Kutzin v. Pirnie

CLIFFORD OPINION: This is an action on a contract for the sale of residential property. The sellers' real-estate agent prepared the contract, after which defendants, the prospective buyers, signed it, paid a deposit of nearly ten percent of the purchase price, and then decided not to go through with the purchase. In the trial court the buyers argued that the contract had been rescinded because attorneys for both parties had sought to amend it during the three-day period provided by the contract's attorney-review clause. The court found the contract to be valid and awarded the sellers compensatory damages, albeit in an amount less than the deposit. The Appellate Division agreed that the contract is binding but held that the sellers are entitled to keep the entire deposit as damages. We granted certification, to determine whether the contract is enforceable and, if so, whether the sellers should be allowed to keep the deposit. We affirm the Appellate Division holding that the contract is valid but modify that court's judgment on the issue of damages and reinstate the damage award of the trial court.

I

On September 1, 1987, defendants, Duncan and Gertrude Pirnie, and plaintiffs, Milton and Ruth Kutzin, signed a contract for the sale of the Kutzins' house in Haworth for $ 365,000. The contract, which is the standard-form real-estate sales contract adopted by the New Jersey Association of Realtors, had been prepared by Weichert Realtors (Weichert), the sellers' real-estate agent. Under its terms, the Pirnies agreed to pay a partial deposit of $ 1,000 on signing the contract and the remainder of the deposit, $ 35,000, within seven days. In compliance therewith, the Pirnies made out a check for $ 1,000 to the trust account of Russo Real Estate (Russo), their real-estate agent. The contract does not contain a "forfeiture" or "liquidated damages" clause; with reference to the disposition of the deposit should the sale not take place, the contract merely states, "If this contract is voided by either party, the escrow monies shall be disbursed pursuant to the written direction of both parties."

The trial court ruled that the parties had entered into a binding contract that had not been rescinded either by agreement or pursuant to the attorney-review clause. Consequently, the court held that the sellers were entitled to $ 17,325 in damages. That amount consisted of the $ 12,500 difference between the $ 365,000 the Pirnies had contracted to pay and the $ 352,500 for which the house eventually sold; $ 3,825 in utilities, real-estate taxes, and insurance expenses the Kutzins had incurred during the six-month period between the originally-anticipated closing date and the date of actual sale; and $ 1,000 the Kutzins had paid for a new basement carpet, which their realtor had recommended they buy to enhance the attractiveness of their house to prospective buyers. The court denied recovery of interest the Kutzins contended they would have earned on the purchase price had the sale to the Pirnies gone through. It also refused to award damages for the increased capital-gains tax the Kutzins had paid as a result of the breach. The court ordered the Kutzins to return the $ 18,675 balance of the deposit to the Pirnies.

On appeal, the Kutzins argued that they should recover the lost interest and the increased capital-gains tax they had incurred, or, alternatively, that they should be allowed to retain the deposit. On cross-appeal the Pirnies claimed entitlement to the entire deposit, again asserting that the contract had been validly rescinded. In an unreported opinion, the Appellate Division found that the contract between the parties "was enforceable according to its terms" but that "the Kutzins' claims to compensation for their allegedly increased tax liability and lost interest were too speculative to be compensable." The court then noted that "the Kutzins' loss as determined by the trial court was less than the Pirnies' $ 36,000 deposit," and concluded that "the Kutzins are entitled to retain the [entire] deposit, but they may not recover any additional amount as damages."

We next determine whether the Kutzins are entitled to retain the entire $ 36,000 deposit as damages. The issue of whether a seller should be entitled to retain a deposit when a buyer breaches a contract that does not contain a liquidated-damages or forfeiture clause has long troubled courts. As Professor Williston has observed, "Few questions in the law have given rise to more discussion and difference of opinion than that concerning the right of one who has materially broken his contract without legal excuse to recover for such benefit [here, the deposit] as he may have conferred on the other party * * *."

"[T]he common-law rule, which has been very generally followed * * *, [was] that where the vendee of real property makes a part payment on the purchase price, but fails to fulfill the contract without lawful excuse, he cannot recover the payment * * * even though the vendor may have made a profit by reason of the default." The thought behind that rule is that "restitution should always be refused, for the good and sufficient reason that the [buyer] is guilty of a breach of contract and should never be allowed to have advantage from his own wrong."

New Jersey traditionally has adhered to the common-law rule. As the Appellate Division stated in Oliver v. Lawson, "It has heretofore generally been held in New Jersey that * * * the defaulting buyer may not recover his deposit, irrespective of the actual damages suffered by the seller and regardless of whether the contract contains a forfeiture provision or not."

Following that long line of cases, the Appellate Division held that the Kutzins are entitled to retain the deposit even though the court was "sympathetic to the trial judge's ruling that the Pirnies were entitled to the return of the balance of their $ 36,000 contract deposit in excess of the Kutzins' actual damages."

Despite the ample authority supporting the Appellate Division's disposition of the damages question, "there has been a growing recognition of the injustice that often results from the application of the rule permitting total forfeiture of part payments under a contract of sale."

Professor Corbin led the movement favoring departure from the strict common-law rule. In The Right of a Defaulting Vendee to the Restitution of Instalments Paid, 40 Yale L.J. 1013, 1013 (1931) (Defaulting Vendee), he stated:

If a contractor has committed a total breach of his contract, having rendered no performance whatever thereunder, no penalty or forfeiture will be enforced against him; he will be required to do no more than to make the injured party whole by paying full compensatory damages. In like manner, a contractor who commits a breach after he has rendered part performance must also make the injured party whole by payment of full compensatory damages. The part performance rendered, however, may be much more valuable to the defendant than the amount of the injury caused by the breach; and in such case, to allow the injured party to retain the benefit of the part performance so rendered, without making restitution of any part of such value, is the enforcement of a penalty or forfeiture against the contract-breaker.

Corbin went on to declare that if a plaintiff "can and does show by proper evidence that the defendant is holding an amount of money as a penalty rather than as compensation for injury, he should be given judgment for restitution of that amount." He then concluded that

[t]he cases denying restitution can * * * be justified on one or more of the following grounds: (1) The defendant has not rescinded and remains ready and willing to perform, and still has a right to specific performance by the vendee; (2) the plaintiff has not shown that the injury caused by his breach is less than the instalments received by the defendant; (3) there is an express provision that the money may be retained by the vendor and the facts are such as to make this a genuine provision for liquidated damages, and not one for a penalty or forfeiture. If the facts are such that none of these justifications exists, restitution should be allowed.


Section 374(1) of the Restatement (Second) of Contracts is based on section 357 but "is more liberal in allowing recovery in accord with the policy behind Uniform Commercial Code § 2-718(2).". That section sets forth the rule as follows:

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. [Id. § 374(1).]

Since publication of the first Restatement of Contracts in 1932, few courts have followed the common-law rule refusing restitution. The Restatement approach of allowing recovery "has steadily increased in favor and probably represents the weight of authority."

The leading New Jersey case is Oliver v. Lawson, in which the court permitted the seller to retain the breaching buyer's $ 20,000 deposit on a $ 215,000 contract even though the seller had sold the property at no significant loss. After recognizing that New Jersey follows the strict common-law rule, the court acknowledged that

[p]laintiffs argue that the more modern view would allow the seller to retain only so much of the deposit as would compensate him for his actual damage sustained. Reference is made to Restatement, Contracts, § 357 (1932), and 5 Williston on Contracts (rev. ed. 1937), §§ 1473-1477. Undoubtedly, this is true in some jurisdictions but, as Williston points out in § 791 (3d ed. 1961), "the great majority of decisions deny the buyer relief." The question was recognized by our court in Bernstein v. Rosenzweig and McEnaney v. Spedick, * * * in each of which recovery of the deposit was denied. However, we found it unnecessary for decision in those cases because the deposit in each instance was not so proportionately large as to concern the court. The deposit was less than 1% of the purchase price in Bernstein and less than 4% of the purchase price in McEnaney.


The court in Oliver then denied recovery to the breaching buyers, stating that "[t]hey failed to present any adequate proof of an unjust enrichment."

With the issue squarely presented in this case, we overrule those New Jersey cases adhering to the common-law rule and adopt the modern approach set forth in section 374(1) of the Restatement (Second) of Contracts. In Professor Williston's words, "to deny recovery [in this situation] often gives the [seller] more than fair compensation for the injury he has sustained and imposes a forfeiture (which the law abhors) on the [breaching buyer]." The approach that we adopt is suggested to have the added benefit of promoting economic efficiency: penalties deter "efficient" breaches of contract "by making the cost of the breach to the contract breaker greater than the cost of the breach to the victim."

We conclude that the Pirnies are entitled, under the Restatement formulation of damages, to restitution for any benefit that they conferred by way of part performance or reliance in excess of the loss that they caused by their own breach. See Restatement (Second) of Contracts, supra, § 374(1). We stress, however, that "[o]ne who charges an unjust enrichment has the burden of proving it."

The trial court found that the Kutzins had suffered $ 17,325 in damages, a figure that we accept because it is not challenged in this Court. The Pirnies' deposit of $ 36,000 exceeded the injury caused by their breach by $ 18,675, and they are thus entitled to recovery of that amount.

Our holding is not affected by the fact that the $ 36,000 deposit was less than ten percent of the $ 365,000 purchase price. Whenever the breaching buyer proves that the deposit exceeds the seller's actual damages suffered as a result of the breach, the buyer may recover the difference.


The judgment of the Appellate Division is modified to reinstate the trial court's damage award. As modified the judgment is:

Affirmed.