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A recent case from the Second Department Appellate Division held that a subcontractor forfeited its right to be paid under its subcontract after it had willfully violated provisions of the New York Labor Law, even though the subcontractor had fully completed its subcontract work.

In Alpha Interiors, Inc. v. Tulger Construction Corp., Alpha Interiors was a subcontractor on a project for additions and alterations to a golf activities center in Lake Success, for which Tulger Construction Corporation was the general contractor.  The subcontract required that Alpha “comply with all laws, ordinances, rules, regulations and orders of any public authority bearing on the performance of the Work under the Subcontract.”  Alpha was further required to comply with Labor Law §220, which requires payment of the prevailing rate of wage and supplements to workers on public works contracts. 

Upon completion of the work, Alpha brought an action against Tulger for breach of contract for allegedly failing to pay for the work performed.  In opposition, Tulger asserted that it was Alpha that breached the contract, by requiring that its workers kick back money they received as supplements and thereby violating the prevailing wage laws.  In support of this defense, Tulger pointed to the fact that Alpha and its president had pleaded guilty to a willful violation of Labor Law §220.  Alpha did not deny the willful violation, but argued that as they had completed their subcontract work, they deserved to be paid for it.

The court recognized that “a party’s illegal acts in the performance of a legal contract may, under certain circumstances, vitiate its right to recover on the contract.”  It held that in order for such a forfeiture to occur, there must at least be a “direct connection between the illegal transaction and the obligation sued upon.”  The decision further limited forfeiture to cases in which the illegal performance of a contract takes the form of commercial bribery or similar conduct and in which “the illegality is central to or a dominant part of the plaintiff’s whole course of conduct in performance of the contract.” 

The Court found that Alpha’s admitted kickback scheme had a direct connection to the amounts it claimed were due under the contract, and because it took place repeatedly during the performance of the work, the illegality was central to or a dominant part of Alpha’s whole course of conduct in performance of the contract.  In so finding, the Court denied Alpha any additional payments for the work performed. 

It is worth noting that this case was concerned solely with the subcontractor’s violation of the prevailing wage laws and that it is possible that other illegal conduct could well lead to the same drastic result of forfeiting contract payments.  This case should serve as warning to subcontractors that failure to comply with labor laws, workers compensation laws and the like may result in similar consequences.

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