A contract law axiom states that an illegal contract is unenforceable. The prototypical example involves a plaintiff attempting to sue on a contract that violates a statute or encourages criminal or fraudulent conduct. Those situations clearly give rise to an illegality defense. But what if a contract term technically violates a statute, but the resulting damage is either trivial or nonexistent? A “no harm no foul” situation. Can the illegal contract term still be enforced?
That’s one of the questions the First District recently addressed in Ritacca v. Girardi, 2013 IL App (1st) 113511 (Sept. 2013), where a plaintiff physician sued to enforce a settlement agreement stemming from an earlier, illegal fee-sharing agreement with two of his former business partners.
After the plaintiff paid over $60,000 to settle a lawsuit filed by an equipment lender (suing on loans which were the parties’ joint responsibility), he sued his two former business partners for reimbursement under a written agreement to operate a medical facility.
Defendants moved for summary judgment on the basis that the written agreement was unenforceable since it called for doctors and non-doctors sharing profits. The trial court agreed and granted summary judgment for the defendants.
Holding: Reversed. Plaintiff could enforce the agreement against the defendants.
The contract – that amended an earlier fee-splitting agreement – clearly violated the Illinois Medical Practices Act’s (the “MPA”) anti-fee-splitting section. 226 ILCS 60/22.2(a)(physicians and non-physicians are precluded from sharing professional fees). The agreement involved improper fee-splitting between two doctors (plaintiff and one defendant) and a lay person (the other defendant) and so was facially illegal. ¶ 9.
However, the Court stressed that just because a new contract stems from an earlier illegal one, this doesn’t mean the later contract is always void. As long as the new/later contract isn’t a continuation or modification of the prior illegal contract, the new contract can be upheld. ¶ 27.
Plaintiff’s suit was premised on a second agreement that made it clear that the underlying (and illegal) first agreement was dissolved and the parties were no longer conducting business. ¶¶ 29-30. This led the Court to find that the second agreement wasn’t a continuation or modification of the earlier illegal agreement.
The Court ruled that the two contracts were sufficiently remote in time and substance from each other so that the plaintiff could enforce the second agreement and seek money damages from the defendants.
The Restatement of Contracts’ Balancing Test
The Court went further and held that even if the second Agreement was sufficiently intertwined with the earlier one, the Court would still enforce it.
In Illinois, a Court can void a contract if a public policy against enforcing the contract “clearly outweighs” upholding it. ¶ 36. The factors that weigh in favor of enforcing a contract that violates public policy include: (a) the parties expectations, (b) the forfeiture that would result if the contract ‘t enforced, and (c) the public interest in enforcing the contract.
The factors weighing against enforcement are (a) the strength of the policy manifested by the legislature or judicial decisions, (b) the likelihood that refusing to enforce a contract term will promote that policy, (c) the serious of the misconduct involved, and (d) the connection between the misconduct and the contract term. Id.
Applying these factors, the Court held that if the latter contract wasn’t enforced, it would result in a $60K plus forfeiture by the plaintiff and unjust enrichment for the defendants – since defendants were jointly responsible for the loan.
The Court also noted that the Medical Practice Act’s dual policies of (1) discouraging profit-seeking doctors from churning their services and (2) deterring non-physicians from recommending doctors out of financial self-interest weren’t served by voiding the second agreement as the parties had long ceased doing business together. The Court ruled that the public policy against medical services fee-sharing didn’t “clearly outweigh” allowing plaintiff to sue on the second agreement. ¶ 40.
Lessons: Ritacca emphasizes that a technical statutory violation won’t always result in a finding of illegality. But if a facially valid contract continues or refers to an earlier illegal one, the “new” contract will be illegal and unenforceable. By contrast, if that new contract is far enough removed from the prior contract in time and subject matter, the new contract can be enforced.