Illegal and Void Contracts: The Legal Twist Most Entrepreneurs Miss

Contracts form the backbone of business, trade, and personal transactions. But not every agreement is legally enforceable. Some contracts are illegal, while others are merely void. Though they often look similar on the surface, the law treats them very differently. Understanding the difference between illegal and void contracts is crucial, not just for law students but also for entrepreneurs, professionals, and anyone entering into agreements.

What Are Illegal and Void Contracts?

In simple terms, an illegal contract is one where the very foundation of the agreement is against the law. Such contracts are not only unenforceable, but they may also attract punishment or sanctions. For instance, a contract to sell banned drugs or commit a crime will be considered illegal.

On the other hand, a void contract is not punishable but is simply without legal effect. A void contract does not break the law directly; it just cannot give rise to enforceable rights. For example, a contract made without the required consent or one made with impossible conditions will usually be void.

As Justice Akanbi once explained, the law distinguishes between a contract declared void by statute and an illegal contract. A void contract does not always carry penalties, while an illegal one often does.

Categories of Illegal and Void Contracts

The law recognizes three main categories of contracts in this area:

1. Contracts illegal by statute – those explicitly prohibited by legislation, such as unlicensed money lending, unlawful land transfers, or dealing in foreign exchange without approval.

2. Contracts illegal at common law – agreements that go against public policy, such as contracts to commit crimes, promote corruption, or obstruct justice.

3. Contracts void at common law – agreements considered void because they conflict with fundamental legal principles, such as contracts restraining trade, contracts ousting the jurisdiction of the court, or sexually immoral contracts.

Examples of Illegal Contracts

• A contract to commit fraud or assault.

• A marriage contract that encourages bigamy.

• A business deal with an enemy country during wartime.

• Agreements involving bribery or corruption in public service.

In such cases, courts not only refuse to enforce the contracts but may also impose penalties.

Examples of Void Contracts

• Contracts in restraint of trade that are too broad or unreasonable.

• Agreements attempting to prevent a person from going to court.

• Contracts based on immoral considerations, such as lodging rented out for prostitution.

Unlike illegal contracts, void contracts don’t always involve sanctions, but they remain unenforceable.

Legal Consequences of Illegal and Void Contracts

The consequences differ sharply depending on whether a contract is illegal or void:

• Illegal contracts: No rights can be enforced. Money or property exchanged is generally not recoverable, and courts will refuse to assist either party. For example, in Everet v Williams, two highway robbers tried to sue each other over their loot—the case was dismissed with severe consequences.

• Void contracts: While the void part of an agreement is unenforceable, the valid parts may still stand. Courts sometimes apply the doctrine of severance, removing the void terms but enforcing the rest, provided the void section is not central to the contract.

Conclusion

The line between illegal and void contracts determines whether:

• A party can recover money or property transferred,

• The agreement attracts penalties, and

• The law will provide any relief.

For businesses, understanding this difference ensures compliance with the law while safeguarding investments. For students and legal practitioners, it helps in grasping core principles of contract law and applying them to real-life cases.