What Are Illegal Agreements?
There are several different types of agreements that a court would consider an illegal contract. However, on a simple level, the law typically defines an illegal agreement as one which the state or public policy prohibits. For instance, if two parties agree to perform an act that is against the law, or perform an act in a way that violates public policy, the agreement could be deemed illegal. As a baseline, most contracts require three essential elements to be enforceable: For an agreement to be illegal under the law, it must either violate a statute or public policy. A contract that is prohibited by statute is void on its face, meaning if challenged even the court cannot enforce the contract. Regarding the elements of enforceability, such a contract would fail the second element , as there is no valid consideration in a contract that contravenes a statute; there is less of a gain for the party who performed the illegal act than any other, generally societal, negatives in place. A contract that is against public policy is also typically void, simply because the terms of the contract prevent a party or the public from carrying out an activity that is in the public interest. In this event, the contract falls into the third element above, as there is nothing of value for the party that was denied the exercise of the public right or legal freedom. If an agreement is capable of being performed in a legal manner, however, the doctrine of severability can permit a court to divide the contract into legal versus illegal elements, and potentially enforce its legal components.
Types of Illegal Agreements
Common types of illegal agreements include (1) agreements to commit crime, fraud, or tort; (2) contracts that restrain trade or unduly restrict competition; (3) contracts that unduly restrain the marriage or parental rights of a person; (4) contracts involving usurious interest rates; and (5) agreements that violate public policy. Courts generally will not make a determination if an agreement is illegal, which means that an illegal agreement cannot be made legal by court order. When a contract is deemed illegal, the entire contract is void. For instance, A and B want to enter into a business agreement to sell marijuana. The agreement is void, as the selling of marijuana is illegal. If the agreement was executed, no court would enforce the terms or award damages for failure to fulfill the contract.
Agreements to commit an illegal act. Any agreement to commit an illegal act is void; there is no remedy for either party if the parties enter into an illegal agreement. For example, A asks B to rob store X. While the men are planning the robbery, X’s manager overhears their plot. Both men are arrested; A and B are charged with conspiracy.
Agreements in restraint of trade. Contracts in restraint of trade are agreements that prevent free, unlimited competition. They can be contracts that prevent a party from conducting business in a certain area for a period of time or other restrictive provisions. In the past, contracts with individuals to limit or restrain a party’s ability to conduct business were not very popular, as it essentially meant the party would not be able to earn a living or have a career. Today, it is common for businesses to require restrictive provisions in its contracts concerning its employees. In certain situations, the agreements will be enforceable for a specific time period, but they must be reasonable.
Agreements in restraint of marriage. Contracts that unduly restrain the marital rights of a party are not enforceable and void. This includes pre-nuptial agreements that impose overly harsh restrictions on one of the party’s rights, from something as simple to having children, to marrying someone else. Courts can force parties to adhere to fair child support agreements, as long as such agreements are in the child’s best interest. Courts generally do not uphold agreements that are unfairly restrictive of parental rights, as they go against public interest. For example, A wants to marry B. B’s parents require A to agree that the couple will not have children. The contract is not enforced, as it is unduly restrictive.
Agreements with usurious terms. Usury is exceeding the lawful interest rate. In Alabama, the lawful interest rate is 6%, but the courts recognize an interest rate of 7% in commercial transactions. Depending on the agreement, contracts can be void.
Agreements in violation of obligations to the government. Agreements in violation of any obligations to the government are prohibited, and the contract would be void. The Alabama criminal code prohibits entering an agreement to fulfill these violations. Violations include bribery or the obstruction of justice.
Implications of Illegal Agreements
Understanding Illegal Agreements: Legal Consequences and Examples
The Parties Cannot Sue Each Other
When parties enter into an agreement that is illegal, they give up any rights they normally would have to sue the other party to enforce the agreement. In other words, the illegal agreement cannot be the basis for a lawsuit. However, if there is part of the agreement that is legal, the court may enforce that portion. The court will determine what part of the agreement is legal and whether the remainder can be separated from the illegal parts. The court may also enforce a provision in the agreement that is against the public policy of the jurisdiction where it resides. Even if the Agreement includes a provision that is not legal and can’t be separated from the Agreement, the court can enforce the provision against the public policy. Example: Bob agrees with Bill to engage in a hit and run violation – both parties are guilty as participants. The agreement is illegal, and the court cannot enforce it. That means neither party can sue to enforce the terms of the agreement, so even though the contract might have benefitted both parties, neither can sue the other. As we know, the law discourages parties from undertaking illegal acts together, and will do whatever it can to discourage parties from deliberately breaking the law. Therefore, courts most commonly do not enforce agreements that the parties knowingly entered into that break the law. However, if the illegal act is a violation of a regulatory statute that does not impose a severe penalty (assuming the penalty is not excessive for the violation), the courts might only rescind the Agreement. Rescission treats the contract as if it never happened and puts the parties in the pre-contract position, like a rescission of an insurance contract. Example: Bob agrees with Bill to sell marijuana illegally, violating the Controlled Dangerous Substances Act (CDS Act). The Contract violates federal law, and the court can put the parties back in the position before the Agreement.
The Parties May Be Guilty of a Fraud
If the Agreement is between two parties and is illegal between each one’s duties to an outsider, the Agreement might be void only between them. Because the terms of the Agreement are illegal, the parties may not be guilty of fraud, but they still can’t bring an action against each other to enforce the terms of the Agreement. Example: Here’s the old "defraud the government" rule again. Bob and Bill enter into an Agreement to rob a $2 store. The Agreement between them is illegal, being based on robbery. However, if a third party was involved, such as Chuck the store owner, Bob and Bill may be guilty of Felony. Under the all in Restatement of Contracts, ยง 598(1), the law requires a party to return the money back to the victim(s), however, if the illegal act does not affect the public, then no return is necessary.
The Parties Could Be Guilty of a Crime
Most often than not, the court will not enforce an illegal Agreement where the Agreement violates a statutory or regulatory provision. This is because some statutory or regulatory provisions are criminal in nature – which could put parties who enter into the Agreement in jeopardy with the law. Example: Bob and Bill agree to kill King Kong. The Agreement is in violation of criminal laws, including but not limited to Murder, Attempted Murder, Conspiracy to Commit Murder, and Reckless Endangerment. Bob and Bill are guilty of committing the crime and the court will not enforce the Agreement because it violates criminal laws.
How Is Legality Determined?
In determining the legality of an agreement, judges will consider a variety of factors. Any formal or informal agreements concerned with the sale of products and services or employment contracts must be considered under the common law or statutory rules of a particular state. Common law rules applied by judges mean that the parties will be held to the terms and conditions set out in an agreement. Statutory rules apply more to the types of agreements which fall under the particular statutes of a jurisdiction.
Judge decisions from previous cases are important when considering the legality of an agreement. These verdicts provide guidance on how the aforementioned laws will be enforced providing the decision follows a common precedent . When considering the legality of agreements made between people in different states, the precedent falling under the laws of the land where the agreement was made will usually apply. But to determine whether a contract is legal, courts will apply its own jurisdictional principles. When considering the legality of the terms and conditions within an agreement, most judges will ask the following questions: Based on other judge verdicts regarding the illegality of contracts, dividing the categories mentioned above, the first three questions all ask whether the agreement is recognized as lawful fact. The final question then asks whether it falls under the common law or statutory law that can be set out in the agreement proposed.
Case Law Examples
Numerous cases have dealt with illegal agreements, often clarifying the application of the rules and exceptions around these types of contracts. Sarter v Mohn (1934) 52 CLR 1 dealt with the permissibility of monopolies (i.e. illegal agreements in restraint of trade), and the debtor’s obligations where an illegal contract has been executed. The High Court stated that the onus rests on the creditor to amend the illegality in those circumstances to ensure recovery of amounts due. In Peters v Gusinde (1944) 44 SR (NSW) 134, the court held an agreement did not per se become a legal agreement if it was partly to be performed in a foreign jurisdiction where it would be legal. In Weber v Totalisator Board (1993) 2 Qd R 35, the Queensland Court of Appeal had to consider the extent to which public policy could make unenforceable an otherwise lawful promise to pay money. The plaintiff had been convicted of a gambling offence under the Totalisator Act, and sued for payment of his winnings (in breach of the Act). The Court held that the money had been derived from an illegal act, and the plaintiff was not entitled to recover it. The Court refused to follow prior authority regarding gaming and betting, and found that the case could be distinguished as it involved the plaintiff rather than the bookmaker. In Oldfield v Transcontinental Corp (2000) 1 Qd R 691, the Court held it is not sufficient to deny enforcement of a promise that its purpose is immoral or illegal; the purpose must be to have the object rendered unlawful or impermissible under the legislation.
In Taylor v Johnson (1983) 2 NJLR 514, the parties entered into an agreement to sell certain property with the intention that the purchaser would acquire it for the purpose of demolishing the building, and for developing the vacant land. The purchaser had connections to a political party, and wished to gain favour so they would not need to pay rates on the vacant land. The agreement provided that on completion the buyer would demolish the building (or use "reasonable endeavours" to do so), and that the seller would give the buyer a notice cancelling the contract if the building was not demolished within one year. The Court found that the agreement was not illegal, but merely constituted a partial restraint of the landowner’s usage of the property. There was no express criminal sanction, but there was an intention to avoid rates and charges, which the legislature intended to prevent. The Court ordered specific performance, but held that "It is not open to a party seeking the grant of a decree for specific performance to insist upon the performance of the other party of an obligation which it can never be able to perform". In this case, the contract was established to be an agreement in partial restraint of trade.
In Global Wine Co Pty Ltd v Majestic Wine Warehouses Co Plc [2002] NSWSC 716, the question before the Court was whether the ‘advance’ payments were a loan (which must be repaid), or whether it was a certain amount of money paid as security for the performance of certain clauses in the agreement in case of a breach (which need not be repaid). It was held that the money had been paid as a loan, as the payment cannot be consideration for the agreement itself, given the consideration was illusory. The clause required the payment of a certain amount of money on contracting (which was a breach of the Trade Practices Act), and then required the repayment of the money when the illegal clauses were fulfilled (which was also a breach of the Trade Practices Act).
Safeguarding Against Illegal Agreements
Most often, the illegal agreement will be obvious, but there are some instances when it might not seem illegal but is. It is important to have attorneys review your contracts and agreements to make sure nothing you are doing is illegal , and that you understand everything you are signing. This applies to everything from waivers to non-compete agreements. The simple answer to protecting yourself is to know the laws and regulations in your area. Hiring an attorney is the best way to ensure that the agreements you enter into will not be illegal under the law.