Legal Updates

A contract plotted to be illegally performed will be deemed invalid even if this plot was devised after the contract execution

November 5, 2023

Two entrepreneurs who founded a company in the field of cannabis made an agreement according to which one would own all its shares, while the other would be given an option to purchase 50% of the shares. However, after exercising the option they chose to conceal the purchase from the authorities due to the concern that the company's license to engage in cannabis would be revoked due to the purchaser’s criminal background.

The Court held the agreement to be illegal and therefore void. A contract which content is illegal, i.e., includes a commitment to perform an act prohibited by law, or a contract which purpose is illegal, i.e., intended to promote an illegal purpose even if it is not part of the content of the contract - is an invalid contract. When parties to a contract agree to perform it in an illegal manner, the contract will be deemed an illegal contract, whether with regards to its purpose or content. Accordingly, a contract will be deemed invalid when its performance has become illegal even if at the time of its execution it was legal. Here, the failure to register the purchaser's shares under his name, after the exercise of the option, was for an illegal purpose, which is to hide this fact from the regulator. Therefore, even though the concealment does not appear in the contract and when it was executed the parties had no intention of hiding anything from the authorities and the decision to conceal the information was made only after its execution - this does not change the fact that the contract is illegal and invalid.