Illegal And Unenforceable Contracts



Illegal and unenforceable Contracts

An illegal contract is a contract that was made for an illegal purpose and, consequently, violates the law. Contracts are illegal if the performance or formation of the agreement will cause the parties to engage in activity that is illegal. The illegality must relate directly to the subject matter creation of the contract and not some intervening circumstance.

Technically, an illegal contract or agreement is not a contract at all, and courts will not enforce them. Thus, they are said to be void or “unenforceable”- it is as if the contract never existed, and the parties will not be entitled to relief if either party breaches the contract.

whether a contract is illegal or not depends on the subject matter of the contract. For example, an employment contract for the hiring of a blackjack dealer is illegal if gambling is illegal in that state. This because the contract would require the employee to perform illegal activities, namely, gambling.

On the other hand, a contract for the sale of a deck of cards is usually not found to be illegal if selling cards is not prohibited by state laws. The contract will be enforceable even if the cards are being sold to a known gambler in a state where gambling is prohibited. This is because the required performance, that of selling cards, is not itself illegal.

Therefore, it can sometimes be difficult to prove that a contract is illegal. A general guideline to follow is: if the contract requires either of the parties to do something that is illegal, then it is usually unenforceable.

common examples of illegal contracts include:  

  • Contracts for the sale or distribution of controlled substances such as drugs or paraphernalia
  • Contracts for illegal activities including prostitution or gambling
  • Employment contracts for the hiring of underage workers

Sometimes a contract will deal with a subject matter that is not specifically prohibited by law, but is nonetheless against public policy and principles of fair dealing. These contracts will also fall under the category of “illegal contracts” and are also unenforceable as they are against public policy.

Examples of contracts that are void because they violate public policy include contracts which would lead a party to perform labor that would essentially force them to be a slave and certain covenants not to compete. Even though the subject matter of these agreements may not be specifically covered in any statute, a court will still treat them as though they are illegal. These contracts will therefore be unenforceable in a court of law.

Indemnity Guarantee and Bailment

Indemnity and Guarantee are a type of contingent contracts, which are governed by Contract Law.  Simply put, indemnity implies protection against loss, in terms of money to be paid for loss. Indemnity is when one party promises to compensate the loss occurred to the other party, due to the act of the promisor or any other party. On the other hand, the guarantee is when a person assures the other party that he/she will perform the promise or fulfill the obligation of the third party, in case he/she default.

When it’s about securing one’s interest while entering into the contract, people mostly go for a contract of indemnity or guarantee. At first instance, these two will appear same, but there are some differences between them. So if you are also interested to know about the differences between guarantee and indemnity then let’s take a further read.

A form of contingent contract, whereby one party promises to the other party that he will compensate the loss or damages occurred to him by the conduct of the first party or any other person, it is known as the contract of indemnity. The number of parties in the contract is two, one who promises to indemnify the other party is indemnifier while the other one whose loss is compensated is known as indemnified.

  • The indemnity holder has the right to reimburse the following sums from the indemnifier:  
  • Damages caused, for which he was compelled.
  • The amount paid for defending the suit. The amount paid for compromising the suit.

Guarantee

When one person signifies to perform the contract or discharge the liability incurred by the third party, on behalf of the second party, in case he fails, then there is a contract of guarantee. In this type of contract, there are three parties, i.e. The person to whom the guarantee is given is Creditor, Principal Debtor is the person on whose default the guarantee is given, and the person who gives a guarantee is Surety.

Three contracts will be there, first between the principal debtor and creditor, second between principal debtor and surety, third between the surety and the creditor. The contract can be oral or written. There is an implied promise in the contract that the principal debtor will indemnify the surety for the sums paid by him as an obligation of the contract provided they are rightfully paid. The surety is not entitled to recover the amount paid by him wrongfully.

Bailment

Bailment is a transfer of custody of a piece of property rather than a transfer of ownership of a piece of property.

For example, let’s say John Doe owns a big piece of farmland on the eastern shore of Maryland. His adult son wants to move to the area and farm the land.  Rather than transferring ownership of the property to his son, John Doe (bailor) transfers possession or custody of the farmland to his son (the bailee). The son might pay rent or a lease fee in return. The son only receives custody and control of the property, but John still owns it. John is thus responsible for paying the property taxes and is liable for what happens on the land (unless the bailee failed to care for the land properly).

 


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