Understood re bases - it has obviously changed since I last heard something!
Something which is illegal breaks a law. There is no law against GB doing this. If it breaks an agreement that GB have with British Airways, that does not make it illegal - it makes it a breach of an agreement and BA could act as it saw fit with whatever terms are included in that agreement to deal with breaches of it by either party.
If GB's franchise agreement is like the others, they will be able to lease-in capacity to operate under BA flight numbers for an indefinite period provided that:
1/ It conducts a full operational audit of the intended lessor of the aircraft (which it would need to do under JAR-Ops anyway) and maintains oversight of the safe operation to its own standards during the period of the lease;
2/ BA is content that the branding and product spec on the leased aircraft does not compromise the usual service offered to customers versus BA norm;
3/ BA gives its permission to the lease.
In reality, are BA really going to be that bothered about this that they will try to stop it?
If you are unhappy about this, I think it is also worthwhile considering another point. GB is apparently leasing this 737-800 because it doesn't want to extend the lease on G-TTOA. It needs the aircraft for Summer 2007 but thereafter doesn't have any use for it, so it is a six-month expedient. If previous posts are to be believed, the leasing company has said that they will extend but only for six years.
I appreciate that a six-month wet-lease is not helpful to pilot progression prospects, but stopping it could have other consequences. Stuffing your employer up with 5.5 years of lease rentals of (probably around) $300,000 per month for an aircraft that it doesn't need or want will not do much for your job prospects either. Surely there are also benefits to getting 'OA out of the fleet in terms of a more stable lifestyle anyway?