Definition of Obligation in Business Law
The definition of obligation in business law refers to contract laws that require a party to either do something or keep from doing something.3 min read
The definition of obligation in business law refers to contract laws that require a party to either do something or keep from doing something. One example is the obligation to repay a mortgage loan when you buy a house. Most contracts have a penalty associated with failure to fulfill an obligation. Performance requirements are another example of a legal obligation.
Examples of Business Obligation
In addition to the business obligations described above, examples of legal business obligations include:
- Filing requirements with the Securities and Exchange Commission (SEC).
- Requirements for a board of directors to pay a specified sum to executives if a certain event occurs.
- The obligation of a lender to charge an agreed-upon interest rate even if a higher interest rate eventually becomes available.
When a person feels responsible for doing something based on his or her perceptions of right and wrong, this is called a moral obligation. It can arrive from justice, duty, equity, or ethical motives and is not connected with a legal obligation or with receipt of an item of value. It is not a duty completed because of charitable or beneficial intentions.
While some believe that businesses should have an obligation to act in a moral or ethical way, others believe that they should primarily exist to maximize profits within the boundaries of the law. Regardless, many business activities require moral consideration. Small businesses owners must understand how legal and moral obligations interact with one another.
Those who exist in a society are morally obligated to follow its rules, just as those in the business world must operate by its established moral tenets. In many cases, these tenets have actually been made into laws, such as in the case of a business contract.
Although some businesses ignore moral obligation, heeding morality is an important part of running an ethical, trustworthy business. Entrepreneurs should strive to follow business ethics that mirror their personal ethics, such as standing by promises even when no legally enforceable contract exists.
If a person promises to pay a debt when he or she is not required to do so, this is considered a moral duty and becomes legally enforceable. For example, a contract signed by a minor is not legally valid until he or she turns 18 and promises to fulfill it, even though he or she does not have to do so.
This also applies to a contract with unfair terms if both parties have agreed to it, though one or both may have a moral obligation to refuse a contract that is very unbalanced. Business owners also have a moral obligation to avoid entering contracts that exploit those with disabilities, language barriers, or illiteracy or contracts that require you to bribe someone else.
Mutuality of Obligation
When mutual obligation does not exist, the contract has often been found invalid under Florida case law. For example, in Law-Yue vs. Miami River, LLC, the court found that a condo developer had to return the buyers' deposit because they properly ended the contract.
However, the contract included specific provisions that gave the developer complete discretion about the building. Thus, the contract did not include mutual obligation and could not be legally enforced. Any contract in which return of the deposit is the party's only recourse lacks mutuality of obligation. The court tends to discard provisions to this effect as unenforceable and allow buyers to pursue all legal remedies for contract breach.
Unconscionable contracts also lack mutual obligation. The contract in question must be both procedurally unconscionable, which is associated with the parties' ability to understand the contract and negotiate, and substantively unconscionable, which means that the contract is incredibly and dramatically one-sided. The latter is usually immediately clear to anyone who reviews the contract.
If you buy a property owned by the bank and the bank attempts to add a contract clause indicating that it can accept another offer on the home at any time by returning the deposit. Because this contract lacks mutual obligation, it is invalid and can be canceled by either party at any time for any reason. However, you may require the support of an attorney.
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