4.2 Contract Performance, Breach, and Enforceability

Contract Performance, Breach, and Enforceability

Once a valid contract exists, the parties must perform. This section covers how contracts end, what happens when a party breaches, and the remedies available. The exam tests the difference between rescission, assignment, and novation, and asks you to compute damages or earnest-money outcomes.

Ways a Contract Is Discharged

A contract ends (is discharged) in several ways:

• Performance - both parties fully perform (the normal, happy ending).
• Mutual rescission - both agree to cancel and return to their pre-contract positions.
• Assignment - one party transfers their rights to a third party (the assignor usually remains secondarily liable unless released).
• Novation - a new contract or new party substitutes for the old, releasing the original party from liability.
• Operation of law - bankruptcy, the running of the statute of limitations, or alteration of the document.

Assignment vs. Novation

Students confuse these constantly.

Example: Buyer A assigns a purchase contract to Buyer C. If C defaults, the seller may still pursue A (secondary liability). If instead the parties sign a novation substituting C for A, then A is fully released and only C is liable.

Breach and Remedies

A breach is failure to perform without legal excuse. The non-breaching party may pursue:

• Specific performance - a court order compelling the party to complete the deal. Available in real estate because each parcel is considered unique; a buyer often sues a defaulting seller for specific performance.
• Compensatory (money) damages - to cover the actual loss.
• Liquidated damages - an amount agreed in advance, commonly the buyer's earnest money. The seller keeps it instead of suing for actual damages.
• Rescission - cancel the contract and restore the parties; the buyer recovers the deposit when the seller is at fault.

Time Is of the Essence

When a contract states "time is of the essence," deadlines are strictly enforced and missing one is a material breach. Without that clause, courts allow a reasonable time to perform.

Worked Numeric: Liquidated Damages and Earnest Money

A buyer makes a $9,000 earnest-money deposit on a $300,000 home. The contract names the earnest money as liquidated damages. The buyer breaches by walking away with no valid contingency.

• The seller elects liquidated damages and retains the $9,000.
• By accepting liquidated damages, the seller generally gives up the right to sue for additional actual damages or for specific performance.
• If actual damages were higher (say the seller later sold for $285,000, a $15,000 shortfall), the seller is still limited to the $9,000 unless the contract preserved other remedies.

The trap: liquidated damages cap the recovery. The point of the clause is certainty, not full compensation.

Contingencies as Conditions Precedent

Many 'breaches' are not breaches at all because a contingency failed. A contingency is a condition that must occur before a party's duty to perform arises. If a financing or inspection contingency is not satisfied, the buyer's duty to close never matures, so canceling is not a breach. This is why the earnest money is returned.

Contrast that with default: a buyer who has no remaining contingencies and simply refuses to close has breached. The seller may then keep the earnest money or pursue specific performance, depending on the contract. Reading whether a condition has been satisfied or waived is the key analytical step before deciding if a breach occurred.

Damages: Compensatory, Consequential, and the Duty to Mitigate

When a contract permits a damages suit, the non-breaching party seeks compensatory damages to be placed in the position they would have occupied had the contract been performed. Some contracts also allow consequential damages (foreseeable losses beyond the contract itself), though these are limited and often waived.

The non-breaching party generally has a duty to mitigate - to take reasonable steps to reduce the loss. A seller whose buyer defaults must usually try to resell rather than let damages accumulate.

Liquidated damages avoid all this by fixing the number in advance, but the clause must be a reasonable estimate of anticipated harm. A clause that is really a penalty (grossly excessive) may be struck down by a court.

Exam tip: actual damages, liquidated damages, and specific performance are usually alternative remedies - a party elects one path rather than stacking them. The contract language controls which options remain available after a default.

Liquidated Damages and Earnest Money

Most residential purchase contracts, including the Utah REPC, address breach through a liquidated damages clause tied to the buyer's earnest money. Liquidated damages are an amount the parties agree in advance, and courts enforce them only if (1) actual damages were hard to estimate at signing and (2) the amount is a reasonable forecast, not a penalty.

Worked example: A buyer deposits $10,000 earnest money on a $400,000 home, then defaults without a valid contingency. If the contract caps the seller's remedy at the earnest money as liquidated damages, the seller keeps $10,000 and the contract ends - the seller cannot also sue for additional losses under that clause. If, instead, the contract preserves all remedies, the seller might pursue actual damages or specific performance. The exam tests whether the chosen remedy clause limits recovery (liquidated damages) or preserves the full menu of remedies.