When does a contract become an illegal contract?

Any agreement between parties can be affected by an illegal contract. Serious illegality renders a contract null and void. In such cases, legal remedies may be unavailable to one or more of contracting parties.

However, just because a contract is illegal, legal remedy cannot be denied to a party or parties. The court considers the steps when entering the contract to ensure that neither party engaged in illegal actions during the negotiation phase.

What is an illegal contract?

A contract is illegal under the following circumstances:

• It is forbidden by law
• It has an illegal objective nature
• It is fraudulent and involves or implies injury to another person or property
• If the court considers a contract to be immoral or contrary to public policy

Such agreements are illegal, punishable by law, and considered null and void ab initio.

When a party seeks to enforce an agreement that is forbidden by law, an illegal contract is framed to prevent claims based on the contract. In such cases, illegality is the primary defence to legal claims.

The courts deny a claimant seeking to recover a benefit from their guilt. If a contract involves illegal activity, its illegality is determined by considering factors against events that resulted in the disagreement.

Examples of an illegal contract

• Contracts for the purchase or sale of illegal substances such as drugs
• Contracts for illicit activities prohibited by law
• Employment contracts for workers who are under the legal working age
• Contracts to fight the state government
• Contracts for illegal mining
• Agreements restraining legal proceedings
• Contracts restraining parental rights
• Illegally created monopoly contracts

Government Contract

Article 299 of the Constitution of India states that all contracts on behalf of the government under the executive power should be in the name of the President or Governor. The contract is known to be a government contract only if made in the name of the President or governor. Furthermore, an authorised person should enforce all contract terms to act on their behalf.

Illegal Agreement

An illegal agreement violates any law and its nature is criminal, contrary to public policy, or immoral. Because these agreements are void from the beginning, the contracts that are collateral to the original agreement are invalid. In this context, agreements associated with or incidental to the primary agreement are collateral agreements.

Because the law strictly prohibits such agreements, entering into one is considered a punishable offence. Therefore, the parties are penalised under the Indian Penal Code. For example, an illegal agreement could include an agreement with ambiguous terms or an agreement to murder.

Difference Between Void and Illegal Contracts

A void contract is a contract that is not illegal but does not have any legal effect, and it is an ‘agreement not enforceable by law,’ according to Section 2(g) of the Contract Act. By contrast, an illegal contract does not have legal effect and is unlawful under law.

Another critical aspect of an illegal contract is that any agreement or transaction collateral to the primary contract becomes unlawful and consequently unenforceable.

A void contract is considerably broader than an illegal contract because all illegal contracts are void, but all void contracts are not illegal.

Conclusion

Various types of illegal contracts exist, and all such contracts are null and void. Contracts can be considered illegal if either party’s conduct violates the law or is otherwise discouraging activity that other people consider offensive or wrong.

When a party asserts illegality as a defence in a contractual dispute, the offending party should prove that the contract or actions performed to enter into the contract were unlawful.

In most cases, the court does not award monetary relief to either party because an illegal contract is not a contract. Therefore, if a plaintiff invokes a breach-of-contract claim against a defendant, but the defendant claims that the contract is illegal, court determination of an illegal contract will not allow the plaintiff to recover for breach. The contract itself is void and effectively thrown out.