What is Legal Purpose
Defining Legal Purpose in the Context of Contracts
‘Legal purpose’ refers to the requirement that contracts must have a legally acceptable objective. Essentially, the subject matter of a contract must be legal if the contract is to be compliant with contract law – and therefore enforceable as a binding agreement.
Contracts do not automatically become binding simply because they embody an agreement, and nor do they bind the parties simply because they have been signed. The courts will only enforce an ‘agreement’ that complies with certain minimum criteria .
These criteria in order to be legally enforceable are that:
A contract that does not satisfy the "legal purpose" criterion is known as "void". This means that even though both parties may believe that they are bound by it, having signed it and engaged in performance actually carried out in accordance with its terms, the contract nonetheless has no legal effect and no party can rely upon it in order to require the other party to comply with its obligations under the contract.
Why Legal Purpose Matters in Contracts
A contract that does not have a legal purpose is void. It is important to have a legal purpose for the contract because it will determine the validity of the enforceability of the contract.
Contemplating on possible outcomes is inherent when entering into a contract. You contemplate the possible consequences if you were to break the contract. You also consider what will happen if you do not get paid after the work has been done. However, under the principle ‘ex turpi causa non oritur actio’, you will be barred from taking any actions in court to recover under a contract if the subject matter of the contract is illegal or immoral.
For example, if you were to enter into a contract that was for the sale of illegal drugs, the courts will look at the main purpose of the contract. If the illegal purposes are the main reasons for entering into the contract then the agreement will be void. Otherwise the courts will enforce the contract. This is why having a legal purpose of the contract is important because it will determine whether or not the contract is enforceable.
Legal Purpose and Unacceptable Purpose
Traditionally, courts have considered contracts that violate criminal law to be contrary to public policy, whether or not the law has been enforced. A contract is "illegal" if it is prohibited by statute, or strikes at the interest of the community, as when pledging the honesty or credit of the debtor proves untrue and the debtor’s goods are fraudulently seized. If a debtor sells or assigns his property with an intent to defraud, his creditor may not enforce the contract. Indeed, the nature of any public offense, the illicit object of any contract, and the public good specifically, by means of disgust, fear, or aversion, exclude the enemy of society, the criminal, from the benefits of a contract entered into or carried out with the notion of effecting an illegal object (as in the case of prostitution). Thus, contracts tainted with an illegal purpose void their consideration and further execution on the premise that no man may take advantage of his own wrong.
In determining whether a contract violates public policy, the entire contract must be examined, and not just portions of it. The contract must be viewed as a whole to determine whether the contract offends against public policy, or is merely incidentally against public policy.
A contract to bribe a judge is illegal: A contract, whereby one party is to procure a conviction against a third person by bribing a judge is void as against public policy, even though a portion of the fruits of the transaction are to go to an innocent party who had no part in the criminal act, e.g., where one party borrowed money from another for the express purpose and with the intention of using it in the bribery of a judge in order to convict a third party, the money transaction is illegal as against public policy.
Legal Purposes in Certain States
Legal purpose, as previously discussed, varies depending on the jurisdiction. In Indiana, for example, "An objection to a contract based on its violation of public policy will not lie unless a statute clearly and definitely declares it contrary to public policy or the violation of the contract itself necessarily conveys a disreputable impression." FFC Servs., Ltd. v. R.D. Werner Co., 782 N.E.2d 364, 366 (Ind. Ct. App. 2003). Kentucky courts have held that "contracts are invalid when they are in direct contravention to public policy" and "courts have discretion to void contracts whose enforcement would produce the kind of mischief to the public good that is plainly and strongly against public policy." Bulleit Burners of Ky. v. Ward, 400 S.W.3d 615, 624 (Ky. Ct. App. 2012) (internal citation omitted).
Pennsylvania courts have stated that "A contract constitutes a ‘contrary’ purpose if the conduct it requires or involves contravenes a law or legal prohibition or is injurious to the public welfare or morals or safety." Value Line Fund, Inc. v. Penske Corp., 538 A.2d 845, 851 (Pa. Super. Ct. 1988). New York courts have reasoned that "[r]efusing to entertain an action …that is premised on a contract contrary to public policy, [is] consistent with our long-standing respect for the principle that, ‘[a] court will not lend its aid to a man who found his cause of action upon an immoral or an illegal act.’" Dufrense v. Astronics Corp., 805 N.Y.S.2d 893 (N.Y. Sup. Ct. 2005) (quoting O’Rourke v. Governor’s Island Corp., 15 N.Y.2d 374, 381, 257 N.Y.S.2d 642, 204 N.E.2d 846 (N.Y. 1965)).
As discussed above, Michigan courts have focused on the discriminatory impact of covenants not to compete rather than the specific legal purpose of the agreement. Other states utilize a similar analysis focusing on whether an agreement, even if it otherwise is contravening of some law, will produce some sort of mischief or harm that is contrary to public policy. Therefore, while the nuance of the standard utilized in different jurisdictions may vary, courts have a built-in flexibility in deciding what constitutes enough "mischief" to warrant intervention by the court.
Contracts that Lack a Legal Purpose
If the purpose of a contract is prohibited by law, it is void. The courts in Mississippi will not enforce what is called a "void ab initio" contract. By entering into a contract that lacks legal purpose, a party may be exposing itself to additional liability, depending on the facts of the case. As a matter of public policy, a contract that has no legal purpose will not be enforced, regardless of how fair it may seem to the parties. In taking this approach, courts are refusing to reward, bless, or legalize the illegal.
With the general rule that a contract without legal purpose is void ab initio, there are multiple exceptions to the rule. For example, if the consequences of a void contract should fall upon the innocent party, then a court may reform the contract to include the appropriate legal purpose. A contract executed for an illegal or immoral object that is void based on this principle will remain valid and enforceable when the parties go beyond the bounds to accomplish the object by an alternative route. Courts hold that where the parties pursue their object by a new and lawful means, such means will serve as a substitute for the illegal object .
A contract for legal and illegal purposes is void as to the illegal part only, and it is not necessarily void as to the legal part. A contract that is partially void because it has illegal and legal parts is void only to the extent of its illegality while it is valid and enforceable to the extent that it is legal. An agreement clearly separable into distinct legal and illegal parts should be enforced with respect to the legal provisions. However, if the illegal part of the contract depends so essentially on the illegal part that it is not presumed that the parties would have entered into the one without the other, either the entire contract would be unenforceable and void or the illegal part would be unenforceable and void, depending on the real intention of the parties. If the illegal part were not separable, that part of the agreement would be unenforceable and void.
Lastly, under the doctrine known as "in pari materia" (i.e., equal reason), contracts between two or more parties that, either in form or substance, are similar in everything essential in point of law may be construed together.
How to Ensure a Contract Has a Legal Purpose
For any covenant not to compete to be enforceable, the contract must contain a legal purpose. This means that the contract cannot be for any illegal purpose or for the specific purpose of committing an illegal act. In court it is the burden of the contract party seeking to perform under the contract to prove that the contract was made for a legal purpose. Once a defendant has proven that the contract was made for an illegal purpose, it is up to the contract party seeking to perform to prove that the remainder of the contract can be performed without the illegal term. Here are a few practical tips for individuals and businesses to get the best result from this analysis.
- Contracting parties should only enter into agreements for legal purposes because if they entered into an agreement with the specific purpose to break the law, then it is almost impossible to enforce a contract. Contracting parties should be able to prove on their face as well as in context that the reason they are entering into the contract is legal.
- If you suspect that your contract with another party has been created to discuss or engage in illegal activity, confirm with an attorney that the agreement is not for an illegal purpose. There is no requirement that someone has to engage in the illegal activity it is enough to just know or have reason to believe that the illegal activity is occurring.
- If some terms in the contract can be performed without the illegal term, then the remainder of the contract must be performed. It is the defendant’s burden in court to show that one part of the contract is illegal and the rest cannot be performed without it. So do not get discouraged just because you have an illegal term, work with an attorney to draft the agreement so that other parts are not affected.
Case Examples Related to Legal Purpose
In the matter of Norray v Bhana [2003] WASC 126, the plaintiff vendor and the defendant purchaser entered into a contract for the sale of a profile cut-off machine on terms negotiated by an agent. That agreement, on its face, created an obligation on behalf of the purchaser to pay a ten percent deposit, which was acknowledged by the agent on behalf of the purchaser. The plaintiff sought to enforce the contract on the basis that the agent’s signature on the contract amounted to the signature on behalf of the purchaser and constituted part performance of the contract. The purchaser did not sign the contract in his own handwriting. However, the receipt for the interlocked ten percent deposit under the contract was signed by the purchaser’s representative. The defendant purchaser asserted that the contract was unenforceable because the agent that negotiated the contract for him did not have authority to bind the purchaser. The court held there was no mutual agreement between the parties and therefore, the purchaser was not bound by the terms of the contract. ‘There was no consensus by the parties as to the essential terms of the contract, which those terms are, in essence, that time was not of the essence and the defendant would not be able to compel specifics performance of the contract,’ stated the court. As such , the vendor was unable to compel the purchaser to complete the contract. In another case study – Coolidge v State of Victoria [2001] VSC 558 – the plaintiff entered into a contract of sale with the State of Victoria to purchase State land. The purchaser had plans to subdivide and develop the land purchased. The contract was conditional on the purchaser receiving a Town Planning Permit – the condition was that the State of Victoria was to use its best endeavours to obtain a permit. Due to a change in policies and practices by the State’s Department of Infrastructure (i.e. the State’s statutory Town Planning Authority), the defendant State was no longer willing to exercise its powers under the contract. The State expressed unwillingness to support the purchaser’s planning application, specifically the proposed development characteristics of the allotment in the District Zone. Further, the Director of the Department instructed the Council to notify the purchaser that it had been advised by the Department that the State would not be supporting its application and that no permit should be issued. The purchaser was notified that it was in default pursuant to the provisions of the contract, and advised that unless the default was rectified by, or before, a stated date, the contract would be terminated. Instead of taking the course of action previously adopted by the Council, the purchaser took action for specific performance. The purchaser sought specific performance on the ground that by the State’s conduct in making the planning application and in not itself first applying to the Supreme Court to seek an injunction preventing the Council from issuing a permit to an objector, consent was inferred. The court held that the purchaser was entitled to specific performance. The above case studies are just a couple of instances where the legal efficacy of the legal purpose of a contract has been tested in judicial proceedings.