Lancellotti v. Thomas

Superior Court of Pennsylvania · 1985 · Contracts

ContractsRestitutionBreachForfeitureLiquidated damagesdefaulting purchaserrestitutionforfeiture

Facts

The parties entered into an agreement under which appellant paid appellees $25,000 to purchase the name, goodwill, and equipment of a luncheonette business, and also entered a related lease for the premises. Appellant also promised to build an addition to the building, and an addendum provided that if the addition was not constructed as agreed, appellant would owe appellees $6,665 as rent for the 1973 summer season and the equipment would revert to appellees upon default. Appellant paid the $25,000 and operated the business, but the addition was not built and appellees later resumed possession of the business. Appellant sought return of the $25,000, while appellees claimed they could retain it and also sought $6,665 rent, which appellant conceded.

Issue

May a defaulting purchaser of a business, who has made payments before breach and entered a related lease, recover any part of those payments? More specifically, should Pennsylvania continue the common law rule barring recovery by a breaching party, or instead allow limited restitution under Restatement (Second) of Contracts § 374?

Rule

Pennsylvania rejects the common law rule that automatically bars a breaching party from recovering payments made before default and adopts Restatement (Second) of Contracts § 374. Under that rule, when the nonbreaching party justifiably refuses further performance because of the other party's breach, the party in breach is entitled to restitution for any benefit conferred by part performance or reliance in excess of the loss caused by that breach, except to the extent the parties agreed that the performance would be retained on breach and that retention is a reasonable liquidated-damages measure in light of anticipated or actual loss and the difficulties of proving loss.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Cleveland, Nora Patel agreed to buy a neighborhood print shop from Samuel Kerr for $60,000 and paid $18,000 upfront. After operating briefly, Nora repudiated the agreement before closing the remaining obligations. Samuel resold the business quickly and can prove only $4,000 in losses caused by Nora's breach; the contract had no clause allowing him to keep the deposit on breach.

If Nora sues to recover part of the $18,000 she paid, which result is most consistent with the governing rule?

Explanation. The majority adopted Restatement (Second) of Contracts § 374. Under that rule, when the nonbreaching party justifiably refuses further performance because of the other party's breach, the breaching party may recover restitution for any benefit conferred by part performance or reliance in excess of the loss caused by the breach. Here, absent a valid retention provision, Samuel cannot automatically keep the full $18,000; Nora may seek the excess over Samuel's $4,000 loss. (Derived from Lancellotti v. Thomas (n.d.).)