Key Takeaways

  • Legality is one of the essential elements of a valid contract; agreements involving illegal acts are void and unenforceable.
  • Contracts must have a legal purpose and comply with laws and public policy in the governing jurisdiction.
  • Certain industries (e.g., healthcare, finance) impose additional regulatory considerations that affect contract enforceability.
  • Void vs. voidable contracts differ: void contracts are invalid from inception; voidable ones are valid unless contested.
  • Common legality issues include agreements for unlawful acts, restraint of trade, and contracts with unlicensed practitioners.

Legality in contracts is deemed to be an enforceable, a mutual agreement between two competent parties, with all parties freely engaged in the agreement.

What is a Contract?

A contract, which may be written or oral, is an agreement between competent parties engaging in mutual commitments enforceable by law. Legality is an involved warranty that an agreement or contract strictly follows the law of a particular jurisdiction. For example, for insurance contracts, the assumption is that all involved risks are covered under the policy are legal ventures. When involved with business agreements, the first consideration is to check if the agreements or promises indicated in the contract are enforceable by law. When dealing with contracts, "party" may mean an individual, company or a corporation.

As stated, contracts contain promises to be enforced under law. The need for a contract arises if a duty comes into existence because one of the parties made a promise. If by any chance, a promise on a contract is breached, remedies are offered to the harmed party. It could be in a monetary form or specific performance of the promise on some circumstances.

The increasing use of a contract known as "Contracts of Adhesion" (or form-contracts) is a recent concern that emerged in contract law. This type of contract gives the ability for the stronger party to force the terms to the weaker party. Some of the examples are lease contracts, mortgage agreements, and even sign-up agreements and online purchases.

Types of Contract

There are a few types of contract including:

  • Unilateral Contracts: This type of contract requests performance instead of a promise from the party accepting the offer. The contract comes to life when the requested performance is complete. A reward system is one of the numerous examples of a unilateral contract where payment in form or monetary is offered in return for something valuable or exchange for information. Insurance contracts are also of this type.
  • Bilateral Contracts: This type is a widely used kind of contract. It is a type of contract that most people consider as traditional – an exchange of promises mutually approved by the parties involved. Since it's mutual for all parties, both parties make a promise on the contract.
  • Express Contracts: Another type is an express contract where agreements and its terms are expressed explicitly by language, either written or spoken.
  • Implied Contracts: Implied contracts require no obvious offer expressed in words or writing.

Elements of a Contract

For a contract to be enforced by law, it should have a legal purpose. A contract that would engage in illegal or immoral activities would not be enforced by courts. In addition, both parties involved must be of legal age, competent and in the right state of mind, and not under the influence of drugs or alcohol. If you engage in a contract with a person under legal age or that is mentally ill, the contract will not likely to be enforced.

During disputes, the court initially decides if an agreement forms a contract or not. For an agreement to constitute a contract, it should have a valid acceptance of the offer, sufficient consideration, capacity, and legality. The offer allows an individual or business to expect that the other party is willing to be bound by the offer on the terms proposed. Terms that go with the offer should always be definite and certain.

If mistakes have been encountered or made by at least one of the parties, the contract might not be enforced. It will also be voided if one of the parties fraudulently or forcefully influences another. In some states, a valid substitute can satisfy the elements of consideration.

Understanding Legality in Contract Law

Legality is a foundational element in contract law. For a contract to be enforceable, its terms and purpose must comply with the law. A contract that facilitates illegal activity—such as drug trafficking, fraud, or unlicensed services—is inherently void and will not be upheld by courts.

Key aspects of contract law legality include:

  • Legal Purpose: The agreement must not require any party to engage in unlawful or immoral conduct.
  • Compliance with Statutes: Contracts must adhere to relevant local, state, or federal laws.
  • Regulated Industries: Agreements in fields like healthcare, construction, or finance must comply with industry-specific regulations.
  • Public Policy Violations: Contracts cannot contradict public interest—for example, contracts that waive the right to sue for negligence in a daycare setting may be voided.

Even if all other elements (offer, acceptance, consideration, and capacity) are present, the absence of legality invalidates the contract.

Enforcement and Contract Defenses

A contract might not be enforced by a court based on few reasons, called defenses to the contract. It is designed to keep the fairness in maintaining the substance of the contract during the bargaining process. If a valid defense is present, the contract may be annulled by the party who was the victim of the unfairness. 

Consulting with a skilled business attorney to ensure that your contract is valid is a good thing to consider if you have concerns with regard to the enforceability of your contract. You can also ask the assistance of these professionals when drafting your business contracts.

Legal Review for Contract Compliance

Given the complex nature of contract law legality, it’s often wise to have contracts reviewed by an attorney, especially in the following scenarios:

  • The contract involves significant financial stakes or long-term obligations.
  • It touches on regulated industries (e.g., employment, franchising, real estate).
  • One party resides in a different state or country, triggering potential jurisdictional conflicts.
  • The contract includes non-compete clauses, waivers of liability, or indemnification language.

A legal review can help ensure that the contract is enforceable, aligns with current laws, and protects the parties’ interests.

If you need assistance, you can connect with a top-rated attorney through UpCounsel’s platform.

Void vs. Voidable Contracts

Understanding the distinction between void and voidable contracts is crucial in assessing contract legality:

  • Void Contracts:
    These are never valid from the outset. For example, a contract to commit a crime is void and unenforceable by law.
  • Voidable Contracts:
    These are initially valid but may be legally rescinded by one party due to factors like misrepresentation, coercion, or undue influence.

Only the affected party in a voidable contract has the right to rescind it. In contrast, void contracts have no legal effect at all and are considered null.

Common Legality Issues That Invalidate Contracts

Certain circumstances can render a contract illegal or unenforceable under the principle of contract law legality. These include:

  1. Illegal Subject Matter
    • Agreements involving criminal acts (e.g., bribery, illegal gambling) are void.
  2. Restraint of Trade
    • Contracts that excessively limit a party’s ability to engage in business or employment may violate antitrust laws or public policy.
  3. Usury
    • Charging excessively high interest rates on loans may violate state usury laws.
  4. Licensing Violations
    • Contracts made by unlicensed professionals in regulated industries (e.g., unlicensed contractor or medical provider) may be void if the licensing requirement is meant to protect the public.
  5. Unconscionability
    • If a contract is grossly unfair or one-sided to the point that it shocks the conscience, it may be deemed unenforceable.

Courts evaluate legality at the time the contract is formed, not after. Therefore, even if circumstances change later, a contract that was legal at inception generally remains valid unless later performance becomes illegal.

Frequently Asked Questions

  1. What does legality mean in contract law?
    Legality refers to the requirement that a contract’s subject matter and terms must not violate the law or public policy.
  2. Can a contract be legal if one part is illegal?
    Not usually. If the illegal portion is severable and does not affect the core purpose of the contract, courts may enforce the remainder.
  3. Is a contract valid without legality?
    No. Contracts lacking legality are void and unenforceable, even if all other elements are satisfied.
  4. Can a verbal contract be illegal?
    Yes. Both written and verbal contracts must meet legality standards. Illegality voids any type of agreement.
  5. What industries face higher legality scrutiny in contracts?
    Healthcare, finance, insurance, construction, and education often involve stricter legality standards due to regulatory oversight.

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