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Public policy
A court may refuse to enforce a contract if the contract violates public policy or may refuse to enforce one or more terms of a contract if the term violates public policy. In some cases this is an easy decision for a court to make. A federal or state statute or regulation or a local ordinance may specifically provide that a term in a contract or a contract is against public policy and therefore unenforceable or void. For example, in Stirlen v. Supercuts the trial court had found that the arbitration term of Stirlen's employment contract offended public policy because subparagraph (c) of the arbitration term, restricting Stirlen's remedies available in arbitration, violated a section of the California Civil Code addressed to contractual exemptions from certain types of liability.
Likewise, a court will refuse to enforce a contract (i.e. refuse to grant a remedy for breach of a contract) that requires the commission of a serious crime or tort, even though the statute criminalizing the behavior makes no reference to contracts whose terms require or otherwise implicate such behavior. See R.2d Contracts 192. Consider the proverbial "hit" contract, i.e. one in which one party promises to pay another to kill a third person (although it is not likely that either party to such a contract, for fear of prosecution, will come forward seeking judicial enforcement of the contract). Should the hit man thereafter decide not to perform the hit, the court will deny a remedy to the person promising to pay for the hit. Likewise, should the hit man perform the hit and the person promising to pay decline to do so, the court will deny a remedy to the hit man.
Absent explicit guidance from legislation or administrative regulation about the nature and existence of a relevant public policy, and beyond instances involving the commission of serious crimes or torts, courts have faced and continue to face the difficult question of determining what other social, economic, or political interests to protect by refusing enforcement to contracts inconsistent with those interests. An accumulation of centuries of precedent has identified a variety of interests deserving protection. These include the marriage and parent-child relationship (R.2d Contracts 189, 190, and 191), rights to be free from unreasonable restraints of trade (R.2d Contracts 186-188, not reproduced in these materials), and other protected interests (R.2d Contracts 193, 194, 196). You may learn in your Torts class, for example, that a clause in a contract exculpating one party from liability for harm caused by his or her intentional or reckless conduct is unenforceable, but that a clause exculpating one party from liability for harm caused by his or her negligent conduct may in some cases be enforceable (R.2d Contracts 195). Tunkl v. Regents of the University of California is an early leading case involving a clause exculpating a hospital from negligence toward its patients. In the context of family relationships, Marvin v. Marvin illustrates how changing social mores may over time alter the judicial conception of a paticular public policy.
We are left still with the difficult task of evaluating new claims of evolving social, economic, and political interests. For example, would a contract to clone a child using the cell nucleus of an infertile man and the ovum of his wife violate a public policy? (For an introduction to arguments in favor of and in opposition to human cloning, compare the web sites of the Human Cloning Foundation and Americans to Ban Cloning) R.2d Contracts 179, reflecting the vague contours established by prior judicial decisions, tells us only that in the absence of legislation a public policy "may be derived by the court from . . . the need to protect some aspect of the public welfare."
Moreover, even if one has discerned a relevant public policy, there may be sufficient reason to enforce the contract notwithstanding some offense to public policy. R.2d Contracts 178 calls for a balancing of the interests favoring enforcement against the interests against enforcement.
With some exceptions, courts will not order restitution in favor of a party who has performed (and thereby rendered a benefit to the other party) under or in return for, a promise unenforceable on the grounds of public policy. R.2d Contracts 197, 198, 199.
Supplementary reading: Farnsworth, 5.2 - 5.9.