4.2 Contract Performance, Breach, and Enforceability

How contracts end and what happens when they break

Most contracts end by performance — both parties do what they promised. But the exam focuses heavily on the alternatives: assignment, novation, discharge, breach, and the remedies that follow. Read each fact pattern to identify which party failed and what the non-breaching party may do.

Performance questions reward precision about timing and substitution. Read for who is still on the hook after a transfer, and whether a deadline was strict or flexible. A surprising number of wrong answers come from assuming that handing a contract to someone else (assignment) erases the original party's liability — it usually does not.

Discharge of a contract

A contract can be discharged (ended) in several ways. Full performance is the normal route. Partial performance may discharge it if both agree. Substantial performance may entitle a party to payment minus damages. Mutual rescission returns both parties to their pre-contract position. Novation substitutes a new contract or a new party with the consent of all — the original party is released. Assignment transfers rights to another, but the assignor usually remains secondarily liable unless released.

Assignment vs. novation

This pairing is heavily tested. Assignment transfers contract rights to a third party; the original party stays on the hook if the assignee defaults. Novation replaces a party (or the whole contract) with the consent of everyone, fully releasing the original party. So if Buyer A assigns a purchase contract to Buyer B and B defaults, the seller may still pursue A — unless the seller agreed to a novation releasing A.

Breach and remedies

A breach is failure to perform without legal excuse. The remedy depends on who breached and what the contract says. Memorize this remedy table.

Specific performance is a court order forcing a party to complete the sale — available in real estate because each parcel is legally unique, so money damages may be inadequate. Liquidated damages are an amount agreed in advance (often the earnest money) that the seller keeps if the buyer defaults, instead of proving actual losses.

Liquidated damages worked example

A buyer puts $12,000 earnest money on a $400,000 home and the contract names the deposit as liquidated damages. The buyer defaults with no valid contingency. The seller relists and ultimately sells for $395,000 a month later, with $1,500 in extra carrying costs. With a valid liquidated-damages clause, the seller keeps the $12,000 and need not itemize losses. Without that clause, the seller would have to prove actual damages — here roughly $5,000 price drop plus $1,500 costs = $6,500 — and could only recover what is proven.

Note the lesson: a liquidated-damages clause can favor either side depending on the numbers. Here the seller comes out ahead by keeping $12,000 instead of proving $6,500, but if the market had risen and the seller's actual loss were near zero, the clause would still cap recovery at the deposit. Courts also strike clauses that are punitive rather than a genuine pre-estimate of loss.

Time is of the essence

When a contract states "time is of the essence," deadlines are strict and missing one is a breach. Without that phrase, courts may allow a reasonable time to perform. Watch for fact patterns where a buyer misses a financing deadline by two days: with the phrase, the seller may cancel; without it, a short delay may be excused.

Enforceability recap

A contract may be valid yet unenforceable if it is not in writing where required, if the statute of limitations has expired, or if it was obtained by fraud, duress, undue influence, or mutual mistake (which can also make it voidable or void). Distinguish fraud (intentional misrepresentation of a material fact) from innocent misrepresentation (an honest but false statement) — both can unwind a contract, but only fraud supports punitive damages.

Reading the breach fact pattern

Exam questions rarely use the word "breach" directly; they describe behavior and ask for the remedy. Identify three things in order: who failed to perform, whether an excuse applies, and what the contract says about damages. If the buyer walks away with no contingency, the seller's remedy turns on whether a liquidated-damages clause exists. If the seller refuses to convey clear title, the buyer's most powerful remedy is specific performance, because the unique-property doctrine means money may not make the buyer whole.

A final distinction worth memorizing: rescission unwinds the contract and restores the parties to their original positions (deposits returned, no sale), while damages leave the breach in place and compensate the injured party in money. Mutual rescission requires both parties' agreement; unilateral rescission generally requires a legal ground such as fraud, mutual mistake, or a failed contingency. Pick rescission answers when the question emphasizes "canceling and being made whole," and damages answers when it emphasizes "compensation for a loss."

One more frequently tested wrinkle: an agent cannot decide a deposit dispute. When a buyer and seller fight over earnest money after a breach, the broker holding the funds must not simply hand them to the party they personally favor. The funds stay in escrow until the parties agree in writing, a mediator or arbitrator resolves it, or a court orders a release. Choosing "the broker releases the deposit to the seller" automatically is usually wrong.