Contracts Cancelled Because of Illegal Actions May be Unenforceable

FCI Group, Inc. v. City of New York, 2008 WL 2796591 (N.Y. App. Div. July 22, 2008)

In this case, plaintiff contractor sued to recover the outstanding balance for work already completed on a construction project after the city cancelled the contract because of plaintiff’s attempted bribery of two city officials.  The Appellate Division, First Department, granted defendants’ motion for summary judgment, holding that:  (i) “plaintiff agreed to conduct itself ethically…and consented to the imposition of penalties for violating the contractual prohibition against dispensing monetary inducements to City workers;” and (ii) the illegal conduct at issue was central to plaintiff’s performance under the contract.

The court rejected defendants’ alternative argument that the contract’s alternative dispute resolution clause required dismissal in favor of arbitration.  The court held that the narrow ADR provision only applied to specified disputes in accordance with the intent of the parties and could not be interpreted so as to render the language limiting its scope mere surplusage.