Obligations and Contracts: Everything You Need to Know
Obligations and contracts are interrelated. Each party to a contract is legally bound to perform certain duties. These duties are called contract obligations.3 min read
Obligations and contracts are interrelated. Each party to a contract is legally bound to perform certain duties. These duties are called contract obligations.
What Are Contract Obligations?
All contracts involve exchanging something that has some value, be it a product, service, or money. Each of the contracting parties has some responsibilities with respect to this exchange. These responsibilities are known as contract obligations. For example, if you enter into a contract to sell a vehicle, you have an obligation to transfer its ownership, whereas the buyer has an obligation to pay you for it. The terms of the contract will specify the ways to fulfill the obligations (amount and mode of payment, time and place of delivery, etc.).
If any of the parties fails to fulfill its obligations, it amounts to a breach of contract and may require the breaching party to reimburse the other party for the damages.
What Is a Contract?
A contract is an agreement that is legally binding upon the parties. Contractual rights and obligations are enforceable in the court of law. A court may either order specific performance of the obligations or award damages for the financial loss caused due to breach of contract.
In order to constitute a valid contract, there must be four essential elements:
- Intention of the parties to create a legal relationship
The parties negotiate on various aspects of the agreement before it becomes binding and takes the form of a contract. Therefore, it's important to determine the precise time of contract formation (i.e., the moment from which the contractual obligations come into effect).
Consideration or the mutual promise of the parties forms the basis of a contract. These promises define the scope of rights and obligations of the contracting parties.
If one party fulfills its obligations under the contract while the other party fails to do so, the fulfilling party can approach a court for seeking relief. For example, a web developer entered into a contract with a graphic designer for designing some promotional material for $3,000. The designer created and delivered the material and the developer confirmed that it meets the terms of the contract. Now, if the web developer fails to pay the designer, the designer can seek relief from a court for the breach of contract.
Usually, courts grant monetary damages for the breach of a contract. However, in some special cases, courts may also ask the breaching party to fulfill its contractual obligations. Since contracts are legally enforceable, the contracting parties can use contracts as a basis of their business relationships.
For example, a multimedia company promised to pay $3,000 to a composer for a brief composition as detailed out in the agreement. Soon after the composer started composing the piece for the company, he got another offer from a big studio and abandoned the contracted project. The multimedia company had to find another composer and pay him $4,000 for the said assignment. The company can now sue the original composer and claim a damage of $1,000 for the loss it incurred due to the breach of contract.
Examples of Contract Obligations
Contractual obligations depend upon the subject matter of a contract. For instance, a sales contract may have altogether different contractual obligations from a property rental contract. Nevertheless, most of the contracts contain some common forms of contract obligations:
- Payment: In a contract to buy or sell a product or a service, the buying party usually has a legal obligation to pay the seller for the said product or service. The contract may specify the terms of payment, such as the amount, form, and time of payment.
- Delivery: The selling party is usually under an obligation to deliver the sold product or service. The contract may specify the terms of delivery, such as the date and method of delivery.
- Quality of Goods: Most of the sales contracts require the seller to provide goods that meet a certain level of quality. A contract may specifically describe the required quality standards.
In addition to the above types of specific obligations, the contracting parties are also bound to follow the general principles of contract. For example, all contracting parties have a legal obligation to deal fairly with each other. No party should use any force or coercion for creating a contract.
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