4.2 Contract Performance, Breach, and Enforceability

4.2 Contract Performance, Breach, and Enforceability

Most contracts end by full performance — both parties do what they promised. But the exam tests the other endings: assignment, novation, breach, and the remedies that follow.

Discharge, Assignment, and Novation

• Performance — obligations fully completed. The normal, clean ending.
• Assignment — one party transfers their rights under the contract to a third party. The original party usually remains secondarily liable unless released. Most real estate contracts are assignable unless they say otherwise.
• Novation — a new contract substituted for the old, or a new party substituted for an original party, with the original party released from liability. Novation requires the consent of all parties.

Trap: Assignment alone does not release the assignor; only novation does. If a question says the original buyer is "completely off the hook," the answer is novation, not assignment.

Time Is of the Essence

When a contract states "time is of the essence," deadlines are strictly enforced. A party who performs even one day late has breached. Without that clause, courts allow a reasonable time for performance. Watch for the phrase in closing-date and contingency-deadline questions.

Remedies for Breach

When a party defaults, the non-breaching party chooses a remedy.

Specific performance is favored for real estate because each parcel is considered unique, so money may not make the buyer whole. A seller cannot usually force a buyer to buy via specific performance and instead keeps damages.

Worked Numeric: Liquidated Damages

A buyer puts down $12,000 earnest money on a $400,000 home, then walks away with no valid contingency. The contract contains a liquidated damages clause naming the earnest money as the seller's sole remedy.

• Seller's recovery is capped at $12,000, even if the seller later resells for $385,000 (a $15,000 shortfall plus carrying costs).
• The seller cannot also sue for the extra loss; electing liquidated damages forecloses other money remedies.

Now flip it: without a liquidated damages clause, the seller could pursue actual compensatory damages — potentially the $15,000 loss plus extra carrying and marketing costs — but must prove them. The trade-off: liquidated damages are certain and quick; actual damages are uncapped but must be proven.

Types of Breach and the Default Process

Not every failure is the same. A material breach goes to the heart of the bargain (the seller refuses to convey) and lets the other party cancel and sue. A minor (partial) breach is a small deviation (a minor repair left undone) that supports damages but usually not cancellation. Anticipatory breach (repudiation) occurs when a party announces before the deadline that they will not perform; the non-breaching party may sue immediately rather than wait.

When a buyer defaults, the seller typically issues a notice of default and, if uncured, declares the contract terminated and pursues the contractual remedy. The earnest money is not automatically the seller's — escrow holders may require written release from both parties or an interpleader, because wrongly releasing disputed funds creates liability. This is why escrow instructions and the contract's default paragraph control the outcome.

Discharge Beyond Performance

Contracts can also end without anyone breaching:

• Mutual rescission — both parties agree to cancel and restore each other to their original positions.
• Impossibility of performance — the subject matter is destroyed (the house burns down before closing) or performance becomes legally impossible.
• Operation of law — bankruptcy, a change in law making the act illegal, or expiration of the statute of limitations.
• Accord and satisfaction — the parties agree to accept different performance (an accord) and the new performance is completed (satisfaction), discharging the original duty.

Trap: mere difficulty or higher cost does NOT excuse performance — only true impossibility does. A builder who underestimated costs is still bound. Distinguish rescission (unwind, restore the status quo) from cancellation (terminate going forward); rescission tries to return both parties to where they started, which matters when deposits or partial payments have already changed hands.

Choosing a Remedy: Buyer vs. Seller Default

The non-breaching party usually must elect one remedy rather than stack several. The right choice depends on who defaulted and what the contract says:

• Seller defaults (refuses to convey marketable title): the buyer may sue for specific performance, because each parcel is legally unique and money may not substitute. Alternatively the buyer may rescind and recover the earnest money, or sue for damages.
• Buyer defaults (walks without a valid contingency): the seller typically keeps the earnest money as liquidated damages if the contract so provides, or pursues actual damages (resale shortfall plus carrying costs) if it does not. Sellers rarely obtain specific performance against a buyer because forcing someone to buy is impractical.

Mitigation matters: a non-breaching party generally must take reasonable steps to limit its loss (the seller should re-list and re-sell promptly), and a court will reduce damages a party could have avoided. Electing liquidated damages, however, sidesteps the proof-and-mitigation burden because the amount is pre-agreed.