An Illegal Contract: Everything You Need to Know
An illegal contract is an agreement that violates the law because its fulfillment requires the parties to engage in illegal activity.3 min read
An illegal contract is an agreement that violates the law because its fulfillment requires the parties to engage in illegal activity. Such a contract is void and unenforceable from the get-go. Thus, if the contract is breached, neither party will be entitled to any compensation or held liable.
It is important to note that a contract can be illegal without violating the law. For example, this can occur when a contract deals with certain activities, like gambling or prostitution, that are not explicitly prohibited by law but are discouraged due to violation of public policy.
While a void contract could still be legal, an illegal contract is usually void.
Types of Illegal or Invalid Contracts
For a contract to be valid, it must include required elements―an offer and acceptance. The terms of the offer made by one party must be clearly stated in the contract, and the other party must accept those terms willingly. The offer, also called “a consideration," could come in the form of money, goods, or services. Both parties must have complete comprehension of the implications of their agreement.
A contract could be illegal because of the following reasons:
- Lack of capacity: If one party does not have mental capacity to understand fully the effect of the contract, like in case of a senior with dementia, a mentally handicapped person, or a small child.
- Illegal purposes: If a contract is made to perform an illegal activity, like selling drugs.
- Mistaken interpretation: If either or both parties have incorrect understanding of the terms of a contract.
- Misrepresentation and fraud: If a contract contains false statements.
How to Determine That a Contract is Illegal
The subject matter of a contract determines its legal standing. For example, if gambling is illegal in some state and you hire a blackjack dealer, such an employment contract will be illegal because it requires the person to engage in illegal activity. But if state laws allow sale of playing cards, then a contract to sell cards will be legal, even if the cards are sold to a known gambler in a state where gambling is illegal.
Other Examples of Illegal Contracts
- Contracts for the sale or distribution of controlled substances, like drugs
- Contracts for illegal activities, like prostitution or gambling
- Employment contracts for the hiring minors
- Any contracts that go against public policy or force a party to perform labor as a slave
Is the Contract Void or Unenforceable Because It Is Illegal?
To avoid liability, defendants often resort to the defense of illegality or “void as against public policy.” Thus, care must be taken when drafting and entering into contracts to avoid severe consequences of contract illegality. Typically, the court won't enforce an illegal contract and will leave the parties as they are. But illegality of a contract can be raised by any party or the court at any time. In the absence of dominating public interest in voiding the contract, an illegal contract could be enforced if:
- The party seeking the enforcement is less guilty than the other party
- The law was violated without any serious moral turpitude
- The other party would benefit unfairly from the contract voidance
- The penalty would be disproportionally harsh compared to the degree of illegality
Certain situations allow a party to get relief based on quantum meruit and to recover the justified value of the rendered services or provided goods even if the illegality of the contract is proved short time after.
The law gives no assurance of compensation for services that were performed illegally under a contract but were not explicitly prohibited by law. But in cases when the services performed under an illegal contract by one party are not illegal by their nature and the other party does not deliver willingly on their part, it is possible for the former party to be compensated under a quantum meruit for the actual value of what the other party received. To protect their right to recovery in case of a breach of contract, the plaintiff must always allege a cause of action for quantum meruit every time when a contract breach is caused by nonpayment for provided services or goods.
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