4.5 DISCHARGE OF CONTRACTS

Performance of a Contract
Many contracts call for a specific time by which the agreed-on acts must be completely performed. In

addition, many contracts provide that time is of the essence. This means that the contract must be performed within the time limit specified. A party who fails to perform on time is liable for breach of contract.

In Illinois, a deed or contract executed on a Sunday or legal holiday is valid and enforceable. However, when the last day on which a deed or contract must be executed is a holiday or a Sunday, the deed or contract may be executed on the next regular business day.

Assignment
Assignment — New Person
This is a transfer of rights or duties under a contract. Rights may be assigned to a third party (called the assignee) unless the contract forbids it. Obligations also may be assigned (or delegated), but the original party remains primarily liable unless specifically released. An assignment may be made without the consent of the other party unless the contract includes a clause that permits or forbids assignment.

Novation — New Contract
Substitution of a new contract for an existing contract is called novation. The new agreement may be between the same parties, or a new party may be substituted for either (this is novation of the parties). The parties’ intent must be to discharge the old obligation. For instance, when a real estate purchaser assumes the seller’s existing mortgage loan, the lender may choose to release the seller and substitute the buyer as the party primarily liable for the mortgage debt. When there are many changes to a real estate contract and it is faxed several times, the contract may not be legible. Novation occurs when a new, clear contract with all the accepted changes is signed by all the parties.

Assignment = substitution of parties Novation = substitution of contracts

Breach of Contract
A contract may be terminated if it is breached by one of the parties. A breach of contract is a violation of any of the terms or conditions of a contract without legal excuse. The breaching or defaulting party assumes certain burdens, and the non-defaulting party has certain remedies.

Seller Breach
If the seller breaches a real estate sales contract, the:

• The buyer may sue for specific performance unless the contract specifically states otherwise. In a suit for specific performance, the buyer asks the court to force the seller to go through with the sale and convey the property as previously agreed.
• The buyer may also choose to sue for damages alone,
• The buyer may choose to sue for specific performance and damages, in which case the buyer asks that the seller pay for any costs and hardships suffered by the buyer as a result of the seller’s breach in addition to forcing the seller to sell the property to the buyer.
• Alternatively, the buyer may rescind (cancel) the contract and the seller must return any earnest money deposit.

Buyer Breach
If the buyer defaults:

• the seller can sue for damages
• sue for the purchase price in exchange for a deed (similar to specific performance for a buyer).
• the seller may declare the contract forfeited. In this case, the contract usually permits the seller to retain the buyer’s earnest money as liquidated damages.
• the seller may sue for compensatory damages if the buyer’s breach resulted in further financial losses for the seller.

The contract may limit the remedies available to the parties. A liquidated damages clause permits the seller to keep the earnest money deposit and any other payments received from the buyer as the seller’s sole remedy.

Statute of limitations
In Illinois, the statute of limitations for oral contracts is five years; for written contracts, ten years. Any rights not enforced within the applicable time period are lost.

Other Reasons for Termination
Contracts may also be discharged or terminated when any of the following occurs:

• Partial performance of the terms, along with a written acceptance by the other party
• Substantial performance, in which one party has substantially performed on the contract but does not complete all the details exactly as the contract requires (Such performance may be enough to force payment, with certain adjustments for any damages suffered by the other party.) For instance, if a newly constructed addition to a home were finished except for polishing the brass doorknobs, the contractor would be entitled to the final payment.

• Impossibility of performance, in which an act required by the contract cannot be legally accomplished
• Mutual agreement of the parties to cancel
• Operation of law such as in the voiding of a contract by a minor, as a result of fraud, due to the expiration of the statute of limitations, or because a contract was altered without the written consent of all parties involved
• Rescission one party may cancel or terminate the contract as if it had never been made. Cancellation terminates a contract without a return to the original position. Rescission, however, returns the parties to their original positions before the contract, so any monies that have been exchanged must be returned. Rescission is normally a contractual remedy for a breach, but a contract may also be rescinded by the mutual agreement of the parties.