Everything Old Is New Again (Contract Illegality)

Everything Old Is New Again (with apologies to Peter Allen).

Our common law system gives the old and grizzled great deference.  In a society that extols youth, it may be the only place left that does.  Mining the past for legal doctrines is never more important than now when everyone, including courts, is looking to add ballast to our lives.  Creative use of old legal doctrines can advance our clients’ cases and persuade judges.  We suggest that one corner of the law that deserves renewed examination is the doctrine of illegality as a contract defense.  Of course, as a defense, the defendant bears the burden of proving illegality in a contract action.

Illegality can arise in two circumstances.  First, a contract when entered can be entirely lawful but the activity it embraces can later become illegal.  Better known under the name of impossibility, the defense excuses all parties from further performance, but does not render unrecoverable past amounts due and owing (that is, any debts accruing before the illegality intervened).  Second, the contract may be illegal ab initio, when signed.  When suit is brought to recover for breach of such a contract, courts leave plaintiffs to their own devices, refusing to become a party to the illegality by enforcing it.  Think of the suits landlords filed against tenant bars during prohibition as an example.  See, e.g., Musco v. Torello, 128 A. 645 (Conn. 1925).

In our work on a recent, pre-COVID-19 case, we resurrected the doctrine of illegality to defend against a contract action, arguing that certain actions undertaken by the plaintiff amounted to a fraudulent (and illegal) scheme that barred any recovery.  We suggest keeping an open mind to the illegality defense when seeking to defend against a contract—including an executory contract—that, for any number of reasons, may have violated the restrictions imposed on commercial activity during the current crisis, with its attendant increase in state and federal regulation.  If performing the terms of a contract would require a client to violate state or federal stay-at-home, social distancing, or other regulations, illegality just may be the best defense.

Don’t throw the past away
You might need it some rainy day
. . .
When everything old is new again

Arthur F. Fergenson is a Senior Counsel in our Maryland office.
Heather L. Williams is a Partner in our Maryland office.