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What is a Contractual Obligation?

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What is a Contractual Obligation?

A contractual obligation is an obligation that arises from a contract. The terms of the contract may impose obligations on one or more parties to perform, or not perform, certain actions. A contractual obligation usually involves financial penalties for failing to meet the obligations outlined in the contract. A contractual obligation is also known as a “ covenant.” A party’s failure to meet its obligations will often result in that party being liable for breach of contract, which can have serious consequences in some cases. For example, if an individual sells their car to another party with a clause in their contract obliging them to service the car and keep it in good working condition at all times. If the individual fails to do so, they may face legal action and financial repercussions if the new owner decides to sue them for breach of contract.

What Is a Contract?

A contract is an agreement between two or more parties that is enforceable by law. The purpose of a contract is to outline the terms and conditions of a proposed business or commercial transaction. The contracting parties usually make an offer and the other party either accepts or rejects that offer. The terms of the contract may involve monetary payments or the provision of goods and services. Once the contract has been signed by both parties, it becomes legally binding and each party is obligated to fulfill their contractual obligations. Contracts can be written or verbal. Written contracts are more legally binding than verbal contracts because they can be proven in court if necessary. Before signing a contract, it is important to read it carefully and understand all of its terms. If you are under the age of 18, you may be required to get your parents’ approval before signing a contract.

Types of Contractual Obligations

– Financial Obligations: These are obligations for the payment of money. For example, an individual who borrows money from a friend promises to repay that money at a specified time and with interest if applicable.

– Performance Obligations: These involve the promise to perform some action or task. For example, a contractor who is hired to remodel a house promises to complete the project by a certain date. 

– Non-performance Obligations: These are obligations to refrain from certain actions. For example, an individual who is applying for a job promises not to steal company property.

Breach of Contract

A breach of contract occurs when one of the parties fails to meet the contractual obligations outlined in their contract. For example, an individual borrows money from a friend and then fails to repay that money on time. Contract law puts the onus on the person who was wronged (the victim) to take legal action against the party who wronged them. Legal action may include filing a lawsuit to request monetary compensation for the victim. If a contract is breached, the victim may be able to recover any losses or financial damages resulting from the breach of contract. In some cases, the party who breached the contract may be liable for compensatory damages. Compensatory damages are financial penalties designed to reimburse the victim for any financial losses they incurred as a result of the breach of contract. Compensatory damages often include the payment of contractual damages or liquidated damages.

Remedies for Breach of Contract

– Rescission of Contract: This occurs when a contract is rescinded or nullified due to a breach of contract. If a contract is rescinded, the parties are no longer obligated to fulfill their contractual obligations. Rescission of a contract is often a last resort and is rarely enforced by a court because it amounts to a breach of contract for both parties. 

– Specific Performance: This is a remedy that obliges a party to perform the terms of their contract. For example, a homeowner who hires a contractor to remodel their house may be able to seek specific performance if the contractor breaches their contract by refusing to finish the project. This remedy is only available in special cases, such as when specific performance is necessary to preserve the rights of a third party. 

– Damages: This remedy is awarded to the victim of a breach of contract as compensation for any financial losses they incurred as a result of the breach of contract. Various types of damages may be awarded in the event of a breach of contract, such as liquidated damages, consequential damages, and nominal damages.


Contracts are a crucial part of any business transaction and the terms of a contract will often outline the obligations of one or more parties. If one of the parties fails to meet their contractual obligations, they are in breach of contract and the other party may be able to take legal action to recover any losses they incurred as a result of the breach of contract. Contract law is complex and it is important to understand the terms of a contract before signing it. If you are planning to sign a contract, you should read the contract carefully and make sure you understand all of its terms.


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