Key Takeaways:

  • Illegality in contract law renders agreements void and unenforceable if they involve illegal activities or violate public policy.
  • Statutory and common law illegality are two key types that courts consider when evaluating contracts.
  • Quantum meruit allows partial recovery for non-illegal services rendered under an illegal contract.
  • Severability clauses can preserve parts of a contract by excluding illegal provisions.
  • Legal assistance is crucial for navigating disputes about illegality in contracts.

Illegality in contract law is a concept which indicates that a contract is illegal, and therefore, unenforceable. Even if the other requirements of a contract are present–the offer, acceptance, consideration, and mental capacity–a court could still deem that the contract is illegal. Moreover, even if the parties to the contract aren’t questioning the legality of the agreement, the court could still determine that it is illegal. If such agreements are in fact deemed illegal, then the entire contract will be void.

Illegal Contract: An Overview

Generally, an illegal contract is one that is made for an illegal purpose, and for that reason, violates law. For example, a contract that requires some sort of illegal act or conduct on the part of one or both parties, will be deemed illegal in entirety. However, a contract can be deemed illegal even if the performance under the contract wouldn’t otherwise violate law. There are certain activities that might not be prohibited by law, but would still be discouraged by the public. Such activities could also deem a contract illegal.

The illegality itself must relate to the contract, whether it be what is included in the contract or how the contract was entered into. If a court determines that the contract is illegal, it will no longer exist. Thus, it becomes void or unenforceable.

Arguing that the contract is illegal can be a defense to a breach of contract should such a suit arise. Therefore, if the other party brings a legal suit against you for breach of contract, you as the defendant can argue that the contract itself is illegal, and therefore, the entire contract is void.

Common Law and Statutory Illegality

Under contract law, illegality can arise from two main sources: common law and statutory law. Common law illegality relates to agreements that go against public policy, such as contracts to commit fraud or other unethical acts. Statutory illegality, on the other hand, occurs when an agreement directly violates laws or regulations, such as unlicensed business transactions or contracts exceeding interest rate caps.

Courts evaluate these cases based on the nature of the illegality and its impact on the agreement. For example, even seemingly harmless contracts may be void if their execution would undermine societal ethics or legal principles.

Proving an Illegal Contract

It could be rather difficult to prove that a contract is illegal, particularly if the illegal conduct isn’t related to the agreement. But, if the contract requires either party to act illegally, then you know that you’ll have an argument to make for its illegality.

Exceptions to Illegality in Contracts

While many illegal contracts are void, there are exceptions where courts may uphold parts of an agreement. For instance:

  • Contracts for non-illegal objectives: If a contract includes an illegal provision that can be removed without altering its core intent, courts may enforce the rest of the agreement.
  • Non-culpable parties: If one party was unaware of the illegality or was coerced into the agreement, courts may offer remedies or partial enforcement.

Severable Contracts

A severable contract can be formed either by the parties involved in the contract or as a result of the court’s actions. In order to create a severance contract, the parties can include a specific severance clause in the contract. The clause itself will indicate that if there is any other clause that would deem the contract to be illegal, then that clause would be removed from the contract so long as the removal wouldn’t drastically alter the performance under the contract.

Importance of Severability Clauses

Including severability clauses in contracts can significantly mitigate risks. These clauses specify that any illegal or unenforceable provision does not invalidate the entire contract. For example, a severability clause might state: “If any term is deemed illegal, it shall be severed, leaving the remaining terms intact and enforceable.”

However, if removing the illegal term drastically alters the contract's intent, the entire agreement may still be voided.

Quantum Meruit

A party might be able to recover under “quantum meruit” the value of the goods or services that were already performed prior to the contract being deemed illegal. While the law doesn’t promise that one party can be paid for services that were illegally rendered under a contract that is prohibited by statute, the party might be able to recover monetarily if the following can be met:

  1. The services that were previously given weren’t intrinsically illegal
  2. The other party intentionally failed to perform

While the one party could potentially recover for the services that he already rendered, he cannot recover on the contract itself since it was deemed illegal. Of course, this is determined on a case-by-case basis depending on the circumstances of the parties and contract.

Whenever one party brings a breach of contract dispute against the other party due to the other party’s failure to pay for services that the plaintiff already rendered, the plaintiff should always argue for quantum meruit in an attempt to recover, particularly if the defendant brings a claim for illegality of the contract.

Legal Limitations on Quantum Meruit Claims

Quantum meruit recovery is not guaranteed in cases of illegality. Courts weigh the extent of illegality against principles of fairness. For instance:

  • Partially performed contracts: If services were rendered before the contract's illegality was apparent, recovery may be possible.
  • Unjust enrichment prevention: Courts use quantum meruit to prevent unjust enrichment, ensuring a party doesn’t unfairly benefit from another’s work despite the agreement being void.

Do I Need a Lawyer to Help Me Prove Illegality?

While you aren’t required to hire a lawyer in a contract dispute, it is always a good idea to speak to a qualified contract attorney who can answer your questions regarding the contract. Note that you might find yourself defending a lawsuit, which could cost time and money. Therefore, it is best to speak to an experienced attorney who can inform you whether or not the contract is illegal.

FAQ Section:

  1. What makes a contract illegal under statutory law? A contract is illegal under statutory law if it explicitly violates legislation, such as unlicensed trade or excessive interest rates.
  2. Can a severability clause save an illegal contract? Yes, a severability clause can allow legal portions of the contract to remain enforceable if the illegal parts are severed.
  3. What is quantum meruit in the context of illegal contracts? Quantum meruit allows partial recovery for services rendered before the contract was deemed illegal, provided those services were not intrinsically unlawful.
  4. How does common law illegality differ from statutory illegality? Common law illegality involves violations of public policy, while statutory illegality occurs when agreements breach specific laws.
  5. Why should I consult an attorney for an illegal contract? An attorney can assess the validity of the agreement, identify applicable exceptions, and provide guidance on potential remedies or defenses.

If you need help learning more about the illegality of a contract, or if you need legal assistance with determining whether or not your contract is illegal, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.