“Applicable Law” Refers to the Law at What Date?

Thanks to Jeff Ammon of the Michigan law firm Miller Johnson, I learned of the Sixth Circuit’s recent opinion in Kia Motors America, Inc. v. Glassman Oldsmobile Saab Hyundai, Inc. (copy here).

Kia’s dealer contract with Glassman specified that “As permitted by applicable law, [Kia] may add new dealers to, relocate dealers into or remove dealers from the [Area of Primary Responsibility] assigned to [Glassman].” Here’s how the court described the dispute (citation omitted):

Kia’s right to establish a new dealer in Glassman’s vicinity is unrestricted by the Agreement, but it is restricted by an anti-encroachment provision in the [Michican Motor Dealers Act]. This provision requires a car manufacturer to give notice to an existing dealer before establishing a new dealer in the same vicinity. … When Kia and Glassman signed the Agreement in 1998, the “relevant market area” was defined as the area within 6 miles of the proposed new dealer. However, on August 4, 2010, the Act was amended to extend the distance to 9 miles.

Sixteen days after the 2010 Amendment became effective, Kia informed Glassman that it intended to establish a new dealer in Troy, Michigan. The new dealer would be located about 7 miles from Glassman’s location (thus falling within the “relevant market area” under the 2010 Amendment, but outside the “relevant market area” when the Agreement was signed in 1998). When Glassman protested that it was entitled to notice under the Act, Kia filed a declaratory judgment action in the United States District Court for the Eastern District of Michigan. Kia sought a declaration that the 2010 Amendment did not require it to give notice to Glassman and did not give Glassman the right to protest the new dealer. Glassman filed a counter-complaint asking for the opposite declaration.

The district court granted Kia’s motions and denied Glassman’s motions. It concluded that when the parties used the term “applicable law” when referring to Kia’s right to establish a new dealer in Glassman’s Area of Primary Responsibility, they meant the law in effect in 1998 and did not intend to incorporate future changes in the law.

The Sixth Circuit affirmed. I don’t find its rationale convincing, but that’s irrelevant for our purposes. Instead, the question is, as usual, what might the drafter have done differently?

I pointed Jeff toward the discussion of as amended in MSCD 13.33–39, a rough version of which can be found in this 2007 post. Although it’s couched in terms of specific statutes, it applies equally to a vague reference to “applicable law.” (I’ll make that point in the fourth edition!) It concludes with the following recommendation:

So when in a contract you’re referring to an element of a statute or another contract, make it clear whether you’re referring to the statute or the other contract as in effect on the date of the contract you’re drafting or as in effect at any time in the future.

It also suggests that to express the second of those two meanings, you’d be better off saying as in effect at any time instead of tacking on as amended. [Update: But see my exchange with Vance in the comments.]

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.