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When Illegal Agreements Can Still Be Enforceable in New York


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1/1/2016
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This was just one of the issues that New York Federal Judge Jack Weinstein had to address in Globaltex Group Ltd. v. Trends Sportswear Ltd., a commercial litigation case where the plaintiff sought to recover payment for goods that it shipped. The facts of this case were - and are - rather fascinating. In this case, the plaintiff, a Hong Kong garment manufacturer, sold the defendant several large containers of clothing. But here's the interesting part: instead of standard invoicing for the shipments, both parties to the deal used a "double invoicing" method in order to avoid United States customs duties. The first invoice, which understated the amount and value of the clothing, was presented to customs officials for purposes of calculating the amount of customs duties that were owed; a second invoice which set forth the actual value of the goods seeking payment was then sent by plaintiff to the defendants. When the defendants failed to pay on these invoices, leaving an outstanding balance totaling nearly $2 million, this lawsuit seeking recovery in breach of contract, business fraud, unjust enrichment, tortious interference and conversion followed. The defendants in this case definitely merit the "chutzpah" award: they sought to dismiss the claim - and thereby avoid having to pay for the goods that they ordered, received, and presumably profited from - on the grounds that the contract between the parties was illegal, and therefore, unenforceable. The Court articulated the general rule as follows: "In New York '[i]llegal contracts are, as a general rule, unenforceable.' Lloyd Capital Corp. v. Henchar, Inc., 80 N.Y.2d 124, 127 (1992) ... An agreement which is lawful on its face and which does not contemplate or necessarily entail unlawful conduct in its performance is enforceable by the promisee even though he engages in unlawful activity in the agreement's performance." Applying these rules to reject the defendants' argument, the Court stated as follows: "It appears that the double invoicing was only indirectly related to the contract, rather than being "central to or a dominant part of the plaintiff's whole course of conduct in performance of the contract ... Defendants' invocation of the illegality doctrine is unpersuasive in that they seek to use the doctrine "as a sword for personal gain rather than a shield for the public good." I have no doubt that justice was achieved by this decision.



Category: Business Litigation

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