An illegal agreement in business law is a contract that was made for an illegal reason and is consequently against the law. If the content of the agreement causes the parties to perform illegal actions, then the contract is illegal.

Agreements collateral to the original are also considered void. Collateral agreements are agreements that are connected or incidental to the original agreement. The law prohibits these kinds of agreements, and entering into one is punishable by law.

What Is an Illegal Agreement?

Examples of an illegal contract include an agreement whose terminology is unclear or an agreement to kill somebody. The illegality is directly correlated with what is written in the contract and is not influenced by an outside force.

A contract that might lead to an illegal action but doesn't explicitly mention an illegal action would be considered legal. It can be difficult at times to prove when a contract is illegal. A rule to follow is if a contract requires either party to do something not legal, then it's not enforceable.

A person involved in an illegal agreement risks losing because their actions are not covered by the illegal contract. Therefore, it's important to get the advice of an attorney before signing a contract, and the attorney can tell you if the contract is illegal or not.

Exceptions to Illegal Contract

  • The contract has been completed. If the obligations set forth in the contract have already been fulfilled and the contract is no longer active, the public can't be protected anymore by the law, except by example.
  • No bad intention of the party seeking enforcement. The courts will look at the absence of bad actions by the party seeking enforcement against the defense and will determine who is at greater moral fault.
  • Unjust advancement by a party seeking enforcement. What is the likelihood that enforcement will enable the party seeking enforcement to have an advantage at the loss of the other party?
  • Forfeiture outweighs illegality. The disproportionality of the forfeiture impact is weighed against the severity of the illegality. In other words, will enforcement cause a forfeiture that is more severe than illegality?

Illegality is not a defense for parties not in the group that the law was created to protect.

Quantum Meruit

On some occasions, a party can recover under quantum meruit the value of the goods or services completed even if the contract was found to be illegal. If the services rendered were not in themselves illegal, and if one party fails to follow their part in the contract, the other party may recover under quantum meruit for what the party received in value. When the breach of contract is based on failure to pay for services, a plaintiff should invoke quantum meruit to preserve the right to recover.

Difference Between Void and Illegal Contracts

A void contract may not necessarily be prohibited by law, while an illegal contract is not legal, and those involved can be penalized for signing it. A void contract has no consequences in court because it is null from the start.

All illegal contracts are void, but the reverse is not the case. "Void" means no legal binding, while "agreement" means a consensus of parties on something. A void agreement is not legally binding.

A void agreement loses its legal nature when it is declared void. This kind of agreement sets forth no rights or obligations on behalf of the parties, as well as no legal rights. A void contract's scope is wider than that of an illegal contract, since not all void contracts are necessarily illegal, while all illegal contracts are void from the beginning. A void contract is not punishable by law, while an illegal agreement is considered an offense.

Examples of illegal contracts include:

  • Agreements for the sale and distribution of illegal substances like drugs
  • Agreements for illegal activities like prostitution
  • Agreements about the hiring of underage workers

Some contracts deal with subjects that are not prohibited by law but that do go against public policy and fair dealing. These contracts are considered illegal and therefore unenforceable because they go against public policy. Even if the subjects of the agreements are not specifically referred to in a statute, the court will still see them as illegal.

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