Commercial Custom, Common Law & Contracts Impacted by COVID-19

Which secular law principles might a beis din apply in a contractual dispute arising out of COVID-19 and its related circumstances?¹  Our last post explained when and how minhag hasochrim – commercial custom – might be applied by a beis din when adjudicating contractual disputes.²  In this post, we consider which of these secular law principles might apply to contracts frustrated by COVID-19.³  We give particular consideration to the types of contracts most likely to have been impacted by COVID-19 within the Jewish community, including contracts relating to Pesach programs, weddings and daycare.

Common Law and Frustrated Contracts

Contractual obligations derive from the parties’ intent to voluntarily bind themselves to perform under the contract.  Sometimes, an intervening event makes performance of the contract impossible or renders the circumstances so drastically different from those anticipated that enforcement would be inconsistent with the parties’ original assumptions, or simply unfair.⁴  In those instances, a court may discharge the parties’ obligations with the understanding that it would be unreasonable to enforce the contract under such circumstances.⁵  Thus, when an unforeseen event occurs between the creation of a contract and its completion that makes performance of a contract impracticable, a court (or beis din) must determine whether the contract is still enforceable as originally contemplated, and if not, what the subsequent rights or duties of the parties might be.  As explained below, when performance is excused either by the contract’s own provisions or through the doctrines of impossibility or frustration of purpose, the parties’ remaining contractual duties are discharged, and the value of payments or services already rendered under the contract may be recouped.

Procedurally, a party may raise a force majeure clause or the doctrine of impossibility or frustration of purpose as an affirmative defense against a breach of contract claim.  If a contract was partially performed before the frustrating event, the party who already provided payment or services can sue under an unjust enrichment theory to recoup the value of the performance rendered.⁶

The Contract as the Point of Departure

In determining whether the parties are excused from performance because of some cataclysmic event, a court begins by determining whether the contract itself expressly allocates the risk of such an occurrence.  Some contracts include a force majeure – or “act of G-d” – clause which relieves the parties from liability if “an extreme and unforeseeable occurrence” beyond either party’s control frustrates performance of the contract.⁷  A force majeure clause will usually list the categories of events that excuse performance, for example: “The parties’ performance under this Agreement is subject to acts of God, war, government regulation, terrorism, disaster, strikes, . . .”⁸  In one case, a banquet hall was sued for breach of contract after a wedding reception was cut short due to an area-wide power failure which occurred forty-five minutes after the reception began.⁹  The plaintiffs sued to recover their prepayment, as well as the cost of the band, photographer and videographer.¹⁰  The court held the banquet hall was not in breach because the contract’s force majeure clause excused the hall from performance when prevented “by an act of God (e.g., flood, power failure, etc.).”¹¹  Consequently, the hall was required only to return the prepayment it received, less the value of services it had rendered before the power outage.¹²

Courts construe force majeure clauses narrowly and limit their applicability to those events listed in the contract.¹³  Thus, if a force majeure clause does not reference a pandemic, epidemic, or health-related crisis, a court will likely not interpret the clause as excusing performance because of COVID-19 alone.  However, a contract that is frustrated due to government regulations in response to COVID-19 may be rescinded if the contract contains a force majeure clause that references government regulation.  For example, a court held that the proprietor of a wedding venue might be excused from performance when the building was subject to a government vacate order after being deemed structurally unsound, as long as the structural deficiency was not the proprietor’s fault.¹⁴

Pesach programs in Florida that were canceled due to Florida’s ban on vacation rentals, or wedding contracts that were frustrated due to the prohibition against large gatherings, might be excused under force majeure clauses that make provision for government regulations.  In such a case, a proprietor might be excused from liability for breach of contract; however, a would-be client would still be able to recover advance deposits made.

Still, force majeure clauses must be read carefully.  Some force majeure clauses provide for limited relief such as delayed or rescheduled performance instead of complete excusal, or require advance written notice of nonperformance, or only apply to events which prevent one party’s performance but not the other.  Further, force majeure clauses generally cannot be invoked to excuse performance due to financial hardship even if the hardship is the result of an otherwise covered catastrophe, unless the clause specifically refers to financial hardship.¹⁵

Even when a contract does not contain a force majeure clause, a contract may allocate risk of contractual impracticability in other ways, such as by expressly allocating the risk of a particular occurrence to one party,¹⁶ or by making one party’s performance unconditional.  Clauses that make one party’s performance unconditional are more commonly found in lease contracts and operate to make a lessee’s lease payment obligations absolute.¹⁷

Impossibility and Frustration of Purpose

If a contract does not expressly allocate the risk of impracticability, parties can seek to be excused from performance under the common law doctrines of impossibility or frustration of purpose.  However, both doctrines are applied quite narrowly, as courts are reluctant to excuse performance absent “extreme circumstances.”¹³

Impossibility

The doctrine of impossibility excuses parties from performance when an unforeseeable intervening event, “the non-occurrence of which was a basic assumption upon which the contract was made,” makes performance impracticable.¹⁸  The impossibility doctrine is usually limited to cases where the contract’s subject matter or means of performance is destroyed through an act of G-d, or by law.¹⁹  The archetypal impossibility case is Taylor v. Caldwell, where a music hall burned down a week before it was scheduled to host a series of concerts; the court held both parties were discharged from the contract.²⁰  In a similar case, a travel company contracted with a hotel in the Catskills to use its premises for a Pesach program, but the hotel burned down on erev yom tov.²¹  The court held the impossibility doctrine applied, and required the hotel to refund the deposit paid by the travel company.²²

Thus, whether a Pesach program contract can be excused under this doctrine would turn on whether performance was indeed impracticable.  Relevant factors might include the program’s location and whether vacation rentals were prohibited in that particular jurisdiction; and the program’s format, such as whether it was at a hotel or provided families with individual apartments.²³

Further, the impossibility doctrine is limited to events that were unforeseeable and thus could not have been provided for in the contract — if the event was foreseeable, the court assumes the contract implicitly allocated the risk to the party whose performance was made impossible.²⁴  In a WWI-era contract for the manufacture of cloth, a court held the manufacturer was liable for non-performance even though a wartime regulation had made it impossible to procure yarn, because the possibility of such a regulation was foreseeable at the time of contracting.²⁵ The determination of whether and when the COVID-19 outbreak and subsequent government-mandated lockdown was foreseeable may be central to the determination of whether a contract should be excused.  Presumably, a contract for a Pesach program entered into after March 11, 2020, when the WHO declared a global pandemic,²⁶ is less likely to be excused than one entered into earlier in the winter or a contract with a wedding venue entered into several months in advance.²⁷

Finally, impossibility due to financial hardship generally does not excuse performance, especially in New York.²⁸  Indeed, New York courts have denied impossibility in cases of financial hardship resulting from the 2008 stock market crash,²⁹ the September 11 terrorist attack,³⁰ and Madoff’s Ponzi scheme.³¹

Frustration of Purpose

While impossibility addresses circumstances when performance becomes literally impossible or impracticable, the doctrine of frustration of purpose addresses circumstances in which performance is possible, but pointless.³²  Frustration of purpose allows a contract to be excused when an unforeseeable event completely frustrates the contract’s underlying purpose.³³  Like the doctrine of impossibility, frustration of purpose is construed narrowly and is generally available only when the frustrating event was not reasonably foreseeable.³⁴

Thus, in the classic 1902 English case Krell v. Henry,³⁵ a contract to rent an apartment from which to view the coronation procession was deemed frustrated when the king took ill with appendicitis and the coronation was canceled.³⁶  By contrast, in another case a tenant was not excused from a commercial lease involving a property which was to be used as a showroom for new automobiles, even after the government issued a wartime regulation prohibiting the sale of new vehicles.³⁷  The court found that the regulation was not unforeseeable at the time of the contract and did not completely destroy the contract’s value, as the property could still be used for other valuable purposes.³⁸

A contract whose purpose was completely frustrated due to the COVID-19 — such as a contract for a wedding venue, caterer, or band that becomes unnecessary when the wedding must be delayed or held in a backyard — might be excused under this doctrine.  However, where the contract is not completely frustrated — such as in the case of a multi-year lease involving a retail store deemed non-essential and shut down for several months during the pandemic — the court is unlikely to excuse a portion of the contract under this doctrine.  This is particularly the case with businesses, such as restaurants, which could still conduct some business.

Prepayment and Remedies

When a contract is excused, both parties are discharged from any remaining obligations.  If some payment had already been made or some services performed, a party is entitled to recover the value of any benefit conferred upon the other party.³⁹  Thus, prepayments generally must be refunded if no goods or services were provided in exchange.  In the earlier case of the hotel that burned down before Pesach started, the travel company was entitled to a refund of their deposit.⁴⁰  Thus, if a contract for a Pesach program is excused due to impossibility, the operator would not be held liable for breach but may be required to return advance deposits. 

A party is, however, entitled to keep or receive the value of any counter-performance already rendered.  In the case of the wedding reception that was cut short due to a power outage, the banquet hall could still recoup the value of services provided prior to the outage.⁴¹  In another case where a student took ill and withdrew from school mid-year, the school could retain the value of services provided while the student was in attendance.⁴²  Thus, if a daycare program is deemed excused from performance for several weeks due to the lockdown, they would still be entitled to payment for the value of services performed.^{43 44}

To conclude, while every case is unique and every analysis fact-specific, our last few articles have attempted to broadly outline factors which might be relevant to adjudicating a contractual dispute arising out of COVID-19.  In our first post, Rabbi Zylberman discussed the halachic principles of frustrated rental contracts that may be applied in a din torah.⁴⁵  In our second post, Rabbi Rosensweig analyzed when and to what extent a beis din would apply minhag hasochrim to incorporate secular law in a din torah.²  Finally, in this post, we considered which secular law principles might be applied in a din torah in which minhag hasochrim has been determined to be applicable.

1. Tzirel Klein is a law intern at the Beth Din of America and a J.D. candidate at Harvard Law School. Thanks to Rabbi Shlomo Weissmann, Rabbi Itamar Rosensweig and Dani Ritholz for insightful comments and suggestions.
2. Rabbi Itamar Rosensweig, “Commercial Custom and Jewish Law,” Jewishprudence (June 2020).
3. This article attempts to broadly outline the relevant doctrines, which vary to some extent among jurisdictions. Where applicable, the article notes where New York courts have taken a distinct approach.
4. See Restatement (Second) of Contracts 11 Intro. Note (1981).
5. See id.
6. See, e.g., Leisure Time Travel, Inc. v. Villa Roma Resort and Conf. Ctr., Inc., 52 N.Y.S.3d 621, 623 (Sup. Ct. 2017).
7. 30 Williston on Contracts § 77:31 (4th ed.).
8. OWBR LLC v. Clear Channel Commc’ns, Inc., 266 F. Supp. 2d 1214, 1216 (D. Haw. 2003).
9. Facto v. Pantagis, 915 A.2d 59, 60 (N.J. Super. App. Div. 2007).
10. Id. at 60. These additional costs represent consequential damages, which would only have been available to the plaintiffs had they prevailed on their breach of contract claim.
11. Id. at 62–63.
12. Id. at 63.
13. Kel Kim Corp. v. C. Markets, Inc., 519 N.E.2d 295, 296 (N.Y. 1987).
14. Goldstein v. Orensanz Events LLC, 44 N.Y.S.3d 437, 438 (App. Div. 2017).
15. See OWBR LLC v. Clear Channel Commc’ns, Inc., 266 F. Supp. 2d 1214, 1216 (D. Haw. 2003). In that case, the defendants cancelled a conference at a resort scheduled for February 2002, claiming that the September 11, 2001 attack had resulted in much fewer bookings than anticipated, making the conference economically infeasible. Id. at 1216. The resort sued for breach of contract. Id. The court found that although the contract’s force majeure clause included “terrorism,” performance was not excused when the clause did not explicitly cover financial hardship. Id. at 1223–24.
16. RNJ Interstate Corp. v. U.S., 181 F.3d 1329, 1331 (Fed. Cir. 1999) (contractor could not recover the value of work already performed after the building burned down in the midst of renovations when contract allocated all risk to contractor until completion).
17. See, e.g., Sage Realty Corp. v. Jugobanka, D.D., 1998 WL 702272, at *4–5 (S.D.N.Y. Oct. 8, 1998) (tenant obligated to make rent payments even after U.S. government froze the tenant’s assets and sealed the leased premises when contract stated that rent obligations would not be impaired even if landlord is unable to provide access to premises due to government action). Similarly, “hell or high water” clauses are generally limited to finance leases, and make a lessee’s payment obligations absolute. See Gen. Elec. Capital Corp. v. FPL Serv. Corp., 986 F. Supp. 2d 1029, 1035 (N.D. Iowa 2013) (hell or high water clause in equipment lease required lessee to make payments even after equipment was destroyed in Hurricane Sandy).
18. Restatement (Second) of Contracts § 261 (1981). The Restatement calls this doctrine “impracticability” in recognition that performance is not only excused in cases of absolute impossibility, but also in cases of extreme difficulty, including extreme financial hardship. Restatement (Second) § 261, cmt. d.
19. 407 E. 61st Garage, Inc. v. Savoy Fifth Ave. Corp., 244 N.E.2d 37, 41 (N.Y. 1968).
20. 3 B. & S. 826, 122 Eng. Rep. 309, 324, 6 R.C. 603 (1863).
21. Leisure Time Travel, Inc. v. Villa Roma Resort and Conf. Ctr., Inc., 52 N.Y.S.3d 621, 622 (Sup. Ct. 2017).
22. Id. at 623.
23. A related issue arises when circumstances force a contract to be performed in a manner different than anticipated. For example, some universities were sued for breach of contract and unjust enrichment after moving all classes online during the 2020 spring semester without reducing tuition fees. See, e.g., https://www.classaction.org/media/bennett-et-al-v-columbia-university.pdf. Generally, a party will not be held to be in breach of contract if it acted in good faith and “substantially performed” its contractual obligations. See Restatement (Second) of Contracts §§ 237, cmt. d., 241 (1981).
24. World of Boxing LLC v. King, 56 F. Supp. 3d 507, 512 (S.D.N.Y. 2014); see also Cook v. Deltona Corp., 753 F.2d 1552, 1558 (11th Cir. 1985).
25. Crown Embroidery Works v. Gordon, 180 N.Y.S. 158 (App. Div. 1920).
26. See https://www.who.int/news-room/detail/29-06-2020-covidtimeline
27. Compare Airbnb’s COVID-19 refund policy, which promises to refund all vacation rentals with check-in dates between March 14, 2020 and July 31, 2020, but only if they were booked on or before March 14, 2020. https://www.airbnb.com/help/article/2701/extenuating-circumstances-policy-and-the-coronavirus-covid19
28. See 407 E. 61st Garage v. Savoy Corp., 244 N.E.2d 37, 41 (1968) (“financial difficulty or economic hardship, even to the extent of insolvency or bankruptcy” does not excuse performance).
29. Twin Holdings of Del. LLC v. CW Capital, LLC, 906 N.Y.S.2d 784 (N.Y. Sup. Ct. 2010).
30. U.S. Bancorp Equip. Fin., Inc. v. Ameriquest Holdings LLC (September 11, 2001 terrorist attack which depressed market for airplanes did not excuse loan defaults in the airplane industry).
31. Sassower v. Blumenfeld, 878 N.Y.S.2d 602, 603-05 (Sup. Ct. 2009). See also Lantino v. Clay LLC, 2020 WL 2239957, at *3 (S.D.N.Y. May 8, 2020) (financial hardship due to COVID-19 pandemic does not excuse failure to make payments under settlement agreement).
32. U.S. v. Gen. Douglas MacArthur Senior Village, Inc., 508 F.2d 377, 381 (2d Cir. 1974).
33. Id.
34. See Lloyd v. Murphy, 153 P.2d 47, 50 (Cal. 1944).
35. (1903) 2 K.B. 740 (C.A.).
36. Krell v. Henry, (1903) 2 K.B. 740 (C.A.).
37. Lloyd v. Murphy 153 P.2d 47, 48–53 (Cal. 1944).
38. Id. at 51-53.
39. Restatement (Second) of Contracts §§ 272, 377 (1981).
40. Leisure Time Travel, Inc. v. Villa Roma Resort and Conf. Ctr., Inc., 52 N.Y.S.3d 621, 623 (Sup. Ct. 2017).
41. Facto v. Pantagis, 915 A.2d 59, 63 (N.J. Super. App. Div. 2007).
42. Dubrow v. Briansky Saratoga Ballet Ctr., Inc., 327 N.Y.S.2d 501, 504 (N.Y. Civ. Ct. 1971).
43. Whether a parent would be excused at all from payment for the time the daycare was closed would of course depend on the terms of the contract and the circumstances of closure.
44. While courts have discretion to award damages as necessary to avoid injustice, recovery in cases of impossibility or frustration is usually limited to restitution. Restatement (Second) of Contracts § 377 (1981). Damages for costs incurred in reliance on a contract mainly arise in cases where a benefit was conferred and then destroyed by the supervening event, as in the case of unfinished renovation work on a property destroyed by fire. See generally id.
45. Rabbi Michoel Zylberman, “Covid-19 and Canceled Rental Contracts,” Jewishprudence (June 2020).