When are Agreements Illegal?
An illegal agreement is essentially a contract that does not lawfully bind the parties and therefore is unenforceable by law. Under the India Contract Act, 1872, several kinds of illegal agreements exist such as; agreements that are illegal by nature, agreements that are against public policy, agreements that restrain trade, agreements that are injurious to persons or property, and agreements that involve the commission of a crime or tort.
Agreements without consideration fall under the category of illegal by nature. Under this type of agreement, the parties do not freely consent to the terms of the contract and therefore, it will not bind parties. A contract becomes an agreement only when both sides of the contract have shown a willingness to consent. Every contract is basically an agreement, but an agreement is not always a contract unless it includes an offer from one party and acceptance of that offer by another party. Many times, the absence of consideration is not crucial because the parties have received something in return either from cash or services which they provide for what they receive. But if the agreement lacks consideration, it is void. Example: X and Y may agree to go to USA, but if there is no consideration, it will not be enforceable in the eyes of the law.
Agreements against public policy are made void as they are against the health and safety of the public or the morals of society. This means agreements that may serve the interest of some people or some public but not of the general public. In other words, an agreement that negatively affects public safety, or that is immoral or may harm the public will not be enforceable . For example, an agreement to commit a crime is not legal.
Agreements restraining trade are contracts that attempt to limit a person’s right to engage in the practice of trade in a particular geographical area and for a set time period. Example: agreements are for the sale of goods / services not exceeding 5,000 Rs. . If goods sold are worth more, the agreement will be void.
Agreements injurious to persons or property, also called as agreements in restrain of personal freedom simply mean agreements whereby a person is restrained to do a lawful act or restricts him from following his own trade will be void.
Agreements in restraint of marriage or of trade or in restraint of legal proceedings are all examples of agreements that are those legally considered void. If an agreement has the questions of authority, if there is a judicial act which has been passed without any authority, then that decision will be void ab initio.
Agreements for gambling such as betting are also illegal agreement. Gambling involves risking something of value on the outcome of a game, contest, or other event in hopes of winning a prize. This agreement is unenforceable because the outcome is uncertain.
An agreement which can not be performed , for example , if A agrees to give B a thousand dollars if it will rain next day in NYC, but neither A nor B knew that the weather forecast predicts sunny weather, naming this in the agreement, then that agreement will be void and not enforceable by law.
So, if even after reading the above text, if you feel your agreement is illegal and unenforceable then please contact a law firm that specializes in contract disputes. Law firms will offer you a free case review.
Common Types of Illegal Agreements
There are different types of illegal agreements. They include those that violate criminal statutes, those that are entered into on the basis of fraudulent terms, and those that violate public policy. A contract that is based on any of these illegal bases is itself illegal.
Agreements that constitute criminal activity are illegal. If a defendant agrees to commit a crime and is subsequently charged with a crime, the charges will stand on their own. The murder charge is not considered to be the contract for murder. The contract that the parties entered had the same effect as any other contract under these circumstances. Tribunals will not intervene in a private agreement that is based on a murder-for-hire arrangement. Beagley v. State, 415 P.2d 800 (Okla. 1966), cert. denied, Beagley v. State, 395 U.S. 916, 89 S.Ct. 1784, 23 L.Ed. 2d 735 (1969).
An agreement into which a person entered pursuant to a scheme designed to defraud is based on fraud and is void. No statement, writing or representation by the promoter may be enforceable because the promoter entered the agreement on the basis of false or misleading terms. As an example, consider the case of Williams v. Meese, 926 F.2d 884 (9th Cir. 1991) in which the plaintiff completed the required forms normally used by the federal government in applying for a permit to bear arms. But the forms were misleading because they included confidence schemes and scams that permitted the purchase of weapons from undercover officials. The plaintiff claimed that this amounted to entrapment and asked the courts to intervene in the private law of the contract. However, the court declined to intervene because there was no contract in the first place. The application to purchase a weapon was void as a matter of law because it was a contract to commit a crime.
Agreements that violate public policy are also illegal. For example, in a case involving the dissolution of a law firm, the court found that the firm’s clients should have their choice about restrictions on their right to enter into contracts with other firms. An agreement that removed the clients’ choice was therefore in violation of public policy. Baker v. Alderman, 149 Or. App. 446, 944 P.2d 986 (1997).
Example: Agreements to Engage in a Criminal Act
One of the most obvious, and commonly cited, examples of an illegal agreement is one that has a purpose of committing a crime against a third party. For example, in People v. Dronso, the court found that an agreement to commit robbery, even if not consummated, constituted conspiracy for purposes of a trap and trace order, because it showed intent to violate the criminal law, and therefore made the agreement illegal. In Murdock v. Classic Dodge Jeep, 2009 WL 174577 (Tenn.Crim.App.), the court stated that an agreement to commit theft is illegal under Tennessee’s version of the Restatement as a violation of the criminal laws. Similarly, where a central purpose of an agreement is to induce the violation of a criminal statute, its legality is governed by the local law in question.
For example, in Moscone v. Pacific Tel. & Tel. Co., 13 Cal.Rptr. 404 (Cal. 1961), an agreement to induce a telephone utility to defraud a public utility commission of money was illegal as a violation of the criminal laws and thus none of the parties could claim benefits under it. In Royall v. Penn Cent. Co., 229 A.2d 26 (Pa. 1967), an agreement to fill a fictitious order under false pretenses was an illegal agreement. While some courts limit this principle to crimes that arise out of the agreement itself, others do not.
Example: Agreements Based on Misrepresentation/Fraudulent Statements
An agreement may also be deemed illegal in situations where the agreement is based on the deceit or the dishonest representation of one party to the contract. When this happens, the agreement is not considered as having the contractual form that the law recognizes and, as a result, loses its validity. A common scenario is a loan transaction where one party misrepresents the intended use of the money. For example, assume a company is negotiating a financing arrangement with a bank. The bank, as part of the financing, requires a personal guarantee by the company’s president. The president misrepresents to the bank that all proceeds of the loan will be used for the company’s expansion and all security will be given to the bank for the loan. Subsequently, after the loan is made, the company president uses the proceeds to fund his personal expenses or to purchase another business. As a result of the president’s misrepresentation, the bank’s security is provided to another lender and no security is registered in the bank’s favour. In this scenario, the agreement (being the guarantee) by the president to the bank would probably be set aside as an illegal contract because the agreement was founded on the illegal purposes of the company’s president.
Agreements Against Public Policy
An agreement may also be held illegal on the ground that its performance would be contrary to the public policy of India, that is, to the interests of the public at large. Agreements violating public policy do not fall within Section 23, as a result of which they are void under Section 23. Such agreements violate the rules of good faith and fair play. The general rule is that a contract contravening public policy is void.
A contract may contravene public policy: Public policy contraventions may be summarized as those affecting: An important category of public policy violation is an agreement in restraint of trade. Any contract whereby anyone is restrained from exercising a lawful profession, trade or business of any kind, is, by that fact itself, void. However, an agreement not to carry on business is not, by itself, a restraint of trade . Where any trade is being carried on, the restriction to carry on a similar trade by another is a restraint of trade amounting to a violation of public policy.
Agreements to commit crime or torts are not permitted as well. An agreement between two parties to commit a crime is void. The law does not award damages for breach of such an agreement.
The restraint is not unlawful and, therefore, not void when it is founded on legal consideration and is no more than is essential to protect the trade interests of an employer and not against the interests of the public at large. But an agreement is void if it is in restraint of trade.
A contract encouraging or facilitating an immoral marriage is void, that is, a contract made in order to facilitate the formation of a concubinage, or to create a situation in which a man may legally have simultaneous marriages with various women.
Legal Ramifications of Illegal Contracts
The legal consequences of an illegal agreement can be severe, often resulting in the total unenforceability of the agreement itself. In the most extreme cases, the parties may even be vulnerable to criminal penalties. As a general matter, the following agreements may rise to the level of being illegal and therefore completely unenforceable by a court of law:
- Agreements to commit a legal wrong or tort: A county sheriff can be liable for wrongful arrest or false imprisonment during an unlawful detainment, as can a private citizen who detains an offending party. Under 18 U.S.C. ยง 241, the law prohibits two or more people from depriving a person of civil rights while under color of a statute, ordinance or regulation.
- Agreements that violate public policy: A contract to commit bribery (e.g., a traffic ticket agent accepting a bribe in exchange for a warning instead of a fine) acts against state and federal public policy.
- Agreements that restrain trade or restrict competition: A person can be prosecuted by the U.S. Department of Justice if he or she is involved in a price-fixing scheme with a competitor.
- Agreements made without mental competency: People suffering from mental illness, intoxication or impaired faculties are unable to contract, and therefore any agreement made during those times may not be enforceable in court.
While these are merely examples of illegal agreements, it’s easy to see how entering into any one of these could have severe legal consequences. A party to an illegal agreement could also find him- or herself involved in litigation with a third party injured by the illegal actions of two or more similarly complicit parties.
Avoiding Involvement with Illegal Agreements
Business owners, employees and consumers all want to be sure they are not entering into an illegal agreement without knowing it. Arguably, the best way to do this is by conducting their own legal due diligence. By ensuring that the contract they are about to execute does not violate any antitrust laws or other illegal agreements themselves.
If you are a business, we suggest at the very least asking the employees to have a basic understanding of agreements that could end up being illegal for various reasons . The business can also provide training to all of its employees so that they will understand the difference between the legal agreements that are permissible under the law and the illegal agreements that are not.
If you are an employee, we recommend doing your own due diligence as well. For example, checking with your lawyer and conducting research on accepted business practices to ensure you and your company are not entering into an illegal agreement with another party.