4.2 Contract Performance, Breach, and Enforceability

How contracts are discharged

A contract ends (is discharged) in three broad ways. The exam asks you to match a fact pattern to the correct method.

• Performance: both parties do what they promised — the normal, happy ending (a closed sale).
• Agreement of the parties: they mutually agree to end it. Rescission unwinds the contract and returns parties to their pre-contract position. Novation substitutes a new contract or new party with the consent of all.
• Operation of law: bankruptcy, expiration of the statute of limitations, or genuine impossibility of performance (the subject property is destroyed).

Time is of the essence

When a contract states "time is of the essence," every deadline becomes a strict, material condition. A buyer who closes one day late has technically breached. Without that clause, courts often allow a reasonable extension.

Discharge by impossibility vs. mere difficulty

Genuine impossibility discharges a contract — for instance, the house burns down before closing, so the exact subject matter no longer exists. But a deal that has merely become harder or less profitable (interest rates rose, the buyer's other house did not sell) is not discharged; that is the buyer's risk. The exam separates true impossibility (subject destroyed, illegality enacted, party dies in a personal-service contract) from financial inconvenience, which is not an excuse.

Remedies for breach

When one party defaults, the injured party chooses among remedies. They are generally alternatives — you cannot collect damages and also force the sale for the same breach.

Liquidated-damages worked example

A buyer puts down $10,000 earnest money on a $400,000 home with a liquidated-damages clause. The buyer defaults with no valid contingency. The seller may keep the $10,000 as liquidated damages and is then barred from also suing for additional actual losses — the parties agreed in advance that $10,000 settles the breach. If instead the seller had no liquidated-damages clause and resold for $385,000, the seller could sue for actual damages of $400,000 − $385,000 = $15,000, which exceeds the deposit.

Trap: Earnest money is not automatically the seller's on default. It is the agreed liquidated sum only if the contract says so; otherwise actual damages must be proven.

Assignment vs novation

Assignment transfers a party's rights (and usually duties) to a third party, but the original party may remain secondarily liable. Novation substitutes a new party with everyone's consent and releases the original party entirely. If an investor takes over a purchase contract and the seller signs a release of the original buyer, that is novation, not mere assignment.

Trap: Many contracts are assignable by default unless they say "non-assignable." Personal-service or financing-dependent contracts are common exceptions.

Specific performance, damages, and the buyer/seller asymmetry

The remedy a party can realistically obtain depends on which side breached:

• Seller breaches (refuses to convey): the buyer's strongest tool is specific performance, because each parcel is unique and money may not substitute. A court can order the seller to sign the deed.
• Buyer breaches (walks away): the seller usually cannot force a stranger to live in the home, so the practical remedies are keeping the earnest money (if a liquidated-damages clause says so) or suing for actual damages (the resale shortfall plus carrying costs).

Worked comparison: A buyer contracts at $400,000 with $12,000 earnest money. The buyer defaults without a contingency.

• With a liquidated-damages clause: the seller keeps the $12,000 and the matter is closed; the seller cannot also sue for more.
• Without such a clause, if the seller relists and sells for $378,000: actual damages are $400,000 − $378,000 = $22,000, plus provable extra carrying costs (taxes, interest, utilities) during the delay. Here the seller would prefer proving actual damages because they exceed the deposit.

Mitigation of damages

A non-breaching party generally must take reasonable steps to mitigate — a seller cannot let the property sit unmarketed and then claim a full year of lost value. Damages are limited to what reasonable effort could not avoid.

Statute of limitations and laches

Every breach claim must be filed within the jurisdiction's statute of limitations for written contracts (commonly four to six years). A valid contract whose limitations period has run becomes unenforceable, not void — mirroring the status grid from 4.1. The related equitable doctrine of laches bars a party who sleeps on a right so long that enforcing it would unfairly prejudice the other side.

Trap: Rescission and damages are usually alternative remedies for the same breach — a party who rescinds (unwinds the deal and is restored to the prior position) generally cannot also collect expectation damages, because they have elected to undo rather than enforce the bargain.