Key Takeaways

  • An illegal contract involves agreements that violate laws or public policy and are thus unenforceable.
  • Examples include contracts for illegal activities, unfair labor practices, and contracts made under duress or fraud.
  • Even if both parties agree, courts will not enforce contracts that involve illegal actions.
  • Illegal contracts differ from invalid or voidable contracts in that they are null from the outset.
  • Some agreements become unenforceable due to impossibility or being unconscionable in nature.
  • Legal remedies are not available for breaches of illegal contracts, even if losses occur.
  • Consulting an attorney before signing or attempting to enforce a questionable contract is essential.

How Can a Contract be Proven Illegal?

Contract legality depends on the contents of the contract. Let's say, for example, there was an employment contract for a poker dealer in a state where gambling is illegal. The contract would be illegal because it requires that employee to engage in illegal activity, in this case, gambling.

A contract to sell a deck of playing cards, on the other hand, would typically not be illegal if selling cards were legal in that state. In this case, the contract could be enforced even if these cards were sold to a gambler in a state where gambling is illegal.

Proving that a contract is illegal can be a gray area. A good general rule of thumb is to ask: By engaging in the contract, are either of the parties doing something illegal? If the answer is yes, the contract is illegal and unenforceable.

A Few Examples of Illegal Contracts

  • Contracts for selling or distributing drugs, drug paraphernalia or other controlled substances
  • Contracts for prostitution, gambling, or other illegal activities
  • Contracts for employing underage workers

Taking a closer look at our example of drug paraphernalia, a drug user may legally purchase equipment and items that could be used to take drugs. However, if the vendor made a contract to help the drug user set up a device to take drugs, that's where the contract becomes illegal.

Besides contracts that explicitly break the law, some illegal contracts go against public policy and fair dealing. Examples of illegal contracts that violate public policy are forced labor — essentially slavery — and contracts that would prevent fair market competition

More Real-World Illegal Contract Examples

To further clarify what constitutes an illegal contract example, consider the following real-life scenarios where contracts are deemed unenforceable due to their illegal nature:

  • Non-compete agreements that violate antitrust laws: A contract that restrains trade by preventing a party from working in their field for an unreasonably long time or geographic area can be illegal if it impedes fair competition.
  • Bribery agreements: Any contract involving the exchange of money or favors to influence public officials or court proceedings is considered illegal.
  • Fraudulent contracts: If the contract involves deceitful practices such as falsifying financial records to mislead investors or creditors, it is illegal.
  • Unlicensed work contracts: Agreements with individuals or companies lacking proper licenses to perform regulated work (e.g., medical procedures or legal services) may be illegal and unenforceable.
  • Contracts to circumvent immigration laws: For example, marrying solely for the purpose of obtaining citizenship can lead to contracts (including prenuptial or financial agreements) being ruled illegal.

These examples reflect how diverse illegal contracts can be, extending well beyond the obvious scenarios of criminal acts.

What If an Illegal Contract is Breached By a Party?

Illegal contracts are unenforceable and legal action can't be taken if a party breaches an illegal contract. Looking again at our example of the poker dealer's employment contract in a state where gambling is illegal, if the employer failed to pay the poker dealer his salary, the poker dealer would not be able to take legal action against the employer and may end up losing those wages.

Exceptions and Public Interest Considerations

Although courts generally refuse to enforce illegal contracts, there are rare situations where a court might intervene:

  • Severability: If only part of a contract is illegal but the rest is lawful, a court might enforce the legal portions.
  • Lack of Equal Guilt (In Pari Delicto): If one party is significantly less at fault—for example, being misled or coerced—the court may allow them to recover damages or void the contract.
  • Public Interest: In limited circumstances, courts may allow relief if voiding the contract entirely would harm the public or contravene a larger policy goal.

These exceptions are rare and nuanced, so seeking legal counsel is highly advised if you suspect any part of a contract may be illegal.

Should I Contact a Lawyer for an Illegal Contract Issue?

After entering into an illegal contract, you won't be able to take legal action to recover losses. If you're unsure whether or not a contract is illegal, it's best to consult a lawyer before entering into the contract. An experienced lawyer will easily be able to spot if a contract is illegal.

Illegal Versus Invalid Contracts

For a contract to be legal and binding, both parties must be aware of what they're agreeing to. Some grounds to void, or invalidate otherwise legal contracts are:

Lack of Capacity

Children, people with mental disabilities, and seniors with dementia are some examples of parties that may not have the capacity to understand and enter into a legal contract.

Misinterpretation

One or both parties misinterprets or misunderstands the terms in a way that is harmful to one of the parties. Harmless, trivial misinterpretations don't invalidate the contract.

Misrepresentation or Fraud

Outright misrepresentation or fraud is grounds to invalidate a contract. For example, one party knowingly passing off a Picasso forgery as authentic would count as blatant, fraudulent misrepresentation. However, if the seller believes the fake Picasso to be authentic, he is making an innocent misrepresentation, which may also be basis to void the contract.

When Legal Contracts Become Unenforceable

Sometimes a contract that was legal at the time it was signed may later become unenforceable due to unforeseen circumstances or changes in the law. These situations include:

  • Impossibility of Performance: A natural disaster, change in law, or death of a key party may make it impossible to perform the contract.
  • Frustration of Purpose: When the fundamental reason for the contract no longer exists (e.g., renting a venue for a parade that is canceled), performance may be excused.
  • Illegality Due to New Law: If legislation passes that makes the agreed-upon activity illegal after the contract was executed, the contract becomes unenforceable from that point forward.

These scenarios underscore the importance of regularly reviewing contract terms for compliance with evolving laws and regulations.

Frequently Asked Questions

1. What is an illegal contract example that might seem legal at first? An agreement to pay an unlicensed contractor to perform regulated electrical work may seem legal but is illegal due to licensing laws.

2. Can I sue someone if we had an illegal agreement and they broke it? No. Courts will not enforce any part of an illegal contract, even if you suffer financial loss from the other party’s breach.

3. Is a contract made under duress considered illegal? While not always “illegal,” a contract made under duress can be voidable or unenforceable because consent was not freely given.

4. What happens if only part of a contract is illegal? Courts may sever the illegal portion and enforce the rest—this is called “partial enforcement” or applying the doctrine of severability.

5. How can I ensure a contract is legal before signing? Consulting a contract attorney is the safest way to confirm legality. You can find top-rated lawyers on UpCounsel for assistance.

If you need help determining whether you're dealing with an 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.