4.2 Contract Performance, Breach, and Enforceability
Key Takeaways
- Time-is-of-the-essence makes deadlines strict; a missed date becomes a material breach.
- Specific performance forces a sale because property is unique; rescission unwinds the deal.
- Liquidated damages cap the seller's recovery at the pre-agreed deposit when it is the sole remedy.
- Assignment leaves the original party secondarily liable; novation releases them.
- A valid contingency that fails permits lawful cancellation, not breach.
Once a contract forms, the exam asks how it ends and what happens when someone fails to perform. Learn the three outcomes and match each breach to its remedy.
Three Ways Performance Ends
- Full performance (execution) — both parties do everything promised; the contract is then executed.
- Breach — one party fails to perform a material obligation without legal excuse.
- Lawful termination — the contract ends for a legitimate reason (a failed contingency, mutual rescission, or impossibility), which is not a breach.
Exam trap: A buyer who walks away because a written financing contingency failed has lawfully canceled, not breached. A buyer who walks with no valid contingency has breached.
Time Is of the Essence
A time-is-of-the-essence clause makes every stated deadline strict. Missing a date is then a material breach, even by a day. Without the clause, courts allow a reasonable delay. Expect a question where one party closes two days late: with the clause, that is breach; without it, it may be excused.
Remedies for Breach
Match the facts to the remedy the injured party seeks.
| Remedy | What it does | When it fits |
|---|---|---|
| Specific performance | Court orders the breaching party to complete the sale | Buyer sues a seller, because each parcel of land is unique and money cannot replace it |
| Compensatory damages | Money to cover the actual loss | Either party suffers measurable money harm |
| Liquidated damages | A pre-agreed sum (often the earnest deposit) is the sole recovery | Contract caps the seller's recovery at the deposit if the buyer defaults |
| Rescission | Unwinds the contract; parties return to their pre-contract position | Misrepresentation, mutual mistake, or mutual agreement |
Worked example: A seller signs a purchase contract, then refuses to convey because prices rose. The buyer can sue for specific performance, forcing the sale, because the specific property cannot be replaced with money.
Liquidated Damages in Practice
Many purchase contracts state that if the buyer defaults, the seller's sole remedy is to keep the earnest money as liquidated damages. That caps the seller's recovery — the seller cannot also sue for additional losses if the clause says it is the exclusive remedy.
Worked example: A buyer deposits $9,000 earnest money. The contract names that deposit as liquidated damages and the seller's only remedy. The buyer defaults with no valid contingency. The seller keeps the $9,000 and cannot pursue more, even if the home later sells for $12,000 less.
Assignment vs. Novation
- Assignment transfers contract rights to a new party. Unless released, the original party remains secondarily liable if the assignee fails.
- Novation substitutes a new party (or new contract) and releases the original party entirely, with all parties' consent.
Exam trap: Assignment keeps the original obligor on the hook; novation lets them off. The release is the dividing line.
Discharge by Other Means
A contract can also end by mutual rescission (both agree to cancel), accord and satisfaction (accepting a different performance in settlement), impossibility of performance (the subject is destroyed or the act becomes illegal), or operation of law (bankruptcy, expiration of the statute of limitations). When a question lists a destroyed property before closing or a newly illegal use, the discharge is impossibility, not breach. The throughline of this section: separate lawful endings from breaches, then match each breach to the narrowest remedy the facts support.
A seller signs a binding purchase contract but later refuses to close because home prices have risen. The buyer wants the specific home, not a refund. What remedy best fits?
A purchase contract states that if the buyer defaults, the seller's sole remedy is to retain the $10,000 earnest money as liquidated damages. The buyer defaults with no valid contingency, and the seller later resells for $14,000 less. How much may the seller recover?
Buyer A assigns her purchase contract to Buyer B, but the seller does not release Buyer A. Buyer B then fails to close. What is Buyer A's position?
Statute of Limitations and Mutual Mistake
Even a valid contract can become unenforceable if a party waits too long. The statute of limitations sets a deadline (often several years for written contracts) to sue; afterward a court will not enforce the claim.
Mistake, Fraud, and Duress
- Mutual mistake about a material fact (both parties wrong about the parcel's size) can make a contract voidable or support rescission.
- Unilateral mistake (only one party is wrong) usually does not void the contract unless the other party knew of the error.
- Fraud, misrepresentation, undue influence, and duress each make a contract voidable by the injured party, who may rescind or affirm.
Exam trap: Fraud makes a contract voidable, not void, the defrauded party chooses whether to cancel. Only the injured party may disaffirm.
Remedy-Matching Cheat Sheet
When a question describes a breach, match the facts to the narrowest remedy:
| Facts in the question | Best remedy |
|---|---|
| Seller refuses to convey a unique property | Specific performance |
| Buyer defaults; contract names the deposit as the sole remedy | Liquidated damages |
| One party defrauded the other | Rescission |
| A measurable money loss occurred | Compensatory damages |
Exam trap: Specific performance is sought against a defaulting seller (land is unique); liquidated damages typically protect a seller when the buyer walks.
Impossibility and Frustration of Purpose
A contract can be discharged when performance becomes objectively impossible, the unique property is destroyed before closing, or a change in law makes the agreed use illegal. Frustration of purpose is related: an unforeseen event destroys the reason for the contract even though performance is technically possible. Neither is a breach; both lawfully end the duty to perform. Routine financial hardship, by contrast, does not excuse performance.
Exam trap: A buyer's mere inability to afford the deal is not impossibility; only destruction of the subject or newly illegal performance discharges the contract.