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 Illegal Contracts General Principles
(Kashani v. Tsann Kuen China Enterprise )

Contracts Illegal General Principles
(Kashani v. Tsann Kuen China Enterprise)

 2.         General Principles Regarding Illegal Contracts

            As one authority has noted, “[t]he law has a long history of recognizing the general rule that certain contracts, though properly entered into in all other respects, will not be enforced, or at least will not be enforced fully, if found to be contrary to public policy.”  (15 Corbin on Contracts (2003) § 79.1, p. 1 (Corbin); see also Wong v. Tenneco, Inc. (1985) 39 Cal.3d 126, 135 [“‘“No principle of law is better settled than that a party to an illegal contract cannot come into a court of law and ask to have his illegal objects carried out . . .”’”]; Lewis & Queen v. N. M. Ball Sons (1957) 48 Cal.2d 141, 150 [“the courts generally will not enforce an illegal bargain or lend their assistance to a party who seeks compensation for an illegal act”]; Winfield, Public Policy in the English Common Law (1928) 42 Harv. L.Rev. 76.)  Such agreements are “traditionally referred to as ‘illegal contracts,’” even though they “are functionally described as contracts unenforceable on grounds of public policy.”  (Rest.3d Restitution & Unjust Enrichment (Tent. Draft No. 3, Mar. 22, 2004) § 32, com. a, p. 154 (Tentative Draft).)[5]

            California statutes require that a contract have “a lawful object.”  (Civ. Code, § 1550, subd. (3); see Civ. Code, § 1596.)  Otherwise the contract is void.  (Civ. Code, § 1598.)  Civil Code section 1668 provides that a contract that has as its object a violation of law is “against the policy of the law.”  Civil Code section 1667 states that “unlawful” is “1.  Contrary to an express provision of law;  [¶]  2.  Contrary to the policy of express law, though not expressly prohibited; or,  [¶]  3.  Otherwise contrary to good morals.”  (See also Civ. Code, §§ 1441 [“A condition in a contract, the fulfillment of which is . . . unlawful . . . is void”], 1608 [“If any part of a single consideration for one or more objects, or of several considerations for a single object, is unlawful, the entire contract is void”].)  California courts have stated that an illegal contract “may not serve as the foundation of any action, either in law or in equity” (Tiedje v. Aluminum Taper Milling Co. (1956) 46 Cal.2d 450, 453-454), and that when the illegality of the contract renders the bargain unenforceable, “‘[t]he court will leave them [the parties] where they were when the action was begun’” (Wells v. Comstock (1956) 46 Cal.2d 528, 532; see also Kolani v. Gluska (1998) 64 Cal.App.4th 402, 408, disapproved on other grounds in Bonifield v. County of Nevada (2001) 94 Cal.App.4th 298 [“illegal contracts are void”]).

            A recent authority states, “It is often asserted that there is a presumption against the availability of restitution in the context of illegal agreements.  Courts continue to recite that the law will ‘leave the parties to an illegal contract where it finds them.’  Neither generalization is accurate, and the better authorities immediately qualify any such statement by acknowledging a lengthy and intricate list of exceptions.”  (Tentative Draft, supra, § 32, com. b, p. 157.)  Courts in California have, depending on the facts, carved out exceptions to the statutory and judicial language that illegal contracts are void and unenforceable.  (See, e.g., Asdourian v. Araj (1985) 38 Cal.3d 276, 292-294, superseded by statute on other grounds by Bus. & Prof. Code, § 7031 [illegal contract enforced if defendant would be unjustly enriched or plaintiff would be subject to harsh penalty]; M. Arthur Gensler, Jr., & Associates, Inc. v. Larry Barrett, Inc. (1972) 7 Cal.3d 695, 702 (Gensler) [illegal contract can be enforced if statutory penalties interpreted to exclude as a sanction nonenforcement of contract]; Tri-Q, Inc. v. Sta-Hi Corp. (1965) 63 Cal.2d 199, 218-220 [illegal contract may be enforced based on such considerations as whether public cannot be protected because contract terminated, no serious moral turpitude involved, defendant more at fault, and defendant otherwise would be unjustly enriched]; Lewis & Queen v. N. M. Ball Sons, supra, 48 Cal.2d at p. 151 [illegal contract enforced if policy better served by enforcement against violating defendant]; R. M. Sherman Co. v. W. R. Thomason, Inc. (1987) 191 Cal.App.3d 559, 564 [“Civil Code sections 1598 and 1608 are not always applied literally; in many cases they have simply been overlooked or ignored”]; 1 Witkin, Summary of Cal. Law (9th ed. 1987) Contracts, § 451, pp. 401-402; 3 Schwing, Cal. Affirmative Defenses (2d ed. 1996) § 37:6, pp. 22-23 (Schwing); Rest.2d Contracts §§ 178, 179, 180, 181, 182, 183, 198, 199.)[6] 

            For purposes of illegality, the “law” is a broad term.  In this connection, the Restatement Second of Contracts defines the term “legislation” as including “any fixed text enacted by a body with authority to promulgate rules, including not only statutes, but constitutions and local ordinances, as well as administrative regulations issued pursuant to them.”  (Rest.2d Contracts, supra, § 178, com. a, p. 7.)[7] 

            “A bargain may be illegal because the performance that is bargained for is illegal; and the performance may be illegal because governmental authority has declared it to be a ‘crime,’ in any one of the multiplicity of degrees. . . .  This is true whether the performance bargained for is one that is merely promised, to be rendered in the future, or is one that is rendered as the executed consideration for a return promise.  On the other hand, a bargain may be illegal even though no illegal performance is either promised or executed as the consideration for a promise; it may be illegal because the making of such a bargain is itself forbidden and subjected to penalty.”  (6A Corbin on Contracts (1962) § 1373, p. 2.)

            When, as in this case, the parties have not designated an applicable law, courts have applied the law of the place of contracting or the place of performance in determining the legality of the contract.  (See generally 1 Witkin, Summary of Cal. Law, supra, Contracts, § 57, p. 93, § 58, pp. 93-95; 3 Schwing, supra, § 37:1, pp. 3-8.)  The Restatement Second of Conflicts of Law provides that the effect of the illegality of a contract upon the rights of the parties under the contract should, in the absence of an effective clause by the parties, be determined by the law of the state with the most significant relationship to the contract.  (Rest.2d Conflict of Law, § 202(1), com. c, pp. 645-646; see Robbins v. Pacific Eastern Corp. (1937) 8 Cal.2d 241, 272.)  Notwithstanding these general principles, the forum state will not apply the law of another state to enforce a contract if to do so would violate the public policy of the forum state.  (Frame v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1971) 20 Cal.App.3d 668, 673; 1 Witkin, Summary of Cal. Law, supra, Contracts, § 51, p. 88; 15 Corbin, supra, § 79.7, pp. 44-45.)  California law includes federal law.  (People ex rel. Happell v. Sischo (1943) 23 Cal.2d 478, 491 [Federal law is “the supreme law of the land (U.S. Const., art. VI, sec. 2) to the same extent as though expressly written into every state law”]; 6A Corbin on Contracts, supra, § 1374, p. 7 [“Under our Constitution, national law is also the law of every separate State”].)  Thus, a violation of federal law is a violation of law for purposes of determining whether or not a contract is unenforceable as contrary to the public policy of California.

Kashani v. Tsann Kuen China Enterprise-May 11 2004-B166041

May 11 2004

B166041 [PDF] [DOC]

Kashani v. Tsann Kuen China Enterprise 5/11/04 CA2/5

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