An “illegal contract” is a contract that is based on or relates to an illegal purpose that violates the law. The contract is illegal if the agreement will cause the parties to carry out some form of illegal activity. For example, contracts for:

  • The sale of drugs
  • Unlicensed selling of alcohol.
  • Prostitution
  • Illegal gambling
  • Hiring underage workers.

An illegal contract is void and does not technically exist.

Enforcement of illegal contracts

In general, courts will not enforce illegal contracts. The contracting parties have no legal support or relief. As the illegal agreement is void (did not exist), the court takes a hands-off policy. It is not recognized or enforced by law and neither party will be entitled to any legal remedies.

Contracts contrary to public policy

A contract may be in breach of public policy if it results in:

  • A breach of law
  • Harms citizens
  • Causes injury to the state.

Illegal Contracts – Special Situations

Excusable Ignorance

Courts may allow legal recovery if one of the parties to an illegal contract did not know, and had no reason to know, that the contract was illegal.

E.g. A person agrees to allow their neighbor to rent their garage to park their car but they were not aware that the car was used to store illegal drugs.

Party Withdrawing before Performance

If one party to an illegal contract decides to withdraw from that contract before it has been completed then they will be entitled to compensation for any losses.

A share dealer pays an employee of a company they trade with information on a new sales deal. They pay them $1000 for the information. Due to insider trading rules, they decide to stop the deal before they received the company information. They are entitled to get their money back.

Party Not Equally at Fault

One party is forced or persuaded to enter into an illegal contract by fraud, duress, or undue influence. In this case, the victim can recover their losses.

Partial Illegality

Only a small part of the contract is illegal and unenforceable. In this case, the contract as a whole may still be legally enforceable with the exception of the one part.

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Posted in Business Law, Contract Law.