Despite their alleged verbal instruction, you still have a contract with them. Technically, escrows cannot be cancelled unilaterally by one of the parties to the contract. I would have concern that the contract is still in place without a signed contract cancellation on the buyer's part. The issue isn't escrow, its the contract - and the form you need signed is called Cancellation of Contract, Release of Deposit, and Joint Escrow Instructions. Escrow can't cancel contracts either.
Can you entertain another offer? Sure...but without the contract cancellation signed by the first buyer, there maybe a risk you run and counsel of a trusted attorney maybe in order here just to make sure you don't end up in a mess.
Just because the buyer breaches the contract and for that matter fails to perform doesn't mean the seller is free of their obligations to the buyer under the contract. Do everything you can to get the signatures....there are people out there that create situations like this simply to extort money out of innocent home sellers. What can happen is you go into escrow with another party and then these buyers show back up in the picture with their contract and stall you new deal until you pay them to go away so you can sell to the new buyers. That might not be the case here, but it isn't worth taking the chance.
I don't agree with Dennis' statement that once 48 hours has passed on the Notice to Perform, you are free to accept another offer. Once the 48 hours has passed, you present them with the cancellation of contract - but the contract is not officially cancelled until they sign the cancellation form. Verbal doesn't cut it.
CA DRE 01775528