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Thursday, April 09, 2020
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With federal, state and local governments restricting movement, imposing curfews, closing restaurants and banning gatherings, while updated guidelines from the federal government recommend that people avoid gatherings of over 10 people, the fate of this year’s Passover holiday resort programs appears all but certain. The closure of a program requires the unraveling of a host of contracts—guests, organizers, suppliers and hotels are entangled in a web of agreements designed to make the program run. When a contract itself does not anticipate the unlikely event of a pandemic (as some contracts do in so-called force majeure clauses), a couple of seldom-used contractual excuses will likely be implicated: frustration of purpose and impossibility. And while those doctrines may apply to excuse future performance, resolving disputes over money already paid and costs incurred requires a fairness analysis resorting to almost-never-used principles of restitution.

 

Frustration of Purpose

When a change in circumstances makes performance of a contract virtually worthless, as appears to be the case here, performance might be excused. The excuse applies when two questions can be answered affirmatively:

1. Was there a mutually understood “basis of the contract” that “without it, the transaction would have made little sense”?

2. Was the basis of the contract fully and completely frustrated?

Consider what happened after the outbreak of avian flu in 2015. The epidemic wiped out scores of chickens, which caused a poultry farmer to lose a valuable contract to provide eggs to Kellogg’s. In the aftermath, the farmer scrapped plans to build a new facility planned for the purpose of supplying those anticipated but now cancelled Kellogg’s orders. The farmer then claimed he should be released from a contract for the purchase of a commercial dryer. According to the farmer, the purpose of the contract was to install the dryer at the new plant to fulfill Kellogg’s orders and that purpose was now frustrated. The court agreed that this might have been the case, assuming that both parties fully understood this purpose and that the new equipment would be worthless due to cancellation of the Kellogg’s contract in the aftermath of the flu.

 

How Might Frustration-of-Purpose Claims Apply to Passover-Program Contracts?

Frustration of purpose may be a particularly potent means for releasing contracts related to cancelled Passover programs. Within the Jewish community at least, the purpose of contracts around these programs is generally understood by all parties involved to facilitate a program for hundreds of guests to spend Passover together at a hotel with food, lodging and recreation all provided. That purpose is frustrated and the contracts are rendered worthless when the program is forced to cancel due to bans on gatherings to prevent the spread of a deadly disease. However, frustration of purpose only excuses future performance. Past performance—nonrefundable deposits, for instance—are subject to a separate restitution analysis, which we will discuss below.

 

Impossibility

Another excuse from performance that may release Passover-program contracts is the legal doctrine known as impossibility. A contract is considered impossible to perform, and sometimes excused on that basis, when two elements can be established.

1. Performance of the contract must have been made impossible.

2. The event causing impossibility must have been unforeseeable. If it was a foreseeable event that could have been negotiated around in the contract (e.g., in a force majeure clause), courts will be reluctant to excuse performance based on impossibility.

In the case of Passover programs, impossibility may apply to release all parties from their contractual obligations if the program is truly impossible to carry on. However, as between the host and the guests, the excuse can only be invoked by the host of the program whose performance is rendered impossible due to a ban on gatherings, for instance.

A guest’s obligation is only to pay the contractually agreed upon amount, and courts will not likely agree that ability to pay is rendered impossible by the pandemic. (The guest would of course have a claim for breach of contract when the program is cancelled, but the host will likely have a valid excuse: impossibility of performance.)

 

Restitution

Given alternative applicable doctrines seem likely to release future performance from Passover-program contracts, it becomes important to consider how courts would treat non-refundable deposits already paid by guests as well as costs incurred by hosts and suppliers. These issues of remaining inequities after disbanding the contract are dealt with by the courts on an equitable basis—meaning, judges attempt to do what is fair. The operator of the Passover program should not be allowed to keep a windfall and would be forced to return any profits. But guests should not expect that courts will provide full refunds—costs have been incurred and these events were wholly unforeseeable and nobody’s fault.

The best resolution under these circumstances is for all parties to work together in good faith—an obligation implied in every contract—to allocate losses as fairly as possible. Ideally, hosts will make every effort to negotiate the cancellation of contracts with suppliers and venues and then, after accounting for unrecouped costs, return as much money (and other value) as possible to guests.

Passover-program contracts are just a subset of the disruption being wrought as global movement grinds to a halt. Organizations and people are assessing their contractual obligations, potential tort liability, insurance coverage and regulatory compliance in light of these unprecedented circumstances. If you have any questions about the issues addressed in this article or otherwise, please do not hesitate to reach out.


Jonathan Feder is an associate in Quinn Emanuel’s New York office. He assists clients in crisis situations including representation in all stages of government investigations and prosecutions as well as complex commercial litigation. Prior to joining the firm in 2015, Jonathan graduated magna cum laude from University of Pennsylvania Law School, where he also served as an editor on the board of the University of Pennsylvania Law Review.

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