Obligations Under a Contract
Understanding the Obligations of Contractual Parties
Contractual obligations refer to the duties and responsibilities that each party agrees to perform as part of a contract, service agreement, or lease. An obligation is a promise to perform, use, sell, or refrain from doing something with property. This can be something as simple as allowing someone access to property, such as a parking space, or more complex actions, such as completing a new construction project by a specified date.
Contracts are legally enforceable documents that bind the parties to its terms and conditions in accordance with the terms of the written agreement . Failure to comply with any of the terms could lead to a legal battle and may result in damages being awarded to the non-breaching party. It is imperative that the term and conditions of a contract are written as clearly as possible to avoid any misunderstandings, so that it is clear to the non-breaching party how the other party has allegedly caused a breach of contract. If the terms and conditions are not clearly defined, it can lead to expensive and time-consuming litigation.
It is critical to be aware of well known pit-falls in contracts and understand how to properly draft an enforceable and comprehensive agreement.
Types Of Breaches Of Contract
Companies engaged in contract negotiations can benefit from understanding the common types of contract disputes that occur:
Minor Breaches
Some breaches of the terms of a contract are minor. Parties may miss a deadline but have made good faith efforts to comply with the obligations. The non-breach party’s interests are not substantially harmed.
Material Breaches
If a party materially breaches a contract, the non-breach party is usually entitled to compensation for the damages incurred. Examples of material breaches include:
Fundamental Breaches
A fundamental breach is one so serious that the other side has no obligation to perform under the contract. For example, a party fails to deliver goods or services of the quality or value promised.
Anticipatory Breaches
Anticipatory breaches refer to a situation in which it becomes clear that one party will not be able to perform according to the contract before the performance date.
Resolving Disputes In Contracts
When contractual obligations become conflicting expectations, various means exist to resolve the conflict. Negotiation involves parties engaging in informal dialogue to arrive at a solution without resorting to legal action. Oftentimes, the mere threat of litigation can bring parties to the negotiating table. Whether formal or informal, negotiation is often the most cost-effective means of resolution. It can also preserve important business and personal relationships, but parties must be cautious about compromising their rights inadvertently through dialogue. Mediation is a voluntary process wherein an impartial third party facilitates dialogue between the two parties’ to try to arrive at a mutually agreeable resolution. The mediator does not render a decision like a judicial officer or arbitrator, but instead encourages the parties to investigate and explore how the interests of each party can be served through a resolution. While mediation may not always work, it provides another layer of dialogue and can ultimately reduce the likelihood of a costly court proceeding. Mediation is strongly encouraged in most jurisdictions and required before litigation is permitted in some. Arbitration involves a neutral third-party individual or panel rendering a decision regarding the outcome of the conflict. The parties submit their evidence and arguments, but do not usually engage in dialog directly with each other. While arbitration is arguably more cost-effective than litigation, it is not without significant expense. In addition, arbitration awards are not always appealable and much like a court proceeding, arbitration may have a public record component. Litigation involves filing a case in a court of competent jurisdiction. Litigation is the most expensive mechanism of dispute resolution so far as attorneys’ fees, expert witness costs, filing fees and time. Parties often try to forego litigation and seek an alternative dispute resolution mechanism before resorting to a lawsuit. Regardless of what mechanism a party utilizes to seek a remedy and vindicate their rights, it is important to understand the potential costs and benefits of arbitration, litigation and non-binding dispute resolution mechanisms.
Essential Clauses To Have In A Contract
Common contractual pitfalls can be avoided by ensuring your contracts contain the essential clauses, such as:
- Indemnity clause
- Termination clause
- Jurisdiction clause
In order to ensure that contracts are expressed in plain terms that are easy to understand, it is necessary to include these standard and fundamental clauses.
The purpose of the indemnity clause is to provide protection to either party from a claim brought against them, particularly concerning failures arising under the other party’s obligations under the contract. So, for example, in the event that one party is in breach of their obligations, the indemnity clause would cover the associated losses caused to the non-breaching party. This is usually expressed in such a way that covers both direct and consequential losses. Care should be taken when expressing the parties’ liability in an indemnity clause to ensure that it does not conflict with the limitations within the contract.
The objective behind the termination clause is to protect an innocent party from being in a continuous contractual relationship with a party that repeatedly breaches the contract without necessary remedial action having been taken by that party . Normally, the breaching party will be given notification of the failure and time to remedy the situation. However, where this is not possible or the breach is sufficiently serious, one or both parties are entitled to terminate the contract without further notice where the other party has committed a material breach of the contract. A material breach will generally involve a situation where the innocent party would not have entered into the contract if they had known about the other party’s failure to perform their obligations under the contract. It is important to note that an innocent party cannot terminate a contract if the contract makes it clear that a breach of a particular term does not entitle the innocent party to terminate.
The jurisdiction clause sets out the countries in which any proceedings that arise under an existing contract will be brought. Contracts may be performed in a number of different countries and it is important to think about what jurisdiction clause will be most advantageous to your business. For UK companies that trade internationally, it is clearly beneficial to stipulate the jurisdiction in England and Wales, where the laws will be familiar.
Dealing With Amendments of Contracts
Contract modifications are sometimes inevitable as project requirements evolve or unforeseen circumstances arise. It’s important to understand the rules that apply to making these changes and the potential consequences of not complying with them.
When One Party Wants to Change the Terms If a party wishes to unilaterally change the contract, the other party is within its rights to refuse. If that party has any concerns at all about whether the changes are necessary, it may need to go so far as to put up repeated objections in writing, so that later it would not be able to say that it was pressured into a decision. Courts have held that if a contract is modified by the actions or statements of one party alone, the modification will not be binding.
Both parties have an obligation to avoid any statement that might lead the other to believe that the adverse change is acceptable, before they have a chance to object. Statements made after the parties’ representative has had a chance to review the change are of less concern. Changes made in existing correspondence are of little concern. Statements made during a meeting where no objection was raised are usually taken to have been acceptable.
The same general principles apply to changes made by contract documents to which the parties have contracted or agreed to be bound, for instance, drawing changes issued by an architect. The obligation to object is triggered when a party has received notice of the change.
Subsequently, the other party will have to demonstrate that if it had known about or been consulted on the change, there would have been no objection or that it would have cost more money to object than to comply.
When Both Parties Agree to Change the Terms Some contracts include detailed provisions that are not binding unless explicitly accepted by both parties. For instance, the agreement may contain, "Accept as specifically noted herein, there are no other terms or conditions."
Less detailed provisions require a change to be in writing, and then signed by the person authorized by the other party to execute amendments.
In either case, the idea is to make sure that the agreement in its final form is identical with the agreement that the parties intended when they signed the original.
Most importantly, even though the contract specifically requires any change to be made in writing, one must still object if one thinks that the change to be made is outside the scope of what was agreed to.
Something that could frustrate the amendments is the presence in the contract of a provision that states that it cannot be amended without the written agreement of all the parties to the contract. If the parties who signed the agreement are not the only parties affected by the modification, the inclusion of this clause could prevent the change from being binding.
Making Changes that Result in a Requirement to Pay More Money Many courts have held that compensation for a contractor’s additional work that did not get into the contract will have to wait until the contract is performed or the job is finished, and no payment will be made until the court has resolved the dispute.
Some courts have held that one side must take affirmatively all the steps that are necessary to show that a claim existed for it to be collected, not merely wait for the passing of time to see whether the other side will admit the liability.
Avoiding Problems With A Contract
There are, of course, many things that the parties can do to help prevent problems with any contractual arrangements. Due diligence and research are important. But it is also important to have a clear understanding of the scope of each party’s responsibilities, and clear communication between the parties with respect to those responsibilities, and all contractual issues. A few common examples include: Drafting contracts so that they accurately reflect the parties’ mutual intent. For example, if a party contractually agrees to perform services (and perhaps, even more important in this context, does not agree to reimburse the other party for the costs of services performed), then the parties clearly have not agreed that the services will be provided free of charge. If the parties have renegotiated a pre-existing relationship which had included an express financial obligation, particularly where the language of the document was ambiguous as to whether the prior version of the agreement was still in effect, but the most recent version of the agreement contains no such express financial obligation, the parties should review the drafts carefully to see if they still agree that there is no financial obligation. The question arises – if the agreement now omits the express reference and is completely silent, does that change the parties’ rights with respect to a charge, or their obligations simply not to perform without an obligation to pay? Clear scope of work and clearly identified and assigned responsibilities. This may seem like an obvious need , but those working in the trenches often do not keep a clear track of responsibilities. Early work overlapping with later work is a common example of the kind of confusion that can arise. Parties that are contributing to one another’s work product should be sure that there is no misunderstanding as to the actual terms for the collaborative process. Keep in mind that routine and/or evolving relationships can lead to significant gaps in the clarity as to the performance of responsibilities when parties are in the middle of the work or relationship. Those gaps can often be filled by a reasonable and perhaps careful re-assessment of earlier negotiated language to specifically determine if any predecessor version is still in effect. A party might, for example, have assumed that the pre-relationship terms are still binding on the post-relationship operation, or that prior confusion as to the financial obligation has been resolved without the need for an express provision as to the matter in a new version. But "assumptions" about the intent of a party often hurt both parties, and are not a clear defense against a claim of breach of contract. After all, a court may very well hold the parties to an agreement, even an ambiguous one, to its literal terms. So if it lacks clarity as to any matters that are/should be reflected in written agreements, it may also lack enforceability on behalf of either party with respect to the scope of rights and responsibilities. But it will be binding on the parties to its literal terms. And, of course, once a breach occurs, the only question becomes one of damages – both because a defendant’s liability is often capped by whatever limitations are contained in the contract, but also because causation becomes an issue and a disputed conclusion as to which party’s breach may or may not have caused the losses. In other words, it is essential for the parties to plan carefully, even at an operational level, to decide how the parties can work together efficiently and effectively, and without misunderstandings of basic responsibilities, particularly where the actual language of a prior version is ambiguous as to the issue.