407 East 61st Garage, Inc. v. Savoy Fifth Avenue Corp.

Brief Fact Summary. A parking garage contracted with a hotel to provide the hotel's patrons with parking.  The hotel closed down prior to the end of the parties' contract.

Synopsis of Rule of Law. "[B]y ceasing operation of its hotel, Savoy is not excused, as a matter of law, from obligations under its agreement with the garage, and that there is, at least, an issue of fact as to implied conditions in the agreement."

Facts. The Plaintiff, 407 East 61st St. Garage, Inc. (the "Plaintiff"), entered into an agreement with the Defendant, Savoy Fifth Avenue Corp. (the "Defendant"), on October 1, 1963, to provide garage services for the Savoy Hilton Hotel.  The contract was to last for a period of 5 years, and the Plaintiff agreed to pay the Defendant 10% of all "gross transient storage charges to the hotel guests."  The agreement was to expire on September 30, 1968.  There was no language in the agreement specifying that the Defendant must remain in the hotel business.  The only provision concerning termination allowed the Defendant to "terminate the contract should the garage default in the performance of any condition, including the provision of adequate service, and then fail to cure the default within 30 days after receiving written notice."  In June 1965, the Defendant's hotel was no longer profitable after incurring substantial financial losses, and subsequently was demolished.  The property was sold to another company, and an office building was erected in its place.  The Supreme Court treated the contract as a requirements contract, and found that absent any allegations of bad faith, the Defendant was not liable for breach of contract.

Issue. "[W]hether the closing of the hotel prior to the expiration of the contract period, due to the asserted financial inability of Savoy to remain in the hotel business, subjects it to continued liability under the contract"?

Held. Yes.  The court concluded "by ceasing operation of its hotel, Savoy is not excused, as a matter of law, from obligations under its agreement with the garage, and that there is, at least, an issue of fact as to implied conditions in the agreement."  The court first concluded that the Supreme Court's characterization of the relevant contract was not correct, because it was not a requirements contract, but instead a license or franchise. The general rule regarding a license is "revocation of a license granted for a stipulated term may be a breach of contract and may result in the imposition of liability for damages."  Accordingly, "if the garage had been granted a license to operate its enterprise on Savoy's premises, liability might persist after sale of the building."  The court, however, refused to analyze the contract based on a label, and instead asked whether "this agreement imports an implication that Savoy was obligated to remain in the hotel business, or, better, had undertaken indefeasible obligations for the full term."
•    The court observed, "a promise to remain in business will be implied particularly where the promisee has undertaken certain burdens or obligations in expectation of and reliance upon the promisor's continued activity."  The court found that a specific clause in the contract stating the "the agreement would terminate upon specified notice to the garage or would terminate if the hotel should close" would have been the obvious solution.  However, one did not exist, and the only right the Defendant had to terminate the contract concerned the Plaintiff's default.  Even if the Plaintiff knew of the Defendant hotel's dire financial straits when they entered into the agreement, it does not relieve the Defendant from its responsibilities under the agreement as a matter of law.   
•    The court additionally recognized the "the incongruity of an enterprise, as large as a metropolitan hotel, being obligated to 'continue in the hotel business' merely because of various relatively minor incidental service contracts, such as that involved here."  However, the court argued the incongruity does not lessen the Defendant's liability.  The incongruity "does suggest that there may be a custom or usage in this industry to regard incidental service contracts for a period terminable on the hotel's going out of business."  Although, the record was devoid of any reference to such custom and usage, if it is testified to at trial on remand, subject to the parol evidence rule, this information could be admissible to "establish the correct interpretation or understanding of the agreement as to its term."
•    The court also recognized that the Defendant could assert the hotel's precarious financial situation as an excuse for its failure to perform.  The court summarily rejected this argument by recognizing "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".  The court observed "the purpose of providing garage services to hotel guests was frustrated only when Savoy itself made a business decision to close the hotel, and did not result from unanticipated circumstances."

Discussion. Among other things, this case shows that mere economic difficulties experienced by one party will not allow that party to escape from their contractual responsibilities.  It is interesting to read this case alongside [Western Properties v. Southern Utah Aviation, Inc.].