4.2 Contract Performance, Breach, and Enforceability

Contract Performance, Breach, and Enforceability

Once a valid contract exists, the exam shifts to how it ends. A contract is most commonly discharged by full performance by both parties. It can also end by mutual agreement, by operation of law, or by impossibility of performance.

Ways a contract is discharged

• Performance. Both parties complete their obligations (most closings).
• Mutual rescission. Both parties agree to cancel and restore each other to the pre-contract position.
• Novation. A new contract or new party replaces the old, releasing the original obligor.
• Operation of law. Bankruptcy, expiration of the statute of limitations, or a court order ends the obligation.
• Impossibility. Destruction of the subject property or illegality makes performance impossible.
• Breach. One party fails to perform, giving the other party remedies.

Material vs. minor breach

A material breach goes to the heart of the contract and excuses the non-breaching party from performing. A minor breach allows the contract to continue but may entitle the injured party to damages. A seller who refuses to convey title has materially breached; a seller who is two days late delivering a minor disclosure usually has not.

Remedies for breach

The non-breaching party generally chooses one of three remedies. They cannot stack inconsistent remedies.

Specific performance is favored in real estate because each parcel of land is considered unique, so money may not adequately compensate a wronged buyer.

Liquidated vs. actual damages — worked example

A buyer defaults on a $400,000 purchase after depositing $12,000 earnest money. The contract contains a liquidated damages clause. The seller's recovery is limited to the $12,000 deposit as the agreed, pre-set remedy — even if the seller later resells for $410,000 and suffered no actual loss, and even if the seller's true loss exceeded $12,000. Without a liquidated damages clause, the seller would have to prove actual damages (carrying costs, price difference on resale, marketing) to recover, which is harder and uncertain.

Time is of the essence

A "time is of the essence" clause makes every deadline a strict, material condition. If a party performs even one day late, that lateness is a breach. Without the clause, courts allow a reasonable time to perform. Exam fact patterns often add this clause and then describe a party closing one day late — the late party has breached.

Assignment vs. novation

These are routinely confused.

• Assignment transfers the rights under a contract to a third party. Unless the contract prohibits it, most real estate contracts are assignable. The original party generally remains secondarily liable if the assignee fails to perform.
• Novation substitutes a new party (or new contract) for the old one and releases the original party from liability. Novation requires the consent of all parties, including the party who is owed performance.

The key distinction: assignment does not release the assignor; novation does. A buyer who assigns a purchase contract still has potential liability; a seller who agrees to a novation has released the original buyer entirely.

Statute of limitations and laches

Even a valid claim for breach has a deadline. The statute of limitations sets the period within which a party must sue (commonly longer for written contracts than oral ones). Once it expires, the breach claim is barred and the contract becomes unenforceable in court. The related equitable doctrine of laches bars relief when a party delays unreasonably and the delay prejudices the other side. On the exam, an injured party who waits years to act often loses the remedy, not because no breach occurred, but because the claim is time-barred.

Mutual mistake vs. unilateral mistake

A mutual mistake of a material fact (both parties wrong about the same thing) generally allows rescission. A unilateral mistake by only one party usually does not void the contract unless the other party knew or should have known of the error. A buyer who simply misreads the price they offered is bound; a buyer who is misled by the seller's false statement has a misrepresentation claim, which is a different theory.

Conditions, accord and satisfaction, and the duty to mitigate

A condition precedent must occur before a duty to perform arises — a financing contingency is a condition precedent to the buyer's duty to close. A condition subsequent ends an existing duty when a later event occurs. Exam fact patterns often hinge on whether an unmet contingency excuses performance: if the financing condition fails and is not waived, the buyer's duty never matured, so walking away is not a breach and the earnest money is returned.

Accord and satisfaction discharges a contract when the parties agree to accept a substitute performance (the accord) and that substitute is carried out (the satisfaction). A seller who accepts $5,000 and a used vehicle in place of a disputed $7,000 obligation has discharged the debt by accord and satisfaction once the substitute is delivered.

The non-breaching party generally has a duty to mitigate damages — to take reasonable steps to limit the loss. A landlord whose tenant abandons a lease usually must make reasonable efforts to re-rent rather than let rent accrue and sue for the whole term. A seller injured by a buyer's default should make reasonable efforts to resell. Damages the injured party could have avoided through reasonable mitigation are generally not recoverable.

Worked example: a tenant breaks a 12-month lease with 6 months ($6,000) remaining. The landlord re-rents after one month at the same rate. Because of the duty to mitigate, the landlord typically recovers the one month of lost rent ($1,000) plus reasonable re-rental costs, not the full $6,000. The exam answer turns on mitigation, not on the face amount left on the lease. Distinguish punitive damages (rare in contract; meant to punish, awarded mainly for fraud or tort) from compensatory damages (the standard contract remedy that makes the injured party whole).