What Is Legality of Purpose?
Legality of purpose refers to the requirement that the objective or subject matter of a contract must be lawful and not contrary to public policy. As a foundational principle within Contract Law in Finance, any agreement formed for an illegal or immoral purpose is generally considered void from its inception, meaning it holds no legal force and cannot be enforced by a court. This concept ensures that the legal system is not used to facilitate or uphold activities that are prohibited by statute or are harmful to society.
For a contract to be valid and enforceable, it must meet several criteria, and legality of purpose is one of the essential elements, alongside offer and acceptance, consideration, and capacity. Contracts lacking legality of purpose are typically void contracts, distinguishing them from voidable contracts, which may be set aside at the option of one party but are initially valid.
History and Origin
The principle of legality of purpose in contract law is deeply rooted in historical legal systems, tracing back to Roman and common law traditions. Ancient legal codes and philosophical texts, such as Plato's The Laws, recognized the idea that agreements to do something forbidden by law or decree should not be enforced. This foundational concept underscored that the state's judicial power should not be leveraged to uphold agreements that undermine its own laws or the moral fabric of society.4
Over centuries, as commercial and civil interactions grew more complex, courts developed a body of rules reflecting the maxim ex turpi causa non oritur actio, meaning "no action arises from a dishonorable cause." This principle prevents a plaintiff from suing based on an illegal contracts or one that is against public policy. The evolution of this doctrine demonstrates a consistent legal stance against enforcing agreements that promote criminal activity, fraud, or other harmful acts, reflecting the judiciary's role in maintaining public order and integrity.
Key Takeaways
- Legality of purpose is a fundamental requirement for a contract to be legally valid and enforceable.
- A contract whose objective is illegal, criminal, or against public policy is considered null and void.
- Courts will generally refuse to enforce agreements lacking a legal purpose, leaving parties without a legal remedy.
- This principle prevents the legal system from being used to sanction or facilitate unlawful activities.
- The concept extends beyond explicit statutory prohibitions to include actions deemed harmful to society or unethical.
Interpreting the Legality of Purpose
Interpreting the legality of purpose involves determining whether a contract's objective aligns with existing laws and established public policy. This assessment considers not only direct violations of statutes but also activities that, while not explicitly forbidden, are deemed detrimental to public welfare or good morals. For instance, a contract to commit a crime, such as a financial fraud, clearly lacks legality of purpose. Similarly, a gambling contract in a jurisdiction where gambling is illegal would be void.
The interpretation can be nuanced, especially when dealing with contracts that are not explicitly criminal but may violate public policy. Courts examine the underlying purpose of the contract and its potential impact on society. An unenforceable contract is one that, while perhaps meeting other contractual elements, cannot be upheld in court due to reasons such as illegality or unconscionability.3 This ensures that the courts do not inadvertently endorse or reward behavior contrary to societal interests.
Hypothetical Example
Consider a hypothetical scenario where two individuals, Alex and Ben, enter into an agreement. Alex, a stock trader, offers to pay Ben a substantial sum if Ben uses his insider knowledge to manipulate the price of a specific stock. Ben agrees, intending to profit from this illegal activity. They draft a formal written agreement outlining the terms of the payment and the stock manipulation strategy.
In this instance, even though the agreement has apparent offer and acceptance and consideration, its legality of purpose is fundamentally flawed. The objective of the contract—stock manipulation—is a direct violation of Securities Law. Should Alex fail to pay Ben, Ben would have no legal recourse to enforce the contract. A court would declare the contract a void contract because its purpose is illegal, and no damages or specific performance would be granted.
Practical Applications
Legality of purpose is crucial across various domains of finance and business. In investment banking, any agreements related to insider trading, market manipulation, or other illicit activities would be deemed void due to a lack of legal purpose. Companies engaging in mergers and acquisitions must ensure their agreements comply with Antitrust Law to prevent agreements that stifle competition from being invalidated.
Furthermore, contracts involving the sale of illegal goods or services, such as prohibited substances or unlicensed financial products, are unenforceable from the outset. Governments actively enforce regulations to prevent contracts from being used to bypass laws. For example, presidential actions may direct federal agencies to terminate contractual agreements that promote or facilitate practices deemed discriminatory or otherwise illegal under civil rights laws, reinforcing the mandate for a legal purpose in all agreements.
##2 Limitations and Criticisms
While essential for maintaining legal integrity, the application of legality of purpose can sometimes present complexities. The definition of what constitutes "against public policy" can evolve with societal norms and judicial interpretation, leading to some degree of uncertainty. Cases where the illegality is incidental to an otherwise lawful contract, or where one party is significantly less culpable than another, can also pose challenges for courts.
Historically, the application of the ex turpi causa rule has not always been straightforward, with legal debates on how strictly to apply the principle, especially when it might lead to unjust outcomes where a less culpable party is denied any remedy. Modern jurisprudence, as seen in certain legal precedents, has introduced a more nuanced approach, considering factors such as the underlying purpose of the prohibition, other relevant public policies, and the proportionality of denying enforcement. This reflects an attempt to balance the need to deter illegal conduct with the desire to prevent disproportionate penalties.
##1 Legality of Purpose vs. Enforceability
While closely related, legality of purpose and enforceability are distinct concepts in contract law. Legality of purpose refers specifically to the lawful nature of the contract's objective. If the purpose is illegal, the contract is generally considered a void contract from its creation, meaning it never truly existed as a valid legal agreement.
Enforceability, on the other hand, is a broader term indicating whether a court will compel the parties to fulfill their contractual obligations. A contract can be unenforceable for reasons beyond just illegality of purpose. For example, a contract might be unenforceable due to lack of capacity (e.g., one party is a minor), lack of proper consideration, the presence of duress, or if its terms are too vague. Thus, while a contract without legality of purpose is always unenforceable, an unenforceable contract is not necessarily illegal in its purpose; it may simply have other legal deficiencies that prevent a court from upholding it.
FAQs
Q: What happens if a contract lacks legality of purpose?
A: If a contract lacks legality of purpose, it is considered a void contract. This means it is invalid from the moment it was created, has no legal effect, and cannot be enforced by a court.
Q: Can an illegal contract be made legal later?
A: No, generally an illegal contracts cannot be made legal later. If the initial purpose was illegal, the contract is void and cannot be retroactively validated. Parties would typically need to create an entirely new agreement with a lawful purpose.
Q: Does "legality of purpose" only apply to criminal acts?
A: No, legality of purpose extends beyond strictly criminal acts. It also applies to agreements that violate statutes, regulatory laws (like Securities Law), or established public policy, even if they don't involve explicit criminal behavior.
Q: How is legality of purpose determined?
A: Legality of purpose is determined by examining the contract's objective, subject matter, and the way it is intended to be performed against existing laws, regulations, and judicial interpretations of public policy. Courts consider whether the agreement undermines societal interests or specific legal mandates.