Maxton Builders, Inc. v. Lo Galbo - 68 N.Y.2d 373, 509 N.Y.S.2d 507, 502 N.E.2d 184 (1986)

Rule:

A party who defaults on a contract cannot recover the amount or value of part performance. This rule is applicable to contracts generally, and has been applied to a wide variety of circumstances including the sale of goods, employment contracts for a fixed term, construction contracts, and installment land sales. In all of the cases the common law would deny any relief to the defaulting party even when there had been substantial, or nearly complete performance. Such holdings prompted criticism calling for reform of the parent rule on the ground that it produced a forfeiture, and the amount of the forfeiture increases as performance proceeds, so that the penalty grows larger as the breach grows smaller. The modern rule advocated by the critics permits the party in default to recover for part performance in excess of actual damages, but places the burden on him to prove the net benefit conferred.

Facts:

The plaintiff, Maxton Builders, Inc., contracted to sell a house to the defendants and accepted a check for the down payment. When the defendants canceled the contract and stopped payment on the check, the plaintiff sued for a breach claiming a right to the down payment -- a right traditionally allowed in the State of New York under the rule set forth in Lawrence v Miller. The trial court denied plaintiff's motion for summary judgment holding that a fact question was presented as to whether recovery of the down payment would constitute a penalty under the circumstances. The Appellate Division modified and granted summary judgment to the plaintiff for the amount of the down payment. The defendants appealed claiming there was no breach because they effectively exercised a contractual right to cancel. In the alternative, defendants urged that plaintiff's recovery should be limited to actual damages. 

Issue:

Did the defendants breach the parties’ contract, thereby warranting the payment of the entire down payment to the plaintiff pursuant to New York law? 

Answer:

Yes.

Conclusion:

On appeal, the court held that the defendants breached the contract. They bargained for and obtained a limited right to cancel, which they failed to exercise within the time agreed upon. The court also held that, under New York law, the defendants were not permitted to recover the down payment because they defaulted on the contract. The longstanding rule provided that the party who defaulted on a contract could not recover the amount or value of part performance. A more modern rule, which was proposed by the defendants, would have permitted the defendants, as the defaulting party, to recover for part performance in excess of actual damages, but it placed the burden on them to prove the net benefit conferred. However, the modern rule was not the law in New York. Also, the defendants did not prove that the actual damages were less than the plaintiff alleged or that there was, in fact, a net benefit conferred.