What are Illegal Agreements?
For a contract to begin with, the agreement must be lawful and not illegal. A contract or oral agreement is invalid in its entirety if it involves an illegal act. This is true whether the agreement:
• Is fully carried out by the parties; or
• Is incomplete due to lack of performance.
A "contract" that violates state or federal laws is an illegal agreement and therefore has no legal effect.
In most cases, an illegal agreement results when it violates criminal law. An agreement must be legal in its formation and in its performance.
But the agreement need not necessarily be criminal in nature to be illegal. For example, if an agreement is made for a legitimate purpose but addresses a prohibited act that is not illegal, it is still considered illegal as long as it is against public policy.
Illegal agreements vary in form , but they can be classified as:
• Agreements that interfere with the administration of justice;
• Agreements that usurp the power of the judicial system;
• Agreements that undermine the performance of a public office; or
• Agreements that are prejudicial to public safety.
Even though a contract is illegal, its illegality must go to the essence or foundation of the contract.
There are some exceptions to the general rule that an illegal agreement is void. The most common exception is though equitable (fairness) considerations. In such circumstances, the court may be persuaded that its enforcement does not promote the object of the statute.
If the court finds that the agreement is not illegal, the parties can seek relief based on the original agreement.
Types of Illegal Agreements
One common type of illegal agreement is fraudulent. A contract must have honesty between the parties. If one party is deceived by the other, whether intentionally or not, this is a fraudulent agreement and may not be enforceable in court. An example of an illegal agreement based on fraud would be: A purchases a car from B, knowing full well that the car has been in three major accidents and will likely break down within the next month. This is a bad faith deal and would not be enforceable in a court of law.
A duress illegal agreement may be real or psychological. Real duress is when one party threatens the other with physical harm or perhaps even death if they do not complete whatever the threatener wants them to do. Psychological duress involves the use of mental pressure and manipulation to force one party to do something. Example: Party A holds Party B at gun point and threatens to shoot them unless they sign a contract stating that all of Party A’s debts will be paid. Or; Party A threatens Party B with mental anguish and jail time unless they sign the contract.
Malpractice as an illegal agreement is when a contract is formed between one party in a position of power, such as an attorney for example, or where one party abuses their power to distort the possible outcome, such as a doctor having sex with his/her patients. Another example: Party A knowingly and intentionally tells Party B that the vehicle they are buying has been inspected and cleared of all defects that would prevent safe driving.
Illegal consideration is when the thing that is being obtained through the exchange of the illegal agreement is illegal itself. Example: you are forced into selling drugs in exchange for the promise of release from jail.
Consequences of Illegal Agreements
The Matters made in Illegal Agreements
The validity of illegal contracts can often be put to the test by a party to the agreement. A party may be allowed to have the contract not enforced or struck down by the courts if the violation of the law which renders the contract unenforceable has not been committed by that party. If a party did break the law then there is a good chance that that party could be punished for it.
While the courts have the right to enforce contracts, those that are illegal create no rights – and in fact create only wrongful ones. Because the parties have entered into an agreement which is illegal – they cannot enforce their agreement through the courts. The agreement will be declared null and void and will not be completed. In a contract for the loan of money, if the money was lent in contravention of the law then the lender may not recover it.
Other forms of punishment may also apply to the parties in an illegal agreement. Just because one party may have the opportunity to seek a remedy from the court that the other may not does not mean that because one party may be able to owe money, the other gets a free ride. Penalties can apply to either party and any partner- and in any capacity. The principals of the company can be held liable for the illegal seizure of money by the company through the contract. Each party may end up with criminal liability for their part in the crime of entering into an illegal agreement. Any and all partners, agents and employees of a company can be held criminally liable for their role in the criminal act of entering into an illegal agreement or contract. The logical consequence of such actions is that each party is liable for any criminal acts or violations of the law enacted in the making or implementation of the contract.
The parties to a contract would both be penalized for entering into an illegal agreement, however, those who are not parties to the contract cannot seek to enforce it even if the contract was made illegal as a result of their actions.
Effects on Businesses of Illegal Agreements
Illegal Agreements: How they affect businesses
Enterprises often enter contracts with people and companies, and on the face of it, they may be legitimate. Regrettably, not all of them are. Contracts that are either illegal or immoral may have deleterious effects on businesses. The following is a list of concerns associated with illegal agreements:
Materiality
Illegal agreements are typically material or significant in nature, meaning that there is a very high likelihood that if a court or tribunal were to consider the same, it would rule that the agreement is void or otherwise unenforceable. Agreements which deal with the purchase and sale of prohibited/substandard goods, the provision of licensed services without the requisite permits/licenses or even bad faith agreements are some examples of illegal agreements.
Financial Losses
Engaging in an illegal agreement may result in a financial loss to the business that has entered into the agreement. This is because a party to an illegal agreement will not be able to claim or seek compensation for any loss suffered as a result of the agreement. This is the case even where that person enters the agreement in good faith.
Lack of Legal Remedy
If a party to an illegal agreement was to suffer a loss under the agreement , that party would be barred from approaching a court of law or tribunal to claim any compensation from the defendant. Courts and tribunals generally take the view that it would be contrary to public policy to allow a party to seek a legal remedy from a court of law or tribunal when the cause of action arises out of a transaction that is against the law or is immoral. Any damages which would otherwise accrue to a party as a result of the illegal agreement will thus be forfeited. This would naturally be an issue particularly when an enterprise has been acting both in good faith and lawfully.
Damage to Reputation
An illegal transaction will not only have financial ramifications, but will also tarnish the image and reputation of the business. Losing the goodwill it has built up over the years as a result of the unlawful and immoral conduct will have a negative effect on its relationships with suppliers, credit providers, shareholders and other stakeholders. Many businesses view reputation as an important aspect of their brand through which they compete in the market. Apart from this, customers and clients may also refuse to do business with the enterprise. In principle, this extends to the sanctions which apply to government officials and the duties and responsibilities they carry.
Regulatory Scrutiny
An enterprise which engages in an illegal agreement may become susceptible to regulatory sanctions. A regulatory authority may consider the matter and hold the parties responsible for the illegal transaction liable, depending on the nature of the industry. In so doing, the regulatory authority may consider the extent to which the enterprise has contravened the law, the degree of moral blameworthiness, whether the enterprise has done everything possible to prevent the contravention from occurring and the existing regulatory framework which seeks to prevent such conduct.
Prevention and Legal Protection
To avoid the hassles and penalties associated with illegal agreements, it is essential that individuals and businesses protect themselves by ensuring compliance with the law.
Before entering into any agreement or contract, all parties should be aware of and understand its terms. This will minimize the ability to argue later that any part of the agreement is illegal or outside the scope of the agreement. In most cases, if you are unsure as to whether an agreement may be regarded as illegal it is a good idea to obtain legal advice prior to signing to avoid problems down the line.
Careful diligence before entering into an agreement will go a long way toward eliminating liability resulting from an illegal agreement. The various types of illegal agreements each have different legal implications. By seeking proper advice prior to signing any contract, an individual can determine whether or not problematic terms exist, and therefore whether the contract or agreement should be signed.
Real-Life Examples
From employment contracts that violated public policy to release agreements that attempted to shield employers from harassment claims, there are more examples of illegal agreements than we can count. Here are just a few of the industries and types of businesses that have gotten into trouble for entering into illegal agreements:
Manufacturing
A steel manufacturing company once required all applicants to agree to a mandatory arbitration agreement. Even worse, the company forbade its employees from discussing any aspect of the arbitration with other employees. Not only was the mandatory arbitration agreement found to be illegal , but the NLRB required the company to pay back pay to the employees who had been subjected to illegal terms of employment.
Restaurants
A national restaurant chain once insisted that all of their employees sign contracts prohibiting them from discussing wages, work hours, and other employment conditions with anyone but management. This practice was discovered by the NLRB, and the company was found to be violating federal laws.
Retailers
Numerous retailers have faced legal action after requiring all new hires to sign a contract in which they agreed not to bring any criminal charges against the company. Fortune 500 companies are not immune – a nationwide company was required to pay $16,000 to a former employee after it was discovered that they were forcing all employees to sign illegal contracts.