Key Takeaways:

  • A contract is illegal if it involves unlawful activities, violates public policy, or lacks essential legal elements.
  • Essential components of a valid contract include offer, acceptance, consideration, and legal capacity of both parties.
  • Contracts may be void due to fraud, coercion, mistake, misrepresentation, or statutory violations.
  • Courts do not enforce illegal contracts, meaning parties cannot seek legal remedies for breaches.
  • Some contracts may be voidable rather than void, depending on the circumstances and applicable laws.

What makes a contract illegal? Any contract that does not conform to applicable state and federal laws and does not include all required elements is not legally enforceable. A contract must be created and executed following certain guidelines to bind its parties by law.

Elements of a Valid Contract

A valid contract constitutes an offer by one party that is accepted, typically in writing, by the other party. If the initial offer is not accepted, negotiation may take place until both parties agree to the established terms.

Both parties to a legal contract must:

  • Be at or older than the age of consent
  • Agree to the terms of the contract freely
  • Have the mental capacity to meet the terms of the agreement

A valid contract must include a value or price, known as the element of consideration. This could also be a benefit, interest, or right. Both parties to the contract must benefit from the agreement. 

Most contracts are only valid if they are in writing, but certain spoken agreements are legally enforceable. Contracts involving substantial debt, real estate, or a delay in meeting the terms (such as a last will and testament) must be written to be legally valid.

In general, consensual, legal contracts that include consideration and are entered into by two adults of sound mind are considered valid. 

The Role of Public Policy in Contract Legality

Public policy plays a crucial role in determining contract legality. Even if an agreement meets basic contractual elements, courts may declare it illegal if it conflicts with public interests. Examples include:

  • Non-compete agreements that unreasonably restrict trade.
  • Contracts that encourage crime, such as agreements to commit fraud or insider trading.
  • Unconscionable contracts, which are so one-sided that they exploit one party.

Courts assess these contracts on a case-by-case basis, considering fairness, harm to public interest, and statutory guidelines.

Elements of an Illegal Contract

Illegal contracts are those that require either party to engage in an illegal activity to fulfill the contract. This would not be considered a legal contract by the court and could not be enforced. Thus, illegal contracts are void and neither party will be entitled to relief if the other party breaks the contract. Sometimes, contract breach is defended in court by asserting that the contract was illegal and thus not enforceable.

Examples of an illegal contract include:

  • Those for the distribution or sale of drugs, drug paraphernalia, and other types of controlled substances
  • Those for illegal activities, such as gambling or prostitution
  • Those that hire underage employees
  • Those that are against fair dealing principles and/or public policy

Consequences of Entering an Illegal Contract

When a contract is deemed illegal, the consequences can be severe:

  • Non-Enforceability – Neither party can seek enforcement in court.
  • Lack of Legal Remedies – If one party breaches the agreement, the other cannot recover damages.
  • Penalties and Fines – Certain illegal contracts, such as those involving fraud, may lead to criminal charges.
  • Forfeiture of Benefits – Any gains from the contract may be seized or deemed void.

In limited circumstances, courts may enforce parts of an illegal contract if the illegal portion can be severed without affecting the lawful elements.

Types of Illegal and Invalid Contracts

A contract is illegal and thus invalid when it involves one or more of these elements:

  • Lack of capacity, which means that one or both parties does not have the mental ability to enter into a contract. This includes those younger than age 18 and those with mental disabilities or dementia, as well as anyone else who cannot understand the contract they have signed. This type of contract is not automatically void if both parties choose to honor it, but it will not be legally enforced.
  • Illegal purposes, including both crimes as well as agreements that charge more for a loan or service than is legally allowed
  • Mistaken interpretation, in which one or more parties is unclear about the terms of the contract. This must involve a major element of the agreement, not a trivial element that can be easily fixed. However, the contract will not be invalidated if the person knew that they did not understand the contract correctly when they signed it.
  • Misrepresentation and fraud, such as false statements, which are influential enough to convince the unknowing party to sign the contract.

Contracts That Violate Licensing Laws

Some contracts become illegal because they involve unlicensed professionals performing services that legally require certification. Examples include:

  • A contract with an unlicensed contractor for construction work in states that mandate licensing.
  • Agreements with unlicensed medical practitioners, which violate healthcare regulations.
  • A contract for legal services with someone who is not a licensed attorney.

These contracts are typically unenforceable, and courts may refuse to uphold payment obligations or services rendered.

Proving a Contract Is Illegal

The subject matter of a contract determines whether it is illegal. For example, if a blackjack dealer is hired for employment in a state where gambling is illegal, the employment contract is illegal because it would require him or her to perform illegal activities. However, simply selling a pack of cards to a known gambler is not illegal. This fine line means that the legality of a contract can be difficult to prove. In most cases, the court will consider a contract illegal if it cannot be fulfilled without performing illegal activity. 

If you inadvertently enter an illegal contract, you will be unable to have its terms enforced by the court if the other party is in breach of contract. Therefore, it's important to consult a contracts attorney to review any contract you are in the process of negotiating. He or she can warn you if an agreement is illegal.

How Courts Determine the Legality of a Contract

Courts analyze several factors when determining a contract’s legality:

  1. Intent of the Parties – If both parties knowingly entered into an illegal agreement, it is void.
  2. Nature of the Violation – If the contract violates statutory laws, it is automatically unenforceable.
  3. Severability of Illegal Terms – Some contracts contain both legal and illegal terms. If the unlawful provisions can be removed without affecting the contract’s overall purpose, the rest of the contract may remain valid.
  4. Unjust Enrichment – Courts consider whether enforcing the contract would unfairly benefit one party.

In cases where a party was unaware of the illegality or coerced into an illegal contract, courts may provide relief or restitution.

Frequently Asked Questions

  1. What happens if I unknowingly enter into an illegal contract?
    If you unknowingly enter an illegal contract, courts may not enforce it, but in some cases, they may provide restitution if you were misled.
  2. Can an illegal contract be partially enforceable?
    Sometimes. If the illegal portion of the contract can be removed without affecting the contract’s purpose, courts may enforce the legal parts.
  3. What should I do if the other party refuses to honor a legal contract?
    If your contract is legal and enforceable, you can file a lawsuit for breach of contract and seek damages.
  4. How can I verify if a contract is legal?
    Consulting an attorney is the best way to ensure a contract complies with state and federal laws.
  5. Are verbal contracts illegal?
    No, but some contracts must be in writing to be legally enforceable, such as real estate agreements and large financial transactions.

If you need help with determining whether a 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.