As a general rule, courts will not allow recovery for work performed under a valid contract where the contractor committed illegal acts which are directly connected to performance under the contract. But recovery is allowed when the illegal conduct is merely collateral rather than directed connected to the contract. Since connection is a matter of degree, some illegalities are only incidental to the contract and a contractor is allowed recovery under such circumstances.
In the recent case of Alpha Interiors, Inc. v Tulger Construction Corp., an appellate court determined whether a subcontractor's illegal kickback scheme was sufficiently connected to the contract to preclude recovery for the work performed.
Tulger was the general contractor on a construction project, and Alpha was one of its subcontractors. The subcontract between Tulger and Alpha, which was a lump sum subcontract, provided that Alpha must "comply with all laws, ordinances, rules, regulations and orders of any public authority bearing on the performance of the Work under the Subcontract", including the requirement to pay prevailing wage and wage supplements under the Labor Law.
After the work was completed, Alpha sued to recover its outstanding balance owed under the subcontract. Tulger moved for summary judgment dismissing the complaint, arguing that Alpha had breached the contract by requiring its workers to kick back money they received for their wage supplements. In support of the motion, Tulger submitted evidence that Alpha and its president had pleaded guilty to a willful violation of the Labor Law for failing to pay prevailing supplemental benefits. In opposition, Alpha did not deny its guilty plea, but nevertheless argued that it had performed the work under the contract and should be paid the amounts claimed to be outstanding.
The appellate court held that where a party's illegal acts are directly connected to the obligation which forms the basis for the lawsuit, it may forfeit its right to recover. After so holding, the court found that Alpha's requirement that its workers kick back their wage supplements were directly connected to the amount claimed owing from Tulger under the subcontract. The court elaborated that because the kickback scheme took place repeatedly during Alpha's performance of the subcontract, the illegality was "central to or a dominant part of its whole course of conduct in performance of the contract". Under such circumstances, the court held that public policy precludes Alpha from recovering the amounts it claims are due.
Here, even though Alpha performed the work under a valid subcontract to the satisfaction of the general contractor, public policy forbids recovery where one party results to illegal conduct in accomplishing its performance under the contract.