Statutory Illegality in Contracts: Legislation, Liability & Examples

Statutory Illegality in Contracts: Legislation, Liability & Examples
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  • 0:06 What Is Statutory Legality?
  • 0:49 Usury, Licensing,…
  • 4:46 Lesson Summary
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Lesson Transcript
Instructor: Kat Kadian-Baumeyer

Kat has a Master of Science in Organizational Leadership and Management and teaches Business courses.

The law states that the terms of a contract must not violate any laws including statutes. Any contract written that is in violation of statutes or laws is unenforceable.

What Is Statutory Illegality?

Let's start with the basics. A statute is an act proposed and prescribed by legislature that declares something, like a law. Violating the prescribed law is illegal, or not permissible.

In contract law, there is an element called object of the contract, and this means the terms of the contract must be legal.

Put all together, it is safe to say statutory illegality, in contract law, means no terms of a contract can be in violation of statutory law. It can get a bit murky in the interpretation of statutes by courts or even individuals. However, many times the law is very specific about what can be considered in violation of statutory law. Let's look at a few examples.

Usury, Licensing, Gambling & Sabbath Day

Usury is the act of charging a higher interest rate than that which is allowed by statute or law. Statutes regulating interest rates generally apply to credit card companies, banks and lending institutions that lend to individual consumers.

If a company charges a rate of interest higher than allowed by law, they may be charged with extortion, or exceeding the amount of interest that can be legally charged, and subjected to fines and other punishments. This is sometimes called 'loan sharking'.

There are exceptions to this that permit pawnshops and payday loan companies to charge a higher rate of interest than allowed by law, but this varies by state.

Some professions require that a professional obtain a license, or permit to perform a service. There are two types of licenses one can obtain:

  • Regulatory license
  • Revenue license

A regulatory license is issued to professionals who perform tasks that can affect the health, welfare and safety of citizens, like plumbers, doctors and lawyers. These professions, amongst others, require passing a standardized test and paying fees to obtain the license.

Others require a revenue license, which generate revenue for a certain industry or affiliation, like licensing to distribute flyers to the public or even deliver milk.

Whether a person holds the mandated license makes all the difference when a breach of contract occurs. For instance, if you were to hire an electrician to install a ceiling fan, it would be a good idea to confirm that he holds a valid and current license. Should you find out that the electrician does not have the appropriate licensing to do the job, you may refuse to pay him.

Now, it is not as cut and dry as this. The courts will look at a few things:

  • Is a license required for the profession?
  • If so, is there anything written in the statute that bars recovery of payment by someone who does not hold the required license?
  • What type of license is required? Is it regulatory or revenue?

In the case of Hydrotech Systems Inc. v. Oasis Water Park, California law was upheld when it was ruled that the contractor for Hydrotech, who was not properly licensed to be a contractor in the state, would not recover pay for installing pool wave machines at Oasis Water Park.

In most cases, when a regulatory license is required but not held, recovery for payment of services is not mandatory. Simply stated, not having the appropriate licensing will hurt a professional's chances of payment for a job performed.

Gambling contracts, where people enter into a contract that involves a gamble or risk, like a lottery ticket or a raffle, are also illegal in states that have laws against such wagering.

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