A contract which either involves the commission of an illegal act, or which in some other way is contrary to public policy and hence unenforceable. The law regarding illegality in contracts is generally regarded to be quite complex.
A contract may be illegal by virtue of construction or performance.
Where a contract is illegal by construction, i.e. performance requires either party to engage in conduct prohibited by statute, an illegal contract exists and it will be rendered void. An example would be a contract where A agrees to kill B in exchange for a sum paid by C.
Where a contract is illegal by performance, i.e. a party engages in conduct prohibited by statute whilst performing contractual obligations, it is less clear – sometimes the contract may be determined unenforceable (so that proprietary interests might pass) rather than void. An example would be where A contracts to drive B to a destination, but A exceeds the speed limit during the journey.
There are two types of illegality: statutory and common law.
1. Statutory illegality (contracts made illegal by statute) – contracts directly prohibited by statute, contracts with an illegal objective, contracts illegally performed, and contracts made otherwise void by statute.
2. Common law illegality (contracts made illegal by common law/contracts contrary to public policy) – contracts prejudicial to the administration of justice, contracts promoting public corruption, contracts prejudicing marital status, contracts promoting sexual depravity, and contracts in restraint of trade.
Where conduct is determined to be illegal or contrary to public policy, it is generally held to be unenforceable. However, in some cases, the illegal term/s may be severed from the contract to allow the remainder to be enforced.
Contracts can also be deemed illegal where:
• They are formed for the purpose of inducing one party to break another legally binding contract already made
• The subject matter is to be used for a known unlawful purpose
Money paid or property transferred under an illegal contract is generally not recoverable by the parties to the contract.