Key Takeaways

  • Illegal contracts are void and unenforceable in court, meaning parties cannot seek monetary relief for breaches.
  • Types of illegal contracts include agreements that involve criminal activity, fraud, lack of proper licensing, and contracts that violate public policy.
  • Common examples include contracts for illegal gambling, drug distribution, price-fixing, and employment agreements that violate labor laws.
  • Consequences of illegal contracts may involve penalties, rescission, or criminal liability depending on the nature of the illegality.
  • Legal alternatives and preventive measures include ensuring contracts comply with state and federal laws, seeking legal counsel, and using legal contract templates.

There are different types of illegal contracts, all of which are void and unenforceable. Contracts can be deemed illegal if the conduct being performed by either party violates the law or is an otherwise discouraging activity that others would deem offensive or wrong. If using illegality as a defense in a contractual dispute, the party must prove that the illegality relates directly to the contract itself or the steps taken when entering into the contract.

Since an illegal contract isn’t actually a contract, the court will not award either party with monetary relief in most circumstances. Therefore, if the plaintiff brings a breach of contract claim against a defendant, but the defendant argues that the contract is illegal, then any determination by the court that it is, in fact, illegal will not allow the plaintiff to recover for breach; the contract itself is void and essentially thrown out.

Nature and Contractual Obligation

While not all courts will deem a contract illegal, they will always look to the unique circumstances of each contract to determine whether or not the performance under the contract is wrong or illegal. The court will also look at the steps taken when entering into the contract to ensure that no illegal actions were taken by either party during the negotiation phase. For example, if the one party threatens the other party into signing the agreement, then the court will find the contract unenforceable.

While courts will support such contractual disputes, and ensure that a proper remedy is given to the disadvantaged party, courts also want to allow parties to freely enter into contracts, as every single business transaction requires one. Courts want the parties to work out their issues during the negotiation phase, and not have to intervene in a contractual dispute unless it is being brought due to illegality, impossibility, duress, or coercion.

Common Types of Illegal Contracts

Illegal contracts typically fall into several categories, each involving conduct that violates the law or public policy. Here are some of the most common types:

  1. Contracts Involving Criminal Activity – Any agreement to engage in activities such as drug distribution, illegal gambling, or fraud is void.
  2. Contracts That Violate Public Policy – Agreements that promote corruption, discrimination, or violate fundamental rights can be deemed unenforceable.
  3. Unlicensed Professional Contracts – Some professions require specific licensing (e.g., medical, legal, or construction work). A contract performed by an unlicensed professional may be illegal.
  4. Price-Fixing and Restraint of Trade Agreements – Contracts that create monopolies or unfairly restrain competition violate antitrust laws.
  5. Contracts for the Sale of Stolen or Illegally Acquired Goods – Agreements to buy or sell stolen goods or counterfeit products are illegal.
  6. Employment Agreements That Violate Labor Laws – Contracts that impose unfair wages, deny legally required breaks, or force employees into unsafe working conditions may be unlawful.
  7. Wagering and Gambling Contracts – Many jurisdictions have specific laws governing gambling, and contracts based on illegal betting may not be enforceable.

Elements of a Valid Contract

A valid contract is one that includes several elements as follows:

  1. Offer
  2. Acceptance
  3. Consideration
  4. Mental Capacity
  5. Consent
  6. Legal Subject Matter
  7. Mutual Assent

The contract must include an offer from one party to the other. The party making the offer is known as the offeror and the party receiving the offer is the offeree. The party making the offer is essentially promising that if the offeree accepts the offer, the offeror will enter into the contract.

Thereafter, the other party must accept the offer. Once the offeree accepts the offer, the offeror can no longer withdraw the offer. The acceptance can’t introduce any new terms to the offer. If it does, then this will be considered a counter-offer rather than an acceptance. Keep in mind that acceptance only constitutes as such if the offeror knows that the offer is made. For example, if a person accepts what he thinks is an offer, but the offeror indicates that she wasn’t offering anything, then a contract cannot be established.

Next, the parties will need to have consideration. This is rather easy as a promise to do something can constitute consideration. For example, if John promises to sell Sue his car in exchange for $200, the promise by both parties constitutes consideration. However, if no consideration is present, then a court will deem the contract void as if it never existed.

Both parties entering into the contract must have the mental capacity to enter into the agreement. This means that the parties must both be at least 18 years of age and be mentally competent.

Next, both parties must consent to having entered into the agreement, while indicating that they were not forced or threatened into entering into the contract.

The subject matter of the contract itself must be legal. For example, if it involves illegal gambling, then the contract will be deemed illegal and unenforceable. Another example would be if one party asks another party to engage in fraudulent or some other wrongful activity.

Lastly, the parties must mutually assent to performing under the contract. This element is similar to that of consent, as the parties cannot be coerced into entering into the agreement.

Consequences of Illegal Contracts

If a contract is found to be illegal, it is generally considered void and unenforceable. The consequences include:

  • No Legal Remedy – Courts typically refuse to assist parties in enforcing illegal agreements or recovering damages.
  • Rescission of the Contract – If one party unknowingly enters an illegal contract, courts may allow them to rescind (cancel) the agreement.
  • Penalties and Fines – In some cases, parties involved in illegal contracts may face civil or criminal penalties.
  • Exceptions for Public Interest – In rare situations, courts may provide relief if one party was unaware of the illegality or was forced into the contract.

How to Avoid Illegal Contracts

To ensure contracts remain legal and enforceable, consider the following best practices:

  • Verify Licensing and Legal Requirements – Ensure all parties involved hold the necessary licenses and meet regulatory requirements.
  • Consult Legal Professionals – Lawyers can review contracts to confirm their compliance with state and federal laws.
  • Avoid Overly Broad or Unreasonable Terms – Agreements that unfairly restrict trade or impose excessive penalties may be challenged in court.
  • Use Clear and Ethical Contract Language – Avoid ambiguous terms and ensure all agreements align with ethical and legal standards.

Frequently Asked Questions

  1. What makes a contract illegal?
    A contract is illegal if it involves criminal activity, fraud, violates public policy, or requires one party to act unlawfully.
  2. Can an illegal contract ever be enforced?
    Generally, no. Courts will not enforce illegal contracts, but in rare cases, they may provide relief to an innocent party who unknowingly entered the contract.
  3. What happens if I sign an illegal contract unknowingly?
    If you were unaware of the illegality, courts might allow rescission, meaning you can cancel the contract and possibly recover any losses.
  4. Are contracts with unlicensed professionals always illegal?
    Not necessarily. In some cases, if the unlicensed work does not pose a threat to public safety, courts may still enforce part of the contract.
  5. How can I check if my contract is legal?
    Consulting a legal professional is the best way to ensure compliance with state and federal laws. You can find experienced attorneys on UpCounsel for contract review.

If you need help learning more about the types of illegal contracts, or if you need legal help determining whether 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.