Applicable law: Overview, definition and example
What is applicable law?
In contracts, “applicable law” refers to the laws and regulations both parties must follow while fulfilling their responsibilities under the agreement. This is distinct from “governing law,” which determines the legal system used to interpret the contract. Applicable law ensures compliance with relevant local, state, and federal laws, such as safety standards, tax regulations, and employment rules, wherever the contract is carried out.
Why is applicable law important?
Applicable law ensures that both parties in a contract comply with the legal requirements that apply to their business activities. This includes following local, state, and federal laws, such as tax regulations, safety standards, or employment rules, depending on where they operate.
By including an applicable law clause, the contract clarifies that each party is responsible for staying compliant with these laws, reducing the risk of fines, penalties, or legal disputes. It also ensures fairness by requiring adherence to rules that protect public interests, like environmental regulations or consumer rights, helping to maintain trust and transparency in the business relationship.
Understanding applicable law through an example
Imagine your New York-based company contracts with a California supplier to provide components for your products. The applicable law clause in your agreement requires both parties to comply with relevant legal obligations. For your supplier, this might mean following California’s strict environmental regulations, worker safety rules, and transportation standards. On your side, it could mean adhering to New York tax laws and federal import regulations.
If the supplier fails to meet California’s environmental standards, you might face production delays or reputational damage. Similarly, if your company ignores its legal obligations, you risk fines or disputes with regulatory authorities. The applicable law clause ensures that both sides are clear on the rules they must follow, protecting the integrity of the business relationship.
An example of an applicable law clause
Here’s a sample applicable law clause you might find in a contract:
“Each party shall comply with all applicable local, state, federal, and international laws, rules, and regulations in connection with its performance under this Agreement. Any failure to do so shall be considered a material breach of this Agreement.”
Conclusion
Applicable law isn’t just legal filler—it’s a vital part of any contract. It keeps both parties accountable, ensuring they follow the rules that govern their business activities. This clause helps prevent legal disputes, promotes fairness, and protects your business from unnecessary risks.
When you see an applicable law clause in a contract, think of it as a safety net. It’s there to keep everyone operating above board, no matter where or how the agreement is carried out.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.