Key Takeaways

  • Illegal agreements are void and unenforceable due to their violation of laws or public policy.
  • Common types include contracts involving illegal services, lack of capacity, or fraudulent terms.
  • Courts often refuse to enforce illegal contracts unless one party is significantly less culpable or enforcement avoids greater harm.
  • The “lesser evil principle” may guide court decisions when strict non-enforcement would yield worse societal consequences.
  • Quantum meruit may apply in limited cases to recover the value of services despite a contract’s illegality.

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.

Additional Grounds for Illegality in Contracts

Some contracts may be deemed illegal not only because of their subject matter but also due to how they were formed or executed. These include:

  • Contracts that restrain trade: Agreements that unreasonably limit business competition, such as certain non-compete clauses, may be deemed illegal under antitrust laws.
  • Usurious contracts: Loan agreements that charge interest above the legal limit may be unenforceable.
  • Contracts to obstruct justice: Any agreement to bribe a public official or to conceal evidence constitutes an illegal contract.
  • Unlicensed activity: If the performance of a contract requires a state-issued license (e.g., for contractors or medical professionals) and the party lacks that license, the contract may be illegal and void.

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.

Factors Courts Consider When Evaluating Illegal Agreements

Courts assess multiple factors when deciding whether to enforce or void an illegal agreement:

  • Severity of the illegality: If the breach of law involves significant moral turpitude or public harm, the contract is less likely to be enforced.
  • Disproportionality of penalties: Courts may consider whether denying all remedies would be unfairly harsh, especially for a less-guilty party.
  • Legislative intent: If the purpose of the law violated was to protect one party (e.g., consumer protection laws), courts may still allow recovery by the protected party.
  • Public interest considerations: Some courts balance the impact of enforcement on public policy and social order—this is sometimes referred to as applying the "lesser evil principle"​.

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.

The Lesser Evil Principle in Illegal Agreements

A growing body of legal thought, supported by judicial reasoning and academic literature, endorses what is known as the "lesser evil principle." This principle asserts that courts should assess whether enforcing an illegal agreement would result in less societal harm than voiding it. For example:

  • Enforcing a contract may be justified to avoid unjust enrichment of one party.
  • The principle supports upholding autonomy and fairness when one party is not at fault.
  • Courts may be guided by which outcome better aligns with legal integrity and public welfare​.

While not universally adopted, this approach is gaining traction in both academic and judicial arenas for providing a balanced resolution when both parties are tainted by some form of wrongdoing.

Frequently Asked Questions

  • What is an illegal agreement?
    An illegal agreement is a contract that involves unlawful actions or violates public policy, making it void and unenforceable.
  • Can a partially illegal contract be enforced?
    Yes, if the illegal part can be separated and the rest of the contract remains legal, the enforceable portion may still be upheld.
  • What happens if I unknowingly enter an illegal contract?
    If the illegality is evident, the contract is still void, though courts may offer remedies if you are the less culpable party or were misled.
  • Can I get compensation if the other party benefited from an illegal agreement?
    Possibly. Under quantum meruit, courts may award compensation for the value of services rendered, especially if they were legal in nature.
  • How do courts decide whether to enforce an illegal agreement?
    Courts weigh factors like public interest, the relative guilt of the parties, and whether enforcement avoids a greater injustice.

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