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Is a Contract Enforceable If It Violates the Law?

Is a Contract Enforceable If It Violates the Law?

New York courts will not enforce certain contracts if they violate state law or public policy. But that does not mean a contract is automatically unenforceable if it violates a state law. Rather, the court must determine the violation compromises “public health or safety.” or is otherwise “gravely illegal and immoral.” A recent decision by a Manhattan trial judge illustrates how this policy works in practice.

Grape Solutions, Inc. v. Majestic Wines, Inc.

Grape Solutions is a New Jersey-based wine wholesale supplier. In 2009, Grape Solutions entered into an oral contract with Majestic Wines, a New York-based wine wholesaler. Of importance to this case, Majestic was licensed to sell alcoholic beverages in New York, while Grape Solutions was not.

Under the original contract, Majestic purchased wine directly from Grape Solutions. That is, Majestic picked up wine from Grape Solutions' warehouse and transported it to its own warehouse, from where it sold the wine to its New York retail customers. But in 2010, the parties modified the terms of the contract such that Majestic merely processed orders from its retail customers, which were then directly fulfilled by Grape Solutions from its warehouse. Although Grape Solutions' wines never passed into Majestic's physical possession, Majestic invoiced its customers for these transactions and collected a $5 per case markup.

After Majestic's owner died in 2011, the company was sold. The new owners assumed an outstanding balance of about $311,000 owed to Grape Solutions for prior retail sales. When this was not resolved, Grape Solutions filed suit in Manhattan Supreme Court in 2012, alleging breach of contract.

Before the Supreme Court, Majestic argued its amended contract with Grape Solutions was unenforceable as a matter of law. New York's liquor laws prohibit unlicensed wholesalers from selling wine to customers within the state. Since Grape Solutions shipped its wines directly to New York customers, Majestic argued this violated the law, notwithstanding the fact Majestic processed and invoiced those orders.

But the court wouldn't let Majestic have it both ways. On May 11 of this year, Judge Shirley Werner Kornreich partially granted Grape Solutions' motion for summary judgment. She held New York's liquor laws did not render the contract here unenforceable. The law cited by Majestic was designed to “enable New York to more efficiently collect taxes and prevent the sale of alcohol to minors,” the judge said. Neither of these concerns were applicable in this case. So even if Grape Solutions did break the law by directly shipping wine to New York retailers, “the alleged illegality would not be the type of harm the statute seeks to prevent.”

And in any event, Majestic also benefited from the allegedly illegal conduct. “Simply put,” Judge Kornreich said, “Grape Solutions' wine was sold to licensed New York retailers. Majestic provided Grape Solutions with the use of its license and collected payments for the wine from the retailers on behalf of Grape Solutions.” Grape Solutions is therefore entitled to payment for the goods it furnished to the retailers. Judge Kornreich therefore granted Grape Solutions summary judgment as to Majestic's liability; she reserved judgment on damages because there is still a dispute over just how much is owed.

Need Help Understanding the Law?

In negotiating a business contract, it is always important to consider whether or not the proposed terms violate law or public policy. And if litigation becomes necessary to enforce a contract, it's even more important to understand how the law may affect the rights of the parties. If you need advice on these types of issues from an experienced New York business attorney, contact our office today.

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