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When does a contract become an illegal contract?

Any type of agreement can be affected by an illegal contract. Serious illegality renders a contract null and void. Legal remedies may be unavailable to one or more of the contracting parties.

However, just because a contract is illegal does not mean a court will deny a party or all parties any legal remedy. The court will also consider the steps taken 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 if:-

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

These agreements are illegal, punishable by law, and null and void-ab-initio.

When a party seeks to enforce an agreement that the law forbids, an illegal contract prevents claims based on the contract. The illegality primarily serves as a defence to legal claims.

The courts will deny a claimant seeking to recover a benefit from their guilt. If a contract involves illegal activity, it will be determined by weighing a list of factors against the events that gave birth to 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
  • Contract to fight the state government
  • Contract for illegal mining
  • Agreement restraining legal proceedings
  • Contract restraining parental rights
  • Illegally created monopoly contract

Government Contract

Article 299 states that all contracts made under the Executive power should be in the name of the President or Governor. It 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 or whose nature is criminal, contrary to public policy, or immoral. As these agreements are void from the beginning, the contracts that are collateral to the original agreement are also invalid. In this context, the agreements associated with or incidental to the main agreement are collateral agreements.

Because the law strictly prohibits such agreements, entering into one is considered a punishable offence in the eyes of the law. As a result, the parties are penalised under the Indian Penal Code. An illegal agreement could include, for example, an agreement with ambiguous terms or an agreement to murder someone.

Difference Between Void and Illegal Contract

A void contract is a contract that is not illegal but has no legal effect, and it is an ‘agreement not enforceable by law, according to section 2(g) of the Contract Act. On the other hand, an illegal contract has no legal effect and is also unlawful under the law.

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

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

Conclusion

There are various types of illegal contracts, all of which are null and void. Contracts can be considered illegal if either party’s conduct violates the law or is otherwise discouraging activity that others would consider offensive or wrong.

Suppose a party asserts illegality as a defence in a contractual dispute. In that situation, the offending party must show that the contract or the actions performed to enter into the contract were unlawful.

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

FAQs on Illegal Contract

Is it possible to enter into a contract for an illegal objective?

It determines that if the objective is illegal and contrary to public policy, the contract is illegal and void, with no legal enforceability.

Are illegal agreements null and void?

Illegal agreements are those in which the objective or consideration is not legally enforceable and is punishable by law. As a result, illegal contracts are null and void from the beginning.

Do courts have the authority to enforce illegal contracts?

Illegal contracts are generally unenforceable, and a court will frequently refuse to enforce an illegal contract.

What makes up an illegal contract?

An "illegal contract" is the agreement in which subject matter relates to an illegal purpose that violates the law.

About Author

I am a law final year student and an aspirant for Company Secretary (CS) who is keenly interested in Company law and other commercial laws.

I have cracked the first level of the CSEET exam & also I have written a couple of research papers, articles, and blogs few of them got published.

I have worked under a few law firms and gained practical experience in the field of company law, civil law, and criminal law. In my previous internship, I assisted different company & consumer disputes and helped the counsel in researching and drafting.