Before STALEY and FORMAN, Circuit Judges, and LANE, District Judge.
This is an action for breach of contract brought by plaintiffs, S. Curtis Dempsey and Alice E. Dempsey (appellants in No. 13,868) against defendants, Charles W. Stauffer and Violet M. Stauffer (appellants in No. 13,869) and James E. Lawrence and Ruth B. Lawrence. The jurisdictional requisite of diversity is present and the law of Pennsylvania is applicable.
The issues before this court pertain to the determination of the District Court that (1) there was a bad faith breach of contract for which (2) plaintiffs are entitled to recoup principal installment payments made prior to breach, and (3) additional damages relating to loss of bargain, except that (4) plaintiffs failed to prove fair market value of the property involved. The opinions of the District Court are reported at 182 F.Supp. 806 and 197 F.Supp. 260.
The material facts may be briefly summarized. On October 9, 1956, Charles W. Stauffer and wife contracted to sell to S. Curtis Dempsey and wife a diner property located in Lancaster, Pennsylvania. They agreed the Dempseys were to pay the sum of $59,000.00 in weekly installments of $113.46 each, together with interest on the unpaid balance of 5% per annum. Purchasers were also to pay all taxes and sewer and water rents. Further, it was provided that title to the premises remained with the sellers until such time as the purchase price, interest, and other payments due had been paid in full. At that time sellers were to deliver to buyers a special warranty deed. The buyers had the right to anticipate any and all payments.
As of November 14, 1957, the Dempseys had paid as due the weekly installments of principal ($6,467.22) and interest ($3,059.40) but had not paid any of the taxes or water rent levied on the premises for the year 1957 ($754.34), although the latter were overdue. On that date, without prior notice to the Dempseys, the Stauffers executed an affidavit of default based upon the nonpayment of taxes and water rent and contracted to sell the diner to a third party, the Lawrences, for the sum of $66,000.00. This second contract of sale had been the subject of negotiations over a period of several months and, except for names, dates, and amounts, contained terms identical to the Dempsey contract. The Stauffers then caused to have served upon a Dempsey employee at the diner a copy of the affidavit of default and a letter which read, in part:
"This is to further advise you that your rights under this agreement have been terminated and you are to remove, personally, from 823 S. Prince Street, Lancaster, Pennsylvania, forthwith. And you are further notified that none of the personal property at said 823 S. Prince Street is to be touched or moved by you."
The Lawrences thereupon took possession of the premises and have since conducted the operation of the diner.
The District Court concluded that, by their acceptance of the weekly payments of principal and interest, the Stauffers clearly recognized the contract with the Dempseys was in full force and effect and, therefore, the sellers could not terminate the contract without demand on the Dempseys for performance.*fn1 Accordingly, the court ruled that the Stauffers are liable for damages resulting from the breach of contract.
The Pennsylvania courts have repeatedly held that, in a contract where time is not of the essence, "[where] time for the performance of a contract is extended from time to time, with no intention manifested to hold to literal performance, a party cannot rescind without a demand for strict performance within a reasonable time." Riddle Co. v. Taubel, 277 Pa. 95, 96, 120 A. 776, 777 (1923). See also Warren Tank Car Co. v. Dodson, 330 Pa. 281, 199 A. 139 (1938); Atlantic City Tire & Rubber Corp. v. Southwark Foundry & Machine Co., 289 Pa. 569, 137 A. 807 (1927); Hopp v. Bergdoll, 285 Pa. 112, 131 A. 698 (1926); C. Trevor Dunham, Inc. v. Nemitz, 82 Pa.Super. 382 (1923); Kuhn v. Skelley, 25 Pa.Super. 185 (1904).
The Stauffers contend that Paragraph 15*fn2 of their contract is sufficient either to make time of the essence or to require strict compliance on the part of the plaintiffs. The Supreme Court of Pennsylvania in considering a similar clause in Warren Tank Car Co. v. Dodson, supra,*fn3 stated:
"From the strict legal standpoint the creditor is entitled to enforce the forfeiture according to the terms of the contract, but equity, or a court administering equitable principles under legal forms, will not permit him to do so if by lulling the debtor into a false sense of security he has led him into a default which otherwise the debtor might have avoided. Being an equitable doctrine, it is limited by the conditions which equity imposes upon those who seek its relief, and among such conditions the most familiar - and the oldest in the history of equity jurisprudence - is the requirement that he who seeks equity must do equity. Prior indulgence by the creditor does not give the debtor an automatic right to an extension, but merely a reasonable opportunity to perform, provided he can show that additional time would enable him to do so." 330 Pa. at 286-287, 199 A. at 142. (Italics in original state reporter.)
At no time were the Dempseys in default in payments to be made to the Stauffers. The latter had lost nothing by the acts of which they complained. By not insisting that the Dempseys pay the taxes and water rents when due, they lulled the Dempseys into a false sense of security.
"While the lessor had a right to insist on strict performance, he was equally at liberty to permit a variance; and if in doing so over a considerable period, he put the lessee off his guard, it would be inequitable that he insist on exact performance without notice to the * * * [plaintiff] of his intention to require such performance in the future. The inequitableness of such action would be more evident where, as in this case, each payment increased the value of the * * * [plaintiff's] interest in ...