Terminology Relating to Obligations

I’ve been working on my preferred wording for recurring components of M&A contracts, such as the conditions to closing. This task has forced me to decide what terminology I wish to use in connection with obligations.

“Obligation” Versus “Covenant”

Let’s start with the word obligation itself. Why not use covenant instead?

Black’s Law Dictionary defines obligation as follows: “A formal, binding agreement or acknowledgment of a liability to pay a certain amount or to do a certain thing for a particular person or set of persons; esp., a duty arising by contract.” And it defines covenant as “A formal agreement or promise, usu. in a contract.”

As such, covenant would seem to be a synonym of obligation, and an archaic one at that—it has a quaint Old Testament (or Raiders of the Lost Ark) quality to it. (Mellinkoff’s Dictionary of American Legal Usage says that covenant is “An old synonym for contract and agreement.”) When given a choice between the archaic and the more modern, I’ll always go for the more modern.

In my experience, corporate lawyers generally use obligation and covenant interchangeably, except that many use only covenant when referring to obligations that are grouped together in a contract and that address how a given party is to conduct itself between signing and closing, while a debt remains outstanding, or in some other context. I don’t see any need to switch from one word to the other depending on where I am in a contract or the kind of obligation involved. I stick with obligation throughout.

Outside of a contract, many corporate lawyers use covenant in terms of art such as covenant not to compete. While I’m not inclined to get worked up about extracontractual jargon, for my part I might use noncompetition provision rather than covenant not to compete.

Covenant often occurs in the phrases affirmative covenant and negative covenant, meaning an obligation to do something and an obligation not to do something. By contrast, one doesn’t refer to an affirmative obligation or negative obligation, or at least Black’s doesn’t have an entry for those terms. But they would seem perfectly good alternatives.

But a broader question is whether in a contract any purpose is served by distinguishing between affirmative and negative obligations. I don’t feel any need to do so.

“Obligation” and “Prohibition”

In MSCD, I include among the categories of contract language “language of obligation” and “language of prohibition.” But for the same reason that I don’t use affirmative obligation and negative obligation in contracts, I don’t think that any benefit would come from using in a contract both obligations and prohibitions.

“Obligation” Versus “Duty”

The Black’s definition of obligation suggests that it means the same thing as duty. But I don’t feel inclined to switch to duty, even though it’s a shorter word. Because obligation works fine and is the more prevalent word, little would be gained by abandoning it in favor of duty.

“Perform” and its Alternatives

I used to say that a party performs an obligation. (The noun form is performance.) But I’m wavering. An obligation includes a duty not to do something, so perform would have to encompass sitting on your hands. That might be a stretch.

At the drafting workshop I held in Toronto earlier this week under the auspices of Osgoode Professional Development, I invited participants to suggest alternatives. One candidate was discharge an obligation. It would seem a plausible candidate: Black’s defines the noun discharge as “Any method by which a legal duty is extinguished; esp., the payment of a debt or satisfaction of some other obligation.” But it’s a rather specialized word.

Another suggestion was fulfill an obligation. The American Heritage Dictionary gives as a definition of fulfill “To carry out (an order, for example).” So fulfill, too, would seem to work.

But my current favorite is comply with an obligation. Sure, it’s a word longer than the alternatives, but I think it’s the most straightforward option. What do you think?

One thing I wouldn’t do is use two or more of the above alternatives.

“Breach” and its Alternatives

I refer to breach of an obligation. I prefer it to the more dramatic violation.

One could use the negative form of perform and its alternatives, but that seems a roundabout way of expressing the same meaning.

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.