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What You Should Know about Discharging a Contract for the Real Estate License Exam

Discharging a contract means ending the contract in one of several appropriate ways. Real Estate License Exam questions on this topic tend to focus on the definitions of these different ways of ending a contract. The most common and ways for a contract to be discharged are listed here in alphabetical order (after performance, because it is the most common):

  • Performance: Performance is the ideal way to end a contract, because all parties have fulfilled their obligations. “Time is of the essence” is a phrase that sometimes is used in contracts to mean that a breach of contract occurs if an obligation isn’t completed within the specified time frame stated in the contract.

  • Assignment and delegation: Someone else takes over or is assigned the obligations of one of the parties to the contract. The party taking over the obligations is called the assignee. Say that you are a builder who agrees to build someone a house. You can’t do the job, but you assign the contract to another builder who builds the house under the same terms that were agreed to.

    This example is different from delegation, where you’d simply hire another builder to work for you to build a house. In an assignment, your responsibilities and obligations are transferred. In a delegation, you remain primarily responsible.

  • Death: If you die, you definitely don’t have to fulfill your obligations under a contract. However, that doesn’t mean that someone else won’t have to do what you agreed to do. For example, your estate may be required to go ahead and purchase a property that you contracted to buy before your death.

  • Impossibility of performance: In a situation where the action that was contracted cannot be performed legally, the possibility of performing the task can be declared impossible. Suppose you hire a builder to build an addition onto your house, and after you sign the contract, you find out the town won’t let you build the addition. At this point you’re no longer obligated to go through with the contract.

  • Mutual agreement: In this situation, both parties to the contract agree to cancel it. They can agree with no penalty to either party, or they agree to some exchange of money to pay for any damage or loss to one or the other of the parties.

  • Novation: Novation is a situation in which a new contract with different terms replaces an old one. The new contract can be between the same parties or between one of the parties to the original contract and a new party.

    Writing a new contract when only minor changes need to be made is not the usual course of action. Each party usually just initials and dates the minor changes to signify their acceptance. Novation is reserved for major or more severe changes.

  • Operation of law: This type of situation can relate to some legal issue that arises that cancels the contract. For example a contract that is made on the basis of fraud is canceled when the fraud is discovered.

  • Partial performance: Discharging a contract for partial performance refers to an acceptance by one party of incomplete work by the other party and an agreement that the incomplete work will constitute fulfillment of the terms of the contract.

  • Rescission: A rescission of a contract sometimes is called a unilateral rescission. Rescission is when one party decides not to fulfill its obligations under the contract and considers the situation to be as if the contract never existed. One party to a contract sometimes uses rescission when the other party doesn’t appear to be fulfilling its obligations.

    For example, the painter who never shows up to paint your house may prompt you to rescind the contract.

  • Substantial performance: With the work under contract nearly completed, a substantial performance discharge of the contract may be in order. Under these circumstances, one party may force payment from the other party. Say, for example, you contract to build an addition onto your house.

    The builder finishes 95 percent of the work but you still owe him a third of the agreed upon amount. You refuse to pay until that last 5 percent of the work is complete. The builder can sue you for payment on the basis of substantial performance.

    The court may let you keep a small amount of money to finish the job (not the 33 percent). The builder receives most of his payment and his obligations to you are declared over.

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