An illegal contract is a contract that was made for an illegal purpose and, consequently, violates the law. Contracts are illegal if the performance or formation of the agreement will cause the parties to engage in activity that is illegal. The illegality must relate directly to the subject matter creation of the contract and not some intervening circumstance.
Technically, an illegal contract or agreement is not a contract at all, and courts will not enforce them. Thus, they are said to be void or “unenforceable”- it is as if the contract never existed, and the parties will not be entitled to relief if either party breaches the contract.
It is a defense to a breach of contract that the contract was illegal. This is called the “defense of illegality.” Thus, if a party breaches a contract that is illegal, they will not be held liable since the agreement itself is prohibited by law.
As mentioned above, whether a contract is illegal or not depends on the subject matter of the contract. For example, an employment contract for the hiring of a blackjack dealer is illegal if gambling is illegal in that state. This because the contract would require the employee to perform illegal activities, namely, gambling.
On the other hand, a contract for the sale of a deck of cards is usually not found to be illegal if selling cards is not prohibited by state laws. The contract will be enforceable even if the cards are being sold to a known gambler in a state where gambling is prohibited. This is because the required performance, that of selling cards, is not itself illegal.
Therefore, it can sometimes be difficult to prove that a contract is illegal. A general guideline to follow is: if the contract requires either of the parties to do something that is illegal, then it is usually unenforceable.
Other common examples of illegal contracts include:
Sometimes a contract will deal with a subject matter that is not specifically prohibited by law, but is nonetheless against public policy and principles of fair dealing. These contracts will also fall under the category of “illegal contracts” and are also unenforceable as they are against public policy.
Examples of contracts that are void because they violate public policy include contracts which would lead a party to perform labor that would essentially force them to be a slave and certain covenants not to compete. Even though the subject matter of these agreements may not be specifically covered in any statute, a court will still treat them as though they are illegal. These contracts will therefore be unenforceable in a court of law.
If a contract is found to be illegal, it is unenforceable and as if it was never formed. The court will usually leave the parties “as they are” at the time of breach. Neither party can recover losses because the court is basically saying, “No contract exists.”
Assume again that an employment contract was made for the hire of a blackjack dealer in a state where gambling is illegal. If the employer failed to pay wages to the blackjack dealer for their work done, the blackjack dealer cannot recover lost wages because the entire employment contract is illegal. Even though the employer is in breach of the contract, no legal remedy is available because the contract is illegal.
An illegal contract will prevent a party from receiving damages for breach of contract. It also prevents recovery based on other theories such as contract rescission (terminating the old agreement and making a new one) or restitutionary damages.
Illegal contracts can present some challenges for both parties since recovery of damages is usually not available. That is, a person who is involved in an illegal contract runs the risk of loss because their activity is not covered by contract protections. Therefore, it is usually necessary to contact a contracts attorney before entering into any type of contract agreement. An experienced lawyer will be able to inform you whether a contract is illegal or not.
Last Modified: 08-06-2014 05:00 PM PDTLaw Library Disclaimer
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