4.2 Contract Performance, Breach, and Enforceability

How contracts are discharged

A contract can end several ways, and the exam tests the vocabulary precisely:

The assignment-vs-novation distinction is heavily tested. Assignment transfers rights but the original party can remain on the hook. Novation substitutes a new obligation/party and releases the original party. If the question says the original party is fully released, the answer is novation.

Remedies on breach

When the buyer defaults, the seller typically chooses among three remedies:

1. Retain the earnest money as liquidated damages (if the contract so provides).
2. Sue for actual (compensatory) damages to recover proven losses.
3. Sue for specific performance to force the buyer to complete the purchase.

When the seller defaults, the buyer can sue for damages or for specific performance — a court order compelling the seller to convey the property. Specific performance is uniquely available in real estate because every parcel is considered legally unique, so money damages may be inadequate.

Worked numeric

Buyer puts $8,000 earnest money on a $400,000 home and then defaults. The contract contains a liquidated-damages clause. The seller relists and sells to another buyer for $400,000 a week later, suffering no real loss. Under the liquidated-damages clause the seller may keep the $8,000 as the agreed remedy without proving actual loss — that is the purpose of liquidating damages in advance. The seller generally cannot keep the $8,000 and also sue for additional damages; the clause caps recovery.

Enforceability clauses and timing

Liquidated damages fix the amount payable on breach in advance, avoiding a fight over actual loss. The amount must be a reasonable estimate, not a penalty.

Time is of the essence makes every deadline strictly enforceable; missing a closing date is then itself a breach. Without that clause, a reasonable delay is usually tolerated.

Statute of limitations sets the window to file suit; once it passes, an otherwise valid claim becomes unenforceable.

• A material breach excuses the non-breaching party and triggers remedies.
• A minor breach allows recovery of damages but not cancellation.
• An anticipatory breach (repudiation before performance is due) lets the other party act immediately rather than wait.

Assignment, novation, and contract continuity

Real estate contracts often change hands before closing, and the exam tests who remains liable.

Most contracts are assignable unless they contain a clause forbidding it or involve personal services. A purchase agreement is usually assignable; a personal listing relationship generally is not. When the question stresses that the first party walks away completely free of any obligation, the answer is novation, because only novation releases the original party. If the first party is still on the hook should the substitute default, the answer is assignment.

Damages vocabulary you must separate

The exam contrasts several damage types. Compensatory (actual) damages restore the injured party's proven loss. Liquidated damages are an agreed-in-advance sum, valid only if it is a reasonable estimate and not a punitive penalty. Punitive damages punish egregious conduct and are rare in ordinary breach cases. Specific performance is an equitable remedy ordering actual performance, used because land is unique.

A seller who keeps a $10,000 liquidated-damages deposit on a $500,000 deal generally cannot also pursue additional compensatory damages — choosing the liquidated clause is treated as electing that remedy. Recognize this election-of-remedies trap: the contract usually forces a choice rather than a stack of recoveries.

Liquidated damages, election of remedies, and the duty to mitigate

When a buyer defaults, the contract usually directs the earnest money, but the underlying rules are tested directly.

Liquidated damages must be a reasonable pre-estimate of harm, judged at the time the contract was signed, not a penalty. A grossly excessive sum is unenforceable as a penalty.

Election of remedies: the non-breaching seller generally chooses one path. Keeping the earnest money as liquidated damages typically waives suing for actual damages or specific performance for the same breach.

Duty to mitigate: the injured party must take reasonable steps to limit loss — a landlord whose tenant breaks a lease usually must try to re-rent rather than let the unit sit.

Worked breach numeric

A buyer defaults on a $400,000 contract with $12,000 earnest money named as liquidated damages. The seller relists and resells three weeks later for $398,000, with $1,500 extra carrying cost. If the seller elects the liquidated damages, the seller keeps $12,000 and cannot also recover the $2,000 price gap and $1,500 costs. If actual loss ($3,500) is far below the deposit, a court may still enforce the $12,000 provided it was reasonable at formation.

Statute of limitations and the tender requirement

Each state sets a limitations period for suing on a written contract (commonly several years). Miss it and an otherwise valid claim becomes unenforceable. Before claiming the other side breached, a party usually must tender performance — show readiness and ability to perform — so the breach is clearly the other party's. A buyer who never deposited funds or applied for financing may not be able to prove the seller breached, because the buyer's own performance was never tendered.