4.2 Contract Performance, Breach, and Enforceability
Key Takeaways
- Discharge can occur by full performance, mutual agreement, novation, assignment, or operation of law.
- A breach gives the non-breaching party remedies: damages, specific performance, rescission, or liquidated damages (often the earnest money).
- Specific performance forces conveyance because each parcel of real estate is legally unique.
- Time is of the essence makes performance deadlines strictly enforceable.
- Assignment transfers rights but the original party may stay liable; novation substitutes a new party and releases the old one.
Contract Performance, Breach, and Enforceability
Once a valid contract exists, the exam shifts to how it ends. A contract is discharged (terminated) when its obligations are resolved. Most contracts discharge by full performance, but several other routes appear on the test.
Ways a contract is discharged
- Performance — both parties fully complete their obligations (the normal closing).
- Mutual agreement — parties agree to cancel (release/rescission).
- Novation — a new contract or new party is substituted for the original, releasing the old party.
- Assignment — rights are transferred to a third party (the assignor may remain secondarily liable).
- Operation of law — bankruptcy, expiration of the statute of limitations, or court action.
- Impossibility — performance becomes objectively impossible (e.g., the property is destroyed).
Assignment vs. novation (high-value distinction)
| Assignment | Novation | |
|---|---|---|
| What transfers | Contract rights/obligations to a new party | Entire contract replaced or party substituted |
| Original party liability | Often remains secondarily liable | Released from liability |
| Consent of other party | May not be required | Required |
If an exam answer says the original party is fully released, you are almost always looking at novation, not assignment.
Time is of the essence
A time is of the essence clause makes every stated deadline a strict, material term. If a buyer must close by June 30 and the clause is present, closing on July 1 is a breach even by one day. Without the clause, courts allow a reasonable time for performance.
Worked example: A contract requires inspection within 10 days and contains a time-is-of-the-essence clause. The buyer orders the inspection on day 12. The seller may treat the contingency as waived or the buyer as in default, because the deadline was strictly binding.
Breach and remedies
A breach is a failure to perform without legal excuse. The non-breaching party chooses among remedies:
| Remedy | What it provides | Typical use |
|---|---|---|
| Compensatory damages | Money to cover actual loss | Seller relists at lower price, sues for difference |
| Liquidated damages | Pre-agreed amount kept on breach | Seller keeps buyer's earnest money |
| Specific performance | Court orders the actual conveyance | Buyer forces a unique property's sale |
| Rescission | Cancel the contract, restore parties | Mutual release; deposit returned |
Why specific performance works in real estate
Each parcel of land is legally unique, so money damages may not make a buyer whole. Courts will therefore order a defaulting seller to actually convey the property — a remedy rarely available for ordinary goods.
Liquidated damages worked example
A buyer deposits $9,000 earnest money on a $300,000 home. The contract states the deposit is liquidated damages if the buyer defaults. The buyer walks away with no valid contingency.
- Seller's remedy: retain the $9,000 as liquidated damages (3% of price).
- The seller generally cannot then also sue for additional compensatory damages, because liquidated damages are the agreed-upon, exclusive measure.
- If the seller wanted to pursue actual losses instead, the contract would need to preserve that right.
Contrast: if the seller defaults, the buyer may seek return of the deposit plus specific performance or damages, depending on the contract terms.
Statute of limitations
Even a valid claim must be filed within the statute of limitations. Once that period expires, the contract obligation becomes unenforceable by operation of law — another reason "unenforceable" and "void" are not the same.
Partial performance and substantial performance
Not every shortfall is a material breach. Courts distinguish a minor (immaterial) breach from a material breach. A material breach goes to the heart of the bargain and lets the injured party cancel and sue. A minor breach (e.g., a trivial repair left undone) allows damages but not cancellation; the contract must still close.
Worked example: A seller agreed to repaint a fence before closing and did not. The buyer cannot refuse to close over a $200 cosmetic item — that is a minor breach. The buyer closes and may seek a small credit or damages. Compare a seller who cannot deliver marketable title: that is material, and the buyer may walk.
Rescission vs. cancellation vs. recission of contingency
| Action | Effect |
|---|---|
| Rescission | Contract undone; parties returned to pre-contract position; deposit returned |
| Cancellation (termination) | Future duties end; past duties may remain |
| Contingency failure | Specific condition unmet; contract voidable by protected party |
Counting deadlines correctly
Most contracts count contingency periods in calendar days unless the contract says business days. Worked example: A 10-day inspection period begins the day after the effective (acceptance) date. If acceptance is the 3rd, day 1 is the 4th and day 10 falls on the 13th. With time is of the essence, the inspection must be ordered and the contingency addressed by the 13th, or the buyer risks waiving the right and being held to the purchase.
Earnest money disputes
When buyer and seller both claim the deposit after a failed deal, the broker holding it in trust must not simply hand it to one side. The broker may hold the funds, seek written mutual release, or use interpleader (deposit the funds with a court to decide). Releasing trust funds to the wrong party is a license-law violation.
A seller defaults and refuses to convey a one-of-a-kind waterfront lot the buyer is under contract to purchase. Which remedy is most appropriate for the buyer?
A buyer assigns her purchase contract to a friend but does not obtain the seller's release. After the friend defaults, the seller looks for recourse. What is the most accurate statement?