A contract is illegal if either its formation or its performance is contrary to the public interest and to public policy. In general, illegal contracts are void. While there is a wide variety of situation which may produce illegal contracts, the discussion in this lesson will focus on three broad categories of such contracts: (1) contracts in violation of positive law, (2) contracts expressly made void by statute, and (3) contracts contrary to public policy.
1. Contracts in violation of positive law. A contract which provides for the commission of a crime or whose nature tends to induce the commission of a crime is illegal. Similarly, a contract which cannot be performed without the commission of a tort is illegal; however, the fact that a tort is committed during the performance of a contract does not in itself make the contract illegal.
2. Contracts made illegal by statutes. Statutes which expressly deal with the legality of certain types of contracts may be divided into three groups: (1) criminal statutes, (2) statutes expressly declaring contracts void, and (3) regulatory statutes. Statutes commonly have statutes which either prohibit or regulate wagering. Generally, wagering contracts are illegal and will not be enforced. Wagering contracts should be distinguished from contracts to shift a risk. In a wagering contract, a risk is created for the purpose of bearing it---such as a bet on a football game. A risk-shifting contract---such as an insurance contract---is legal so long as the person purporting to shift the risk actually had the risk. Stock and commodity market transaction entered into in good faith are speculative contracts and not illegal as wagers.
Some common example of statutes declaring certain types of contracts illegal are usury laws and Sunday closing or blue laws. These statutes often make the contracts void and may subject the parties involved to various penalties and forfeitures.
In order to protect the public, states have enacted a wide variety of statutes regulating the conduct of various types of businesses and professions. The most common type of regulation provides for the obtaining of a license before a person, partnership, or corporation engages in a regulated activity such as the practice of law or medicine or the carrying on of a trade such as barbering or plumbing. If a person contracts to perform such a service or engages in a regulated business without first having obtained the required license, any contracts he makes are illegal. Again, however, a distinction must be made between regulatory statutes which require proof of skill and character before the issuance of a license, and those statutes designed to raise revenue and which permit the issuance of a license to anyone who pays a certain, often substantial, fee. The failure to obtain a license required by a revenue-raising statute does not affect the legality of a contract made by the unlicensed person.