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Legal Memorandum: Ostensibly Illegal Contracts in CA

Issue: May an ostensibly illegal contract be legally enforced in California?

Area of Law: Business Organizations & Contracts
Keywords: Illegal Contract; Legal enforcement
Jurisdiction: California
Cited Cases: 63 Cal. 2d 199; 49 Cal. 2d 754; 45 Cal. 2d 764; 77 N.E.2d 780; 6 Cal. 3d 94; 118 Cal. App. 4th 531; 48 Cal. 2d 141; 38 Cal. 3d 276; 191 Cal. App. 3d 559
Cited Statutes: Bus. & Prof. Code § 7031; Contracts § 451, at 401-02, § 452, at 402-04; 3; Restatement (Second) of Contracts §§ 178, 179, 180, 181, 182, 183, 198, 199
Date: 05/01/2008

In Kashani v. Tsann Kuen China Enterprise Co. (2004) 118 Cal. App. 4th 531, 13 Cal. Rptr. 3d 174, the court explained that courts in California have often carved out exceptions to the statutory and judicial language that illegal contracts are void and unenforceable.  Id., 118 Cal. App. 4th at 541.  An illegal contract will be enforced if, for instance, the defendant would be unjustly enriched, or the plaintiff would be subject to harsh penalty, if the contract were not enforced.  Id. (citing Asdourian v. Araj (1985) 38 Cal. 3d 276, 292-94, superseded by statute on other grounds by Bus. & Prof. Code § 7031). 

In other words, an ostensibly illegal contract may be enforced based on such considerations as whether there was no serious moral turpitude involved, the defendant was more at fault, and the defendant otherwise would be unjustly enriched.  Id. (citing Tri-Q, Inc. v. Sta-Hi Corp. (1965) 63 Cal. 2d 199, 218-20).  “Civil Code sections 1598 and 1608 [regarding unenforceable or void contracts] are not always applied literally; in many cases they have simply been overlooked or ignored.”  Id. (quoting R. M. Sherman Co. v. W. R. Thomason, Inc. (1987) 191 Cal. App. 3d 559, 564).  Accord 1 Witkin, Summary of Cal. Law (9th ed. 1987), Contracts § 451, at 401-02; 3 Schwing, Cal. Affirmative Defenses (2d ed. 1996) § 37:6, at 22-23; Restatement (Second) of Contracts §§ 178, 179, […]

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