4.2 Contract Performance, Breach, and Enforceability

Ways a Contract Is Discharged

A contract ends, or is discharged, in several tested ways:

• Performance - both parties fully do what they promised (the normal path; closing).
• Mutual agreement / rescission - parties agree to cancel and restore each other to their original positions.
• Assignment - one party transfers rights to a third party; the original party remains secondarily liable.
• Novation - a new contract or new party substitutes for the old, and the original party is fully released.
• Operation of law - bankruptcy, illegality, or expiration of the statute of limitations.

The assignment-versus-novation distinction is a favorite. Under assignment, the assignor stays on the hook if the assignee defaults. Under novation, the original party is released entirely.

Breach and Remedies

A breach is the failure to perform a contractual duty without legal excuse. The injured party chooses a remedy:

Table: Remedies for Breach

Specific performance is available in real estate precisely because each parcel of land is considered unique, so money alone cannot make the buyer whole. A buyer typically seeks it against a backing-out seller.

Liquidated Damages - Worked Numeric

Many contracts include a liquidated damages clause that caps the seller's recovery if the buyer defaults.

Example: A buyer offers $400,000 and deposits $12,000 earnest money. The contract states the deposit is liquidated damages. The buyer then walks away without a valid contingency.

• Seller's maximum recovery from the buyer: $12,000 (the deposit).
• The seller cannot also sue for the difference between $400,000 and a later, lower resale price, because liquidated damages were agreed in advance.

If there is no liquidated damages clause, the seller may instead pursue compensatory (actual) damages, which could be more or less than the deposit. The exam tests whether you recognize that the clause limits the remedy.

Time Is of the Essence and Enforceability

When a contract says "time is of the essence," every stated deadline, including the closing date, is a strict, enforceable cutoff. Missing the date is itself a breach, and the other party may cancel.

Without that clause, courts generally allow a reasonable time for performance, and a short delay is not automatically a breach.

Enforceability checklist

• Is it in writing and signed (statute of frauds)?
• Has the statute of limitations expired?
• Was consent genuine, or was there fraud, duress, or mistake?

A contract can be perfectly valid in its terms yet unenforceable if the limitations period has run or it was never put in writing.

Assignment vs. Novation - A Closer Look

Both let a contract change hands, but the legal effect differs and the exam exploits the confusion.

Table: Assignment vs. Novation

Most real estate contracts are assignable unless they say "non-assignable" or involve unique personal services. A lease may be assigned (whole interest, tenant stays liable) or sublet (partial interest). When a question stresses that the original party is released, the answer is novation, not assignment.

Default and Earnest Money Disputes

When a buyer defaults, the earnest money in the broker's escrow account becomes contested. The broker may not simply hand it to the seller; the broker must follow the contract and, if the parties dispute it, may file an interpleader action so a court decides, or hold the funds until both parties sign a release.

Worked timeline

1. Buyer deposits $10,000 earnest money.
2. Buyer fails to obtain financing but had no financing contingency.
3. This is a buyer default; the contract's liquidated damages clause lets the seller claim the $10,000.
4. If both had instead agreed to cancel under a valid contingency, the buyer recovers the deposit.

A salesperson never decides who is right; that judgment belongs to the broker, the parties, or a court.

Damages: Compensatory, Consequential, and the Duty to Mitigate

When no liquidated-damages clause applies, the non-breaching party recovers compensatory damages measured by actual loss. Some jurisdictions also allow consequential damages for foreseeable downstream losses, though real estate awards usually focus on the bargain itself.

A key common-law rule: the injured party has a duty to mitigate - to take reasonable steps to limit the loss. A landlord whose tenant abandons a lease must make reasonable efforts to re-rent rather than let rent pile up and sue for the full amount.

Numeric illustration

A seller is owed performance on a $300,000 contract. The buyer defaults with no liquidated-damages clause; the seller resells for $285,000 after reasonable effort. Compensatory damages center on the $15,000 shortfall plus provable resale costs - not an arbitrary penalty.