09 Sales Contracts and Leases - Chapter 6: Discharge of Contracts

Breach of Contract

A breach of contract occurs when the terms or conditions of a contract have been violated. When one party breaches the contract's terms, they assume the consequences of defaulting. In these cases, the non-defaulting party has the right to pursue any damages that they suffered as a result of the breach.

Time is of the Essence

A contract could include the phrase time is of the essence. This phrase communicates to a party of a contract that they must perform their contractual duties by a specific date and time in order to avoid a breach of contract. The contract is contingent on them performing their duty by the deadline.

Material Breach

A more severe breach than substantial performance is a material breach. A material breach is severe enough that the non-breaching party then has no obligation to perform their contractual obligations. The breaching party cannot enforce payment and the non-breaching party can seek damages.

Actual Damages

Actual damages are monetary compensation given to an injured party for losses that were a result of the actions or omissions of another party. These must be able to be proven by evidence. These damages are not for "inconvenience" and cannot be speculative. For example: A grocer contracts with a local farmer to provide eggs for one year. The farmer provides eggs for three months and then decides the price has been set too low to support the feed requirements and stops all deliveries. The customers come in and complain to the grocer and the grocer gets repetitive migraines from all the stress. He has to purchase eggs from another producer at a dollar more on the case. He further believes the original farmer's eggs would have sold much better and he would have made about $5,000 dollars more for the year. The only compensation the grocer can receive is the additional cost to purchase the same quantity of eggs.

Substantial Performance

As I talked about in a previous screen, a contract could be breached with substantial performance, which occurs when a party has performed the majority of the contract's terms but does not perform them according to the contract's stipulations. It's like they've done most of what the contract required them to do, but not all of it. In a substantial performance, the offending party has performed enough of the contractual obligations to force payment or compliance with the contract.

Exemplary Damages

Exemplary damages are fines that are used to punish the breaching party. Typically, courts will use exemplary damages to make an example of the breaching party for being grossly negligent or intentionally fraudulent. Courts will opt to use exemplary damages when actual or liquidated damages do not seem sufficient enough to compensate the injured party.

Reformation

If a contract is being breached because of an error in the contract, then the parties could remedy the breach with a reformation. Reformation is the act of a judge changing or modifying a contract to match the true intent of the parties. Reformation might occur when parties enter into a contract without realizing it contained some type of error.

Assignment

If one party wants to withdraw from the contract but they don't want to the contract to be terminated, they can transfer the obligations of the contract to another party through assignment. Assignment is the complete transference of obligations in a contract from one party to another. The original person in the contract withdraws, leaving a third party all of the rights and obligations of the contract. Here's an example of assignment to help you: Bill has been renting an apartment for years, but is ready for a change of scenery. He doesn't want to terminate his contract completely, as he might change his mind in the future, so he asks his brother, Michael, to take it over. Michael and the apartment's landlord agree to transfer the contract and the contract is then assigned from Bill to Michael. Michael is now primarily responsible for the contract terms.

Remedies of a Breached Contract for the Buyer

Likewise, when a seller defaults on a real estate contract, the buyer has four options: The buyer can forfeit the contract. The buyer may accept the earnest money back, releasing everyone from the contract. The buyer can rescind the contract. The buyer can try to recoup liquidated damages, which is the monetary amount required to satisfy a loss resulting from a breach of contract. The buyer can sue for specific performance. In this case, the buyer can try to force the seller to perform the contract. The buyer can sue for compensatory damages. This means that they can try to recover any damages they may have suffered by taking the claim to court.

Liquidated Damages

Liquidated damages are the damages established by the contract in the event of default. They must be reasonably related to costs of breach. The court will scrutinize excessive liquidated damages. Generally, construction contracts have a completion date. Then they will have a clause that will state how much per day the contractor will be charged for late delivery of the building. Example: The Smith family has contracted with Wishful Dreams Construction Co. to build them a home to be completed in eight months. They know they will have to move out of their home and into their new home in exactly eight months. So, they place a liquidated damages clause in the contract of $1,000/day. Hotels and motels around the area have a going rate of $150 to $195 a day. Also, furnished apartments can be rented for $1,100 per month. Is the $1,000/day liquidated damages clause reasonably related to the family's cost or is it punitive in nature? If the court decides the clause is punitive, the court will adjust the clause to reflect the true costs to the Smith family. The earnest money in the contracts can be used as liquidated damages.

Mutual Rescission

Mutual rescission occurs when both parties agree to terminate the contract. When both parties agree to terminate the contract, the contract becomes void, and the situation returns to status quo.

Novation

Novation is an alternative to assignment. But instead of parties, the actual contract is substituted. Novation is a new contract substituting the obligations of an original contract. Legally, it is understood to be the exchange of one contract for another.

Real Estate Contingencies

Real estate contracts can be contingent on a number of different things. Often times a sales contract is contingent on the buyer being able to obtain financing. That way if the buyer is not able to obtain financing, then they won't be on the hook for buying a home they can't afford. A contract could also be contingent on property inspections, environmental inspections, or the sale of the buyer's current property.

Rescission

Rescission is the act of terminating the contract without suffering any consequences. Rescission often occurs in cases of fraud, misrepresentation, mistake, or undue influence. There are two types of rescission: unilateral rescission and mutual rescission.

Discharge of Contracts

Sometimes, individuals will enter into contracts and later change their minds about performing the contract. People in these types of situations sometimes opt to breach the contract, which means to break or violate the terms of the agreement. When a breach occurs, the injured party has several remedies to consider. The injured party's remedy depends on the type of breach of performance that has occurred. Whether partial performance, substantial performance, or no performance has occurred, the injured party has the right to take action against the breaching party. If a party to a contract does not completely fulfill their obligations in the agreement, they are said to have defaulted. And if they have defaulted, then they have breached the contract. In situations where a breach of contract occurs, the injured party can seek compensation for any damages or discharge the contract. When a party discharges a contract, it means that the terms and conditions of the contract have been satisfied or cancelled. Usually, a contract will contain a section that discusses when a discharge is allowable and the consequences of breaching the contract.

When Can a Party Discharge a Contract?

There are several instances in which a party can discharge a contract. Partial performance: As indicated by its name, partial performance occurs when either party only performs a portion of the duties indicated in the contract. When partial performance occurs, the damaged party can seek restitution or cancel the contract entirely. Substantial performance: Occurs when a party has performed the majority of the contract's terms but does not perform them according to the contract's stipulations. Often the party has performed enough of the contractual obligations to force payment or compliance with the contract. Non-performance because of legal issues: When a contract calls for a party to act illegally, that party is not required to meet the terms of the contract. Mutual agreement: A contract can be discharged when both parties mutually agree to cancel the contract. Operation of law: When a contract is not within the realm of legality or becomes unenforceable because of the statute of frauds, statute of limitations, or legal competency rule, the contract can be discharged. Enforcement of these contracts would be a violation of the law.

Types of Monetary Damages

When a breach of contract occurs, the injured party has the right to sue for damages. They have the option to force performance of the contract or to sue for monetary damages. There are three types of monetary damages: Actual damages Liquidated damages Exemplary damages

Remedies of a Breached Contract for the Seller

When a buyer defaults on a real estate contract, the seller has four options: The seller can forfeit the contract. A seller may accept the earnest money as liquidated damages, releasing everyone from the contract. The seller can rescind the contract. This means that the seller can cancel the contract entirely. However, this means that the seller must return all payments they have received from the buyer. The seller can sue for specific performance. Specific performance is a legal remedy that requires the party that has breached a contract to perform in accordance with the terms of the contract as opposed to paying damages to the other party. The seller can sue for compensatory damages. This means that the seller can take the buyer to court to recover any damages they may have suffered because of the breach of contract.

Unilateral Rescission

When unilateral rescission occurs, this means that one party wants to rescind the contract, often because they discover that the terms of the contract are based on fraudulent, inaccurate, or misleading information, or they were subject to undue influence/pressure to enter into the contract. When a party rescinds the contract because of fraud, mistake, misrepresentation, or undue influence, the other party cannot sue for specific performance or for damages.

Terms and Conditions

You've surely seen the phrase "terms and conditions" before. Terms are the various provisions that make up a contract. But what about conditions? Conditions are commonly known as contingencies. Well then, what is a contingency, you ask? When a contract is accepted on the terms that a specific action needs to take place in order for the contract to be executed, that contract is said to be "contingent" upon that action. That contract has a contingency.

specific performance

a legal remedy that requires the party that has breached a contract to perform in accordance with the terms of the contract; as opposed to paying damages to the other party

time is of the essence

a phrase used to communicate when a party to a contract must perform their contractual duties by a specific date and time in order to avoid a breach of contract

contingency

a provision within a contract that makes performance conditional upon the occurrence of a stated event

liquidated damages

sum of money established by the contract as compensation in the event of default

novation

the act of substituting one contract for another

rescission

the act of terminating the contract without suffering any consequences

assignment

the complete transference of obligations in a contract from one party to another