Home Contract drafting Drafting obligations clauses: an overview

Drafting obligations clauses: an overview

December 23, 2024

This article has been written by Prachi Kumari pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution course from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Table of Contents

Introduction

In any contract, an obligation clause is a very integral part of it. An obligation clause is a legal obligation in a contract which sets out the legal duty upon parties involved in a contract that they themselves agreed on a contract to perform. It makes a party involved in a contract abide by agreed-upon-specified terms and conditions.

Obligation clauses differ from contract to contract according to the subject matter of the contract and parties involved in a contract’s intentions of usage of contract. The obligations are legally binding on parties related to various aspects according to the contract of subject matter. It protects the interests of the parties.

Contractual obligation clause

A contractual obligation is a legal clause that, in any given contract, all individuals or any institution guarantee accountability and performance. This also ensures the responsibilities for delivering or performing the obligations and failure to do so raises the legal consequences .

Contractual obligations act as formal promises by the parties which bind the involved parties to their commitments, ensuring they fulfil their end of bargain.

The parties should understand the contract obligations in a sense which they meant to be. Any ambiguity or vagueness related to contractual obligations can arise in disputes and can make a contract invalidate in the eyes of law which means it can make a contract not legally enforceable.

Types of contractual obligations clause

In the obligations clause, the following are common types of obligations that can be mentioned while drafting the business contracts of the obligation clause but this is not an exhaustive list of types of obligations clauses, and this differs from contract to contract according to the subject matter of contact and intention of parties involved:

Payment obligations- Businesses have obligations of payment for goods and services rendered, like payment for raw materials and payment for rented business premises.
Quality and performance standards- Businesses that promise quality and product performance standards are obligated to provide quality and performance standards.
Confidentiality- In some contracts, the company wants to maintain the confidentiality of products in order to maintain its trade secret and parties’ private information. It can either be included in the obligation clause itself or in a situation where parties want to give more emphasis on this clause, then the confidentiality clause can be drafted independently in the contract. Confidentiality obligation clauses can also include non-disclosure obligation clauses or if parties want, they can make separate non-disclosure obligation clauses.
Indemnity and liability- Businesses are liable to indemnify the other party to compensate where they agreed on contract to compensate losses in cases of breach of contract or other specified situations.
Responsibilities- In obligation clauses, it is important to clarify the responsibilities of each party involved in contract and those obligations are binding in nature on them and obligation clauses make the contract enforceable in law.

Points to remember while drafting obligation clause

Following are the points that need to be remembered while drafting an obligation clause:

Clarity and precision- Ensure the obligation clauses are drafted with clarity and precision to avoid the ambiguity and vagueness and misinterpretation of the clause helps to avoid the disputes arising out of it.
Tailored approach- Ensures the obligation clause should be drafted as a tailored approach to reflect specific needs, objectives and circumstances of parties involved in the contract.
Legal review- It is advisable to take legal review and guidance when drafting obligation clauses because it can provide legal insights, identify potential risks and ensure compliance with required legal requirements.

Consequences of breach of contractual obligations

Specific performance: Is a consequence in case of breach of contract’s obligations clause where a party compels the breaching party (the party who breached the contract) to fulfil their obligations as specified in a contract.
Rescission and restitution: Recession involves cancelling the contract and returning the parties to their pre-contract position and restitution aims to restore any benefits or payments provided under the contract.
Liquidated damages: In some contracts, the parties may include a provision specifying the predetermined amount of damages to be paid in case of breach known as liquidated damages.

Some examples of obligation clause

The following are some examples of obligation clauses that, while drafting, are necessary to mention in specific agreements and contracts:

Rental agreement

While drafting the obligation clause of the rental agreement, it should contain the following specifications and obligations, such as:

Specific duties and responsibilities

This obligation clause of a rental agreement should specify that both parties involved have their specific duties and responsibilities, like keeping the property of rental property in good condition and providing basic amenities during the rental period within the rental property, and these are paid by the tenant during their tenancy, etc.

Rent payment Details

In this obligation clause of the rental agreement, it is mentioned that both parties agreed on rent payment details, i.e., fixed amount of rent, mode of payment, date of payment, installment system of payment (if parties wish) and fines in case of late payment of rent.

Compliance with Rules and Regulations

The rental agreement should contain specific rules and regulations, i.e., subletting, operating business activities, and making changes to premises without the permission of the landlord. Tenants are obligated to comply with rules and regulations.

Respect for neighbours and property

It is important mentioned in the obligation clause of the rental agreement to make the tenants obligated to respectful behaviour towards neighbours and maintaining a peaceful environment and to tenants are obligated to not indulge in any activities that may cause damage to rental property.

Partnership contracts

While drafting the obligation clause of the partnership contract, it is important to mention the following obligations, such as:

Obligations to partners give their contributions

In the obligation clause of the partnership contract, it is important to disclose that the parties are obligated to give contributions for everything that they are promised to perform during the partnership.

Obligation not to engage in unfair competition with his own firm

In the obligation clause of a contract, it is important to mention that partners are obligated not to engage in unfair competition with their own firms.

Obligation not to convert money or property of partnership for his own use

In the obligation clause of a partnership contract, it is important to mention that partners are obligated not to convert money or property of the partnership for their own use.

Obligation to pay for damages caused by his fault

In the obligation clause of a partnership contract, it is important to mention that partners are obligated to pay for damages caused by his fault.

As mentioned above, examples of obligations can be mentioned in the obligation clause of a partnership contract and rental agreement. Obligations in the obligations clause of a contract are different from the subject matter of the contract or the parties intentions from the contract.

Conclusion

In any contract, obligation clauses are an integral part of it. Obligation clauses are determined and ensure accountability and performance of parties involved in a contract. Obligation is a legal duty conferred by contract to be contract legally enforceable. To draft the obligation clause, it needs to be drafted with clarity and precision, a tailored approach and legal review. Consequences of breach of contractual obligation clause can lead to recession or restitution of contract. Parties may need to perform specific performances as parties are compelled to perform or may have to liquidate damages. Obligation clauses are drafted obligation clauses according to the nature of contract or agreement, i.e., the rental agreement obligation clause consists of specific duties and responsibilities of tenant and landlord, rent payment details, compliance with rules and regulations, respect for neighbours and rented property, etc. The partnership contract obligations clause are for partners related obligations, such as they can’t engage in unfair competition with his own firm, not convert money or property of the firm to their own use and pay damages for his own fault, etc.