Illegal and Void Agreements

Similarities

  • These agreements are not enforceable at law.

Differences

  • Scope- Illegal agreements are narrower in scope. All illegal agreements are void. Void agreements are wider in scope. An agreement may be void because of a reason other
    than illegality.
  • Effect on collateral transaction – Collateral transaction of an illegal contract also becomes illegal and contract not be enforced. Collateral transaction of an agreement which is void for a reason other than illegality are enforceable at law.
  • Punishment – Parties may be punished for making illegal agreement. Being void does not make a contract punishable.

Despite the similarity between an illegal and a void agreement that in either case the agreement is void ab-initio and cannot be enforced by law, I will explain the above points in detail now.

  1. An illegal agreement is narrower in scope than a void agreement. ‘all illegal agreements are void but all void agreements are not necessarily illegal.’ The object or consideration of an agreement way not be contrary to law but may still be void. For example, an agreement may not be contrary to law but may still be void. For example, an agreement with a minor is void as against him but not illegal. Again, an agreement the terms of which are uncertain is void but such an agreement the terms of which are uncertain is void an agreement is not illegal.
  2. An illegal agreement is wider in effect in relation to collateral transactions than a void
    agreement. When an agreement is illegal, other agreement which are incidental or collateral to it are also tainted with illegality, hence void, provided the third parties have the knowledge of the illegal or immoral design of the main transaction. The reason underlying this rule is that no person shall be allowed to invoke the aid of the court if he is himself implicated in the illegality. On the other hand, when an agreement is void (but not illegal), agreements which are collateral to it are not invalidated and remain valid.

Illustration

A engages B to Murder C and borrows Rs.5,000 from D to pay B. D is aware of the purpose of the loan. D is aware of the purpose of the loan. Here the agreement between A and B is illegal and the agreement between A and D is collateral to an illegal agreement. As such the loan transaction is illegal and void and D cannot recover the money. But the position will change if D is not aware of the purpose of the loan. In that case the loan transaction is not collateral to the illegal agreement and is a valid contract.