Reviewed and Validated by: Naman, Associate
A contract may be said to be invalid or illegal in following three cases:
- Firstly, is the contract is illegal in its inception, neither party can assert that he did not intend to break the law. Both parties have expressly and clearly agreed to do something that in fact is prohibited at common law.
- Secondly, if the contract is ex facie lawful, but both parties intend to exploit it for an illegal purpose, it is illegal in its inception despite it innocuous appearance. Both parties intend to accomplish an unlawful end and both are remediless.
- Thirdly, if the contract is lawful in its formation, but one party alone intends to exploit it for an illegal purpose, the law not unnaturally takes the view that the innocent party need not be adversely affected by the guilty intention of the other.
The consequence where the contract is illegal in its inception-
- A contract that is illegal as formed and is therefore void ab initio is treated by the law as if it had not been made at all. It is totally void, and no remedy is available to either party. No action lies for damages, for any account of profits or for share of expenses.
- Neither party can recover what he has given to the other under an illegal contract if in order to substantiate his claim he is driven to disclose the illegality. The maxim in pari delicto potior est conditio defendentis applies and the defendant may keep what has been given.
- A plaintiff however may recover money, chattels or land transferred under an illegal contract to the defendant, if he can frame a cause of action entirely independent of the contract, for in these circumstances he is not compelled to disclose the illegality.
- A subsequent or collateral contract, which is founded on or springs from an illegal transaction, is illegal and void.
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Importance of Valid Contract
Do parties owe each other duty to negotiate in good faith? Common sense suggests and the law has long recognised that the obligations created by a contract are not at all of equal importance. It is for parties to set down their own value on the terms that they impose on each other. When a party to a contract fails to fulfill agreed upon obligations, he or she can be held accountable for the breach if there is an existing record of the contract.
Breaches could include:
- A failure to perform a contractual duty on time;
- A failure to perform in accordance with the terms of a contract; or
- A failure to perform at all.
Fortunately, even when someone fails to abide by an agreement, contract law offers a form of relief to non-breaching parties in the form of damages. The most commonly awarded damages include:
- Compensatory damages, which are intended to place the non-breaching party in the position that he or she would be in had the breaching party fulfilled his or her end of the contract;
- Punitive damages, which go above and beyond compensatory damages and are intended to punish the breaching party and discourage similar behaviour in the future;
- Nominal damages, which are awarded when a breach occurred, but the other party did not actually experience any monetary loss; and
- Liquidated damages, which are included in the contract when it is formed in the event that one of the parties fails to uphold its end of the bargain.
In some rare cases, courts are also willing to order the breaching party to perform the service or exchange as described in the contract. This is known as specific performance.
When a non-breaching party has already provided a benefit to the other party, he or she can also receive restitution. Contracts are legally enforceable and the consequences of failing to comply with the terms of an agreement can be severe.
This helps encourage those who enter into agreements to abide by the set terms. It also provides those who enter into a contract with the knowledge that they can collect damages for a breached contract.
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