4.2 Contract Performance, Breach, and Enforceability

How Contracts End

A contract is discharged (terminated) in several ways:

• Performance: both parties fully perform—the most common and desired outcome.
• Mutual agreement: rescission (unwinding), novation, or accord and satisfaction.
• Operation of law: bankruptcy, the running of the statute of limitations, or impossibility (e.g., the property is destroyed before closing).
• Breach: one party fails to perform.

Assignment vs. novation

These are routinely confused on the exam.

Key point: novation requires the consent of all parties and releases the original obligor. A buyer who assigns a purchase contract to a friend may still be liable if the friend defaults; only a novation cuts the original buyer loose.

Types of breach and the menu of remedies

A material breach goes to the heart of the bargain (seller refuses to convey; buyer fails to close). A minor (immaterial) breach is a small failure that does not defeat the contract's purpose. The remedies available to the non-breaching party:

1. Rescission: cancel the contract and return both parties to their pre-contract position; earnest money is refunded.
2. Compensatory (money) damages: recover the actual loss caused by the breach.
3. Liquidated damages: a sum the parties agreed to in advance (commonly the earnest-money deposit). If the buyer defaults, the seller typically retains it as the sole, agreed remedy.
4. Specific performance: a court order compelling the actual conveyance. Available in real estate because land is unique, so money alone cannot make a buyer whole.

Worked example—liquidated damages: A buyer deposits $12,000 earnest money on a $400,000 home and walks away with no contingency protecting him. If the contract names the deposit as liquidated damages, the seller keeps the $12,000 (3% of price) and the parties are done. The seller generally cannot then also sue for additional damages if liquidated damages were the agreed exclusive remedy.

Enforceability limits

Even a properly formed contract can lose enforceability:

• Statute of limitations: each state sets a deadline (often longer for written than oral contracts) to file suit. Miss it and the claim is barred—the contract becomes unenforceable.
• Laches: an unreasonable delay that prejudices the other party.
• Failure of a condition: an unmet contingency (financing, inspection, appraisal) lets a party terminate without breaching.

Common traps

• Confusing rescission (mutual unwind, money returned) with cancellation for breach (one party at fault).
• Assuming the seller can keep earnest money and sue for damages—usually it is one or the other when liquidated damages apply.
• Forgetting that specific performance is the buyer's powerful remedy precisely because every parcel of real estate is legally unique.

Numeric trap: A buyer breaches; the home later sells for $385,000 instead of the contracted $400,000, and the seller paid $3,000 extra carrying costs. Actual damages = $15,000 + $3,000 = $18,000. But if liquidated damages were set at the $12,000 deposit as the exclusive remedy, the seller's recovery is capped at $12,000, not $18,000.

Time is of the essence and tender of performance

Whether a missed deadline is a breach depends on the contract's language. When a contract states "time is of the essence," every deadline is strict: closing one day late is a material breach. Absent that clause, courts allow a reasonable delay before treating late performance as breach.

To sue for breach, the non-breaching party usually must show tender of performance — that it was ready, willing, and able to perform its own side. A buyer suing a seller for specific performance must show he had the funds and stood ready to close.

Trap: A buyer who never secured financing and could not have closed cannot win specific performance; he failed to tender, so the seller's refusal is excused.

Worked example — calculating compensatory damages

Compensatory damages put the injured party where performance would have. Suppose a seller breaches by refusing to convey a home contracted at $400,000. The buyer must now buy a comparable home for $430,000 and incurs $2,500 in extra moving and temporary-housing costs.

• Increased purchase cost: $430,000 − $400,000 = $30,000
• Plus incidental costs: $2,500
• Total compensatory damages: $32,500

The buyer is also entitled to return of any earnest money. Contrast this with the seller's side: if the buyer breaches and the home resells for $385,000, the seller's loss is the $15,000 price gap plus carrying costs — but a liquidated-damages clause naming the deposit as the exclusive remedy caps recovery at the deposit amount.

Statute of limitations note: Most states give a longer window to sue on a written contract (often 4-10 years) than an oral one. Filing after the deadline bars the claim no matter how clear the breach.

Accord and satisfaction, novation, and rescission compared

The exam clusters three ways parties end or modify a contract without a breach, and confuses candidates by their similar names.

Worked scenario: A buyer owes a $20,000 balance. The seller agrees to accept a $14,000 lump sum plus the buyer's used pickup as full settlement — an accord; once the buyer pays and delivers the truck (the satisfaction), the $20,000 debt is discharged. Had the seller instead released the original buyer and accepted a substitute buyer on new terms, that would be a novation. Had they simply canceled and returned the deposit, that is rescission.

Trap: Only novation releases the original obligor entirely; an assignment leaves the assignor secondarily liable if the assignee defaults, so a candidate who picks "assignment" when the facts describe a full release has the wrong answer.