Contracts are an essential element of doing business — they serve to protect your company’s interests, define clear terms to your agreements with partners and clients, and outline the obligations of each contracting side.
But what are contractual obligations, exactly?
In short, contractual obligations are promises or commitments codified in a contract.
So, by signing a contract, all parties agree to respect and fulfill their contractual obligations.
In this article, we’ll explain the details of what contractual obligations are, look at different types of obligations, discuss how to handle a breach of contract, and also (and perhaps most importantly) provide you with a framework for managing contractual obligations the right way.
Contractual obligations are the contract terms that all parties commit to.
They’re the backbone of any contract; by spelling them out clearly, you’re making sure you can best prevent disputes and resolve issues swiftly.
There are many types of contractual obligations and they cover a vast array of commitments concerning:
Contractual obligations are legally binding, meaning that if one side fails to fulfill their end of the deal, the other side can take legal action — which, as you can imagine, can be extremely costly and damaging for businesses.
In the US, litigation costs have been constantly on the rise between 2015 and 2021, reaching $23.71 billion in 2021.
This means it’s essential for every business to define precisely the scope of their responsibilities for each contract they’re signing.
To have a contractual obligation, the contracting parties need a valid contract.
But what exactly makes a contract valid, you might be wondering?
There are a number of elements that a contract must contain to be considered valid:
While contracts can be either verbal or written, it’s certainly a good practice to put everything in writing to make sure that both sides share a common understanding of their contractual obligations and a document they can refer to.
Obviously, counting on your memory is problematic in business relationships.
The best way to manage your contract process and create legally valid contracts is by using a dedicated contract management platform like PandaDoc.
Doing so enables you to:
If you’re having trouble navigating all the contracts of your company and staying on top of your contractual obligations, you can schedule a quick 15-minute demo with PandaDoc today and see for yourself how much easier contract management can be.
There are many types of contractual obligations but what unites them all is that they’re up for discussion between the parties involved — and that those obligations should be unambiguously stated in the contract.
The best way to do this (and therefore to protect your interests) is to use contract templates that are adapted to your needs and all use case scenarios you’re dealing with.
PandaDoc has hundreds of those to help you manage all obligations and make sure they’re always explicitly defined in each contract.
Let’s look at some of the most common types of contractual obligations.
You need to make sure that everything related to the delivery is clearly spelled out. This includes:
In case either party needs to meet specific conditions for the delivery to take place (for example, an upfront payment), you should also state this in the contract.
Ah, payment terms!
Obviously, payment terms are crucial for the smooth execution of a contract.
They might vary depending on the type of agreement, the industry, and the parties’ policies — but in all cases, you need to spell them out.
Here are some common payment terms you might find in contracts:
Additionally, payment terms may vary based on when the payment is actually due:
Performance obligations are the specific commitments of one party to the other in terms of the execution and delivery of the product or service.
To avoid disappointment and disputes, it’s crucial that all performance obligations you’re agreeing to are feasible, achievable, and realistic.
Make sure that during the negotiation process you discuss all risks and uncertainties that might impact the delivery, including specific details and requirements you need from the other side — and outline them in the contract, if necessary.
Outlining specific terms for penalties and refunds (in the case of non-fulfillment of a contractual obligation, for example) might sound risky; after all, why imply that things might not always go well when working with a client or partner?
However, having a specific penalty and refund clause protects you from costly (and lengthy) disputes and protects both parties in case things go awry.
Let’s face it: Late payments and missed deadlines do happen and it’s better to be prepared than to extinguish fires.
Contracts aren’t forever, but you need to make sure you can end them the right way. How? By defining the termination terms. And more specifically:
A non-compete obligation is a commitment to not compete with the other party; in the case of employment contracts, non-compete obligations might involve not working for a competitor in a given area, industry, or within a specific timeframe (although the US Federal Trade Commission is proposing to ban such clauses).
Non-disclosure obligations refer to the promise to not disclose confidential business information and are usually time-bound.
Regardless of how well a contract is thought out, formulated, and negotiated, sometimes, the unthinkable might happen: One or both sides might sometimes fail to meet their obligations.
If you cannot fulfill your contractual commitment, there are a few things you can do to limit the level of damage, first to your partnership and then to your reputation.
It’s a good idea to have a strategy for navigating such a scenario before it actually happens.
If you’re the non-breaching party, you need to decide on a plan to control damage. Here are some of the steps you can take:
Regardless of who the breaching party is, if you’re armed with the right platform for contract lifecycle management (like PandaDoc), negotiating a solution becomes much easier. Here’s why:
As you can already see, understanding your contractual obligations and making sure the contracts you sign are valid is key for any business out there.
Now, we’ll discuss in more detail the ways you can leverage PandaDoc to make the contract management process simpler and with fewer undesirable surprises.
Do you need to draft a contract for a new type of deal but have no idea where to start?
Contract templates to the rescue! In our library, we have dozens of contracts you can use for free, ranging from a sales representative contract template to a videography contract template, a consulting contract template, and many more.
Contract templates are the easiest way to start instilling order into your future deals, and, as you can tell from the above examples, ours contain plenty of useful tips on how to best protect your interests.
Contract terms are up for negotiation between all parties involved — but to be able to negotiate contract obligations efficiently, you need to have an efficient negotiation process.
With our platform, you can build a process that:
Long gone are the days where you needed to print out a contract, sign it, scan it, and email it back to the other side to do the same.
(And, in case you’re wondering: Yes, both parties need to sign a contract to make it legally binding.)
PandaDoc is also an e-signature software that enables you to boost the speed with which you can sign documents and collect signatures anywhere, anytime.
Plus, it also improves the security of your contracts (both in terms of legal security and in terms of encryption).
Searching for software for hassle-free eSigning?
Above, we discussed the different elements that make contracts legally binding.
But how do you ensure that in practice? Here’s how:
To stay on top of all the commitments of your business, you need to meticulously keep track of all contracts and store them in a single location.
This makes it easier to manage delivery terms, expiration dates, payment terms, and all other obligations.
PandaDoc seamlessly integrates with the most popular CRM systems out there, including Salesforce, Zendesk Sell, HubSpot CRM, and more, which makes it super easy to coordinate the work of multiple departments and also keep track of everything in one place.
Clearly defining when contracts are to be renewed or when they expire are important for a few reasons, as they:
PandaDoc can help with this, too: You can create draft contracts with pre-defined renewal or expiry terms that are in line with the policies of your organization in minutes.
This way, you’ll make sure you’ll never forget to add a renewal clause to your contract.
Don’t be caught off guard by expiring contracts — allow for plenty of time for renegotiation by setting automated expiration reminders.
There are two ways to do this:
Managing your contractual obligations the right way is crucial for your operations.
But with the growing volume of contracts that companies need to handle nowadays, this can prove to be a challenging task if you don’t have the right tools at hand.
Contract management software like PandaDoc is essential if you want to:
All of this helps you reduce the risk of misunderstandings, disputes, penalties, or litigation.
What are the next steps?
Start your 14-day free trial or sign up for a demo to see for yourself how much easier it can be to handle contracts — and no longer have to deal with endless email threads or (metaphorical) piles of paperwork.
PandDoc is not a law firm, or a substitute for an attorney or law firm. This page is not intended to and does not provide legal advice. Should you have legal questions on the validity of e-signatures or digital signatures and the enforceability thereof, please consult with an attorney or law firm. Use of PandaDocs services are governed by our Terms of Use and Privacy Policy.
Olga Asheychik Senior Web Analytics Manager at PandaDoc
Olga is a Senior Web Analytics Manager at PandaDoc who has been working in the Digital Marketing field for the past 15 years. Olga had roles driving marketing campaigns in document automation, contracts, invoices, and agreements. In her daily life, she is a big fan of traveling and connecting with new people.
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