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Illegality – it's a question of proportionality

07 November 2012

The recent case of ParkingEye v Somerfield Stores Limited saw the Court of Appeal grapple with the impact of illegality in contracts.

 At common law, a defendant can escape enforcement of a contract on the grounds that it is in some way illegal.  The doctrine of illegality has long been the subject of criticism by judges, and by the Law Commission whose report on the issue was cited in this case.  One such criticism is that it produces extreme results in that it withdraws all rights from the claimant, allowing the defendant to escape its bargain and enjoy a windfall.  

In this case, ParkingEye provided an automated control system in Somerfield's car parks.  Motorists who stayed beyond the permitted period were liable to Somerfield for fines.  The contract saw ParkingEye pursue transgressing motorists by sending up to four letters (although, importantly, the format of those letters was not specified in the contract) – in return ParkingEye would retain the fines it received.

ParkingEye unsurprisingly sent its letters with gusto, but the standard third and fourth letters crossed the line into tortious deceit.  Amongst other things they threatened legal action by ParkingEye, for which it had no authority.  Somerfield terminated the contract. At first instance, ParkingEye successfully claimed that this was a repudiatory breach and was awarded damages for its loss of revenue. 

On appeal, Somerfield pleaded illegality as a complete defence on the grounds that ParkingEye intended to send the (tortious) letters when entering the contract, thus tainting the contract with illegality.  This argument had been rejected at first instance.  The Court of Appeal dismissed the appeal and resisted the strict, mechanical application of the illegality doctrine as pleaded by Somerfield.  Instead the Court found it necessary to consider the underlying policy reasons for the doctrine.  It was found that the form of the letters was so distant from the core of the contract that it would be disproportionate to deny ParkingEye its remedy.

This decision sees proportionality acting as an appropriate check on what would otherwise be a sledgehammer of a defence.  In order to successfully plead the defence of illegality, it will now be necessary not only to show the illegality, but to persuade the court that it is a proportionate response that goes to the doctrine's policy rationales.