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Topic 11.6: Breach of Contract

Learning Objectives

After successfully completing this topic, you will be able to
• list the four legal remedies for breach of contract, and
• describe the process of assigning a contract.

Breach of Contract

When one of the parties to a contract fails to perform as promised, that party has breached the contract. The expression time is of the essence is a very important contract clause. If a buyer is required to apply for a mortgage within three days after the contract has been signed, but does not apply until the fifth day, the buyer has defaulted (breached).

Remedies for Breach

The party who did not breach the contract has four legal remedies
• rescind the contract—The innocent party may request that a court cancel the contract, putting the parties back in their original position, including a return of the deposit.
• require specific performance—The innocent party may ask a court to require the other party to perform as promised. In the case of a real estate contract, courts will likely require a seller to sell a property, but will probably just assess damages against a buyer who breaches.
• sue for compensatory damages—The innocent party may ask a court to award compensatory damages in order to repay the losses suffered by the innocent party.
• sue for liquidated damages— The innocent party asks the court to have the buyer forfeit the earnest money deposit. Liquidated damages are usually equal to the earnest money deposit.

The statute of limitations specifies the time limit for filing suit on a contract.

Anticipatory Breach

A definite statement that one of the parties will not perform on the required date (repudiation) is called an anticipatory breach. The innocent party may treat the breach as immediate, terminate the contract, and sue for damages without waiting for the actual breach.

Assignment of contracts

A contract is usually assignable unless the terms or the law prohibits it. The assignor has the legal rights and transfers them to an assignee. The assignor cannot assign the contractual obligations under the contract, and remains responsible if the assignee fails to perform.

A novation occurs when a contract is changed by agreement of all parties. The assignee is substituted for another party, discharging the obligations of the assignor.