4.2 Contract Performance, Breach, and Enforceability

Contract Performance, Breach, and Enforceability

Once a valid contract exists, the exam turns to whether it is performed, breached, or discharged, and what happens next.

Ways a contract is discharged

• Performance — both parties do what they promised (the normal path to closing).
• Substantial performance — minor deviations that still entitle a party to payment, less an offset for the shortfall.
• Mutual rescission — both agree to cancel and return to their pre-contract positions.
• Operation of law — bankruptcy, the Statute of Limitations, or impossibility.
• Breach — one party fails to perform without legal excuse.

Time is of the essence

When a contract states that time is of the essence, deadlines become material. A party who closes one day late has breached, even if otherwise ready, willing, and able. Without that clause, courts often allow a reasonable extension.

Breach and remedies

When one party breaches, the non-breaching party chooses from a menu of remedies.

Specific performance is especially available in real estate because each parcel of land is considered unique, so money alone may not make the buyer whole.

Liquidated damages worked example

A buyer deposits $8,000 earnest money on a $320,000 home. The contract names the earnest money as liquidated damages. The buyer defaults without a valid contingency. The seller's recovery is capped at the $8,000 deposit, even if the seller later resells for $310,000 and arguably lost $10,000. By choosing liquidated damages, the seller forgoes the right to sue for the additional $2,000. That trade-off — certainty for a cap — is the point the exam tests.

Contrast: if the contract did not specify liquidated damages, the seller could pursue actual compensatory damages and potentially recover the full provable loss.

Assignment vs. novation

These two terms are routinely confused.

If a buyer assigns a purchase contract to a friend and the friend defaults, the original buyer can still be on the hook. Only a novation, with the seller's consent to release the original buyer, cuts that liability.

Trap watch

Do not confuse rescission (undo the contract) with reformation (correct a writing to reflect the true agreement). And remember that a contingency that fails (e.g., a financing contingency) excuses performance — it is not a breach.

Earnest money, contingencies, and the duty to mitigate

Earnest money is the buyer's good-faith deposit, held in the broker's or closing agent's escrow/trust account, not the agent's operating account. It is applied to the purchase at closing or disbursed per the contract if the deal collapses. When buyer and seller dispute who gets the deposit, the broker must not simply pick a side; the broker interpleads the funds (deposits them with a court) or follows written escrow instructions, because misdelivering disputed earnest money is itself a license violation.

The duty to mitigate damages

A non-breaching party generally must take reasonable steps to minimize the loss. A seller whose buyer defaults cannot let the home sit and then sue for a full year of carrying costs; the seller must make reasonable efforts to re-list and resell. Damages are reduced by what the seller could have avoided.

Worked example: assignment liability

A buyer signs a $250,000 purchase contract, then assigns it to a cousin for a $5,000 fee. The cousin fails to close. Because an assignment (unlike a novation) leaves the original buyer secondarily liable, the seller may pursue the original buyer for damages. Had the seller signed a novation releasing the original buyer and substituting the cousin, the original buyer would be off the hook. The exam tests this distinction by burying the words "assign" and "novation" in otherwise identical fact patterns.

Statute of limitations, contingencies as conditions, and remedies recap

Every contract claim has a statute of limitations — a deadline after which the courts will not hear the suit. Written contracts typically carry a longer limitation period than oral ones, and once it lapses the obligation is discharged by operation of law even though the underlying debt morally remains.

Conditions precedent vs. covenants

A contingency is a condition precedent: if it is not satisfied, no duty to perform ever arises, so failing it is not a breach. A covenant is a promise already owed; failing a covenant is a breach. The exam contrasts a buyer who walks because the financing contingency failed (no breach, deposit returned) against a buyer who simply changes their mind with financing in hand (breach, deposit forfeited).

Remedies at a glance

Remember the election of remedies: a seller who keeps the deposit as liquidated damages generally cannot also sue for additional compensatory damages — choosing one forecloses the other. That trade-off, certainty versus a larger possible recovery, is exactly what the exam wants you to weigh.