4.2 Contract Performance, Breach, and Enforceability

How contracts end

A contract is most commonly discharged by performance — both parties do what they promised and the deal closes. Contracts also end by:

• Mutual agreement (both parties release each other).
• Operation of law (bankruptcy, expiration, illegality arising later).
• Impossibility (the subject property is destroyed before closing).
• Breach (one party fails to perform without legal excuse).

The exam wants you to identify which discharge applies and what remedy follows a breach.

Time is of the essence

When a contract states that "time is of the essence," every date in the contract is a firm deadline. A party who closes even one day late is in breach and may forfeit rights. Without that clause, courts generally allow a reasonable time to perform.

Worked example

A purchase contract sets closing for June 15 and contains a time-is-of-the-essence clause. The buyer's lender funds on June 16. The seller, who has a backup offer, declares the buyer in default and terminates. Because the clause made June 15 a hard deadline, the seller is likely within rights to cancel and pursue the earnest-money remedy.

Remedies for breach

Liquidated damages math

A buyer deposits $9,000 earnest money on a $300,000 home (3%). The contract names that deposit as liquidated damages. The buyer defaults with no valid contingency. The seller may retain the $9,000 as the agreed remedy and is generally barred from also suing for additional damages — the liquidated sum is the agreed, exclusive measure.

Specific performance and why real estate is special

Courts grant specific performance in real estate because the law treats each parcel as unique — money cannot fully substitute for a particular property. So when a seller breaches, the buyer can often force the sale rather than settle for damages.

Note the asymmetry tested on the exam: a defaulting buyer usually loses earnest money (liquidated damages), while a defaulting seller may be compelled to perform. The reason is the uniqueness doctrine.

Assignment vs. novation

These two transfer concepts are routinely swapped in wrong answers.

• Assignment — one party transfers its rights (and often duties) under an existing contract to a third party. The original party generally remains secondarily liable unless released. The contract itself is unchanged.
• Novation — the parties agree to substitute a new party or a new contract for the old one, and the original obligor is fully released from liability.

Worked example

A buyer under contract assigns the purchase agreement to an investor. If the investor defaults, the seller can still pursue the original buyer (assignment leaves residual liability). If instead the seller, original buyer, and investor sign a novation substituting the investor, the original buyer is released entirely and only the investor is liable.

Common enforceability traps

• Earnest money is not consideration for the contract. Mutual promises are the consideration; earnest money is just evidence of good faith and a damages source.
• A breach does not require bad intent. Failing to perform, even innocently, is a breach.
• Contingencies are not breaches. If a financing or inspection contingency fails and the buyer properly cancels, that is performance of the contract terms, not default.
• Liquidated damages cap recovery. A seller who chose the liquidated-damages remedy generally cannot also sue for the full loss.

Default-remedy math and the seller's choice

When a buyer defaults, a contract usually gives the seller a choice of remedies, but the choice is often exclusive. Suppose a $400,000 contract with $12,000 (3%) earnest money names that deposit as liquidated damages. The buyer walks with no valid contingency.

• Keep the deposit ($12,000) as liquidated damages — fast, certain, ends the matter.
• Sue for actual damages — if the seller later resells for $380,000, the loss plus carrying costs might exceed $12,000, but pursuing it requires litigation and proof.

If the contract names liquidated damages as the sole remedy, the seller generally cannot keep the deposit and also sue for the additional $20,000 shortfall. The exam rewards recognizing that liquidated damages typically cap, rather than supplement, recovery.

Impossibility, frustration, and mutual rescission

Not every failure to close is a breach. If the subject property is destroyed before closing through no fault of either party, performance may be discharged by impossibility, and most contracts return the earnest money to the buyer. If a later law makes the agreed use illegal, the contract can be discharged by operation of law.

Mutual rescission is a voluntary unwinding: both parties sign a release, the deposit is returned, and neither owes damages. Distinguish it from unilateral rescission, which one party invokes as a remedy for the other's fraud, misrepresentation, duress, or undue influence. In both cases the goal is to restore the parties to their original positions, but only one of them is consensual.