What Makes a Contract Illegal: Everything You Need to Know

What makes a contract illegal? Any contract that does not conform to applicable state and federal laws and does not include all required elements is not legally enforceable. 3 min read updated on September 19, 2022

What makes a contract illegal? Any contract that does not conform to applicable state and federal laws and does not include all required elements is not legally enforceable. A contract must be created and executed following certain guidelines to bind its parties by law.

Elements of a Valid Contract

A valid contract constitutes an offer by one party that is accepted, typically in writing, by the other party. If the initial offer is not accepted, negotiation may take place until both parties agree to the established terms.

Both parties to a legal contract must:

• Be at or older than the age of consent
• Agree to the terms of the contract freely
• Have the mental capacity to meet the terms of the agreement

A valid contract must include a value or price, known as the element of consideration. This could also be a benefit, interest, or right. Both parties to the contract must benefit from the agreement.

Most contracts are only valid if they are in writing, but certain spoken agreements are legally enforceable. Contracts involving substantial debt, real estate, or a delay in meeting the terms (such as a last will and testament) must be written to be legally valid.

In general, consensual, legal contracts that include consideration and are entered into by two adults of sound mind are considered valid.

Elements of an Illegal Contract

Illegal contracts are those that require either party to engage in an illegal activity to fulfill the contract. This would not be considered a legal contract by the court and could not be enforced. Thus, illegal contracts are void and neither party will be entitled to relief if the other party breaks the contract. Sometimes, contract breach is defended in court by asserting that the contract was illegal and thus not enforceable.

Examples of an illegal contract include:

• Those for the distribution or sale of drugs, drug paraphernalia, and other types of controlled substances
• Those for illegal activities, such as gambling or prostitution
• Those that hire underage employees
• Those that are against fair dealing principles and/or public policy

Types of Illegal and Invalid Contracts

A contract is illegal and thus invalid when it involves one or more of these elements:

• Lack of capacity, which means that one or both parties does not have the mental ability to enter into a contract. This includes those younger than age 18 and those with mental disabilities or dementia, as well as anyone else who cannot understand the contract they have signed. This type of contract is not automatically void if both parties choose to honor it, but it will not be legally enforced.
• Illegal purposes, including both crimes as well as agreements that charge more for a loan or service than is legally allowed
• Mistaken interpretation, in which one or more parties is unclear about the terms of the contract. This must involve a major element of the agreement, not a trivial element that can be easily fixed. However, the contract will not be invalidated if the person knew that they did not understand the contract correctly when they signed it.
• Misrepresentation and fraud, such as false statements, which are influential enough to convince the unknowing party to sign the contract.

Proving a Contract Is Illegal

The subject matter of a contract determines whether it is illegal. For example, if a blackjack dealer is hired for employment in a state where gambling is illegal, the employment contract is illegal because it would require him or her to perform illegal activities. However, simply selling a pack of cards to a known gambler is not illegal. This fine line means that the legality of a contract can be difficult to prove. In most cases, the court will consider a contract illegal if it cannot be fulfilled without performing illegal activity.

If you inadvertently enter an illegal contract, you will be unable to have its terms enforced by the court if the other party is in breach of contract. Therefore, it's important to consult a contracts attorney to review any contract you are in the process of negotiating. He or she can warn you if an agreement is illegal.

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