407 East 61st Garage, Inc. v. Savoy Fifth Avenue Corporation, 23 N.Y.2d 275 (1968)
Economic hardship, even to the point of insolvency, generally does not excuse a party from fulfilling its contractual obligations, unless the contract specifies otherwise.
Summary
407 East 61st Garage, Inc. sued Savoy Fifth Avenue Corporation for breach of contract after Savoy closed its hotel, the Savoy Hilton, prior to the expiration of a five-year agreement where the garage provided exclusive parking services to hotel guests in exchange for 10% of the gross transient storage charges. Savoy argued that its financial inability to continue operating the hotel excused its performance. The New York Court of Appeals held that Savoy’s economic hardship did not excuse it from its contractual obligations, emphasizing that the agreement may contain an implied promise that Savoy would remain in the hotel business for the duration of the contract, and that Savoy should have included a termination clause for such an eventuality. The court reversed the grant of summary judgment to Savoy, finding that a trial was needed to determine if there was an implied promise.
Facts
407 East 61st Garage, Inc. (Garage) and Savoy Fifth Avenue Corporation (Savoy) entered into a five-year agreement beginning October 1, 1963. The Garage was to provide parking services to guests of the Savoy Hilton Hotel. The Garage bore the responsibility for billing, collections, and any damage to vehicles. Savoy agreed to use reasonable efforts to give the Garage the exclusive right to store hotel guests’ vehicles. In exchange, the Garage paid Savoy 10% of the transient storage charges incurred by hotel guests. In late June 1965, Savoy ceased operating the hotel due to substantial financial losses, demolishing the building and erecting an office building on the site.
Procedural History
The Garage sued Savoy for breach of contract. The Supreme Court, New York County, denied the Garage’s motion for summary judgment and granted Savoy’s cross-motion for summary judgment, holding that the agreement was a requirements contract and Savoy ceased operations in good faith. The Appellate Division affirmed without opinion. The Garage appealed to the New York Court of Appeals.
Issue(s)
Whether Savoy’s closure of its hotel due to financial difficulties excused its performance under the contract with the Garage.
Holding
No, because economic hardship generally does not excuse contractual performance, and there was an issue of fact as to whether the agreement contained an implied condition that Savoy would remain in the hotel business for the contract’s duration.
Court’s Reasoning
The court reasoned that the agreement was not a "requirements" contract but more akin to a license or franchise. The critical issue was whether the agreement implied an obligation for Savoy to remain in the hotel business. The court cited precedent that a promise to remain in business can be implied, especially when the promisee has undertaken obligations in reliance on the promisor’s continued activity. The Garage may have incurred ongoing responsibilities based on the contract’s term. Savoy’s argument that the Garage was aware of the hotel’s financial difficulties before signing the agreement was not sufficient to conclude that the contract implied a conditional termination. The court also noted the absence of a termination clause related to the hotel’s closure. Regarding the defense of impossibility of performance, the court emphasized that financial difficulty or economic hardship does not excuse performance. The court stated, “Generally, however, the excuse of impossibility of performance is limited to the destruction of the means of performance by an act of God, vis major, or by law.” Since Savoy’s performance was possible, although unprofitable, the legal excuse of impossibility did not apply. The court also rejected the argument of frustration of purpose because the purpose of providing garage services to hotel guests was frustrated only because Savoy made a business decision to close the hotel. The court held that “the applicable rules do not permit a party to abrogate a contract, unilaterally, merely upon a showing that it would be financially disadvantageous to perform it; were the rules otherwise, they would place in jeopardy all commercial contracts.” The court modified the order by denying Savoy’s cross motion for summary judgment.