4.2 Contract Performance, Breach, and Enforceability

Forming a contract is only half the analysis. The exam also tests whether the agreement can be enforced, how performance is measured, and what happens when a party fails to perform.

Performance Status: Executed vs. Executory

Executory describes a contract still awaiting performance. A signed purchase agreement is executory from the moment of signing until the deed is delivered and funds change hands.

Executed describes a contract that has been fully performed. At closing, when title transfers and the price is paid, the purchase agreement becomes executed. Do not confuse "executed" with merely "signed"; a signed but unclosed deal is executory.

Validity Status: Three Defects

• Void - no legal effect from the outset, as with an illegal purpose. Nothing to enforce.
• Voidable - valid and enforceable unless the protected party chooses to cancel, as with a minor's contract or one induced by fraud.
• Unenforceable - otherwise valid but a court will not enforce it because of a legal defect, such as an oral land-sale contract or a claim past the statute of limitations.

Table: Validity at a glance

Breach and Remedies

A breach is a failure to perform a contractual duty without legal excuse - the buyer cannot fund the purchase, or the seller refuses to convey marketable title. The injured party may pursue one of several remedies:

• Rescission - the contract is cancelled and the parties are returned to their pre-contract positions, including return of the deposit.
• Compensatory damages - money to cover the actual loss caused by the breach.
• Liquidated damages - a sum the parties agreed in advance, commonly the forfeited earnest money when a buyer defaults.
• Specific performance - a court order compelling the breaching party to perform.

Specific performance is especially important in real estate. Because each parcel is legally unique, money damages may not make a buyer whole, so courts will order a defaulting seller to actually convey the property. Courts will not, however, force personal services.

Table: Remedy fit

Time Is of the Essence

When a contract states that time is of the essence, every deadline is a strict obligation. Missing a date - closing, inspection, financing - is itself a breach, with no implied grace period. Without that clause, courts may allow a reasonable extension before declaring a breach.

Worked example: deposit at risk

A buyer deposits $8,000 earnest money on a $400,000 home. The contract says time is of the essence and lists a liquidated-damages clause. The buyer misses the closing date with no valid contingency. The seller may keep the $8,000 as liquidated damages and is generally barred from also suing for additional damages, because the clause sets the agreed remedy. Had the deal failed under a valid financing contingency, the buyer would instead recover the deposit through rescission.

Statute of Frauds

The statute of frauds requires certain contracts to be in writing and signed to be enforceable. In real estate this captures:

• Contracts for the sale of real property
• Leases longer than one year (the threshold varies by state)
• Most option contracts

An oral agreement to sell land is not void - it is unenforceable. If a party has partly performed, courts in many states may still enforce it under the part-performance exception.

Electronic Signatures

Under federal E-SIGN and state UETA-based laws, electronic signatures are generally as valid as ink, provided the parties consent to electronic dealing and the signature can be attributed to the signer. A digitally signed purchase agreement satisfies the writing requirement.

Exam Traps

• Calling an unclosed but signed contract "executed" - it is executory until closing.
• Mixing up void (never enforceable) and voidable (enforceable unless cancelled).
• Forgetting that an oral land contract is unenforceable, not void.
• Overlooking that time is of the essence removes any grace period.
• Assuming a seller can keep the deposit and also collect extra damages when a liquidated-damages clause applies.

Remedies for breach, compared

When a party breaches a real estate contract, the non-breaching party chooses among remedies, and the exam tests which fits a scenario. Specific performance forces the breaching party to complete the sale and is uniquely available in real estate because every parcel is considered unique, so money damages cannot fully substitute. Compensatory (money) damages pay the injured party for actual losses caused by the breach.

Liquidated damages are a sum the parties agreed to in advance, commonly the buyer's earnest money, that the seller may keep as the exclusive remedy if the buyer defaults; when a valid liquidated-damages clause applies, the seller cannot also pursue additional damages. Rescission cancels the contract and returns both parties to their pre-contract positions, with deposits refunded. A breaching party may also be liable for the other side's costs depending on the contract terms.

The statute of limitations sets the deadline to sue on a breach, and a contract that violates the statute of frauds by lacking a required writing is unenforceable in court even though the parties intended a deal. Matching the remedy to the facts, and recognizing when a liquidated-damages clause forecloses other recovery, resolves most breach questions.