What is a contractual obligation?

Explainer
October 17, 2022
5
min

What is a contractual obligation?

A contractual obligation (or duty) is something that parties agree to do or become responsible for when they sign a contract. These obligations can vary wildly between contracts, but they will usually fall into two broad categories:

  1. A promise to do something
  2. A promise not to do something

These contractual obligations are promises that each party makes to the other about how they will behave throughout the duration of a contract. They are typically decided on when drafting the contract or when negotiating it. 

But, once a contract is signed and fully executed, they become binding on the parties. This means that, if they fail to perform their contractual obligations, they will be breaching the contract. But we’ll get into that in a moment. Let’s look at some examples of contractual obligations first. 

Example of a contractual obligation

Let’s imagine that Anna is a builder and she enters into a contract with Robert to build an extension to his kitchen. 

Her contractual obligations are to: (a) build the extension, (b) do that with quality materials so it doesn’t fall down, and (c) finish it by a certain date.

Meanwhile, Robert’s contractual obligation is to pay for that extension one month after it’s finished. Once all those things are done, both parties have fulfilled their contractual obligations. Boom.

This example is pretty straightforward. And obviously, contractual obligations vary wildly depending on the type of contract – the obligations in Robert’s builder’s contract to put up that extension will be very different to those in, say, an employment contract, or an NDA

But, most contract obligations do have some things in common. These are:

  • Delivery: one party will be obligated to deliver the thing they’re being paid for, probably by a certain deadline
  • Payment: most contracts involve an obligation to exchange one thing of value for another e.g. money for a service. This is called “consideration
  • Quality: one party is usually obligated to provide goods or services that are of a certain standard or quality
  • General contract requirements: all contracts contain general obligations which all parties are expected to follow. So that’s things like acting fairly, telling the truth, not using force to get agreement, etc

But what happens, say, if you’re suddenly unable to meet your contractual obligations? Let’s cover that next.

What happens if you can’t fulfil your contractual obligations?

If you’re unable to fulfil your contractual obligations, it’s possible that the counterparty will attempt to sue you for breach of contract. That is, unless the parties can reach a mutual decision to release you from the contract without requiring compensation. 

But that’s the simple answer. Parties that are unable to fulfill their contractual obligations will have a few options, and we’ll explore these in a little bit more detail now. 

1. The breaching party can be released from the contract

Firstly, the breaching party can request to be released from the contract. If the relationship between the parties is good enough, the counterparty may decide to release you from your contractual obligations without seeking compensation.

Alternatively, you could negotiate a contract amendment that adjusts these contractual obligations to make them more feasible. 

Failing this, the chances are that the counterparty will decide to sue you for breach of contract. Let’s think back to our builder example earlier to understand what this might mean for the party breaching their contractual obligations. 

2. The innocent party can sue for damages 

One possibility is that the breaching party will be sued for damages and be compensated for the losses they’ve suffered as a result of the party not performing their contractual obligations properly. This is often called a ‘contractual dispute’.

For example, Robert can take Anna to court to try to recoup his losses due to her not doing what she said she would, i.e. using quality materials. He could claim for his costs to fix or rebuild the extension, as well as the money for putting the water-damaged kitchen right. 

Robert will only be able to claim for damages that cover the money he lost because of the breach of contract, and nothing else (called “expectation damages”). 

3. The innocent party can seek specific performance 

In some circumstances, it’s also possible for the innocent party to seek specific performance. Rather than ordering the breaching party to pay out for damages, specific performance orders the party to perform their contractual obligations, rather than escaping them. 

If this remedy is issued by the court, it means that Robert can insist that Anna fulfil her contractual obligations e.g. by redoing the work using quality materials. 

What to do if you can’t fulfil your contractual obligations 

If you can’t fulfil your contractual obligations for a genuine reason (something which has affected lots of businesses post-Brexit and during the COVID-19 pandemic) there are still some things you can do before ending up in court. 

First of all, don’t panic. Then…

1. Double-check the contract

It’s a good idea to double-check the contract’s wording and understand exactly what your obligations are. To do this, you’ll need access to the signed contract. This is why effective contract storage is so important. 

There might be something in the terms that lets you terminate the contract early (often called an “express right to terminate” clause). 

Or if something’s happened that’s beyond your control that makes it difficult or impossible for you to carry out your contractual obligations, you might be able to argue “frustration”. This makes the contract void without any penalties – although it can be quite hard to prove. 

There might also be a dispute resolution clause that will tell you what to do in this situation. The best thing to do is consult a lawyer or attorney if you’re not sure of what your legal rights are. After all, this can often be cheaper than getting it wrong when it comes to business contracts and other contracts that carry a lot of contractual risk

2. Have a chat with the other party

You might be able to come to a mutual agreement to end or change (for example with an extension) your contract without any penalties. Whatever happens, keep talking to the other party. This will help protect your relationship and your wider reputation.

3. Get some legal advice

If all else fails, you’ll want to talk to a solicitor to find out what your options are. You might still be able to get things sorted with alternative dispute resolution (which is quicker and cheaper than going to court) or mediation.

Frequently asked questions 

When are contractual obligations formed?

Contractual obligations are officially formed when parties sign the contract. This can be done using an eSignature or a wet ink signature

What does a person get in return for performing a contract obligation?

To make sure that contracts are fair, the promisor will get some form of consideration in exchange for performing their contractual obligations. This consideration can be anything that has some value, and it must come from the promisee. 

Where can you find out what your contractual obligations are?

Usually, your contract will list all of your contractual obligations. 

Are contractual obligations legally binding?

Contractual obligations will be legally binding so long as the contract they're included in is valid.

Need help managing contractual obligations?

If your business is finding it difficult to track and manage contractual obligations, it could be time to adopt contract automation. Using a contract automation tool like Juro, legal and business teams can:

  • Track contractual obligations without the need for manual tagging, and without needing to manually enter contract data into a spreadsheet of some sort
  • Set up automated contract reminders so that you’ll never forget about your contractual obligations, or let a contract deadline pass you by
  • Monitor the progress of contracts at scale. Juro’s easy-to-use contract repository stores contracts and tracks their progress as they move through the contract lifecycle.

To find out more about how Juro can help you to manage your contractual obligations and avoid contractual disputes, fill in the form below to speak with a specialist. 

Book a personalized demo

Find out what all-in-one contract automation can do for your business

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