Before learning about what makes a contract illegal, it may be helpful to have an understanding of what the basic legal definition for a contract is first.
Essentially, a contract is an agreement formed between two or more parties that describes certain legal obligations that the parties have to perform for one another. For example, you sign a contract that the other person will make you a handmade dining table. When they complete the dining table, your promise in the contract is that you will pay for it when it’s done.
If a party fails to fulfill an obligation or provision that was agreed to as part of the contract, then the nonbreaching party will be able to bring a legal action against them for the breach.
A contract is generally used for various transactions, such as the sale of land, goods, or services. Some common examples include employment contracts and sales agreements (e.g., contracts between a buyer and seller for products).
What is an Illegal Contract?
A contract is considered an “illegal contract” when the subject matter of the agreement relates to an illegal purpose that violates the law.
Basically, contracts are illegal if the formation or performance of the agreement will cause the parties to participate in illegal activities. The illegality must relate directly to the contents of the contract and not some other intervening force.
Technically, a contract or agreement that is deemed illegal will not be considered a contract at all and thus, a court will not enforce it. Instead, illegal contracts are said to be void or unenforceable, meaning it will be as if the contract never existed. Therefore, if either party breaches the contract, then they will not be entitled to any remedies.
There is one useful purpose for illegal contracts though and that is when they are used as a defense against a breach of contract claim. This is known as the “defense of illegality.”
For instance, if one party tries to sue the other party for breach of contract, but the court finds that the contract is illegal for some reason, then the party bringing the suit will not receive any damages and the breaching party will not be held liable for a breach because the agreement itself is prohibited by law.
Finally, one important thing to keep in mind is that depending on the situation and the contents of the contract, a court may enforce an illegal agreement if removing the illegal terms would make the rest of the contract legal and enforceable. Again, this will depend on the matter.
How Do You Prove a Contract is Illegal?
As previously mentioned, whether a contract is considered illegal or not will depend on the subject matter of the contract.
For example, if two parties enter into a contract to hire one of them as a blackjack dealer, but gambling is illegal in their state, then the contract will be void. This is because the contract would require the employee to perform illegal activities, namely, gambling.
On the other hand, a contract that is made only for the sale of a deck of cards is typically not considered to be an illegal matter. This contract will be enforceable even if the cards are being sold to a known gambler in a state where gambling is prohibited.
The reason for this is because the required performance, i.e., selling a deck of cards, is not itself illegal (so long as it is not prohibited by any state laws).
Thus, sometimes it may be difficult to prove whether or not a contract is illegal. A general rule of thumb to follow is this: if the contract requires either of the parties to do something that is illegal, then it usually will not be enforceable.
What are Some Other Examples of Illegal Contracts?
Some other common examples of illegal contracts include:
- Contracts for the sale or distribution of controlled substances, such as drugs or drug paraphernalia;
- Agreements made for illegal activities, which may include prostitution or gambling; and
- Employment contracts that permit the hiring of underage workers.
Sometimes a contract will refer to 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 not enforceable.
An example of a contract that is void because it violates public policy is a contract that forces a party to perform labor that would amount to slavery. Another example includes covenants not to compete that are overbroad in scope and would violate the notion of freedom of competition among businesses.
Therefore, even if the subject matter of a contract is not specifically mentioned in any statutes, a court may still treat them as if they are illegal when they create circumstances that would violate public policy. If such a scenario occurs, the court will not enforce the contract.
What Happens If a Party Breaches an Illegal Contract?
As discussed above, when a contract is deemed illegal, then the contract will become void (unenforceable) and it will be as if it was never formed. The court will normally leave the parties in the same condition as they were at the time of the breach. Neither party will be able to recover losses because again, the court is essentially stating, “No contract exists here.”
Going back to the blackjack dealer example, if their employer fails to pay them for the work they did as a blackjack dealer, then the dealer will have no means to recover their lost wages for the work because the entire employment contract is illegal. The employer will be off the hook for the breach of contract and payment to the worker, and the blackjack dealer will have no available remedies.
Additionally, illegal contracts also prevent recovery for more than just monetary damages. Recovery will not be permitted for contract rescission (i.e., cancelling the contract), restitution, or specific performance as well.
Do I Need to Hire a Lawyer for Help with an Illegal Contract Issue?
Parties to an illegal contract may face some challenges when trying to enforce it or recover damages. If the court finds that the contract is void due to illegalities, then neither party will receive protection under the contract. Therefore, if you are having issues that might involve an illegal contract, you should contact a contract attorney immediately.
In addition, you should also consult a contract attorney before entering into any type of contract or agreement. An experienced attorney will be able to draft, review, and ensure that the contract is legally enforceable and that your rights under the contract are adequately protected.