The Massachusetts Supreme Judicial Court recently considered a case involving the attempt by one party to recover amounts paid under a contract that was later determined to be illegal. The facts of the case involved a one page contract that the National Association of Government Employees, Inc. (NAGE) entered into with a consultant to win a government award of a contract to develop real estate. The contract called for the payment of $250,000 if and when the development was “approved and built.” After NAGE won the contract it paid consultant $200,000 with the balance apparently due when the project was completed. The project was not, however, completed and litigation ensued. Under Massachusetts statute, contracts that are contingent upon a government decision are unenforceable. The issue before the court was whether NAGE was entitled to recover the $200,000 it paid to the consultant. The lower appeals court said yes, but the SJC reversed.
Here is the court’s summary of the law in this area (full text can be found here):
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3. Recovery of money paid pursuant to an illegal agreement.
a. The general rule. “[I]t has . . . long been settled that the law will not aid either party to an illegal contract to enforce it against the other, neither will it relieve a party to such a contract . . . who seeks to reclaim his money or whatever article of property he may have applied to such a purpose.” Atwood v. Fisk, 101 Mass. 363, 364 (1869). See Council v. Cohen, 303 Mass. 348, 354 (1939), quoting Berman v. Coakley, 243 Mass. 348, 350 (1923) (”courts will not aid in the enforcement, nor afford relief against the evil consequences, of an illegal or immoral contract”). The policy underlying this rule is that “[t]he suppression of illegal contracts is far more likely in general to be accomplished, by leaving the parties without remedy against each other.” Atwood v. Fisk, supra. Accordingly, the general rule is that a court leaves parties to an illegal contract in the same position as it finds them. See Duane v. Merchants’ Legal Stamp Co., 227 Mass. 466, 468-469 (1917); Huckins v. Hunt, 138 Mass. 366, 366-367 (1885); Atwood v. Fisk, supra.
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The general rule that courts will not grant relief to parties to an illegal contract is subject to an exception:
“where the parties are not in equal fault as to the illegal element of the contract, or, to use the phrase of the maxim, are not in pari delicto, and where there are elements of public policy more outraged by the conduct of one than of the other, then relief in equity may be granted to the less guilty.”
Berman v. Coakley, supra.
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We have required more than a slight difference in culpability before we will grant equitable relief to a party to an illegal contract. The cases where we have done so generally fall into two categories. The first comprises cases “in which one of the parties has, by an illegal act, taken advantage of and oppressed the other.” Berman v. Coakley, supra at 351, quoting Inhabitants of Worcester v. Eaton, 11 Mass. 368, 376 (1814) (allowing plaintiff equitable relief where defendant fraudulently coerced him into unlawful agreement to suppress criminal prosecution). The second involves cases where the provision of law rendering the contract illegal was clearly intended to benefit one party over the other, i.e., the public policy is intended to protect persons of the class to which one party belongs. See Council v. Cohen, supra at 355 (allowing plaintiff to recover interest paid on mortgage contravening Federal home owners’ loan act because purpose of that act was “to aid the homeowner and not the mortgagee”).
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As the Supreme Court of Illinois has observed, granting relief to a less guilty party to an illegal contract is a discretionary decision grounded in public policy, not a matter of right:
“Although courts will generally not enforce contracts which are against public policy where the parties are in pari delicto, this is not to say a court must enforce an agreement when the parties are not in pari delicto. ‘[T]he interest of the public, rather than the equitable standing of the individual parties, is of determining importance.’”
O’Hara v. Ahlgren, Blumenfeld & Kempster, 127 Ill. 2d 333, 348 (1989), quoting Parish v. Schwartz, 344 Ill. 563, 572 (1931). See 8 Williston, Contracts ยง 19:79 (4th ed. 1998). We have said that the relief in such cases “is given to the public through the party.” Council v. Cohen, supra at 355. Here, the public interest weighs against granting [the party engaging the consultant] relief.
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We have in the past prohibited parties from obtaining results through tort law that were unavailable in contract. See, e.g., Harrison v. NetCentric Corp., 433 Mass. 465, 478 (2001) (noting that plaintiff who could not successfully sue corporation in contract could not recover from corporation’s alter ego in tort). In addition, the fact that a contract is unenforceable as against public policy generally forecloses all remedies, regardless of the label, unless a party can show that it was not equally at fault. See Capazzoli v. Holzwasser, 397 Mass. 158, 160 (1986) (contract in consideration of plaintiff’s abandonment of her marriage held unenforceable “on a contract, quantum meruit, or any other theory”). See also T.F. v. B.L., 442 Mass. 522, 530 n.8 (2004) (party to unenforceable contract to create child could not recover child support on alternative theory of promissory estoppel); Lowell v. Massachusetts Bonding & Ins. Co., 313 Mass. 257, 272 (1943) (no recovery in quantum meruit where contract illegal for failure to comply with statutory requisites).
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ALFRED L. ARCIDI vs. NATIONAL ASSOCIATION OF GOVERNMENT EMPLOYEES, INC. (SJC-09663, November 7, 2006).
