Obligations — they obligate an entity to perform an action. In the context of law and contracts a party to a contract has an obligation under the terms of the contract. Violation of the terms of the contract typically incurs penalties.

In this article I sketch out a path from zero contract management, to real-time visibility into your obligations.

verb (used with object),ob·li·gat·ed, ob·li·gat·ing.

  1. to bind or oblige morally or legally: to obligate oneself to purchase a building.
  2. to pledge, commit, or bind (funds, property, etc.) to meet an obligation. 

adjective

  1. morally or legally bound; obliged; constrained. 
  2. necessary; essential.
https://www.dictionary.com/browse/obligate

Thomson Reuters defines a Legal Obligation as:

“A term describing a moral or legal duty to perform or not perform an action that is enforced by a court of law.”

The Thomson Reuters Practical Law database lists over 500 types of contract clauses that create obligations, for example,

“Sale contracts: seller’s insurance obligation: A clause for use in a contract for the sale of residential freehold land that requires the seller to continue insuring the property until completion.”

Or, another example,

“End-of-life software sunset clause: A clause for use in a business-to-business context setting out, at the customer’s option, a process to either replace software which has reached the end of its life, or to provide revised terms for its continued use. This clause is intended for use within a software licensing agreement or an agreement for ongoing maintenance services and provides drafting to govern the replacement or the phasing out of part of the software within an overall supported system. The clause could also be used to supplement provisions dealing with exit management.”

A Force Majeure clause (made infamous by Covid!) suspends (and may end) performance of obligations where a party is prevented from performing by events outside its control.

The essence of defining obligations is to define a business relationship, referencing defined risks, and to manage those risks within the context of achieving a desirable business outcome.

Obligations take the form of behavioural business rules (also see Deontic Logic). Behavioural business rules can be violated, and violations typically imply some form of penalty.

When we express obligations they often take the form of:

  • X must be true after Y
    • On signature you must pay $1,000
  • X must be true before Y
    • You must have house insurance in place before signature
  • X must be performed after Y
    • On receipts of the goods you have 30 days to inspect them and to notify if they are faulty
  • Every X days, Y must be performed
    • A loan repayment must be made on the 1st of the month, until 1st January 2025
  • If X is not performed, then Y
    • Failure to submit expense reports within 3 months of the expense will cause the expense report to be rejected

So, quite complex multi-party stateful interactions, that deal with events occurring in the real-world, as well as the non-occurrence of events.

Obligation Management

The dream for large companies is to be able to see, in real-time, all their important obligations and to have systems that notifying executives/operators when actions need to occur required to fulfil contractual obligations, and in some circumstances automating the fulfilment of the obligations (for example, by making a payment, or sending a notification). On the counter-party side of the contract the system should continuously monitor whether the counter-party has fulfilled their obligations and whether penalties are due.

The inability to solve this problem (at scale) costs large enterprises $$$ in both penalties that they have to pay, as well as penalties that they’ve not recouped.

Challenges

There are multiple challenges to putting in place robust obligation management:

  1. Obligations are semantically complex. There may be some underlying structure that can be exploited, but ultimately they are expressed in terms of time, space, occurrence and non-occurrence of distributed events, trusted communication between (dis)trusting parties. It’s never going to be trivial!
  2. Contract text is sometimes not clear on under exactly what circumstances there are obligations. Sometimes this is intentional, sometimes it is sloppy drafting.
  3. It is easy to confuse a class of obligation, with an instance, that is to say contract text typically defines a business process, but when an obligation comes into effect we are dealing with an instance of the process. For example, the contract text says that upon signature of the loan the Borrower must repay the loan on the 1st of every month, for 24 months. That defines the class of the obligation, which instantiates 24 discrete loan repayment obligations, one for each specific month. Violating any of them will incur a penalty specific to that violation. Violations may even compound or escalate…
  4. To manage obligations one needs to understand events in the real-world; correlating these events with the contractual logic to understand real-time obligations. Most enterprises have a fragmented and very partial view of the events in the real-world that impacts their contracts. Their IoT platform is rarely integrated with Contract Lifecycle Management, for example.

Ways Forward

As they say, “the perfect is the enemy of the good!” and there is incremental value in starting this journey. Let’s break it down into discrete phases:

Contract Management

The journey starts here. If you don’t even know what contracts you’ve signed and with whom, then all bets are off when it comes to obligations! This implies some sort of centralised contract repository or Contract Lifecycle Management system.

Clause Management

Once you are managing your contracts you will quickly see that it is actually the clauses within the contracts that create obligations. There’s enormous value in being able to identify these “obligation creating clauses” — whether they are coming in on 3rd-party paper or being assembled on your own paper. There’s a significant role for AI/NLP/ML/LLM here.

Obligation Class Management

You are now in a position to associate legal text (clauses) with classes of obligations. Allowing you to, for example, understand that you have a general obligation to notify Acme Corp. every quarter with your predicted order size for quarter+N.

Reporting and Dashboards

There’s now value in surfacing obligation class data to internal stakeholders, giving them visibility into all the contracts, parties and classes of obligations being managed. They won’t get real-time visibility into the actual obligations without manually correlating the obligation classes with external events, but there’s still value to be gained in helping to pilot the enterprise and to understand risks.

Event-Driven Enterprise

Before we can move onto managing obligation instances we need to do some enterprise-level work on how events are represented, centralised and communicated across internal systems. For some event types this may be trivial (e.g. DocuSign has a very nice Connect web hook to notify you when a contract has been signed), for others it will require detailed work to gain access to new data sources, or even to put in place additional event capture solutions.

Obligation Fulfilment Automation

Some level of obligation fulfilment automation is desirable, even if it is limited to notifying stakeholders 7 days before an obligation is due. It can, of course, go much further, automating payments, or sending notifications to external parties. An automation platform strategy is required, ideally with a no-code or low-code capability such that business stakeholders can define obligation fulfilment automation workflows.

Trusted Party Data Exchange

This may be a stretch goal in some circumstances, but it is useful to start to sketch the strategy for how trusted automated messages are exchanged with contractual counter-parties, and how to share contract state securely, without exposing internal/private details to the counter-party. Blockchain has been touted as a solution here, now Zero-Knowledge-Proofs are in vogue, but good-old RESTful APIs, client-side certs and encryption, shared databases, or EDI may even be an option.

Obligation Instance Management

Put elements of the above in place and you are walking into the promised land: the ability to see in real-time the state of all your contracts, and their obligations, and to selectively automate obligation fulfilment, or automate notification of non-compliance to your counter-parties. 

Conclusion

Remember, be pragmatic. You don’t need to boil the ocean! Focus on a few key obligations/contracts and automations. 

Define your goals and get started!