The entire purpose of a contract is to outline the rights and obligations of each party entering into a mutual, legally binding agreement.
But simply drafting up the document and signing it doesn’t automatically ensure that those obligations will be fulfilled.
As a party to a contract, it's your job to ensure that you live up to the obligations you agreed to. If you fail to do so, you could put your organization at risk of financial and legal consequences that were otherwise avoidable.
To help protect you against this, we created this comprehensive guide to tracking contract obligations. Here’s what we’ll cover:
- What is a contract obligation?
- What happens if you miss a contractual obligation?
- How do you manage contract obligations?
- What is obligation tracking?
- 5 tips for tracking contract obligations
What is a contract obligation?
A contract obligation is any responsibility you have related to a given agreement.
These obligations are enforceable by law (assuming the contract is legally binding), and contracting parties that don’t fulfill their contractual obligations may be subject to legal consequences.
Contract obligations can include the primary terms of the contract, such as the delivery of or payment for goods and services, but they can also cover the avoidance of certain acts, such as a non-disclosure clause.
Some common examples of contract obligations include the following:
- Compliance terms
- Requirements for data encryption and privacy standards
- A background check prior to engagement
- Payment terms (such as payment being due on the 20th of the month)
- Requirement for a certificate of insurance
- Invoicing terms
- Terms related to refunds, penalties, and credits
- Termination notice periods
- Restrictive covenants
- The publication of uptime availability
- Service level commitments (such as customer support team response times)
What happens if you miss a contractual obligation?
So, if you don’t have a strong contract obligation management process, what kinds of consequences could you face?
#1 Accidental auto-renewals
Failure to track an automatic renewal obligation could lead to contracts being in place for longer than expected or desired.
Here’s a common example:
A sales team leader with a corporate credit card signs up for a sales software tool on an annual subscription. The platform never gets implemented into team use and is eventually forgotten about.
The employee later leaves the company, and nobody is aware of the existing contract, which has an auto-renewal clause. That contract will continue renewing until someone is made aware of the obligation, and the company will continue paying for a subscription they aren’t using.
#2 Delivery and compensation errors
Without understanding the true extent of your contractual obligations, you’re at risk of the following:
- Not providing a service to a client in a timely manner
- Not meeting quality requirements in the final delivery
- Not collecting payment for a client correctly or expediently
#3 Unenforced financial obligations
Many contracts have clauses built in that relate to penalties and additional fees for exceeded thresholds or additional services. As a service provider, failure to track and enforce these obligations essentially equals lost revenue.
#4 Legal consequences
In the most extreme and threatening of cases, failure to track and live up to your obligations under a legally binding agreement could result in legal consequences.
The other party could take you to court for a breach of contract, where you may be required to pay penalties or compensatory damages.
What is obligation tracking?
The practice of keeping on top of your company’s various contractual obligations is known as obligation tracking.
As a process, here’s what it involves:
- Breaking down an agreement into specific, actionable obligations
- Determining who in your organization is responsible for fulfilling obligations
- Creating a strategy and plan for obligation fulfillment
- Setting automated reminders to ensure obligations are met
- Tracking and reporting on obligation fulfillment
While this process can be entirely manual, an obligation tracking process without the use of modern tools is, in large part, an unnecessary waste of time.
Consider, for example, the first step: Breaking down an agreement into specific, actionable obligations.
Corporate agreements can be hundreds of pages in length, meaning this is a time-consuming and costly exercise, even if you outsource it to a junior or paralegal.
But with a tool like SpotDraft’s VerifAI, an AI-powered contract review tool accessible as a Microsoft Word Add-In, you’ll vastly speed up this review process and easily surface your most important contractual obligations.
5 tips for tracking contract obligations
Looking to improve your contract obligation management? Implement these five best practices for dramatic improvements.
#1 Centralize contract management
Your first step is to ensure that all of your contracts are stored and managed in a centralized location.
A contract lifecycle management platform is your partner here.
These tools act as a contract repository where all documents are stored and can help you digitize physical documents to ensure all contract data is in a single location.
The most advanced tools can surface key insights about contract obligations, such as expiry and renewal dates or licensing and certification requirements. You’ll also be able to create contract templates and utilize a pre-approved clause library to standardize obligations across standard-term agreements.
If you’re not working in a CLM tool, then a contract tracking and management spreadsheet is a workable free alternative.
For larger or more complex companies with more advanced contract needs, a contract management platform is a must-have.
Also read: 8 Top Contract Management Software Platforms
#2 Get clear on who owns contract obligations
Your next step is to determine who in your enterprise is actually responsible for fulfilling each contract obligation.
For example, if one of your obligations in a given agreement is to ensure publication of software uptime availability, who on your team is responsible for publishing this information?
In many cases, such as the above, it's not necessarily a legal team member who is responsible for the task at hand. As such, this is going to require a bit of inter-team collaboration.
“For legal GCs, everything is either in black or white, and they do not try to explain why a proposed roadmap or transaction might not happen. But, a business GC understands the nuances of the business and communicates solutions in a language that most stakeholders understand - business rationale (numbers, metrics, etc.).”
~ Sandeep Chowdhury, Group GC, HCC Ltd.
Enabling Business-Legal Collaboration: Advice from 7 GCs
#3 Schedule notifications in advance of obligations
Many contract obligations and required deliverables are time-sensitive, such as the payment of an invoice for services rendered.
To ensure contract compliance with due dates, it's a good idea to set up automated reminders to notify you before a given obligation is due.
This can be as simple as a reminder in your calendar, though your contract management system should provide automation support for such reminders (and may even be able to schedule them automatically).
#4 Utilize contract obligation audits
Even with the best contract management process, obligation compliance can occasionally slip through the cracks.
Obligation fulfillment tracking and automated reminders help, but in many cases, it still requires an actual human being to meet the requirement itself, and humans make mistakes.
Audits are an important part of effective contract administration, helping organizations double-check actual contract performance against obligations. Contract obligation audits also provide the basis for process improvements aimed at preventing missed obligations in the future.
#5 Deal with non-compliance quickly
Theoretically, between the obligation tracking you’ve set up in your CLM and the contract audit processes you’ve put in place, you’ll ensure that your company meets all of the obligations required under the contracts it holds.
If, however, you do spot a compliance issue, your best practice is to work to resolve it as quickly as possible.
Communication is key here.
Admit the error, resolve it quickly, and communicate with your client, supplier, employee, or business partner (i.e., the other party involved in the agreement) to prevent a contract dispute from becoming a major legal issue.
Track and manage contract obligations with SpotDraft
In every agreement you enter into, you’ll have a number of obligations that, under law, you’ll need to fulfill. Keeping track of timelines, contract clauses, and potential liability threats is vital for proper contract management.
Tools like our free, downloadable contract tracker can provide you with a beginning way of monitoring contracts:
For a more sophisticated and streamlined approach to meeting contract obligations and regulatory requirements, you’re going to want a dedicated contract lifecycle management platform.
Through key features, SpotDraft helps you maintain compliance with contractual obligations:
- Contract templates with pre-approved language from legal
- Automated approvals workflows
- Intelligent AI-powered contract drafting and reviews
- Real-time analytics and reporting on obligation fulfillment
Request a demo with the SpotDraft team today to learn more about how our AI-powered contract management solution can help you track, manage, and fulfill contract obligations.