While the contract maybe said to be between seller and buyer, seller can not complete the contract (preform) until the bank agrees, Bank would be the 500 pound gorilla in the room. And there maybe many banks, and others, some you don't even know about.
As a practical matter, the bank has to be happy, or at least agree, so they are not exactly mute point.
When seller accepted your contract, they did so, or should have done so, conditionally on banks and maybe others, as required and need, approval. In as much as a conditional contract by third parties goes, one might wonder if there is a contact , as seller can not preform, as seller can not deliver a clear and free title.
So in short, there is NO contract between buyer and seller until bank (and maybe others) approves. Should bank approve, then there might be a contact, depending what the contact says.
In short, seller does not have capacity to preform.
Only a lawyer can help you here, as they are the only ones that can render a legal opinion on this matter. In a short sale, there can be huge issues, many of them sitting around like land-mines, waiting to explode.
I would not pay much (NO!!!!) attention, nor give any credence to what any REALTOR told me about the law.
RUN to the nearest and best Real Estate Attorney you can find and afford.