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.
I am curious why Ken concludes that “obligation” means the same thing as “duty.”
Black’s Dictionary (8th edition) defines “obligation” as “A legal *or moral* duty to do or not do something” (emphasis added). It defines “duty” as “A legal obligation that is owed or due to another and that needs to be satisfied; an obligation for which somebody else has a corresponding right. ”
Those definitions strike me as different. “Obligation” is the broader term because it includes a moral component. This may not matter much in an M & A contract, but I could see it making a different in other contracts. (Family law comes first to mind.)
Maybe Ken means to include moral, as well as legal, duties in his M&A contracts.
Bryan: As is the case with many legal terms, the meaning of “obligation” shifts depending on context. I’m very comfortable that for purposes of contracts, “obligation” means the same thing as “duty.” Ken
Whereas one usually “makes” a covenant, what verb should a drafter use to indicate the creation of an obligation? I have been using “undertake,” but I am not entirely satisfied with it and would appreciate hearing what others prefer.
Bryan: One “assumes” an obligation. Does that work for you? Ken
Whether it works would depend largely on the context. I initially rejected “assume” because assuming an obligation sounds to me like the obligation already existed. I might assume an obligation that was created by my assignor or predecessor. Undertaking an obligation sounds to my ear more like I am creating the obligation.
Bryan: I agree that it’s not helpful to discuss this sort of issue without considering actual examples. Could you provide one (or some)? Ken
Sure. I use “assume” in two boilerplate provisions, one dealing with delegation and the other dealing with indemnities. The delegation clause has a condition that the delegate deliver a notice that it “assumes” responsibility for any obligations delegated to it. The indemnities provision requires the indemnitor to give notice under certain circumstances that it elects to “assume” control of the defense of a claim. But I also have a boilerplate representation in which one party represents to the other that it has the power to enter into the agreement, to delegate the authority that it has delegated, and to comply with the obligations that it has “undertaken.” Perhaps it is splitting hairs too finely, but it seems to me that using “assumed” in the representation would be using a single word to convey two meanings.
Bryan: I agree that assumption suggests that that which is being assumed already exists. So I wouldn’t use “assume” to convey the notion that a party to an agreement has an obligation under that agreement. I don’t think that should be a problem: in your boilerplate example, I’d just refer to the party’s “obligations under that agreement.” Ken