INTERPRETATION, PERFORMANCE AND DISCHARGE OF CONTRACTS

INTERPRETATION, PERFORMANCE AND DISCHARGE OF CONTRACTS

The majority of all contracts are properly performed and discharged or executed without legal complications. If
difficulties arise, the parties themselves, or with the aid of legal counsel, will typically work out an amicable
settlement. But the courts remain available for the resolution of conflicts between contracting parties that cannot
be so settled. Set forth below are some of the rules which guide the courts in their interpretation of contracts.

Interpretation of Contracts

In general, contracts are interpreted so as to give effect to the mutual intention of the parties as it existed at the
time of contracting, insofar as that intention is ascertainable and lawful. A contract may be explained by
reference to the circumstances under which it was made, and the matter to which it relates. But the language of
the contract governs its interpretation, if the language is clear and explicit and does not involve an absurdity.
Obviously the language should be reduced to writing, for the wiles of the unscrupulous are infinite, and the
memory of every man and woman is finite and fallible.

Fortunately, as noted earlier, most contracts of interest to real estate brokers must be in writing under the Statute
of Frauds. A broker can render valuable service by ensuring that the writing clearly expresses the intention of
the parties. But when a written contract fails to express the real intention of the parties because of fraud, mistake
or accident, the courts will attempt to discover the real intention and disregard the erroneous parts of the
writing.

The execution of a contract in writing supersedes all negotiations and stipulations concerning the matter which
preceded or accompanied the execution of the instruction, even though the law may or may not require writing.
When a contract is partly written and partly printed, written parts control the printed part, and the parts which
are purely original control those which were copied from a form. If the two contradict the latter must be
disregarded.

Modification or alteration of a contract is a change in the obligation by a modifying agreement, which requires
mutual assent. A contract in writing may be altered by a new contract in writing, or by an executed oral
agreement, and not otherwise.

Parol evidence rule. Parol evidence refers to prior oral or written negotiations or agreements of the parties, or
even oral agreements contemporaneous with their written contract. The parol evidence rule prohibits the
introduction of any extrinsic evidence (oral or written) to vary or add to the terms of an integrated written
instrument, such as a deed, contract, will, etc. This rule helps to finalize agreements with certainty, and it

discourages fraudulent claims. On the other hand, the courts will permit such outside evidence to be introduced
when the written contract is incomplete or ambiguous, or when necessary to show that the contract is not
enforceable because of mistake, fraud, duress, illegality, insufficiency or failure of consideration, or incapacity
of a party.

Under the “parol evidence rule,” when a contract is expressed in a writing which is intended to be the complete
and final expression of the rights and duties of the parties, parol evidence is not admissible as evidence.

Where the parties come to an agreement by mistake or fraud, and the written instrument does not express their
agreement correctly, it may be reformed or revised by the court on the application of the party agreeing to it,
provided that this can be done without prejudice to the rights acquired by third persons in good faith and for
value.

Performance of Contracts

Regarding performance of contracts, it is common to find a party who would prefer to drop out of the picture
without terminating the contract. Under proper circumstances, this may be accomplished by assignment or by
novation.

Assignable contract. Whether the contract is assignable depends upon its nature and terms. Ordinarily, either a
bilateral or a unilateral contract is assignable unless it calls for some personal quality of the promisor, or unless
it expressly or impliedly negates the right to assign. The contract might expressly provide that it shall not be
assigned, or contain provisions which are equivalent to such expressed stipulations, or require consent to assign.

An assignment transfers all the assignor’s interests to the assignee. The assignee stands in the shoes of the
assignor, taking the assignor’s rights and remedies, subject to any defenses that the obligor has against the
assignor, prior to notice of the assignment. Where the subject matter of the assignment involves reciprocal
rights and duties, the assignor may transfer the benefit and may divest himself or herself of all rights, but cannot
escape the burden of an obligation by a mere assignment. The assignor still remains liable to the oblige. Even if
the assignee assumes the obligation, the assignor still remains secondarily liable as a surety or guarantor, unless
the obligee releases the assignor.

The assignment carries with it all the rights of the assignor. Thus the assignment of a note carries with it any
incidental securities such as mortgages or other liens.

In some cases the original contracting party who wants to drop out completely may do so by novation.

Novation is the substitution by agreement of a new obligation for an existing one, with intent to extinguish the
latter. The substitution may be a new obligation between the same parties, and/or a new party, either a new
debtor or a new creditor. A novation requires an intent to discharge the old contract and, being a new contract, it
requires consideration and other essentials of a valid contract.

Where one party is indebted to another and the creditor takes a promissory note for the sum owed, this does not
discharge the original debt, unless the parties expressly agree to it, or unless such intention is clearly indicated.
Ordinarily, for a novation, a particular form is not necessary required. It may be written or implied from
conduct where the intent sufficiently appears.

Time

The question of time is often significant in contracts. By statute, if a time is not specified for the performance of
an act required to be performed, a reasonable time is allowed. If the act is in its nature capable of being
performed instantly, it must be performed immediately upon being exactly ascertained, unless otherwise agreed.

If the last day for the performance of any act provided by law to be performed within a specified period of time
shall be a holiday, then such period is extended to the next day which is not a holiday.

Discharge of Contracts

In the matter of discharge of contracts, there are two extremes, full performance and breach of contract.
Between these extremes are a variety of methods of discharge of the contract including the following:

1. By part performance;

2. By substantial performance;

3. By impossibility of performance;

4. By agreement between the parties;

5. By release;

6. By operation of law; and

7. By acceptance of a breach of the contract.

Statute of Limitations

The running of the Statute of Limitations will bar any legal action seeking relief for a breach of contract. Civil
actions can be commenced only within the periods prescribed by the statute after the cause of action has
accrued. The policy of the law is to aid the vigilant. The person who “sleeps upon his rights” may be barred
from relief by this statute. The following is a summary of some of the clauses which are of special interest to
real estate brokers.

Actions which must be brought within 90 days. Civil actions for the recovery of or conversion of personal
property such as baggage alleged to have been left at a hotel, boarding house, lodging house, furnished
apartment house or furnished bungalow court, shall be commenced within 90 days from and the departure of the
owner of the personal property.

Within six months. An action against an officer, or officer defacto, to recover any goods, wages, merchandise
or other property seized by the officer in an official capacity as tax collector, or to recover the price or value of
any such goods or other personal property, as well as for damage done to any person or property in making any
such seizure. Also, actions on claims against a county which have been rejected by the board of supervisors are
included.

Within one year. An action for libel, slander, injury or death caused by wrongful act or neglect of another, or
by a depositor against a bank for the payment of a forged or raised check.

Within two years. An action upon a contract, obligation or liability not founded upon an instrument in writing
(other than open book accounts, accounts stated, and open, current and mutual accounts, where the limit is four
years); or an action founded upon a contract, obligation or liability, evidenced by a certificate or abstract or
guaranty of title of real property or by a policy of title insurance; provided, that the cause of action of such
contracts shall not be deemed to have accrued until the discovery of the loss or damage suffered by the
aggrieved party thereunder.

Within three years. Included are an action upon a liability created by statute, other than a penalty or forfeiture;
an action for trespass upon or injury to real property; an action for taking, detaining, or injuring any goods or
chattels, including actions for the recovery of specific personal property; an action for relief on the grounds of
fraud or mistake. (Cause of action does not accrue until discovery by the injured party of the facts constituting
the fraud or mistake.)

Within four years. An action upon any contract, obligation, or liability founded upon an instrument in writing,
except an action upon any bonds, notes, or debentures issued by any corporation or pursuant to permit of the
Commissioner of Corporations, or upon any coupons issued with such bonds, notes, or debentures, if such
bonds, notes or debentures shall have been issued to or held by the public, where the limit is six years; also
provided that the time within which any action for a money judgment for the balance due upon an obligation for
the payment of which a deed of trust or mortgage with power of sale upon real property or any interest therein
was given as security, following the exercise of the power of sale in such deed of trust or mortgage, may be
brought but shall not extend beyond three months after the time of sale under such deed of trust or mortgage.

An action to recover:

1. Upon a book account whether consisting of one or more entries;

2. Upon an account stated, based upon an account in writing;

3. A balance due upon a mutual, open and current account, provided that where an account stated is based
upon an account of one item, the time shall begin to run from the date of said item, and where an account
stated that is based upon more than one item, the time shall begin to run from the date of the last item.

Within five years. An action for mesne profits (i.e., profits accruing between the time an owner acquires title
and actually takes possession). Also included is an action for the recovery of real property.

Within ten years. An action upon a judgment or decree by any court of the United States or by any state within
the United States.

In connection with the Statute of Limitations, an action is commenced when the complaint is filed with a court
of competent jurisdiction.

Remedies for Breach

As a final possibility, a contract may be discharged by simple acceptance of breach of contract. If one party
fails to perform, the other may accept the contract as ended, concluding either that recoverable damages are too
limited to justify litigation or that the other party is “judgment proof” (i.e., without sufficient assets to satisfy a
judgment).

On the other hand, the victim of a breach of contract may not be willing to accept the breach. That person has a
choice of two, and sometimes three, courses of action, which includes:

1. Unilateral rescission.

2. Action for dollar damages.

3. Action for specific performance.

Rescission

To rescind based upon a breach of contract requires diligent compliance with the following statutory rules:

• One must rescind promptly after discovering the facts which justify rescission; and

• One must restore to the other party everything of value received from the other party under the contract, or
must offer restoration upon condition that the other party do likewise, unless the latter is unable or refuses
to do so.

If a court awards rescission, it may require that the rescinding party make any compensation to the other which
justice may require. It should be noted, however, that a party having the right to rescind may independently
accomplish a completed rescission, terminating further liability and discharging the contract.

Damages

Whenever a party to a contract is a victim of a breach, such party has suffered a detriment and may recover
monetary compensation, which is called damages. This party is entitled to interest (now 10% per annum)
thereon from the day the right to recover is vested. If the contract, itself, stipulates a legal rate of interest, that
rate remains chargeable after the breach as before, and until superseded by a verdict or other new obligation.

Damages for breach of contract must be reasonable, and exemplary damages which serve to punish the
defendant are generally not allowed normally, unless a strong showing of bad faith can be made. Generally, the
measure of damages is the amount which will compensate the party aggrieved party for all the detriment
proximately caused thereby, or which, in the ordinary course of things would likely result therefrom.
Sometimes, if the breach has caused no appreciable detriment, hence no dollar damages, the court will award
“nominal damages” (e.g., $1).

The detriment caused by the breach of an agreement to convey an estate in real property is deemed to be the
price paid and the expenses properly incurred in examining the title and preparing the necessary papers, with
interest thereon. In cases of bad faith, added to the above is the difference between the price agreed to be paid
and the value of the estate agreed to be conveyed, at the time of the breach, as well as the expenses properly
incurred in preparing to enter upon the land. On the other hand, the detriment caused by the breach of an
agreement to purchase an estate in real property is deemed to be the excess, if any, of the amount which would
have been due to the seller, under the contract, over the value of the property to the seller.

Sometimes, especially in building contracts, the parties will anticipate the possibility of a breach (e.g., a delay in
completion beyond a promised date). The parties may specify in the contract the amount of damage to be paid
in the event of a breach. Such liquidated damage agreements will be enforced by the courts provided the
amount specified is not so excessive as to constitute a penalty, and provided it would be impractical or
extremely difficult to fix the actual damage, and normally only if the contract expressly provides that liquidated

damages shall be the only remedy available in the event of breach of the contract.

Specific Performance

Generally, if dollar damages at law cannot provide an adequate remedy, equity will take jurisdiction and order
the defendant to perform the contract. Sometimes, equity may also enforce a promise to forbear from doing
something by granting an injunction.

Requirements to compel performance. Specific performance is especially important in the real estate business
in connection with contracts for the transfer of interests in land. Since every piece of land is unique, the law
presumes that the breach of an agreement to transfer real property cannot be relieved adequately by money
compensation. For specific performance to be available as a remedy, however, certain other requirements must
normally be met before the court will compel a party to perform a contract.

If specific performance is to be ordered, the remedy must be mutual. However, by statute, even if the agreed
counter-performance would not be specifically enforceable, specific performance may be compelled if (a)
specific performance would otherwise be an appropriate remedy, and (b) the agreed counter-performance has
been substantially performed or can be assured. Brokers dealing with prospective oil land and oil leases are
familiar with a contract provision that states the lessee may, at any time before or after discovery of oil on the
property, quitclaim the same or any part thereof to the lessor, whereupon the rights and obligations of the parties
to the lease shall cease. Such a clause, giving the lessee the right to abandon, robs the contract of mutuality.
Therefore, the contract cannot be specifically enforced.

An option for the purchase of real estate, where there is consideration is therefore, specifically enforceable
although the owner cannot at that time compel its performance. Neither can the owner withdraw the option
during the time agreed upon. Upon the written exercise of the option by the buyer according to its terms, a
contract of sale is created. It is this contract that gives rise to the remedy of specific performance. It is not
uncommon for an optionee, or other person who may not have signed a contract, to bring suit thereon for its
specific performance. The fact that the party brings such a suit establishes mutuality, because its subjects
oneself to the court and to agree to abide by the decree of the court.

Obligations which cannot be specifically enforced. By statute, the following obligations cannot be
specifically enforced: (l) to render personal service; (2) to employ another in personal service; (3) to perform an
act which the party has no lawful power to perform when required to do so; (4) to procure the consent of any
third person; and (5) an agreement where the terms are not sufficiently certain to make the precise act which is
to be done clearly ascertainable.

Thus, husband and wife must join in executing any instrument by which community real property or any
interest therein is sold, conveyed, or encumbered, or is leased for a longer period than one year.

Note: The right of a purchaser in good faith without knowledge of the marriage relation where one spouse alone
holds the record title to the real property may be established without the other spouse’s signature.

Since an agreement to procure the consent of a spouse or any third person cannot be specifically enforced, it is
exceedingly important to obtain the signature of the other spouse. In fact, the signatures of both spouses to any
contract relating to community real property should be secured.

Frequently this failure to procure the signature of the other spouse is cured by the seller putting into escrow the
deed signed by both husband and wife, or by the buyer putting into escrow a deed of trust signed by both. When
that is done the original want of mutuality is cured, provided it is done before an attempt is made by the other to
withdraw from the contract by the other party. It is not wise to rely upon this possibility, or even probability.
The alert real estate broker will obtain the signatures of all parties in the beginning.

It is not uncommon that there are two owners of property other than husband and wife. Therefore, it is
necessary to get the signatures of all of the owners, because the buyer could not compel specific performance of
the contract as to one-half of the property that it is contemplated that the whole is to be sold.

Adequate consideration — assent by fraud — merchantable title. Specific performance cannot be enforced
against a party to a contract if such party has not received adequate consideration. This doctrine does not require
that the highest price obtainable must be procured. It means that a price that is fair and reasonable under the

circumstances must be obtained. If a higher price is offered during the negotiations, it must be presented.

Thus, in one California case, the broker signed up a buyer at $30,000, knowing that $35,000 had been offered
for the property. The court held inadequacy was to defeat the buyer’s suit in specific performance. The court
also referred attention to the law which requires perfect good faith on the part of agents, not only in form but in
substance.

Furthermore, in order for the plaintiff to utilize the equitable remedy of specific performance, he or she must
show that the contract with the defendant is just and reasonable. The court denied specific performance in one
case because the seller had not been given adequate security to insure the payment of the balance of the price.

Specific performance cannot be enforced against a party to a contract if his or her assent was obtained by
misrepresentation, concealment, circumvention, or unfair practices of any party to whom performance would
become due under the contract, or by any promise of such party which has not been substantially fulfilled. This
is also true if such assent was given under the influence of mistake, misapprehension, or surprise.

Note: Where the contract provides for compensation in case of mistake, the mistake, if correctable, may be
compensated for, and the contract specifically enforced in other respects.

A buyer is always entitled to receive a merchantable title. Therefore, if the seller cannot give the buyer a title
free from reasonable doubt, the seller cannot specifically enforce such an agreement. This does not mean that
title needs to be merchantable at the time the original agreement was executed. It only means that title needs to
be merchantable at the time it becomes the duty of the seller to convey the title. If the parties agree that the
transfer of title will be subject to the agreement that title will be conveyed, these encumbrances should be
described in the contract and will not block specific performance.