illegal contract

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A contract that is prohibited by statute (e.g. one between traders providing for minimum resale prices) or is illegal at common law on the grounds of public policy. An illegal contract is totally void, but neither party (unless innocent of the illegality) can recover back any money paid or property transferred under it (see ex turpi causa non oritur actio). Related transactions may also be affected. A related transaction between the same parties (e.g. if X gives Y a promissory note for money due from him under an illegal contract) is equally tainted with the illegality and is therefore void. The same is true of a related transaction with a third party (e.g. if Z lends X the money to pay Y) if the original illegality is known to him. In certain circumstances, illegal contracts may be saved by severance.

Subjects: Law — Financial Institutions and Services.

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