Note from Professor:

Notwithstanding the court’s glowing description of the approach to restitution taken in Section 374 of the Restatement (Second) of Contracts (which it adopts), this case articulates the minority approach to the availability of restitution to breaching parties (and strongly contrasts with the rule articulated in Martin v. Schoenberg, which you read in Module 14 of the first semester).

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        SPAETH, President Judge.  This appeal raises the question of whether a defaulting purchaser of a business who has also entered into a related lease for the property can recover any part of his payments made prior to default. The common law rule precluded a breaching buyer from recovering these payments. Today, we reject this rule, which created a forfeiture of the breaching buyer's payments and unjustly enriched the nonbreaching seller, and adopt § 374 of the Restatement (Second) Contracts (1979), which permits limited restitution. This case is remanded for further proceedings so that the trial court may apply the Restatement rule.

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        On July 25, 1973, the parties entered into an agreement in which appellant agreed to purchase appellees' luncheonette business and to rent from appellees the premises on which the business was located. Appellant agreed to buy the name of the business, the goodwill, and equipment; the inventory and real estate were not included in the agreement for the sale of the business. Appellees agreed to sell the business for the following consideration: $25,000 payable on signing of the agreement; appellant's promise that only he would own and operate the business; and appellant's promise to build an addition to the existing building, which would measure 16 feet by 16 feet, cost at least $15,000, and be 75 percent complete by May 1, 1974.

        It was also agreed that appellees would lease appellant the property on which the business was operated for a period of five years, with appellant having the option of an additional five-year term. The rent was $8,000 per year for a term from September 1, 1973, to August 31, 1978. A separate lease providing for this rental was executed by the parties on the same date that the agreement was executed. This lease specified that the agreement to build the existing building was a condition of the lease. In exchange for appellant's promise to build the addition, there was to be no rental charge for the property until August 31, 1973. Further, if the addition was not constructed as agreed, the lease would terminate automatically. An addendum, executed by the parties on August 14, 1973, modified this agreement, providing that “if the addition to the building as described in the Agreement is not constructed in accordance with the Agreement, the Buyer shall owe the Sellers $6,665 as rental for the property ...” for the period from July 25, 1973, to the end of that summer season. The addendum also provided that all the equipment would revert to appellees upon the appellant's default in regard to the addition.

        Appellant paid appellees the $25,000 as agreed, and began to operate the business. However, at the end of the 1973 season, problems arose regarding the construction of the addition. Appellant claims that the building permit necessary to construct the addition was denied. Appellees claim that they obtained the building permit and presented it to appellant, who refused to begin construction. Additionally appellees claim that appellant agreed to reimburse them if they built the addition. At a cost of approximately $11,000, appellees did build a 20 feet by 40 feet addition. In the spring of 1974 appellees discovered that appellant was no longer interested in operating the business. There is no evidence in the record that appellant paid any rent from September 1, 1973, as the first rental payment was not due until May 15, 1974. Appellees resumed possession of the business and, upon opening the business for the 1974 summer season, found some of their equipment missing.

        Appellant's complaint in assumpsit demanded that appellees return the $25,000 plus interest. ***

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        At one time the common law rule prohibiting a defaulting party on a contract from recovering was the majority rule. J. Calamari and J. Perillo, The Law of Contracts § 11–26, at 427 (2d ed. 1977). However, a line of cases, apparently beginning with Britton v. Turner, 6 N.H. 481 (1834), departed from the common law rule. The merit of the common law rule was its recognition that the party who breaches should not be allowed “to have advantage from his own wrong.” Corbin, The Right of a Defaulting Vendee to the Restitution of Instalments Paid, 40 Yale L.J. 1013, 1014 (1931). As Professor Perillo states, allowing recovery “invites contract-breaking and rewards morally unworthy conduct.” Restitution in the Second Restatement of Contracts, 81 Colum.L.Rev. 37, 50 (1981). Its weakness, however, was its failure to recognize that the nonbreaching party should not obtain a windfall from the breach. The party who breaches after almost completely performing should not be more severely penalized than the party who breaches by not acting at all or after only beginning to act. Under the common law rule the injured party retains more benefit the more completely the breaching party has performed prior to the default. Thus it has been said that “to allow the injured party to retain the benefit of the part performance ..., without making restitution of any part of such value, is the enforcement of a penalty or forfeiture against the contract-breaker.” Corbin, supra, at 1013.

        Critics of the common law rule have been arguing for its demise for over fifty years. See Corbin, supra. See also Calamari and Perillo, supra, at § 11–26; 5A Corbin on Contracts §§ 1122–1135 (1964); 12 S. Williston, A Treatise on the Law of Contracts §§ 1473–78 (3d ed. 1970). ***

        In 1979, this rule was liberalized. Restatement (Second) of Contracts § 374 (1979) provides:

        § 374. Restitution in Favor of Party in Breach

(1) Subject to the rule stated in Subsection (2), if a party justifiably refuses to perform on the ground that his remaining duties of performance have been discharged by the other party's breach, the party in breach is entitled to restitution for any benefit that he has conferred by way of part performance or reliance in excess of the loss that he has caused by his own breach.

(2) To the extent that, under the manifested assent of the parties, a party's performance is to be retained in the case of breach, that party is not entitled to restitution if the value of the performance as liquidated damages is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss.

*** Professor Perillo suggests that the injured party has adequate protection without the common law rule. Choosing “the just path,” he therefore rejects the common law rule, explaining this choice by saying that times have changed. “What appears to be just to one generation may be viewed differently by another.” Perillo, supra, at 50. See also 12 S. Williston, supra, § 1473, at 222 (“The mores of the time and place will often determine which policy will be followed.”).

        Many jurisdictions have rejected the common law rule and permit recovery by the defaulting party. ***

        This development has been called the modern trend. See Quillen v. Kelley, 216 Md. 396, 140 A.2d 517 (1958). See also 12 S. Williston, supra, § 1473, at 222 (cases permitting recovery are now the weight of the authority); 5A Corbin on Contracts, supra, § 1122, at 3 (common law rule is broad statement not supported by the actual decisions). But see 1 G. Palmer, The Law of Restitution 568 (1978) (no valid generalization may be made regarding when a defaulting vendee can recover). It may be that the growing number of jurisdictions permitting recovery have been influenced by the widespread adoption of the Uniform Commercial Code § 2–718. See, e.g., Maxey v. Glindmeyer, 379 So.2d 297 (Miss.1980) (allowing recovery of excess of seller's actual damages in land sale contract by following the logic of the state statute equivalent to § 2–718 of the Uniform Commercial Code). Indeed, the common law rule is no longer intact even with respect to land sales contracts. See, e.g., Honey v. Henry's Franchise Leasing Corp., 64 Cal.2d 801, 415 P.2d 833, 52 Cal.Rptr. 18 (1966); McLendon v. Safe Realty Corp., 401 N.E.2d 80 (Ind.App.1980); Newcomb v. Ray, supra; De Leon v. Aldrete, supra; and see 1 G. Palmer, supra, at 596 n. 15 (citing cases).

        In Pennsylvania, the common law rule has been applied to contracts for the sale of real property. Kaufman Hotel & Restaurant Co. v. Thomas, 411 Pa. 87, 190 A.2d 434 (1963); Luria v. Robbins, 223 Pa.Super. 456, 302 A.2d 361 (1973). In such cases, however, the seller has several remedies against a breaching buyer, including, in appropriate cases, an action for specific performance or for the purchase price. See Trachtenburg v. Sibarco Stations, Inc., 477 Pa. 517, 384 A.2d 1209 (1978). See also 5A Corbin on Contracts, supra, § 1145. As long as the seller remains ready, able, and willing to perform a contract for the sale of real property, the breaching buyer has no right to restitution of payments made prior to default. See 5A Corbin on Contracts, supra, at § 1130.

        The common law rule has also been applied in Pennsylvania to contracts for the sale of goods. Atlantic City Tire and Rubber Corp. v. Southwark Foundry & Machine Co., 289 Pa. 569, 137 A. 807 (1927). However, Pennsylvania has since adopted the Uniform Commercial Code, which, as to contracts for the sale of goods, has modified the common law rule by 13 Pa.C.S. § 2718(b), which permits a breaching party to recover restitution. See note 2, supra.

        The viability of the common law rule permitting forfeiture has also been undermined in other areas of Pennsylvania law. In Estate of Cahen, 483 Pa. 157, 168 n. 10, 394 A.2d 958, 964 n. 10 (1978), the Supreme Court held that assuming that a breaching fiduciary could recover in unjust enrichment, the basis would be Restatement of Contracts § 357 (1932), which allows recovery by a breaching party to the extent that the benefits exceed the losses sustained by the other party.

–3–

        In regard to the present case, § 374 of the Restatement (Second) of Contracts represents a more enlightened approach than the common law rule. “Rules of contract law are not rules of punishment; the contract breaker is not an outlaw.” Perillo, supra, at 50. The party who committed a breach should be entitled to recover “any benefit ... in excess of the loss that he has caused by his own breach.” Restatement (Second) of Contracts § 374(1).

        This conclusion leads to the further conclusion that we should remand this case to the trial court. The trial court rested its decision on the common law rule. Slip op. of trial court at 7–8. Thus it never considered whether appellant is entitled to restitution, Restatement (Second) of Contracts § 374(1), nor, if appellant is not entitled to restitution, whether retention of the $25,000 was “reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss,” id., § 374(2).

        Remanded for further proceedings consistent with this opinion. Jurisdiction relinquished.

***

        TAMILIA, Judge, dissenting:  I strongly dissent. In the first instance, the majority does not and cannot cite any Pennsylvania authority adopting the rule cited in § 374 of the Second Restatement of Contracts. Although the ostensible basis for remand is the trial court's reliance on outmoded law, the majority relies on law so new as to be virtually unknown in this jurisdiction. The law in Pennsylvania has been and continues to be that where a binding contract exists, and there is no allegation that the contract itself is void or voidable, a breaching party is not entitled to recovery. Luria v. Robbins, 223 Pa.Super. 456, 302 A.2d 361 (1978). While our Supreme Court may yet abrogate the forfeiture principle in this Commonwealth, it has not yet seen fit to do so, and we may not usurp its prerogatives, particularly when the result would be unjust.

***

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