What are Contract Obligations?

Whenever an agreement is signed, each party is agreeing to take responsibility for performing the actions outlined in it. These are called contract obligations.

One of the first steps of any contract review process should be to isolate the specific obligations it mandates and to make sure the parties understand them completely. Parties need to be able to identify exactly what the contract is asking them to do, how the work will be evaluated, and what will happen if they fail to comply with the obligations as written.

Below is a guide to better understand contract obligations.

This blog post is offered for general information purposes only. It does not constitute, and is not a substitute for, legal advice.

What are contract obligations?

Contract obligations could include various tasks, including completing or avoiding certain acts, making payments, delivering products or services, promises to provide certain information, complying with certain terms, passing background checks or other tests, and more.

When all parties sign an official contract, they are stating that they understand these obligations and accept responsibility for consequences specified if they fail to comply with them. 

Why is understanding contract obligations so important?

If you fail to properly understand your contract obligations, you are much more likely to fail to comply with them in the eyes of the other contract parties. 

If this happens, then you’ll either have to accept responsibility for the consequences of breaching your contract (which could include restitution to the injured parties) or you’ll have to prove that your misunderstanding was reasonable in court. Not only will this also cost you time and money, but if you fail to convince the court of your case, you’ll have to suffer the breach consequences anyway.

The best way to avoid failing to comply with your contract obligations is to understand them as thoroughly as possible before you sign. If you’re unable to understand or comply with any obligations at that point, you can decide how to proceed before you’re contractually bound.

How are contract obligations agreed upon?

Deciding on contract obligations is one of the main objectives of the contract generation and negotiation process. Before a contract can be successfully generated and finalized, all parties must negotiate terms they are willing to agree upon.

Negotiation of these terms usually focuses primarily on the contract obligations specified in the agreement. When buying a house, for example, you might negotiate the down payment you would provide toward purchasing the house or go back and forth on how much of the mortgage you have to pay at a time.

When do contract obligations come into effect?

Contracts should specify an effective date for each contract obligation that specifies when that obligation comes into effect. The effective dates for each of your contract obligations should be very clearly indicated so there’s no room for misunderstanding.

Depending on the nature of the agreement, all contract obligations in a contract may have the same effective date, or some may differ from others.

For example, in a payment contract for a service, the paying party may be obligated to pay some amount of the total cost of a project at a set date before work on that project begins. When the party being paid receives this payment, they may then become obligated to complete work by another effective date. 

What happens if contract obligations are not fulfilled?

Failing to complete a contract obligation is known as a breach of contract. Agreeing on what happens in the event of a breach of contract is another important part of the contract negotiation process.

Every contract obligation may carry the same penalty, or each obligation may carry its own.

In the service payment contract above, the parties could agree to quite a few different consequences for failure to comply. If the paying party does not muster the initial down payment on the work to be completed by the effective date, for example, the party providing the service could be released from the contract.

Carefully check the consequences of breaching a contract during your review process. If you feel these consequences are unclear or unfair, negotiate them before signing the contract.

By standardizing your contract generation and review processes, you can substantially reduce your risk of failing to comply with contract obligations.

Docusign IAM can help make this standardization happen. Get in touch with our team to learn more.