[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 Indeed, it has been said that the rule is outdated, and that there is truly no presumption that all persons know the law.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.
I haven’t used that exact wording, but “to the fullest extent permitted by law” is often used in indemnification clauses and releases, especially in construction contracts.
Many states have statutes that limit indemnification obligations in construction contracts, and some of them provide that an overbroad indemnification clause is void. The parties don’t usually intend an overbroad indemnification clause to be entirely disregarded; rather, they just expect it to be narrowed. So, lawyers sometimes insert “to the fullest extent permitted by law” in their indemnification clauses, and sometimes also add provisions specifically asking courts to narrow the indemnification clause if necessary to make it enforceable. However, courts in some states still won’t do that–for example, I think I once read a North Carolina opinion stating that courts could disregard an unlawful provision but could not substitute another enforceable provision in its place.
The best practice, of course, is to actually read the law and (if there are any) cases and to tailor the indemnification clause to fit the applicable limitations. Some publishers of contract forms, like the American Institute of Architects, have simply drafted the indemnification clauses in their forms to fit within the limitations of the most restrictive anti-indemnity statutes.
Thanks, Tim. I’ve revised my post. What do you think?
Ken:
I think Tim raises a point you have not addressed. Or maybe you did so too subtly for my boorish eye.
The point where I think it worth sticking that phrase in is where a promise could be unenforceable — not illegal such that the promisor has broken the law, just unenforceable, such that the promisor wants to weasel out. In that circumstance, limiting the promise to the extent permitted by law could constrain the obligation sufficiently to avoid the obligation being unenforceable.
Non-compete obligations come to mind as an example. And that brings further nuance: courts in some jurisdictions won’t allow at least some beneficiaries of a non-compete obligation to enforce it when it is unduly vague on its face. They dress this up all kinds of ways, such as “no blue pencil” rules, which have the oddest name ever. But the point is that the possible savings clause is. It a sure thing.
Chris
Putting “to the fullest extent permitted by law” in a contract isn’t like to save you in a jurisdiction that hews to the Restatements. Although your post mentions the Restatement of Contracts, better to start with the Restatement of Restitution. According to the Restatement (Third) of Restitution:
Restatement (Third) of Restitution § 32 (Illegality).
Subsection (2) is the best fit. The Restatement says this of the analytic framework:
Restatement (Third) of Restitution § 32 cmt. c.
I’ve litigated restitution in several cases, and the Restatements view meshes with my practical experience. The court will aggregate facts and will “balance the equities” among the parties.
Williston’s use of “innocent” muddles the analysis. The word suggests that the person seeking restitution would have to establish blamelessness or something close to it. Real life is never so clean. The Restatement handles this by assessing the culpability of the claimant as one of the factors. As with almost everything in the Restatements, culpability is a sliding scale, and the relevance of culpability fluctuates depending on the strength of other circumstances of the claim. Also, while Restatement only requires assessment of the claimant’s culpability, I suspect that most courts will compare the relative culpability among the parties. If the claimant is culpable enough, the court will deny recovery through unclean hands.
All of the above to say this, I it think unlikely that a court–any modern court–would look at the phrase
"except to the extent prohibited by law"and conclude that because the claimant signed a contract that used that phrase in connection with the allegedly illegal conduct, the claimant’s overall culpability was increased, thereby making it less likely that the claimant is entitled to restitution.I vote for redundancy.
Thank you for this, Daniel. Your comment contributed to my changing my mind; see how I’ve revised the post.
We end up using phrases like this quite a bit in public license terms for software and other IP-laden work shared online. For example, in the exclusion/disclaimer of the Blue Oak Model License:
The law actually varies here, particularly around what warranties can and cannot be explained. There is also anxiety about the exclusion of damages, especially in situations where circumstances push courts to try and find grounds for liability.
The main risk is that a court will see a provision they read as in conflict with the law, and sever it as a unit, in part as punishment for potentially misrepresenting to lay readers what the law allows terms to do. Moreover, the intent here really is “disclaim and exclude as much as the law allows”, so those seem the appropriate terms for expression.
I generally fall on the side that such phrases are redundant and should be avoided. Many states have enacted laws that make contracts or provisions violating state law void. In my experience, state statutes are a valuable (and much-overlooked) source when litigating or interpreting contracts. Also, the language’s redundancy is even more pronounced when it involves government entities. A governmental entity cannot bind itself in excess of its actual authority, which does not include illegal acts. There are several good attorneys’ general opinions discussing this issue in the context of state contracts. Finally, in some jurisdictions, relying on this language may give rise to fraudulent inducement or misrepresentation claims, especially where one party acts knowingly or obtains an unconscionable advantage. Although I try to avoid this language, most practitioners in my area rely on it to expedite negotiations.
‘The Carrier shall deliver the Goods to the Destination within three days of the Order. This agreement neither forbids, permits, nor requires the Carrier to exceed any posted speed limit en route.’
This leaves it to the Carrier whether to speed. Assuming that three-day delivery is not intrinsically impossible without breaking the law, the provision creates a duty without prescribing or taking liability for how the duty is to be discharged.
A global provision would resolve the matter, too: ‘Nothing in this agreement forbids, permits, or requires any party to violate any applicable extracontractual law. This provision supersedes any provision bindingly interpreted so to forbid, permit, or require’.
‘Blue pencil’ is a felicitous name for judicial narrowing of an overbroad provision. (Editors traditionally use blue pencils for edits.) Courts don’t like to rewrite the parties’ contracts, partly because they don’t like adjudicating in the abstract what is, for example, the largest permissible area and the longest permissible period for a noncompete duty.
This sometimes leads drafters facing ‘no blue pencil’ jurisdictions to write fallback provisions like, ‘…shall not compete within 100 miles, but if that limit is bindingly determined to be overbroad, within 90 miles, but if that limit is bindingly determined to be overbroad, within 80 miles, but if…’ etc. Ditto with time periods: ‘…for 10 years, but if…’ etc.
If the former employee decides to compete in violation of the most restrictive version, the litigation risk is on her, which gives the former employer an advantage.
‘To the fullest extent permitted by law’ seems equivalent to ‘but not to an extent prohibited by law’.
It’s worthwhile to consider that the law might change after the parties entered into the contract, but while the contract is still in effect. For example, think about how the sanctions on Russia might impact parties’ contractual obligations. A US party may no longer be able to lawfully ship technology products to a Russian company, or perhaps financial transactions are suddenly illegal. So, as I think out loud, would a party be able to raise impossibility of performance as a defense?