9.4  Exceptions to Illegality

As stated in the outset of this Chapter, the general rule is that courts will not enforce illegal bargains. The parties are left where the court found them, and no relief is granted: it’s a hands-off policy. The illegal agreement is classified as void, and that a wrongdoer has benefited to the other’s detriment does not matter. For example, suppose a specialty contractor, statutorily required to have a license, constructs a waterslide for Plaintiff, when the contractor knew or should have known he was unlicensed. Plaintiff discovers the contractor is unlicensed and refuses to pay the contractor $80,000 remaining on the deal. Under the general rule of non-enforcement, the contractor will not get paid. 

As always in the law, there are exceptions, and this is true even when discussing illegal contracts. There are limited instances where a court might permit one party to recover, but those instances do exist, and are discussed below.

Party Withdrawing before Performance

A party that has withdrawn from a contract prior to performance in an illegal bargain may be entitled to seek restitution. For example, Samantha and Carlene agree to bet on a soccer game and deliver their wagers to the stakeholder. Subsequently, but before the game, Carlene discovers the wager is unlawful and decides she no longer wants the bet. She notifies Samantha and the stakeholder. In this case, a court may permit her to get her money back from the stakeholder.

Party Protected by Statute

When a party is protected by a statute, it can have a significant impact on the legality or enforceability of a contract. In contract law, statutes and regulations can override or modify the terms of a contract and may provide protections to one or both parties. For example, securities laws forbid the sale or purchase of unregistered offerings—such a contract is illegal. Yet even with the illegality, the statute allows the purchaser of the unregistered offerings the right of rescission (return of the money paid), so there is still a contract remedy.

Party Not Equally at Fault

When both parties to a contract are equally responsible for the illegal conduct, called ‘in pari delicto‘, the court is more likely to refuse to enforce the contract for both parties. Neither party is favored since both have “unclean hands.” However, there are situations where one party is less culpable or less involved in the illegal conduct than the other party. In such cases, the court may be more lenient toward the party with lesser fault. If one party induces another to make an illegal contract by undue influence, fraud, or duress; the party with lesser fault in the illegality can recover their consideration.

Excusable Ignorance

Excusable ignorance occurs when one party to the contract was genuinely unaware of the contract’s illegal nature. This ignorance may arise due to a lack of knowledge about specific laws or regulations, misrepresentation by the other party, or other reasonable factors that prevented the party from recognizing the illegality. For example, a laborer is hired to move sealed crates, which contain illegal drugs. Although it is unlawful to sell and ship these drugs, the laborer can still be payed for services due to excusable ignorance.

Partial Illegality

Partial illegality in contracts refers to a situation where only a portion of a contract is illegal, while the remainder of the contract is lawful and enforceable. In cases of partial illegality, the court may choose to sever or remove the illegal portion while upholding the valid portions of the contract, provided that the legal and illegal aspects are distinct and separable. For example, a six-page employment contract contains two paragraphs of an illegal noncompete agreement. The illegal part is thrown out, but the legal parts are enforceable.