approaches, one in the Italian Court of Cassation
and one in the United Kingdom Supreme Court (UKSC). The trend in favor of flexibility reveals that the more traditional remedies’ rigidity might not be the best choice in this day and age.[11] Responding to the violation of mandatory rules with the complete “demolition” of the contract (i.e. nullity) might mean using an ax even when the appropriate tool could be the chisel. The automatism that links unavailability of restitution to an univocal criterion, such as “immorality” or “illegality,” seems to be an oversimplification that has lost meaning. The central
claim of rigid approaches, which state that allowing flexibility in establishing remedies could lead to the unpredictability of results and disrupt legal certainty, does not justify their survival. The article attempts to highlight that extensive “staturification”[12] of modern legal systems recommends avoiding “legal reductionism”[13] in favor of a more complex legal apparatus. Jurists around the world feel familiar with the concept of “illegal contracts.”[14] Simply put, these terms immediately recall the limits placed on party autonomy or freedom of contract by substantive law, public policy, or good morals. To be more specific, in civil law systems, illegal contracts may be described as contracts that
violate mandatory rules, public order, and good morals (when the latter are not included in the notion public order[15]). These kinds of contracts are often linked to illicit causa or illicit “object” of the contract, sometimes even to illicit motives of the
contract.[16] The
approach is similar in common law where contracts are often rendered illegal by statutes, common law principles, or described as unenforceable contracts that are rendered void either by statute or common law (including public policy).[17] Although the category of “illegal contracts” seems very well-known, and this area of law might be, at first
glance, straightforward, a more in-depth look reveals something different.[18]
It could be defined as an “optical effect.” In particular, if the category’s content is examined by reading legal literature that abstractly describes this content, one might get the impression of a certain coherence. However, if one examines the case law, the sensation is that of being faced with a bunch of totally different cases that have almost nothing in
common.[19] For instance, contracts to commit a crime, contracts for
employment of undocumented workers, legal contracts which performance is illegal, contracts tainted with corruptions, contracts that violate regulations. Despite the different interests at stake, these contracts could be simply classified as illegal. It seems that the term “illegal contract” represents a sort of label to indicate a wide variety of cases whose only common feature is that they contain some element of illegality. The English expression “contracts tainted with illegality,”
which may sound strange to a civil lawyer’s ear, perfectly describes the phenomenon. This is why many authors divide the category of illegal contracts into a series of sub-categories. However, this sectioning process seems more appropriate for didactic purposes[20] than aimed at linking specific legal effects to each sub-category.[21] Furthermore, the sub-categories of contracts contrary to public policy and good morals, exposed by their very nature to the continuous evolution of society time, make the boundaries of illegal contracts a fluid state. If these latter sub-categories are
fluid, both the internal scans and the external borders of the illegality category become fluid, and a fluid category loses any ordering capacity. Also, the terminology is sometimes a little ambiguous for jurists of different traditions. Even if the expression illegal contracts is very common both in case law and literature, from time to time, in English as lingua
franca,[22] the term “unlawful”[23] or “prohibited”[24] contracts is preferred.[25] In the American Restatement (First) of Contract § 512 (1932), the expression “illegal bargain” replaced “illegal contract,” probably for the contradiction between the concept of contract and
unenforceability.[26] Then, the Restatement (Second) of Contracts § 178 (1981) opted for a more generical indication (without any reference
to the illegality) of a promise or term that might be unenforceable on the grounds of public policy.[27] Moreover, the civil lawyer who uses the terminology
related to invalidity in contract law in a very straight-forward manner is disoriented by common law lexicon, where the use of the terms illegal, void, and unenforceable are not always linear.[28] Likewise, the civil law distinction between “illicit” and “illegal” contracts might seem odd to a common law jurist.[29] Analyzing critical issues that emerge in legal translation highlight the difficulties in understanding,[30] but these difficulties, at their core, reveal the divergences related to the profound way of conceiving the contract. These divergences are almost imperceptible when dealing with the contract’s positive effects, the contract’s interpretation, or the management of the contractual relationship. Nevertheless, they become relevant substrate problems when dealing with the invalidity of the promise or contract meant as in idem placitum consensus;[31] hence the difficulties of comparison.[32] The subject-matter of illegal contracts is broad and complex, with profiles that are difficult to define: identifying rules to navigate through this Dantean dark forest appears to be a very complex operation. 3 Infringement of Mandatory Rules: Some Flexible ApproachesThe equivalence of contract contra legem [33] and a null contract is widespread. This combination seems to have its roots in Roman Law, even if during the classical era of Roman Law, illegality did not necessarily make contracts null as only the infringements of leges perfectae had this effect.[34] It was the Lex Non dubium of 439 that established the rule that contracts that violated legal prohibition were null.[35] Moreover, whatever its actual operation, the European ius commune maintained this combination (at least at the lexical level) and eventually codified it in various civil codes.[36] A last word on the categories of the contractual invalidity. The well-known dichotomy between nullity (or absolute nullity) and annullability (or relative nullity)[37] developed in a laissez faire economy with minimum governmental interference. These categories might not be appropriate remedies in modern systems where interventionist policies have given rise to an intricate pattern composed by default rules, mandatory rules, and then, on a translational level, by compulsory rules, overriding mandatory provisions and rules of public order.[38] The perspective used here is to examine this combination, focusing on the contracts that violate mandatory rules when the rule itself does not provide the effect of the infringement, and evaluating the different degrees of flexibility offered by the law to deal with it. Mandatory rules refer to statutes, common law principles, or compulsory rules, but not “fundamental principles.”[39] The differences have already been highlighted, for instance, in the Draft Common Frame of Reference (DCFR).[40] The problem of flexibility in the approach of a legal system logically arises after this latter has established that the contract cannot be saved by interpretation or by hetero-integration (another relevant general issue), and – at the same time – cannot be separated from the issue of the interpretation of the specific law which assumes the existence of a conflict. This divergence complicates the path quite a bit. To be more analytic, in order to translate violation of law into nullity, it is first necessary to interpret both the law and the contract, and it has now been warned that these are neither simple operations nor ones that produce linear results. Then, since the law (including mandatory rules) and the contract are two hierarchically ordered sets of rules, it must also be ascertained that the latter (i.e. the contract) cannot be modified to comply to the former (i.e. the mandatory law). The principle of contract preservation implies that this control precedes the declaration of nullity. In this context, a flexible approach offers a range of solutions to deal with a contract that infringes mandatory rules.[41] An example of this last approach can be found in different “model laws.”[42] For instance, in the UNIDROIT Principles of International Commercial Contracts (PICC), Art. 3.3.1, Contracts Infringing Mandatory Rules, states that where the mandatory rule does not expressly prescribe the effects of an infringement upon a contract, the parties have the right to exercise such remedies under the contract as long as the circumstances are reasonable.[43] Different criteria in determining what is reasonable must be taken into consideration.[44] Thus, in the case of infringement of a mandatory rule, one or both parties may be granted ordinary remedies available under valid contracts (including the right to performance), or other remedies, such as the right to treat the contract as having no effect—the adaptation of the contract or its termination on terms to be fixed.[45] Under the banner of flexibility, in the Principles of European Contract Law (PECL) formulated by the Lando Commission,[46] Art. 15:102 Contracts Infringing Mandatory Rules, states that where the mandatory rule does not expressly prescribe the effects of an infringement upon a contract, the contract may be declared to have full effect, to have some effect, to have no effect, or to be subject to modification.[47] The decision should be an appropriate and proportional response to the infringement, regarding all relevant circumstances listed in the same article.[48] Comparable flexibility is codified in the DCFR, Art. II.–7:302, Contracts infringing mandatory rules, where it explains that, in such a case, a degree of discretion is given to the Court to declare the contract valid to avoid the contract with retrospective effect in whole, in part, or to modify the contract or its effects. The decision should be an appropriate and proportional response to the infringement regarding all relevant circumstances specified in the Article itself.[49] The key to the model laws mentioned is that the remedy must be appropriate and proportional to the infringement. All rules include a non-exhaustive list of factors and circumstances that must be taken into account such as: the purpose of the rule infringed; the category of persons for whose protection the rule exists; any sanction imposed under the rule infringed; the seriousness of the infringement; whether the infringement was intentional; whether one or both parties knew or ought to have known of the infringement; whether the performance of the contract necessitates the infringement; the parties’ reasonable expectations; the proximity of the relationship between the infringement and the contract, and so on. The above approaches’ guiding principle is to seek a balanced approach, where flexibility and proportionality may be translated into various remedies to deal with contracts that infringe mandatory rules. The search for an appropriate remedy is not left to a general “justice or fairness or equity” principle – instead, a given set of criteria offers a guide to prevent that more flexibility could lead to the law’s unpredictability. 3.1 A More Rigid ApproachGenerally speaking, those that advocate the rigid approach fundamentally assert that rigidity is linked to predictability and, thus, flexibility in establishing remedies could lead to unpredictable results. Therefore, according to this opinion, any benefits of the flexible approach are outweighed by the potential disruptive impact such elasticity has on legal certainty. Within the boundaries of a more rigid approach, it could be included the one that – in the case of a contract that infringes mandatory rules – confines the judge to choose between the alternative of whether the contract is either valid or null without allowing him to scale the remedies.[50] This approach can be found, for instance, in the black letter of the Italian civil code, which was influenced by the German model on the point. In Italian law, the cornerstone of “null contracts” is represented by Art. 1418 c.c. It., which identifies three macro groups of null contracts: i.) when the law establishes it;[51] ii.) when the contracts are contrary to mandatory rules, unless the law provides otherwise; iii.) when the contracts lack an essential element or are illicit.[52] The second group is relevant for this work, governed by Art. 1418(1) c.c. It. This rule derives from §134 of the German civil code (Bürgerliches Gesetzbuch or BGB)[53] of 1900, which states contracts against mandatory rules[54] are null unless the law provides otherwise.[55] The Italian model of invalidity was influenced by the German model, which included invalidity via the category of annullability to protect the other party’s interest, while nullity was considered to defend the general interest.[56] This article is not the place for an in-depth examination of the problems or the extensive debate underlying Art. 1418(1) civ. cod. It., but it is important to note that it introduces the category of so-called “virtual nullities,” i.e., nullities resulting from the violation of mandatory rules without the legislator expressly declaring such nullity.[57] Both doctrine and case-law agree that: i.) the contract can be null even when the legislator has not expressly provided for nullity; ii.) when the law “provides otherwise,” an express exclusion is not necessary (it is sufficient to infer a different solution by way of interpretation on the basis of the rationale and the purpose of the rule).[58] Therefore, in order to simplify as much as possible, in the case of infringement of a mandatory rule, if the legislator is silent (i.e., without expressly providing for nullity or exclusion of nullity), everything is left to the interpreter who either affirms or denies nullity based on the purpose and function of the violated mandatory rules.[59] The problem is not new; it has been discussed in Roman law, in the ius commune,[60] and is still an issue common to different legal systems.[61] The problem of virtual nullity is familiar also in France, where the famous principle pas de nullité sans texte (no nullity without a text), established by the Canonists to limit cases of nullity in certain matters (such as marriage), and the repudiation of nullity from the Ancien Régime is still felt.[62] In the Italian legal system, scholars and case law have been working for decades to clarify cases in which the violation of mandatory rules leads to the contract’s nullity and in which cases it does not.[63] Various positions have developed over time.[64] For example: i.) mandatory rules involving nullity should be more compelling than others;[65] ii.) the purpose of the prohibition distinguishing whether the interest of a social or general nature is at stake, the violation of the rule leads to nullity – if they are rules of a fiscal, currency, police nature accompanied by fines, penalties, there is no nullity (albeit the imposition of a sanction does not in itself exclude that it can accumulate with the nullity of the contract);[66] iii.) nullity is only applied if it is the only way to fully achieve the purpose of the violated law;[67] iv.) nullity, depending on whether the prohibition is addressed to both parties or one of them;[68] v.) the “structural criterion” used in the case law.[69] According to the last approach, only the violation of mandatory rules concerning the contract’s validity can determine a contract’s nullity for conflict with mandatory rules. Whereas the violation of binding supplementary contract rules concerns the behavior of the contracting parties, if they meet certain conditions, their violation may give rise to pre-contractual liability (with compensatory consequences, if they occur before or during the conclusion of the contract) or contractual liability, and eventually lead to the termination.[70] The distinction between rules of validity concerning genetic defects of the contractual relationship and rules relating to the contractual relationship’s performance has the effect of narrowing the scope of the category of nullity further than that which supporters of “pannullism” would like to assign to it. Thus, it is appropriate to highlight that there is a trend in Italy to move away from the civil code categories of nullity/annullability and towards an atomistic model of nullity, under which nullity may assume various forms (e.g., the so-called special nullities, relative nullities, nullities of protection, and so on).[71] The term “special nullities” reflects their collocation in “special” statutes and mainly their “special” discipline. They intend to protect special interests or, better yet, the interests of certain categories of contracting parties.[72] Often, special nullities are represented by the so-called nullity of “protection.”[73] These nullities, as an exception to the provisions of Art. 1421 c.c. It may be invoked only by the party protected by the law, i.e., the one in whose favor the nullity operates. This is why nullity may be requested only by the party worthy of protection, who could also request that the contract be “validated.” This form of nullity is presupposed to be in the general interest to protect the weaker party in the contractual relationship,[74] which again implies adopting a policy substratum opposed to the laissez faire approach (which was the substratum of the nullity/annullability dichotomy). This development considerably enlarges the area of nullity. These nullities have become increasingly used by the legislator in special statutes,[75] and recently have been promoted even by the 2019 bill to amend the Civil Code. Indeed, the bill’s technical report would favor an extension of the mechanism of nullity of protection such that it would almost become an institution of general application. However, this important nullity of protection has not taken root in “virtual nullity” pursuant to Art. 1418(1) c.c. It.; Italian scholars still debate its admissibility, although the European trend seems to suggest its adoption.[76] Despite the legal framework for invalidity being complex (it cannot be fully covered here), a final note to highlight is that the distinction between nullity[77] and annullability may be found in the Italian legal system.[78] However, in the context of contracts that violate mandatory rules (Art. 1418(1) c.c. It.), annullability does not play a role. Only nullity may be declared, with all its effects and peculiarities – the action for declaration of nullity may be asserted by any interested party; it can also be declared, sua sponte (“ex officio”), by the court. Moreover, a null contract cannot be validated unless provided by law, and the action of nullity is not subject to the law of limitation. The declaration of nullity affects the contract from its onset as if the contract never existed.[79] Comparatively, in Austria, despite the rigid wording of Article 879(1) of the Civil Code of 1811 (Allgemeines Bürgerliches Gesetzbuch or ABGB), which states “[a] contract which violates a legal prohibition or public morality is null and void,”[80] the courts make a distinction between an absolute nullity and a relative nullity which depends on its assertion. If the statute’s purpose is merely to protect the other party and does not refer to public interest, it is the party’s responsibility to request the declaration of (relative) nullity.[81] Contracts that breach statutes seeking to safeguard the community’s general interests are null and void, and no declaration of avoidance is necessary.[82] A similar approach appears in the 1992 Civil Code of the Netherlands (Burgerlijk Weboek [or BW]). In particular, according to Art. 3:40(2) BW, a juridical act that violates a mandatory law’s statutory provision is null and void.[83] However, suppose this statutory provision merely intends to protect one of the parties to a more-sided (multilateral) legal act. In that case, such a legal act is voidable, provided that it is in line with the underlying principle of the violated statutory provision. In French law, the classical theory viewing absolute and relative nullity as opposites was recently codified by way of the 2016 reform of the French Civil Code.[84] Since the beginning of the 20th century, this theory has been strongly criticized. Such criticism derives from the doctrine establishing an objective conception which claims that because nullity is the sanction of a legal norm - is from the nature of the latter - that the purpose and the nullity regime must be inferred.[85] Even if the pivot on which the distinction between absolute nullity and relative nullity (i.e., public interests and private interests) has lost its driving force in modern welfare legal systems since the end of the laissez faire economy, this distinction is still present in civil law doctrine (albeit not without causing a degree of confusion). The epochal passage between a laissez faire model and one that seeks to regulate and govern the contract presupposes a broadening of the notion of public or general interest, which tends to be infinite. In this inflation, many corporate sector interests (which may easily be considered public interests) and some overprotection requirements are included in the public interest. However, since the category of nullity (with all its automatic effects) has been conceived as a sanction against abnormal contractual conduct, it is imaginable that its consequences in its new dimension are disproportionate to the seriousness of the damage caused to the public interest.[86] Responding to the infringement of mandatory rules with the total demolition of the contract (i.e., absolute nullity) might again mean using the ax even when the right tool may be the chisel. 4 In Pari Delicto: A Rule Worth ReconsideringThe legal framework constituted by the (relative) equivalence between illegal and void contracts, as well as by the two Latin maxims ex turpi causa non oritur actio or in pari delicto potior est conditio defendentis [87] (which describe the specific effects of “bilateral” illegality), is well-known. Surprisingly, these rules, which embodied the original common core of the WTL, could still govern this area of law in different legal systems.[88] The doctrine of illegality incorporated in the maxims mentioned above has not “aged” well.[89] Furthermore, it is convenient to observe that the terms turpis causa and delictum associate contracts with a criminal or shameful element, and not with everyday life. As a very general rule, the obligations that have been performed under a null and void contract must be returned per the rules concerning the restitution of payments not due. However, in the case of illegal contracts, illegality has constituted a general bar to a claim for restitution. The European Court of Justice[90] has recently recognized the principle stating that no one should profit from his own unlawful conduct is a common principle in the Member States’ legal systems. This belief is not limited to Europe,[91] and, although with some differences, it has been a common core of most Western Legal Traditions. The soluti retentio has been codified – albeit in different ways – by various legal systems. For instance, this approach is used by the Swiss,[92] Austrian,[93] German,[94] and other legal systems.[95] The rule is also very well known in common law countries where the words of Lord Mansfield in Holman v. Johnson (1775) have been very frequently quoted: “no court will lend its aid a man who founds his cause of action upon an immoral or illegal contract.”[96] Another eloquent statement of this view is the one according to which “no polluted hand shall touch the pure fountains of justice.”[97] The previously mentioned Latin maxims have made their way into the common law and have been “translated” into the so-called doctrine of illegality. This doctrine was built on them over two centuries and, over time, became a defense used, on the one hand, to freeze the action of those who act to require the performance of an illegal/void contract and, on the other hand, to paralyze the action for restitution of those who, in pari delicto, had already performed the contract. Not even an action for damages could be brought and therefore common law remedies were useless. If more elasticity developed for the first case, it took more than two centuries to remove the bar for restitution. Those words highlight some of the policy reasons that even today should justify the survival of the rule against restitution,[98] such as maintaining the integrity of the legal system; furthering the purpose of the rule which the claimant’s illegal behavior has infringed; the need to prevent the claimant profiting from his or her own wrong; deterrence;[99] consistency; punishment and others.[100] In Italy, the rule against restitution is codified under Art. 2035 c.c. It., according to which if a contract is against good morals (a narrower subset of illegal contracts) and the parties involved are in pari causa turpitudinis, restitution is unavailable. It is important to highlight that the Italian civil code limits this approach to immoral contracts and not to other illegal contracts. The historical origins in Roman law sanctioning contracts contra bon os mores [101] are evident,[102] and this principle has been codified mostly in European civil codes that contain general clauses stating that contracts against public policy or good morals are null and void.[103] Whereas public policy[104] and immorality stand on the same foot in common law countries (even if the majority of the case law on “immorality” relates to sexual immorality),[105] in some civil law countries (including Italy), these two separate concepts (namely public order and good morals) may lead to different effects.[106] In the Italian legal system, both contracts against public order or good morals are void. However, as an exemption to the general effect of void contracts (i.e., what was received must be restored),[107] when the contract is against good morals, and the parties are in pari delicto,[108] restitution is unavailable.[109] Italian law is not alone in this approach. For instance, although not codified, French law[110] distinguishes between “contrats immoraux”[111] and those that were merely “illicit”; restitution was only unavailable in the first case.[112] French legal scholars have explained that the law in action was not “rigid” on the point, and the judges had maintained a certain margin of discretion to assess whether or not restitution was appropriate under the circumstances of the specific case.[113] However, in France, through the Reform of the French Civil Code in 2016,[114] the Legislator opted for the elimination of any reference to good morals as an effect of its progressive assimilation to public order,[115] which, as evidenced in the text of the Ordonnance’s presentation,[116] was described as obsolete with respect to the evolution of society and case law had progressively abandoned it.[117] In Italian law, the leading doctrine[118] defines good morals as the set of ethical principles shared by the societal majority would perceive an act contrary to them as immoral and shameful. Another authoritative doctrine[119] emphasizes how good morals constitute a body of non-formalized pre-juridical deontological rules, e.g., the trade in sexual services, adopting an opinion for profit, etc. Accordingly, the difference between the two is that public order expresses the legislator’s political choices,[120] while the principles of good morals are extra-legal since they flow from society without the mediation of political authority.[121] The idea of good morals has not gone without criticism. Indeed, pluralistic society could express various and contradictory ethical principles. Moreover, the legislative inflation has hardly left room for the development of unwritten law, or, more specifically, good morals. Almost all social prohibitions (i.e., behaviors that provoke social disapproval) have become legal prohibitions, and an important role has also been played by the development of fundamental rights (such as dignity or solidarity) in the control of a contract’s content.[122] Thus, the scope of good morals has undoubtedly eroded.[123] The rule against restitution is highly criticized.[124] The rationale according to which the rule should serve the policy reason of willingness to conform to people’s behaviors does not justify its survival and does not appear to rationalize the mechanical correlation between immoral contract and lack of restitution.[125] Italian doctrines have pointed out that Art. 2035 c.c. It. could lead to unjust results and have reproached the rule as a general principle to apply in every case.[126] Judges also appear reluctant to apply the rule. As a result, in the last few decades, a scanty number of cases have involved its application. However, it is also true that a recent Italian Supreme Court decision[127] points out how this approach is still “alive” today.[128] Once again, the policy reasons under this rule are always referred to at a totally abstract level. It is seldom understandable how they are applied in individual cases, especially when the courts ultimately refer to the above-mentioned Latin maxims without further explanation or open reference to any policy considerations. 4.1 An Inflexible ApproachIn 2018, the Italian Court of Civil Cassation[129] applied the Latin maxim in pari causa turpitudinis melior est condicio possidentis when it rejected the request for restitution of the sum of Euro 20,650.84 paid by a father to the defendant as remuneration for the promise of a job for his daughter at a bank, where the defendant represented to have some connections. In support of the claim, the father submitted that he had filed a police report against the defendant for crimes of fraud and boasting credit (which resulted in an acquittal due to running of the statute of limitations), as his daughter had not been hired following the agreement. Although the judge primae curae (first instance) rejected the claim for lack of evidence, the Court of Appeals of Naples, in the reform of the Court’s decision, condemned the opposing party and ordered the sum returned to the father. According to the Court of Appeals, in the case in question, the soluti retentio under Art. 2035 c.c. It. was inappropriate. Instead, the restitution rules for payments not due (Art. 2033 c.c. It.) were applicable since the payment had violated mandatory rules and not only of good morals. Finally, the Court of Cassation[130] ruled in favor of applying the soluti retentio rule. The Court of Cassation stated that the agreement was certainly contrary to mandatory rules, but it was also against boni mores, since paying money in exchange for employment is generally contrary to the commonly accepted concept of good morals.[131] The Court of Cassation explained that the concept of contract against good morals also includes (additional to those that infringe the rules of sexual decency and decency in general) contracts against the principles and ethical standards of the collective conscience. These contracts are raised to the level of social morality, at a given time and context. The Court of Cassation further explained that since the simultaneous violation of both public order and good morals constitutes a greater offense, they should treat it as an act which is only contrary to good morals. The Court of Cassation additionally specified that, according to the doctrine and the majority of case law, Art. 2035 c.c. It. is applicable when a single contract violates several rules and when one of the violations is also contrary to good morals.[132] To be clearer, a contract that is void both for infringing mandatory rules and for being against good morals entails the application of Art. 2035 c.c. It.[133] The Italian Supreme Court appears to have mechanically applied the equation “immoral contract equals lack of restitution” without reference to any considerations or policy reasons. This appears even more true in the context of a previous decision where the Court[134] affirmed, even in an obiter dictum, that the soluti retentio rule is directly established in the Latin maxims in pari causa turpitudinis melior est conditio possidentis and nemo auditur suam turpitudinem allegans without indication to any other rationale. Only a few years ago, in 2010, the Italian Supreme Court, although Criminal Section, in a very similar case, in which a father had paid a sum of money in exchange for a false promise to hire his daughter, decided that it was a matter of public policy and application of Art. 2033 c.c. It, by allowing restitution.[135] Perhaps the Court was pushed to greater attention by weighing the different interests at stake. However, the contradictory output of these two decisions could also undermine the idea that a rigid approach undoubtedly leads to predictability of jurisprudential outcomes, at least in some legal systems, such as the Italian one. It seems that the Italian Supreme Court might not be satisfied by a formal approach capable of producing results which may appear arbitrary, unjust or disproportionate. An automatic application rather than an open reasoning related to the policy considerations related to the application of Art. 2035 c.c. It has left the reader with a sense of axiological disorientation.[136] What seems most likely is that the principle of proportionality has been forgotten to be replaced by a search for the greatest possible deterrent to illegal conduct.[137] 4.2 Developments in Favor of FlexibilityA year and a half before the above-mentioned Italian Court of Cassation, the United Kingdom Supreme Court remodeled the doctrine of illegality in contract law with the well-known case, Patel v. Mirza.[138] This case has been described as one of the most significant judgments in the area of English private law in recent years,[139] as the UKSC decided in favor of a restitution award for unjust enrichment despite the source being an illegal contract: the ancient rule that states illegality is the absolute bar for the action of restitution has been definitively removed.[140] The facts of the case are quite simple. Patel had paid Mirza the sum of £620,000. The payment was made on the basis of the agreement that Mirza would use the sum to bet on the trading of shares using inside information. The agreement between the two men was a contract to commit a crime and was itself a criminal conspiracy (the offense of insider dealing is contrary to § 52 of the Criminal Justice Act 1993). The agreement was not carried out because the information was not forthcoming. Nonetheless, Mr. Mirza did not return the money to Mr. Patel, who then brought a claim against Mr. Mirza, who contended that the claim should be dismissed because of the arrangement’s illegal nature. In this case, Supreme Court decided in favor of restitution despite the illegal contract on which the claim for enrichment was based. Although the UKSC decision was unanimous, the Justices did not agree on the reasoning. In fact, the majority favored a discretionary approach based on a “range of factors,” while the minority would have preferred a rule-based approach. The majority chose a “flexible” approach constructed on a “range of factors,” summarized by Lord Toulson as follows:
Patel v. Mirza is the result of a long and continuous process of critical rethinking on the illegal contract that emerged in case law (i.e., from a number of cases in the 1980s and 1990s that rejected the application of the strictest version of the illegal doctrine)[142] and through the work of legal scholars[143] and the Law Commission.[144] This decision aims to seek balance and proportionality among the remedies, the circumstances of the case and the interests at stake, following a flexible approach, disclosing the criteria that drive these choices and thus avoiding criticism of excessive unpredictability or uncertainty on the outcome of the award.[145] Long before (as far back as 1970),[146] New Zealand became the first Commonwealth jurisdiction to enact legislation intended to bring about a comprehensive reform of the law relating to illegality in contracts.[147] The Illegal Contracts Act of 1970 was based on the idea that even if some illegal contract should not be enforceable at law, in other cases, it is a just and proper way to give legal effects, in part or in full, to such agreements.[148] According to the legislature, no rule-based approach would provide the flexibility needed for illegal cases; the result was to give the court a discretion to grant relief – by validating the contract or otherwise – in the appropriate case.[149] The Illegal Contract Act of 1970 was repealed and replaced by subpart 5 of part 2 of the Contract and Commercial Law Act 2017 (CCLA),[150] that reflects the previous rules. It grants the courts extensive powers to bring justice between the parties.[151] Even if the starting point is that illegal contracts have no effect,[152] the court may grant relief that it deems to be just, including (without limitation) restitution, compensation, variation of the contract, or validation of the contract in whole or in part or for any particular purpose.[153] According to § 78, the court, in considering whether to grant relief, as well as the nature and extent of any relief to be granted, the court must have regard for the conduct of the parties. In the breach of enactment, consideration must be given to the object of enactment and the gravity of the penalty expressly established for any breach of the enactment, and any other matters that the court deems appropriate.[154] However, relief is not granted if the court believes the granting of relief to be against the public interest.[155] In the U.S., the effort for more flexibility could be seen in the change in the wording between the First (1932) and the Second (1981) Restatement of Contracts. More specifically, while the former – at section 598[156] – stated as a general rule that a party to an illegal bargain could neither “recover damages for breach thereof nor, by rescinding the bargain, recover performance that he has rendered thereunder or its value,”[157] the Second is in favor of a more balanced approach.[158] Albeit the Restatement (Second) of Contracts § 197 (1981) reaffirms that a party has no claim in restitution for performance that he has rendered under or in return for a promise that is unenforceable on the grounds of public policy, it (immediately in the same section) adds a necessary provision that allows restitution when its denial would cause disproportionate forfeiture.[159] This article leaves a certain discretion to the court. Possible criteria for the judge to follow are indicated only in the Comments. According to the Comments, account will be taken of such factors as the extent of the party’s deliberate involvement in any misconduct, the gravity of that misconduct, and public policy’s strength. In the Comments, it is stressed that the exception is especially appropriate in the case of technical rules or regulations that are drawn so that their strict application would result in such forfeiture if restitution were not allowed.[160] According to this more flexible approach, the Restatement (Third) of Restitution and Unjust Enrichment § 32 (2011) provides that whoever renders performance under an agreement that is illegal or otherwise unenforceable for reasons of public policy, they may obtain restitution to the extent that the consideration of the claim for restitution does not defeat the intended policy of the legal prohibition.[161] In Australia, greater flexibility has been achieved through case law: the courts have developed several exceptions[162] to the general rule ex turpi causa so that in many circumstances, a party may be entitled to recover money paid or property transferred under an illegal contract.[163] In Quebec, according to Art. 1699(2) civil code, the judge declaring a contract’s nullity retains an exceptional discretion not to order restitution or to order only partial restitution, where full restitution leads to injustice. This discretion may be exercised in cases related to illegality.[164] In all these systems, although with very different gradations, there has been a trend in favor of greater flexibility in remedies giving the judge the power to choose the most appropriate one. This choice is sometimes guided by clear and transparent criteria, sometimes entrusted to a more “open-ended discretion” of the judge or even delegated to the rule-exception game. In any case, pre-packaged solution, in which the mere presence of elements of illegality results in a lack of restitution as an automatism seems to be discarded. 5 Conclusion: Legal Reductionism is not an Appropriate AnswerThis contribution has highlighted the difficulties of navigating through the fluid category of “illegal contracts.” Within this dark forest, the present article seeks to highlight the importance of mitigating the principle of equivalence between an illegal contract and a null and void contract (even if not all violations of the law produce nullity) and then dismisses the rule in pari delicto as a general rule for the legal systems that still rely on it. Two categories, relative nullity (or annullability/voidability) on the one hand and absolute nullity on the other, represent a great dichotomy arising at a time when the laissez faire approach prevented the state from intervening in contracts unless such a macroscopic violation jeopardized public interests. In such cases, the state intervened with the strongest sanction of nullity. However, because the state did not want to meddle with the overarching pillars of contract law (namely party autonomy and freedom of contract), this remedy was meant for a restricted nucleus of cases linked to such public interests and illegal contracts were part of it. Indeed, the individual whose interests were compromised had to promote an action of voidability. This dichotomy continues even though the legal context has completely changed, despite the state currently continuously intervenes to regulate, govern and conform contracts.[165] And this has been going on not only in the name of public interest, but also in a series of too common situations where corporate interests are disguised as public ones. Changing the model, the nullity/annullability dichotomy no longer works well, resulting in an over expansion of the scope of nullity so as to address hypotheses that are outside its original scope. Responding to the infringement of mandatory rules with the total demolition of the contract, sanctioning such contracts with absolute nullity might be unnecessary when there are other options available. A nullity claim seeks a declaratory judgment according to which the contract is rendered void from the outset. The action can be asserted by any interested party and it can also be declared, sua sponte (“ex officio”), by the court. Contracts that are null and void cannot be validated, if not provide by law, and the action is not subject to law of limitation. In brief, nullity means the total destruction of the contract.[166] Differently, the model laws examined (such as PICC, PECL, DCFR) offer a wide range of options to find a proportionality between the infringement of a mandatory rule, the circumstances of the case and its effects. Considering the contract valid consequently results in granting ordinary remedies (including the right to performance), avoiding the contract with retrospective effect (in whole or in part) or modifying it. The given set of criteria that a court must take into account (such as the purpose of the rule which has been infringed, the category of persons for whose protection the rule exists, any sanction that may be imposed under the rule infringed, the severity of the infringement, whether the infringement was intentional, whether one or both parties knew or ought to have known of the infringement, whether the performance of the contract necessitates the infringement, the parties’ reasonable expectations, the closeness of the relationship between the infringement and the contract) could lead to a balanced decision without considerably undermining the predictability of law. Once illegality leads to a null and void contract, a different kind of flexibility related to the restitution of the performances comes into play. The rigid approach is the one incorporated in the Latin maxims, ex turpi causa non oritur actio and in pari delicto potior est conditio defendentis, which represent the earliest common core of the Western legal tradition. This approach implies an automatism between illegal contract and lack of restitution when the parties are equally wrong. The soluti retentio rule is still in force, with singular characteristics, in different legal systems. One of them is the Italian legal system, where – according to Art. 2035 c.c. It. – restitution is unavailable in cases where the parties are in pari turipitudinis. Even if Art. 2035 c.c. It. only applies to a minor subset (i.e. contracts against good morals) and not to all cases of illegality, and even if the rule has been criticized by Italian jurists and is only occasionally applied by the courts, a quite recent decision of the Italian Court of Cassation demonstrates that it is still “alive” with a formalistic and automatic approach. On the opposite side, English law – where traditionally illegality had been seen as an absolute bar to the action for unjust enrichment – finally reached a flexible approach (after having struggled for many years with this issue) based on a range of factors, the “trio of necessary considerations,” with the famous case Patel v. Mirza.[167] The aspiration to find a balance struggles instead to be satisfied, on the one hand, if one stops at a simple formal qualification, which as it has been highlighted is not very fruitful, of the contract itself as “illegal” or “immoral,” and on the other hand when the court is entrenched behind Latin maxims that, although repeated incessantly as a mantra, do not help in any way to understand the policy reasons behind the choices made. Jurists cannot use legal reductionism to provide a simple answer to complex issues, because a complex issue requires an equally complex apparatus, even if complexity is more difficult to handle. A flexible approach in dealing with illegal contract cases requires the finding of a balance between the infringement of the law, its effects, the circumstances of the case. A given set of criteria to look at are important not to abdicate the principle of the rule of law and sink into a vague and unpredictable natural justice. Current trends in European systems are moving in the direction of using general clauses as a means of achieving solutions characterized by a fair balance between the interests at stake and the proportionality between circumstances and remedies.[168] The general clause on illegality should follow this course as to find the straightforward pathway that had been lost. This work is licensed under the Creative Commons Attribution 4.0 International License. What are the two types of agreements between two parties?Unilateral contract: Only one party is legally obliged to provide something to the others involved in this contract. Bilateral contract: An agreement where two parties trade services or commodities.
What is the effect of a contract on the relationship between two parties?What is the effect of a contract on the relationship between two parties? A contract permits both parties to rely on the terms they have negotiated and plan their business affairs accordingly.
Which of the following terms refers to an agreement that is overly harsh or lopsided?Unconscionability in contracts can be substantive or procedural. Substantive unconscionability in contracts is when the terms of a contract are harsh, unfair, excessively oppressive, and unduly one-sided.
Which of the following describes a false statement about a fact material to an agreement that the person who made the statement believed to be true?A misrepresentation is a false statement of a material fact made by one party which affects the other party's decision in agreeing to a contract.
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If both parties are equally responsible for an illegal agreement, the contract is:
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