Are Illegal Contracts Void or Voidable? Explained

Key Takeaways

• All illegal contracts are void, but not all void contracts are illegal.
• A void contract has no legal effect from the outset, whereas an illegal contract involves a prohibited act and can incur penalties.
• Voidable contracts are initially valid but can be rejected by one party due to issues like coercion or fraud.
• Illegality makes a contract unenforceable by law, and associated agreements may also be invalid.
• A key distinction is that voidable contracts involve consent issues, while void and illegal contracts often lack legality from the beginning.

The difference between void and illegal contracts is subtle, but important. In 1872, the Indian Contract Act defined the line between void and illegal agreements. A void agreement is most likely not allowed by law, and an agreement that is illegal is stringently not allowed by law. Both parties can be disciplined for joining an illegal agreement. Because a void agreement is invalid from the start, it doesn't have any legal consequences. No aspect of an illegal agreement is ever considered legal. 

Every illegal agreement is void, but not every void agreement is illegal. Agreements connected to an illegal agreement are void. The classic example is the illegal agreement of a murder for hire. Because murder is illegal, two parties can't make a contract to kill. If he isn't paid his fee, a hitman can't go to court and sue the other party for breach of contract because the contract is illegal and void. Some illegal agreements, including the murder for hire example, are crimes by themselves.

However, a contract can be void even if it is legal. One of the main reasons a contract would be made void is if one of the parties is incapacitated and not allowed to join a contract.

It is important to know the difference between void and illegal agreements so you know which contracts break the law. A collateral transaction that comes from a wagering transaction is not void because paying or getting payment for a lost bet is legal. It is possible for a broker to file a lawsuit against the principal to recover his commission from a wagering contract.

What Is a Void Agreement?

A void agreement means that the consensus between two parties isn't legally binding. When an agreement becomes void, it can no longer be enforced by law and loses its legally binding nature. In a void agreement, neither party has any legal rights or obligations or any kind of legal status. However, any transactions linked to a void agreement are valid. When an agreement is void, money that has been paid can be claimed back.

Certain types of agreements are considered void from the beginning according to the Indian Contract Act, including:

• Agreement that restricts marriage
• Agreement that restricts legal proceeding
• Agreement that restricts trade
• Agreement that is considered illegal
• Wagering agreement
• Agreement with a minor

Connected agreements are not always void and can be valid in some situations. 

Examples and Legal Consequences of Void Agreements

Void agreements can result from a range of circumstances, not limited to legality. Common scenarios include:

• Lack of Capacity: Contracts involving minors or persons deemed mentally incompetent.
• Absence of Consideration: Agreements without something of value exchanged.
• Impossibility of Performance: Contracts that cannot be executed due to external impossibilities, such as destruction of subject matter.
• Uncertainty in Terms: If essential terms are vague or ambiguous, the agreement may be considered void.

While void contracts are unenforceable, parties usually do not face criminal or civil penalties unless the void nature stems from illegal activity. Courts may allow restitution to prevent unjust enrichment in some cases, especially when one party has already performed in good faith.

What Is an Illegal Agreement?

An illegal agreement is any contract that is forbidden by law. This includes any agreement that is against the law, is criminal, or that is against public policy. Illegal agreements are invalid from their creation, meaning that agreements associated with the original contract are also considered void. Because illegal agreements are against the law, joining an illegal agreement can also bring punishment. Both parties to the agreement receive the same punishment according to the Indian Penal Code.

Illegal agreements include a contract with uncertain terms, an arrangement to hurt someone, or perform any other illegal act. In an illegal agreement, all connected agreements are void, and the money received can not be claimed or recovered.

Legal Implications and Enforcement Challenges

Illegal agreements are not just unenforceable—they can result in penalties. Examples include:

• Contracts for Unlawful Acts: Agreements to commit crimes or fraud, such as contract killings or bribery schemes.
• Violation of Public Policy: Agreements that go against societal norms or encourage litigation (e.g., contracts discouraging whistleblowing).
• Statutory Violations: Contracts that contravene specific legislation, such as usury laws or antitrust provisions.

Key consequences of illegal contracts include:

• No Legal Recourse: Neither party can sue for performance or damages.
• Collateral Agreements Also Void: Any agreement linked to the illegal contract is also void.
• No Restitution: Courts typically refuse to aid either party, following the principle ex turpi causa non oritur actio—no action arises from a dishonorable cause.

These features emphasize why understanding are illegal contracts void or voidable matters—illegal contracts are void, and more importantly, they carry additional legal consequences.

Void Versus Voidable Contract

A void contract is considered invalid from its creation, most commonly due to not having the normal requirements of a valid contract. For example, a contract where both parties are minors is void because minors don't have legal capacity, and an agreement to traffic drugs is void and illegal because it violates the law.

However, a voidable contract starts out as a valid contract. The unbound party has the option to either affirm or reject the contract, but the bound party isn't allowed to do so. Essentially, only the unbound party can cancel the agreement within a reasonable timeframe. This most often happens when one party enters the contract without free consent.

Void contracts include things like the following:

• Contract between legally incompetent parties or minors
• Contract that restricts trade
• Contract with uncertain material terms
• Contract that involves betting or gambling

Voidable contracts include the following:

• Contract with a party that has been misrepresented or coerced
• Contract where one party is a minor

Distinguishing Void, Voidable, and Illegal Contracts

To clarify whether illegal contracts are void or voidable, it's essential to differentiate all three contract types:

Understanding these differences helps clarify the keyword concern: are illegal contracts void or voidable? The answer is that illegal contracts are void and not voidable, because they are never legally enforceable to begin with.

Practical Scenarios and Enforcement Issues

Consider how courts handle disputes over void and illegal contracts:

• Tortious Interference Claims: If a contract is void or illegal, a third party cannot be held liable for inducing its breach, since there’s no valid agreement to interfere with.
• Restrictive Covenants in Employment: Non-compete clauses may be deemed void if overly broad or contrary to public interest, especially in states like California. However, they aren’t necessarily illegal unless they contravene employment laws.

Employers and individuals must assess the validity of a contract before relying on it in legal disputes. Consulting an attorney through UpCounsel can help determine if a contract falls into the void, voidable, or illegal category.

Frequently Asked Questions

1. Are illegal contracts void or voidable? Illegal contracts are void from the outset. They cannot be enforced, and both parties may face legal consequences.

2. What makes a contract void instead of voidable? A contract is void if it lacks essential elements like legality, capacity, or mutual consent. It is voidable if a party was coerced, misled, or lacked full understanding at the time of signing.

3. Can a void contract be made valid? No. Void contracts are unenforceable from the beginning and cannot be revived through mutual agreement or court action.

4. Can parties recover money paid under an illegal agreement? Generally, no. Courts do not assist parties involved in illegal contracts and typically leave them as they are.

5. How does public policy affect contract legality? Contracts violating public policy—such as those discouraging legal rights or promoting unlawful conduct—are considered illegal and void.

If you need help with the difference between void and illegal contract, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.