[Updated 7:30 a.m. Eastern Time, 25 March 2022]
Today in a session of my online course Drafting Clearer Contracts: Masterclass, we found ourselves discussing the phrase except to the extent prohibited by law (and its variants). It’s used to modify obligations. Isn’t it redundant?, someone asked. If you don’t perform the obligation because to do so would be against the law, surely you can’t be found liable for nonperformance!
Leaving aside how that might be handled in civil law jurisdictions, in the United States a plaintiff damaged by such nonperformance might be able to recover damages from the nonperforming party. Here’s an extract of 5 Williston on Contracts § 12:6 (4th ed.), from a section entitled “Recovery by Innocent Plaintiffs” (footnotes omitted):
Although a mistake of law has often been held to preclude recovery by an innocent party to an illegal transaction, the maxim that everyone is presumed to know the law is far from universally true and numerous courts have questioned its continued vitality in today’s world. Indeed, it has been said that the rule is outdated, and that there is truly no presumption that all persons know the law. Rather, ignorance of the law will not generally excuse one from the consequences of his or her acts, such as punishment for a criminal offense; but when there is a mistake of law common to both parties, and the party injured can be relieved from her mistake without injustice to the other party, or the other party will be unjustly enriched at the expense of the injured party, relief will not be denied on the basis that “ignorance of the law is no excuse.” Numerous cases exist, for example, in which both parties to an illegal bargain are innocent, yet mistaken as to the law, and the courts have without hesitation permitted restitution; or, in some cases, as when a great forfeiture will otherwise result, have enforced the bargain. Similarly, when the plaintiff is ignorant of a particular rule of law, even though the ignorance is not excusable, the modern view, embodied in the Restatement Second, may permit enforcement of the defendant’s promise so long as the plaintiff has not acted in a seriously or deliberately illegal way. Whether the promise will be enforced will again depend on the balancing of interests, as discussed previously.
This is what I said when I first posted this: “So if the circumstances are such that performance might be found illegal, it would be prudent to deploy except to the extent prohibited by law, to reduce the odds of finding yourself sued someone claiming to be an innocent plaintiff.” But after sleeping on it, I’ve changed my mind, with the help of Daniel Guidotti’s comment.
Unlike some court systems, U.S. courts are pretty good about considering the overall circumstances. If someone contracted for performance but performance is found to be illegal in a manner that the performing party was in a much better position to be aware of, a court might ignore a perfunctory except to the extent prohibited by law.
This brings to mind the phrase as liquidated damages and not as a penalty. Well, if liquidated damages appear to be way in excess of any reasonable estimate of damages, a court might well treat it as a penalty, regardless of what the contract says. Courts are willing to look through empty slogans. Heck, Vice Chancellor Laster and I wrote an entire article about that, here.
A performing party should look into possible legal obstacles to its performing. If it’s aware of any such obstacles, it should make them known to the other party and have them acknowledge those potential obstacles in the contract. If you can address the issue head-on, do so.
If no issue exists, you don’t need to the extent prohibited by law. Saying it reflexively, regardless of whether you’re aware of any obstacles, would turn it into an annoying tick.
If the performing party has done some due diligence but a legal obstacle to performing does ultimately surface, evidence of that due diligence would protect the performing party better than would to the extent prohibited by law.
So you can do better than to the extent prohibited by law.
By the way, in his comment, Tim Hadley refers to the phrase to the fullest extent permitted by law. (The fullest is rhetorical emphasis, so you could safely remove it.) This phrase is the obverse of except to the extent prohibited by law—it focuses on what’s included instead of what excluded, but it serves the same function, whatever that’s worth.