Professional illegalities have legal consequences

The proper functioning of the market presupposes that contracting parties comply with the legislative framework governing the exercise of professional activities. Particularly in regulated sectors, such as insurance, the legality of the activity is not merely a formal requirement but an essential condition for the creation of rights and obligations.

Circumventing such requirements, such as registration in official registers or obtaining the necessary licence, creates a web of legal consequences affecting not only the contract itself but also the parties’ ability to seek judicial protection, even in cases where actions have been performed and payments have been made.

Contract law, in conjunction with principles of public policy, does not permit the endorsement of conduct that violates explicit statutory provisions. Case law has consistently adopted a strict stance toward contracts concluded or performed in breach of the law, particularly where the illegality concerns the very purpose of the agreement.

In such cases, courts refrain from granting remedies, even if this leads to seemingly unfair outcomes between the parties, in order to safeguard the coherence and effectiveness of the legal order as a whole.

The case and its factual weight

The Supreme Court decision in Civil Appeal No. 421/2016, dated April 2, clearly illustrates the above issues. The dispute arose between an insurance company and an associate, along with his guarantors, concerning a claim for €43.402, allegedly due as an outstanding balance under a cooperation and financial support agreement.

The company argued that it had paid advances and commissions which became repayable due to the failure to meet agreed production targets.

The defendants, however, contended that the contracts in question were void, as the principal associate was not registered in the register of insurance advisors, as required by Law 35(I)/2002, in relation to that specific company.

They argued that the absence of such registration rendered the performance of the contract unlawful and precluded any claim.

From first-instance acceptance to appellate reversal

The trial court rejected the illegality argument and ruled in favour of the company. It held that the defendant effectively possessed the necessary capacity as an insurance advisor, even though he was registered with another insurance company, and that the absence of specific registration for the claimant did not negate the contractual rights.

On that basis, it awarded the claimed amount, considering the existing registration with another insurer sufficient to establish the contractual relationship.

The Supreme Court took a fundamentally different approach, adopting a strict interpretation of the law. It held that registration in the register of insurance advisors is company-specific and cannot be transferred from one insurance company to another.

Consequently, the associate was not entitled to carry out intermediary activities on behalf of the claimant without prior approval and registration.

Particular emphasis was placed on the fact that both parties were aware that approval from the superintendent of insurance was pending, yet proceeded with the execution of the agreements. This conduct was found to constitute a breach of Law 35(I)/2002 and, accordingly, rendered the contractual relationship unlawful.

Illegality and the exclusion of claims

The Supreme Court reaffirmed the fundamental principle that no cause of action arises from an illegal act. In this case, the illegality went to the very core of the contract, namely, the right to carry out the activity itself. As a result, the agreements could not produce any legal effects.

Equally important was the rejection of the argument based on unjust enrichment. The court emphasised that this doctrine cannot be used as an indirect means of circumventing illegality. Where both parties knowingly participate in unlawful activity, the law refuses to intervene to correct any financial imbalance between them.

Practical implications for the market

This decision carries significant practical implications for all professionals operating in regulated sectors.

It underlines that compliance with legislative requirements is not a procedural step that can be temporarily bypassed, but a prerequisite for the legality of transactions. Commencing activity prematurely, pending approvals, may lead to a complete loss of legal rights.

In my opinion, the decision strongly confirms that illegality operates as an absolute bar to the administration of justice in favour of parties involved in unlawful contracts. The message is clear, without prior compliance with the legislative framework, no business agreement can be considered secure or enforceable in court.

المصدر: Cyprus Mail