11.1: General Perspectives on Illegality

LEARNING OBJECTIVES

1. Understand why courts refuse to enforce illegal agreements.
2. Recognize the rationale behind exceptions to the rule.

Introduction: Why Legality Matters

We have discussed the requirements of mutual assent, real assent, and consideration. We now turn to the legality of the underlying bargain. The basic rule is that courts will not enforce an illegal bargain. (The term illegal bargain is better than illegal contract because a contract is by definition a legal agreement, but the latter terminology prevails in common usage.) Why should this be? Why should the courts refuse to honor contracts made privately by people who presumably know what they are doing—for example, a wager on the World Series or a championship fight? Two reasons are usually given:

1. Deterrence – Denying enforcement helps discourage unlawful behavior.
2. Integrity of the Courts – Enforcing illegal agreements would sully the reputation of the judiciary by giving legitimacy to unlawful conduct.

Judicial Rationale

One contracts scholar explained it this way:

[D]enying relief to parties who have engaged in an illegal transaction…helps to effectuate the public policy involved by discouraging the conduct that is disapproved. Mere denial of contractual and quasi-contractual remedy [however] rarely has a substantial effect in discouraging illegal conduct. A man who is hired to perform a murder is not in the least deterred by the fact that the courts are not open to him to collect his fee. Such a man has other methods of enforcement, and they are in fact more effective than legal process. The same is true in varying degrees where less heinous forms of illegal conduct are involved. Even in the matter of usury it was found that mere denial of enforcement was of little value in the effort to eliminate the loan shark. And restraints of trade were not curbed to an appreciable extent until contracts in restraint of trade were made criminal.

The Harshness of the Rule

Strict enforcement of the illegality rule can be harsh. If one party has already performed under an illegal contract—say, paying money or providing services—they cannot recover what they gave, nor compel the other side to perform. The court simply leaves the parties where it finds them.

Example:

• If Alice pays Bob $5,000 to fix a horse race (illegal conduct), but Bob never does so, Alice cannot sue Bob to get her money back. Even though Bob received an uncompensated benefit, the court will not intervene.

Exceptions to the Rule

Because this strict approach can be unfair, courts have developed exceptions—usually grounded in the principle of restitution (preventing unjust enrichment).

1. Excusable Ignorance
   • A party who is unaware that their promise violates public policy may recover.
   • Example: Carla contracts with Dave to transport goods, not knowing that Dave intends to smuggle contraband. Carla may be able to recover payment for her legitimate services.
2. Unequal Fault (Not in Pari Delicto)
   • If one party is less blameworthy than the other, recovery may be allowed.
   • Example: An unlicensed worker contracts with a sophisticated business owner who knows of the worker’s status. Courts may permit the worker to recover wages if the employer clearly took advantage.
3. Avoiding Forfeiture Disproportionate to the Wrong
   • If denial of recovery would cause extreme forfeiture disproportionate to the violation, restitution may be granted.
   • Example: A minor violation of a licensing law may not bar a contractor from recovering substantial payment for completed work.
4. Withdrawal Before Performance
   • If a party withdraws from the illegal agreement before it is carried out, they may recover what was paid or transferred.
   • Example: Two gamblers deposit money with a stakeholder for an unlawful bet. Before the race occurs, one gambler changes his mind and demands his money back. The court will allow recovery.
5. Ending a Continuing Illegal Situation
   • If allowing restitution will terminate an ongoing violation, courts are more likely to step in.
   • Example: A gambler seeks recovery of money placed in the hands of a bookmaker before it is paid out to the winner. Courts may allow recovery to end the illegal situation.

Statutes and Public Policy Concerns

Beyond agreements expressly prohibited by law (like wagers, usury, or bribery), courts may also refuse enforcement where bargains conflict with broader public policy.

Examples of Statutory or Public Policy Restrictions:

• Medical Licensing Laws: A patient cannot legally contract with an unlicensed herbalist for surgical care.
• Restraint of Trade: Contracts that unreasonably limit competition may be unenforceable.
• Domestic Relations: Contracts encouraging divorce or interfering with parental duties are void.
• Corruption and Justice: Agreements to obstruct justice, commit perjury, or engage in bribery are unenforceable.

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KEY TAKEAWAY

Courts refuse to enforce illegal bargains—even when both parties consent—because they will not reward unlawful conduct or tarnish the reputation of the judiciary by enforcing forbidden deals. However, fairness sometimes compels exceptions. Through doctrines of restitution and public policy balancing, courts may allow recovery in cases of excusable ignorance, unequal fault, withdrawal before performance, or when preventing forfeiture or ending continuing illegality.

EXERCISES

1. Why is illegal contract a contradiction in terms?
2. Why do courts refuse to enforce contracts (or bargains) made by competent adults if the contracts harm no third party but are illegal?