4.2 Contract Performance, Breach, and Enforceability

How contracts are discharged

A contract ends—is discharged—when the parties' duties are satisfied or legally excused. The cleanest path is full performance: everyone does what they promised, and the contract is executed.

Other recognized methods include:

• Substantial performance — a party performs the essential terms in good faith with only minor deviations, entitling them to payment less any damages for the shortfall (common in construction).
• Accord and satisfaction — parties agree to accept different performance than originally promised (the accord) and that new performance is completed (the satisfaction).
• Mutual rescission — both parties agree to cancel and restore each other to their original positions.
• Impossibility of performance — destruction of the subject property or a change in law makes performance objectively impossible.

Distinguish discharge by performance from discharge by agreement. Performance is one-sided action; agreement (rescission, accord and satisfaction) requires both parties to consent. A frequent trap pairs 'accord and satisfaction' with a one-party act—remember the satisfaction (completing the new performance) is what actually discharges the duty, not just the agreement to substitute it.

Transferring a contract: assignment vs. novation

These two are heavily tested and easy to confuse.

Assignment

An assignment transfers a party's rights (and usually duties) under a contract to a new party, the assignee. The original party (assignor) generally remains secondarily liable unless released. Most purchase contracts are assignable unless they say otherwise or involve personal services.

Novation

A novation substitutes either a new party or an entirely new contract for the old one, with the consent of all parties, and it releases the original obligor from liability. Lenders use novation when a buyer assumes a loan and the lender formally releases the seller.

A related term is delegation, which transfers contractual duties (not rights). Duties that depend on personal skill or trust generally cannot be delegated without consent. In a typical purchase contract, the buyer may assign the right to take title, but a seller could object if the assignment changes who must perform a personal obligation. When a question contrasts these terms, anchor on the release: only novation releases the original party.

Breach and remedies

A breach is a failure to perform a contractual duty without legal excuse. The non-breaching party chooses among remedies:

• Actual (compensatory) damages — money to cover the proven loss.
• Specific performance — a court order forcing the breaching party to complete the deal. Because each parcel of real estate is legally unique, buyers can often get specific performance against a defaulting seller—a remedy rarely available for ordinary goods.
• Liquidated damages — a fixed amount the parties agreed to in advance (often the buyer's earnest money), accepted as the full remedy if the buyer defaults.
• Rescission — cancellation that returns both parties to their pre-contract positions.

Worked scenario: A buyer deposits $9,000 earnest money on a $300,000 home with a liquidated-damages clause, then walks away without cause. The seller typically keeps the $9,000 as liquidated damages and cannot also sue for additional losses, because the clause sets the agreed remedy.

Enforceability limits

Even a valid, breached contract may not be enforceable forever.

Time is of the essence

A time is of the essence clause makes every stated deadline—especially the closing date—a strict, material term. If it appears, missing the closing date is itself a breach. Without the clause, courts often allow a reasonable extension to perform.

Statute of limitations

The statute of limitations sets the period within which a lawsuit must be filed (commonly longer for written contracts than oral ones; the exact years vary by state). Once it expires, the wronged party loses the right to sue and the contract becomes unenforceable, even though it was valid.

• Written contracts → longer limitation period in most states.
• Oral contracts → shorter limitation period.
• Expired period → claim is barred; do not confuse this with void.

Default, forfeiture, and partial performance

When a buyer defaults, the contract often allows the seller to declare a forfeiture of the earnest money. When a seller defaults, the buyer chooses among damages, specific performance, or rescission. Note that accepting a remedy can be exclusive: a liquidated-damages clause usually bars the seller from also suing for actual damages.

Finally, distinguish anticipatory breach—a party announces in advance they will not perform, letting the other side sue immediately—from an actual breach at the time performance is due. The non-breaching party need not wait until closing day to act.

Discharge of a Contract

A contract is discharged (the obligations end) in several ways the exam tests by name.

• Performance - both parties do what they promised; the most common discharge.
• Mutual rescission - both agree to unwind and return to their pre-contract positions.
• Novation - the parties substitute a new contract or a new party, releasing the old obligation; a buyer who assumes a loan with the lender releasing the seller is a classic novation.
• Assignment - one party transfers their rights to a third party; unlike novation, the original party usually stays liable unless released.
• Accord and satisfaction - the parties agree to accept a different performance (the accord) and then complete it (the satisfaction).
• Operation of law - bankruptcy, illegality, or the statute of limitations expiring.

Remedies for Breach

When a party breaches, the non-breaching party chooses a remedy.

Table: Breach and Typical Remedy

Liquidated Damages vs. Actual Damages

Liquidated damages are a pre-agreed sum (often the earnest money) the parties set as the measure of loss. A liquidated-damages clause generally bars a separate suit for actual damages on the same breach, so a seller who keeps the deposit usually cannot also sue for the full loss.

Worked Scenario

A buyer with a 5% earnest-money deposit on a $400,000 home backs out with no valid contingency. The deposit is $20,000. If the contract names that deposit as liquidated damages, the seller keeps the $20,000 and the deal ends; the seller cannot then separately sue for an additional shortfall when the home later resells for less. Picking liquidated damages as the exclusive remedy is the trap many candidates miss.