Change in law: Overview, definition and example
What is change in law?
A "change in law" refers to any amendment, introduction, repeal, or interpretation of legislation, regulations, or legal requirements that occurs after a contract has been executed. This provision addresses the impact that such legal changes may have on the obligations, rights, or performance of the parties under the agreement. It is commonly included in contracts to provide clarity on how parties will handle situations where new laws or regulatory changes affect the feasibility or cost of fulfilling their obligations.
"Change in law" provisions are especially significant in long-term agreements, such as construction contracts, energy supply contracts, or public-private partnerships, where legal and regulatory environments may evolve over time.
Why is change in law important?
The "change in law" provision is important because it ensures that contracts remain fair and enforceable, even when external legal conditions change. For parties to a contract, this clause provides a mechanism for addressing unforeseen legal developments that could increase costs, delay performance, or make certain obligations impractical.
Including a change in law provision helps mitigate risks, provides flexibility, and reduces the potential for disputes by outlining how such changes will be managed, such as renegotiation, cost-sharing, or termination.
Understanding change in law through an example
Imagine a renewable energy company enters into a 15-year power purchase agreement to sell electricity to a utility. Midway through the agreement, a new regulation is introduced that imposes additional compliance costs on renewable energy producers. A change in law provision in the contract allows the parties to renegotiate the pricing terms to account for the increased costs resulting from the regulatory change.
In another example, a construction company contracts with a government agency to build a highway. During the project, a new labor law is enacted that requires higher wages for workers. The change in law provision in the contract enables the company to seek reimbursement for the additional labor costs incurred due to the new law.
An example of a change in law clause
Here’s how a change in law clause might appear in an agreement:
“In the event of a change in law that directly impacts the ability of either Party to perform its obligations under this Agreement or materially increases the costs associated with such performance, the affected Party shall notify the other Party promptly. The Parties agree to negotiate in good faith to amend the terms of this Agreement to address the impact of the change in law. If the Parties are unable to reach an agreement within [insert timeframe], the affected Party may terminate this Agreement without liability, subject to any obligations accrued prior to termination.”
Conclusion
A change in law provision is a critical element in contracts, especially those involving long-term or heavily regulated arrangements. It provides a structured approach to managing the impact of unforeseen legal changes, ensuring fairness and flexibility for all parties involved. By including a well-defined change in law clause, contracts can remain adaptable and enforceable in dynamic legal environments, reducing risks and maintaining cooperation between parties.
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.