Keith Mack
A contract is deemed illegal under statutory law when it explicitly violates legislation, such as unlicensed trade, excessive interest rates, or criminal conduct. Common examples include contracts for illegal activities, such as prostitution, gambling, or drug distribution, as well as agreements involving minors or those lacking mental capacity. These contracts are considered void and unenforceable, with courts evaluating the nature of the illegality and its impact on the agreement. While the determination of a contract's legality can be challenging, it is essential to understand that statutory illegality occurs when an agreement directly contravenes laws or regulations, providing a defence against breach of contract claims.
| Characteristics | Values |
|---|---|
| Contracts involving minors or the mentally impaired | Illegal |
| All parties are of sound mind | Legal |
| Parties are not under the influence of drugs or alcohol | Legal |
| Agreement is made of parties' own will | Legal |
| Contract is based on a mistake, duress, or fraud | Illegal |
| Contract involves criminal conduct | Illegal |
| Contract involves unlicensed practitioners | Illegal |
| Contract involves excessive interest rates | Illegal |
| Contract involves gambling | Illegal |
| Contract involves prostitution | Illegal |
| Contract involves slavery | Illegal |
| Contract involves bribes | Illegal |
| Contract involves jury tampering | Illegal |
| Contract involves any type of transaction | Can be illegal |
| Contract involves employment | Can be illegal |
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What You'll Learn
Unlicensed trade
Statutory illegality occurs when an agreement directly violates laws or regulations. In the case of unlicensed trade, this could mean that a contract with an unlicensed professional is deemed illegal if the relevant statute explicitly bars recovery by unlicensed practitioners. For example, in the case of *Pacific Custom Pools, Inc. v. Turner Construction*, a contractor who was statutorily required to have a license constructed a waterslide for a plaintiff while knowing they were unlicensed. The plaintiff refused to pay the remaining $80,000 on the deal, and the contractor did not receive payment.
The requirement for a license can vary based on the occupation. For instance, some occupations may be performed without a license, such as lawn mowing, while others may require a license to prove competency, such as certain plumbing work.
It is important to note that the law of illegality in respect of business contracts is governed by common law, which takes into account all statutes when assessing illegality. This includes primary legislation and those that offend delegated legislation by doing something outlawed by the statute.
In summary, unlicensed trade can render a contract illegal under statutory law, but the specific circumstances, such as the type of license and the relevant statutes, will determine the legality of the contract.
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Excessive interest rates
The specific interest rate limits vary widely across states, and some states, such as Delaware, have more relaxed usury laws compared to others. For example, New York sets its interest rates quarterly, while Delaware's legal rate of interest is 5% above the Federal Reserve rate, making it subject to fluctuations. New York's limit is 16% for civil usury and 25% for criminal usury. Some states, like Hawaii, set a maximum interest rate of 10%, but allow this maximum to be overridden by a written contract.
While usury laws aim to protect borrowers from excessive interest rates, there are certain exceptions and circumstances that allow lenders to charge rates above the legal rate of interest. For instance, customers can choose to waive their protection against excessive interest rates when applying for financing. Additionally, credit card lending and other types of loans may not be bound by usury laws in certain states. In California, for example, banks and similar institutions are exempt from the maximum annual interest rate of 10% on consumer loans.
The Military Lending Act provides an exception to excessive interest rates for active service members and their dependents. This law caps credit card interest rates at 36% for those covered by its protections. Similarly, the Servicemembers Civil Relief Act caps interest rates on any credit card debt incurred by an active service member before entering military service at 6%.
Despite efforts to enact a national usury limit, many states are independently acting to limit payday lenders to an annual percentage rate of 36%, including fees. While usury laws have been relaxed over time to accommodate an increasingly consumerist society, excessive interest rates that exceed the legal rate are still classified as usury and can result in stiff penalties, such as fines or forfeiture of principal and/or interest.
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Criminal conduct
Contracts that violate criminal law, including statutes governing extortion, robbery, embezzlement, forgery, some gambling, licensing, and consumer credit transactions, are illegal. For example, a contract to sell drugs is unlawful as it directly violates criminal law. Similarly, unlicensed professional contracts may be deemed illegal if specific professions, such as medical, legal, or construction work, require licensing.
Agreements made for illegal activities, such as prostitution or gambling, are also considered illegal contracts. These contracts are void and unenforceable, meaning neither party can seek enforcement or legal remedies in court. If one party breaches the agreement, the other party cannot recover damages.
Additionally, contracts that involve criminal conduct, such as concealing a crime, criminal conspiracies, misbehaviour in public office, or receiving compensation for a crime beyond the loss or injury suffered, are illegal. Contracts that promote corruption, discrimination, or violate fundamental rights are also deemed unenforceable as they violate public policy.
It is important to note that the illegality of a contract must directly relate to its contents. Courts assess these contracts on a case-by-case basis, considering fairness, harm to public interest, and statutory guidelines. While it can be challenging to prove that a contract is illegal, particularly if the illegal conduct is not explicitly stated in the agreement, a contract requiring either party to act unlawfully will likely be deemed illegal.
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Minors and the mentally impaired
For a contract to be legally binding, all individuals who signed the agreement must have "contractual capacity". Contractual capacity is a legal term that refers to the minimum mental capacity required to enter into an agreement. Minors (those under the age of 18 in most states) and individuals with mental impairments fall under the categories of people who lack contractual capacity and are presumed to not know what they are doing when they enter into a contract.
Minors have the option to disaffirm or set aside their contractual obligations by stating their intention to not honour the contract. This intention can be stated verbally, in writing, or through actions. For example, if a child entered into an agreement to mow their neighbour's lawn, selling the lawnmower would indicate an intention to disaffirm the contract. In most states, a minor cannot void a contract for necessities like food, clothing, and lodging. A minor can void a contract for lack of capacity only while still a minor. If a minor turns 18 and hasn't done anything to void the contract, then it can no longer be voided.
In the case of individuals with mental impairments, the contract can be voided or a guardian can void it on their behalf. However, it can be difficult to prove that an individual lacked the mental capacity to enter into a contract. Courts will consider the specific facts of the case and may require testimony from physicians, friends, and neighbours to establish competency. For example, in the case of Mrs. Rick, who suffered from Alzheimer's, the court found that she lacked the requisite mental capacity to execute a power of attorney and land conveyance.
It's important to note that while gambling contracts are often illegal, some agreements that appear to involve gambling may not be. For example, if a gardener agrees to care for the grounds of a property owner for life in exchange for an advance payment, the uncertainty of the landowner's death does not make the deal a wager.
Additionally, certain unlicensed practitioners may be prohibited from collecting a fee for their services, depending on the language of the statute and the purpose of the requirement. If the statute requires the practitioner to prove competency, an unlicensed person cannot recover any fees.
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Gambling
Insurance contracts are also speculative, but they are not considered gambling unless one party has no insurable interest. For example, if you took out a life insurance contract on the life of a stranger, the agreement would be void because both parties are gambling on a contingent event. However, if you insure your spouse or your home, the contingency does not make the policy a wagering agreement because you will suffer a direct loss should it occur.
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Frequently asked questions
A contract is illegal under statutory law if it violates legislation, such as unlicensed trade or excessive interest rates.
Examples include contracts for illegal activities such as prostitution, gambling, or the sale of drugs or drug paraphernalia. Other examples include unlicensed business transactions, contracts exceeding interest rate caps, and contracts to conceal or compound a crime.
If a court determines that a contract is illegal, it becomes void and unenforceable. The contract will no longer exist, and neither party will be held liable for a breach.
