Key Takeaways

  • An illegal contract is void and unenforceable because it involves actions that are against the law or public policy.
  • Common types of illegal contracts include agreements for criminal activity, violation of licensing laws, or those that restrict trade unreasonably.
  • Courts may raise the issue of illegality on their own, even if neither party does.
  • Factors like the type of illegality and the harm caused to public interest can influence whether a court provides any remedy.
  • Not all contracts tied to unlawful circumstances are illegal—context and local law matter.

If a party in a contract breaches illegal contract terms, that party is not held liable because the contract itself is illegal. Illegal contract terms are often used as a defense by parties to a contract when they are accused of breaching the agreement. You should be careful when creating and signing contracts, because the current interpretation of what is illegal is broad, and the consequences can be harsh. Attorneys should always consider if illegality will be an issue in a case when they are advising their clients.

Introduction to Illegal Contract Terms

The issue of illegality can be brought up by either party. It doesn't matter if the parties don't raise the question of illegality in court, because the court may do so itself when testimony reveals evidence of illegality.

When analyzing breaches of agreements or when drafting agreements, make sure to consider carefully the possibility of illegal terms in the agreement. It can be very easy for a party to win a breach of contract case if the evidence is strong and clear.

However, if illegality is determined to be a problem, a client can lose everything once the case is over. There are various factors that affect the enforceability of and remedy for illegality, including the type of illegality and the law that was broken.

What Is an Illegal Contract?

An illegal contract is one that was created for illegal purposes and therefore violates the law. Contracts are illegal when the written content therein causes those involved in the contract to act illegally. The illegality being considered should be directly related to the content of the contract and not to some outlying concept.

An illegal contract is not enforceable in a court of law. Such agreements are not considered to be contracts at all, and they cannot be enforced. Both parties are not entitled to compensation if one of the parties breaches the contract.

A contract must contain these basic elements:

  • One party makes an offer, and the other party accepts it.
  • The offer can be goods, services, or money, and not just a favor without compensation.
  • Both parties have to know what they are agreeing to.

A contract that does not contain these features is not valid. Once the existence of a contract has been established, the court must decide whether it is enforceable or not.

How to Prove a Contract Is Illegal

Whether a contract is illegal or not depends on the subject of the contract. For instance, an employment contract that specifies the hiring of a blackjack dealer would be illegal if that state considered gambling illegal. A contract to sell a deck of cards would not be illegal if selling cards was not considered illegal according to state law. This is true even if the cards are sold in a state that does not allow gambling. The selling of cards itself is not illegal.

It can be difficult to prove that a contract is illegal. A good rule to follow is that if the agreement requires either party to do something illegally, then it is not enforceable.

Consequences of an Illegal Contract

The consequences of creating an illegal contract can be quite harsh. When a contract is determined to be illegal, the court will not enforce the contract. Neither party can take its case to court, because the court has established that there is no contract.

Referring to the previous example of the hiring of a blackjack dealer in a state where gambling is illegal, if the person who hired the dealer failed to pay the dealer a wage, the dealer could not recover wages because the job was considered illegal in that state. The contract between the employer and dealer would be illegal and unenforceable.

Examples of Illegal Contracts

  • Contracts for illegal actions such as gambling or prostitution
  • Employment contracts for hiring underage workers
  • Contracts for the distribution or sale of drugs or other controlled substances
  • Agreements that violate public policy and ideas of fair treatment. One example of this would be a contract that leads a party to perform labor that would be considered slavery. Another example might be an agreement to not compete.
  • Contracts that go against public policy are also enforceable as illegal even though they are not specifically forbidden by an existing law

Common Types of Illegal Contracts

Here are several types of illegal contracts that courts typically refuse to enforce:

  1. Contracts for Illegal Acts
    These include agreements involving criminal activities such as drug trafficking, human trafficking, prostitution, or theft.
  2. Unlicensed Activities
    If a person contracts for work they are not licensed to perform (e.g., legal advice from a non-lawyer or electrical work by an unlicensed contractor), the contract may be deemed illegal in jurisdictions that strictly enforce licensing laws.
  3. Restraints on Trade
    Contracts that unreasonably restrict someone’s ability to work or compete in a marketplace, such as overly broad non-compete agreements, may be unenforceable due to public policy concerns.
  4. Contracts That Violate Public Policy
    Even if the subject of a contract is not explicitly illegal, courts may find it unenforceable if it undermines societal interests—such as contracts encouraging divorce, waiving child support rights, or promoting corruption.
  5. Fraudulent Agreements
    Any contract based on misrepresentation, deceit, or fraud (e.g., falsifying financial documents to obtain a loan) can be deemed illegal and unenforceable.
  6. Gambling and Wagering Contracts
    In states where gambling is illegal or heavily restricted, contracts based on wagering may be void.
  7. Employment of Undocumented or Underage Workers
    Agreements to hire individuals without proper work authorization or below legal working age are considered illegal under federal and state labor laws.
  8. Agreements in Breach of Statute
    If a contract breaches a statute (such as price fixing under antitrust laws), it can be rendered illegal even if both parties willingly agreed to the terms.

These types of illegal contracts highlight the importance of understanding both statutory and case law, as legality can vary by jurisdiction and context.

Frequently Asked Questions

  • What are examples of illegal contracts?
    Examples include contracts involving criminal activity, unlicensed services, underage labor, or those that restrict competition unfairly.
  • Can a court enforce part of an illegal contract?
    Sometimes. Courts may enforce the legal parts of a contract if they can be separated from the illegal terms and doing so does not undermine public policy.
  • What happens if I unknowingly sign an illegal contract?
    Even if signed unknowingly, the contract remains unenforceable. Courts typically do not provide remedies for either party.
  • Are non-compete clauses illegal contracts?
    Not inherently, but overly broad or unreasonable non-compete clauses may be considered unenforceable due to restraint of trade.
  • Can I recover money paid under an illegal contract?
    In most cases, no. Courts follow the doctrine of in pari delicto, meaning both parties are at fault and cannot seek legal remedies.

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