Can a contract be enforced where one party has breached a statute in the course of making the contract?
The High Court recently considered this issue in Gnych v Polish Club Limited1. The Court found that a lease was enforceable even though the landlord licensee (the Club) had breached the Liquor Act 2007 (NSW) (the Liquor Act) by failing to obtain approval for the lease from the NSW Independent Liquor and Gaming Authority (the Authority).
The Club granted a lease to Mr and Mrs Gnych to run a restaurant. However, the Club failed to obtain approval from the Authority. Section 92 of the Liquor Act provides that the licensee must not lease or sublease any other part of the licensed premises except with the approval of the Authority. A financial penalty applies for any breach of the provision. The Liquor Act also gives the Authority the power to suspend, cancel or impose conditions on the liquor licence. In addition, the Liquor Act gives the Authority the power to "decide not to take any action".
Subsequently, when disputes arose between the parties, the Club claimed that the lease was unenforceable because approval had not been obtained. The Club excluded Mr and Mrs Gnych from the premises. Mr and Mrs Gnych took action.
On appeal, the High Court's majority judgment recalled the test that:
- the making of the agreement or the doing of an act essential to the agreement's formation is expressly prohibited absolutely or conditionally by the statute;
- the making of the agreement is impliedly prohibited by statute. A particular case of an implied prohibition arises where the agreement is to do an act the doing of which is prohibited by the statute;
- the agreement is not expressly or impliedly prohibited by a statute but is treated by the courts as unenforceable because it is a 'contract associated with or in the furtherance of illegal purposes'."
However, it can often be difficult to work out whether any of the categories apply. The most obvious case, category 1, is where the legislation expressly states that a contract is unenforceable. An example is section 56 of the Property Law Act 1974 (Qld), which is replicated in other states. That section provides that no action may be brought against a person on a guarantee unless the guarantee is in writing and signed by the person to be charged. In other words, if those conditions are not satisfied, the guarantee cannot be enforced.
The position can be more difficult to work out where the legislation, such as section 92 of the Liquor Act, provides that an agreement must not be made unless some condition or requirement is met. The legislation may then provide for a consequence to follow from the contravention, such as a penalty, but it does not state expressly that the agreement is unenforceable.
The effect of the High Court's decision in Gnych is that, in those types of cases, the courts will be reluctant to decide that the agreement is unenforceable where the Parliament has chosen not to impose that consequence in the legislation itself.
An important point in the High Court's decision was that the Liquor Act allows the Authority to decide what steps to take in response to the illegality. The Authority can decide that the lease should be approved retrospectively (because the tenant is a fit and proper person to operate the licensed premises) or alternatively that the lease should not be approved, in which case the Authority can decide to suspend, cancel or impose conditions on the liquor licence. But the point made by the High Court is that, if a court was to decide that the lease was unenforceable then the Authority's power to decide what should be done would be rendered nugatory. It may also allow the wrong-doer to rely upon their own default and penalise the innocent party if they are not able to enforce the relevant contract.
The High Court's decision in Gnych is in keeping with previous cases on this subject. For example, in Master Education Services v Ketchell2, the High Court determined that a franchise agreement was not automatically unenforceable where the franchisor breached section 51AD of the then Trade Practices Act 1974 (now section 51ACA of the Competition and Consumer Act 2010) by failing to comply with the Franchising Code. The High Court pointed to the fact that the TPA provided for a whole range of possible consequences to remedy the breach, so it would be wrong for the courts to make the franchise agreement automatically unenforceable in those circumstances.
In summary, if the legislation in question provides for a penalty or range of consequences for some illegality (including possibly taking no action), then it is likely that the courts will find that an agreement is enforceable. The courts are much more likely to leave the consequences up to the legislation and the relevant authority to decide.
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