Key Takeaways

  • An illegal agreement is unenforceable because it requires conduct prohibited by law or contrary to public policy.
  • Courts refuse to assist in enforcing illegal contracts, regardless of whether both parties benefited.
  • Common examples include contracts for illegal goods, fee-splitting among attorneys, restrictive covenants tied to unlawful conduct, and tax evasion schemes.
  • Some exceptions exist where courts may allow recovery, such as quantum meruit claims or when enforcing would prevent unjust enrichment.
  • Void contracts differ from illegal contracts—while all illegal contracts are void, not all void contracts are illegal.

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.

Common Examples of Illegal Agreements

Illegal agreements take many forms, depending on the conduct prohibited by law or policy. Examples include:

  • Contracts for unlawful goods or services – such as drug sales, prostitution, or hiring underage workers.
  • Agreements that restrict fair competition – including price-fixing or market allocation between competitors, which violate antitrust laws.
  • Tax evasion or fraudulent schemes – contracts intended to hide income or avoid tax obligations.
  • Attorney fee-splitting agreements – fee-sharing between lawyers without client consent has been deemed unenforceable in many jurisdictions.
  • Restrictive covenants linked to unlawful conduct – for example, non-compete agreements tied to illegal practices cannot be enforced.
  • Agreements against public policy – contracts that, even if not explicitly prohibited by statute, undermine justice, fairness, or public interest.

Courts view such agreements as harmful to society, and even if both parties willingly participated, the law generally refuses to intervene.

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.

Why Courts Refuse to Enforce Illegal Agreements

The primary reason courts decline to enforce an illegal agreement is the principle that the legal system will not aid wrongdoing. This approach discourages individuals from entering contracts that violate statutes or policy. Key considerations include:

  • Public interest over private gain – courts prioritize protecting the community from harmful arrangements rather than helping parties profit from unlawful activity.
  • Deterrence – refusing enforcement discourages similar illegal dealings in the future.
  • Equity and fairness – courts assess which party bears greater fault. If one party acted without bad intent while another knowingly acted illegally, limited remedies may be available.

This explains why, even in cases where one party suffers financial loss, the courts usually leave the parties where they stand.

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.

Limited Recovery in Illegal Agreements

While most illegal contracts provide no remedy, certain limited claims may succeed:

  • Quantum meruit recovery – if one party provided services or goods not inherently illegal, courts may allow compensation for their value.
  • Unjust enrichment prevention – if denying recovery would unfairly benefit one party, courts may intervene.
  • Protected class exception – where laws aim to protect a vulnerable group (e.g., labor laws), courts may allow claims by the protected party even if the contract itself is unenforceable.

Still, recovery is rare and depends heavily on the circumstances.

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.

Unenforceable vs. Illegal Agreements

Not every unenforceable contract is an illegal agreement. Courts recognize distinctions such as:

  • Unenforceable contracts – agreements that fail due to lack of formality, mistake, duress, or unconscionability. For example, an oral agreement where a statute requires a written contract. These contracts are not illegal but cannot be enforced.
  • Illegal agreements – contracts that involve conduct that is unlawful or violates public policy. Unlike unenforceable agreements, these expose parties to penalties and sometimes criminal liability.

Understanding this distinction helps businesses and individuals recognize whether a contract is simply flawed or fundamentally unlawful.

Frequently Asked Questions

  1. What makes an agreement illegal?
    An agreement is illegal if it requires conduct that violates the law or public policy, such as committing a crime, engaging in fraud, or restraining trade.
  2. Can an illegal contract ever be enforced?
    Generally, no. Courts will not enforce an illegal agreement. However, exceptions exist in limited cases, such as quantum meruit claims or where the law protects one of the parties.
  3. Are all void contracts illegal?
    No. While all illegal contracts are void, not all void contracts are illegal. A void contract may simply lack enforceability due to technical or formal issues.
  4. What happens if I unknowingly enter into an illegal contract?
    If you unknowingly enter into an illegal contract, it will still be unenforceable. Courts may, in some cases, allow recovery if you acted in good faith without knowledge of the illegality.
  5. How can I avoid entering into an illegal agreement?
    Always seek legal advice before signing contracts, ensure compliance with statutory requirements, and avoid agreements that restrict competition, promote unlawful activity, or conflict with public policy.

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