A Quick Guide to Contractual Obligations

Need to seek legal advice regarding contractual obligations?

What are “Contractual Obligations”?

Contractual obligations are responsibilities/ duties that parties of a contract are legally required to perform in a contractual agreement. For example, party A and party B enter into a contract whereby party A was to supply party B certain goods in return for a sum of money by party B. Their respective responsibility would be:

  • Party A was to supply the goods of a certain quality on a certain date as promised in the contract; while
  • Party B was to pay a sum of money to Party A on a certain date after receiving the goods/ before receiving the goods.

Generally, the contractual obligations of the parties to a contract are dependent on the terms of the contract.

Can a party not fulfil their contractual obligations?

Assuming the contract the parties entered is a valid contract i.e.:

  1. The parties have the legal capacity to enter into the contract;
  2. There was an offer (to create a contractual relationship between parties) made by one party, and the other party accepted the offer;
  3. There was the intention to enter into a legal relationship by both parties- this is ascertained by the fact that consideration was provided by each party to the opposite parties i.e. something of legal value was given in return for the performing the obligations under the contract; and
  4. The contract was entered freely by both parties.

the parties cannot then turn around and refuse to perform their contractual obligations.

However, there are certain circumstances in which one party does not need to perform his obligation/ continue to perform his obligation under the contract.

  1. For example, if an event that can generally be neither anticipated nor controlled/ the circumstances are abnormal and unforeseeable, so that the consequences could not have been avoided through the exercise of due care (i.e. causes one party to unable to perform/to continue to perform their contractual obligation), such event will usually free both parties from performing their contractual obligations. In legal terms, it is called a “force majeure”. It is a clause that is usually found in tenancy contracts. However, to rely on it, the party must show that:
    1. Such clause exists in the contract;
    2. The event spoken above falls under the definition provided in the clause;
    3. The event was beyond the parties’ control and that there were no reasonable steps that the parties could have taken to avoid or mitigate the event or its consequences.
  2. Another example would be where there was an occurrence of an unforeseeable circumstance/ event that goes beyond the control of either party, which makes it impossible or unlawful for one party to continue to perform their obligation.  In law, this is what we term as “frustration”. Under such circumstances, a party may not be held liable to his refusal to perform his contractual obligations.

What happens if one party refuses to fulfil its contractual obligation?

Assuming if a party refuses to fulfil its contractual obligation and has no justification to it, the party would have effectively breached the contract. Under such circumstances, there are some remedies that are provided for by the law to the innocent party. Below are some (but not all) of the more common remedies that are available to the innocent party.

Claim for damages1

When one party refuses to perform their contractual obligation (i.e. breaching the contract) and causes the contract to crumble, the party who suffers as a result of the refusal is entitled to claim for damages (compensation) for any loss or damage caused by the other party. The party who suffered loss would either be entitled to:

  1. Nominal damages- when one party suffers no loss;
  2. Substantial damages- when one party suffers a substantial loss. However, the party who suffered loss must prove that the damage he suffered is a direct result of the other party’s refusal to perform their contractual obligation and that he had tried to mitigate his loss.

Terminate the contract

The act of terminating the contract means that the party who did no wrong is free from any contractual obligations from the point where the other party refuses to perform his contractual obligations.  However, it is not an automatic right- it is only available if the parties refusal to perform their contractual obligation breaches the fundamental terms (the core) of the contract. Anything below that only warrants a claim for damages.

Claim for specific performance2

Specific performance is a court order to compel the party who refuses to perform his contractual obligation to perform it. There are several factors that a court will consider before granting specific performance:

  1. When damages are not an adequate remedy/ compensation; and
  2. Whether the court needs to constantly supervise the other party to perform its contractual obligations.

Need to seek legal advice regarding contractual obligations?

1. Section 74, Contract Act 1950.

2. Specific Relief Act 1950.