Behold the following tweets, one by me considering the difference between saying comply with the law and comply with all laws, not to mention comply with all applicable laws, and an unexpected reply from Jason Morris, aka @RoundTableLaw:
I don't understand how, if contracts to violate the law are invalid, this says anything at all. If what you are concerned about is making breaches of the law a breach of the contract, why not just say that?
— Jason Morris💻⚖️🇨🇦 (@RoundTableLaw) September 26, 2018
It took a while for me to understand Jason’s point. You can read the thread yourself, but the gist of it is that it would be “surplus” to impose on a party an obligation to comply with the law, as we’re all already under an obligation to comply with the law. Jason suggests that instead you say in a contract that it’s a breach of the contract when a party violates the law in performing under the contract.
I get Jason’s point, but I’m not convinced. Yes, everyone has to comply with the law (let’s just suspend disbelief here), but if you don’t, you answer to the state. I don’t see any harm in creating a separate obligation for purposes of the contract. And it might arguably be surplus, but it has the benefit of being more concise than Jason’s formulation. So I don’t think it’s worth trying to teach old and precedent-driven dogs this new trick. But I’d like to hear what you think.
Jason’s question led me to a different and perhaps more thorny issue: how do you determine whether someone has violated the law? Is it only the state that decides that, or is a contract party entitled to assess the facts and the law and come to its own conclusion? If only the state gets to decide, what sort of outcome constitutes violation? For example, if a contract party enters into a consent decree with a government body, would that constitute acknowledgment of violation of law? I’ve done zero research on this. I thought I’d start by putting the issue out there.
14 thoughts on “Two Issues Relating to Contract Obligations to Comply with the Law”
I tend to avoid these sorts of clauses entirely. If I get a speeding ticket while doing some service for you, that’s against the law. Does that mean you should now have a right to sue me and/or end the contract? No. And what about being sued by third parties? If you’re large enough, someone new sues you every day alleging one breach or another. If you’re Google, for example, you even ACTUALLY violate the law according to court judgement maybe once a month. Again, does that entitle their customers to end their contracts with them? No.
If you qualify the provision by saying, for example, “in performing the services,” you largely avoid that sort of problem, no?
It’s compliance week here in my company! The use case which immediately came to my mind for such clauses is extra-territorial anti-corruption laws and sanctions in countries where the rule of law is not particularly strong, and you have to terminate the contract if there is any bad PR or other scary things you do not really want to be associated with. To answer the second question, rather than “assessing the facts and the law”, the clause should focus instead with “threatened” breaches or causing a “material effect” on the performance of the contract. Especially with “threatened”, some parties may not be willing to stick with a presumption of innocence if there is an impact on PR or other obligations.
How about instead of “threatened” you focus on whether a government body claims a violation, or has begun proceedings to investigate a possible violation?
There are a range of thresholds to trigger these kinds of issues in
multiple contexts (due diligence, breach, Cause, and director indemnification all
come to mind). Lawsuits, lawsuits threatened in writing, threatened
lawsuits, the occurrence of facts constituting a reasonable basis for
the assertion of a claim, …. Each of these is tailored to create a
different level (and process) of proof. Moving from objectively easier
to prove facts (was a lawsuit filed?) to more nebulous standards creates a more expansive
application of the provision, and the outcome varies depending on what provision
it is, who’s doing the expanding, and the reason for the expansion.
In the context
of criminal acts, sometimes the use of the violation of the law is used
to incorporate the legal standard into the contract as shorthand. So,
for example, a doctor might be prohibited in the contract from violating
certain federal anti-fraud statutes. That saves a lot of words vs.
incorporating all the acts in the entire body of law, and then the
“violation” standard, as Ken asks, works on its own to moderate the
But wouldn’t it be best to refer to conviction, or indictment? Something more specific than violation?
In some cases, like the definition of cause, an objectively verifiable fact is the right place to strike the balance: indictment, conviction, or certain pleas.
In other cases, the underlying behavior is what I want to prohibit and not only if there’s an eventual conviction. Imagine a company that finds out about an FCPA violation by an employee. They might really want to fire that person without reporting the FCPA violation and asking for a fine.
So “violation of FCPA” is the shorthand for “shall not commit any act that would constitute a violation of FCPA.” And maybe that second version is better because the proof is more clearly in the contract world and there’s a much smaller argument that “I can’t be shown to have violated the law unless I’ve been convicted.”
Since I’m revising an agreement now, I’ll try that second version.
Hey, Ken: Thanks for the twitter chat and the hat tip.
For my part, I think contracts should be drafted to be clear to the parties, first, and consistent with precedent second. I have met clients who can’t read legalese. I have yet to meet a judge who can’t read plain English. I have also never heard of a contract that was interpreted in a way other than written because it was clearer than contracts usually are.
So I’m not worried about a judge declaring it surplus. I’m worried about a client reading it, and thinking: “yeah… I already had to obey the law. So nothing changes there.”
The fact that the other party can refuse to meet their obligations under the contract if you break the law in executing yours is implicit to lawyers and judges, but not normal people.
So why not just say it out loud?
As for question #2, in the absence of a conviction or adverse decision, I’d say it’s of little comfort. Remedies are also not clear, because illegality is usually detected after the fact.
As regards drafting to make the contract clear to the parties, you’re not just preaching to the converted, you’re preaching to the converter! What’s at issue is how to handle this particular context.
It’s implicit in business contracts that if you don’t do what you promise to do, the other side will have a remedy. I don’t find compelling the notion that in this one context, it’s appropriate to make an exception and be explicit.
Ken, this approach and language is typical for my industry, and you are right, what we are seeking to do is make violation of the law a breach of the contract, where it may not have been, without the obligation. In construction, that’s most probably some environmental, safety or anti-corruption law, and absent the provision, it may be that an owner is without remedies. Seems useful to me.
I feel like I must be missing your point of your specific question, “For example, if a contract party enters into a consent decree with a government body, would that constitute acknowledgment of violation of law?”
Government agencies typically prefer to act where private claims are insufficient to assure enforcement. So I don’t see how, in anything like a typical situation, a contract counter-party would have damages arising from such a violation. Damages are an element of a contract claim, so they would not have a claim. (We often think of termination as an additional remedy, but it is probably better to think of rightful termination as a defense to liability on a claim for damages. But declaratory judgment acts allow a party to seeks a judgment of rightful termination.)
My take is that sometimes a party wants to insulate itself as best it can from illegal actions taken by the other party, by specifying that (a) the contract does not require a party to break the law, or (b) the contract requires a party not to break the law.
(a) ‘In requiring delivery of widgets on the time schedule set forth in exhibit A, this agreement does not require any Widgetco driver to exceed any posted speed limit’.
(b) ‘In meeting the delivery schedule in exhibit A, no Widgetco driver shall exceed any posted speed limit’.
Acme wants its timely deliveries, but wants no blame if Widgetco drivers go illegally fast to make them.
Another approach to the same goal might be this:
‘Widgetco acknowledges that meeting the delivery schedule in exhibit A does not require its drivers to exceed posted speed limits. Widgetco shall indemnify Acme from losses and liabilities arising from excessive speed on the part of one or more Widgetco drivers’.
The wording could be adapted to deal with environmental violations, corrupt practices, or other breaches of extracontractual laws.
Acme’s is not looking primarily for damages, but to be kept clean of any legal spatter from Widgetco’s violations.
I’ve never thought through the “compliance of laws” clause to the point of enforcing it and what the “violation of law” must look like or to what degree it must be proven. Certainly it’s not going to be “beyond a reasonable doubt” and I’d suggest it’s not necessary to wait for a conviction or final adjudication of the alleged law violation. In other contexts in my work, we use the “charge” as the thing that triggers the consequence – a citation, an arrest, a civil complaint (if it’s not a crime) or a criminal complaint if it is. This way some 3rd party has made a determination that a law has been violated. if it’s a crime this means somebody has concluded there is “probable cause” and that’s plenty good for your contract breach, I would think. but I’m not even sure this level is necessary for a contract – because the parties are contracting at arms length and there is no due process required to enforce a breach of contract – I’d say the party who seeks to be protected by such a clause should set the bar low for determining whether a violation of law has occurred. hope that makes sense!
Violating law and paying to a State is one thing, while breaching contract and paying to a Party is another thing. Compliance clauses need to connect these two things. And how to connect? By covenant or warranty? I think a warranty is enough. Noncompliance maybe must be proximate cause of damages/losses suffered by the claiming party.