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Posted: May 23, 2015

Court Enforces Contract That Violates Statute

On May 11, 2015, Justice Kornreich of the New York County Commercial Division issued a decision in Grape Solutions, Inc. v. Majestic Wines, Inc., 2015 NY Slip Op. 30770(U)), granting summary judgment to the plaintiff in an action for breach of a wine distribution contract notwithstanding that the terms of the contract may have violated a New York statute.

The plaintiff in Grape Solutions, a New Jersey-based wine wholesaler, entered into an oral contract with the defendant, a New York wholesaler that had a license to sell alcohol to retailers in New York. Under the terms of the contract, the plaintiff shipped wine directly to the defendant’s customers without passing through the defendant’s warehouse. The defendant collected payments from the customers, which it was supposed to pass on to the plaintiff, less a $5 fee for each case sold. The plaintiff sued the defendant for failing to remit the customer ‘payments. In opposing the plaintiff’s motion for summary judgment, the defendant argued that the contract was “illegal” and unenforceable, inasmuch as it provided for the plaintiff to sell wine directly to New York retailers without a license required by the New York Alcoholic Beverage Control Law.

The court rejected the illegality defense and granted summary judgment to the plaintiff. Justice Kornreich noted that the fact that a contract may violate a statute does not automatically render it unenforceable as between the parties to the contract:

Contracts which violate statutory provisions are, as a general rule, unenforceable on public policy grounds where the statute which is violated is enacted to protect the public health and safety. However, if the statute does not provide expressly that its violation will deprive the parties of their right to sue on the contract, and the denial of relief is wholly out of proportion to the requirements of public policy the right to recover will not be denied. Courts generally enforce the contract where there are other regulatory sanctions and statutory penal ties in place to redress violations of the law.

To constitute a valid defense to an action on a contract, the alleged illegality must be central to or a dominant part of the plaintiff’s whole course of conduct in performance of the contract. The illegality defense is inapplicable where it would result in a substantial forfeiture to one party while allowing the other party, who has already reaped the benefit of the transaction, to avoid the corresponding obligation. This is particularly true where the two parties are equally culpable with respect to the illegal conduct. Forfeitures by operation of law are disfavored where the party who is alleged to have breached the contract is attempting to improperly use public policy as a sword for personal gain rather than a shield for the public good. Thus, once the party seeking such enforcement has performed his obligations, the court should consider the quality of the illegality, the extent of public harm, the relative guilt of the parties, and the cruelty of the forfeiture involved in a denial of remedy.

(Internal quotations and citations omitted) (emphasis added). Here, the court observed: (1) the ABCL does not preclude suits based on contracts that violate the statute, and instead imposes penalties on violations; (2) the alleged illegality did not undermine the stated purpose of the statute (i.e., to facilitate collection of taxes and to prevent the sale of alcohol to minors); (3) the defendant participated in (and benefited from) the alleged illegality; and (4) the “conduct was not so ‘gravely illegal and immoral’ as to bar recovery as a matter of public policy.” Accordingly, Justice Kornreich rejected the illegality defense.

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