PSI New Jersey Real Estate State Practice Exam

A contract is terminated if:

1. One party decides to back out

2. Both parties agree to terminate

3. It is impossible for one of the parties to perform

4. New legislation makes the contract invalid

The correct answer is: It is impossible for one of the parties to perform

The correct answer illustrates a fundamental principle in contract law known as "impossibility of performance." This principle holds that a contract can be considered terminated if an unforeseen event occurs, making it impossible for one party to fulfill their contractual obligations. For instance, if the subject matter of the contract is destroyed or if one party becomes incapacitated and unable to perform their duties, the contract is terminated due to the impossibility of performance. In this context, it's important to recognize that simply deciding to back out does not by itself terminate the contract unless both parties agree to that decision. A mutual agreement to terminate (the second choice) is indeed a valid reason for contract termination, but it relies on the cooperation of both parties involved. New legislation that invalidates a contract (the last choice) also represents a termination; however, it is based on external factors rather than the parties' abilities to perform. Understanding the nuances of these situations helps clarify why impossibility of performance is a decisive and recognized reason for contract termination.