Why Would This Clause Be In A Contract?

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Latest post Wed, Nov 30 2016 9:23 AM by ca19lawyer2. 2 replies.
  • Tue, Nov 29 2016 8:12 PM

    Why Would This Clause Be In A Contract?

    This is a question that comes from my job.  I do a lot of redlining of vendors' contracts in my current job.  There are certain things that are always unacceptable to our attorneys, so I get to read the lots of pages of 4 pt type to find all of those and mark them up. (It sounds boring but I actually like my job. )

    A somewhat new thing kept appearing recently, particularly in contracts for Software as a Service. ("cloud")

    I kept seeing clauses that required us to agree to follow all applicable laws (or some variation on that).

    I finally asked our attorney about that, who told me to try to get that out of the contract.  When I asked, "Why?" the answer was that if we're already violating some law, perhaps inadvertently, we don't want to also be in breach of contract at the same time for the same thing.  (A circumstance when this might happen would be, for example, if one of our computers gets a virus that causes it to, unbeknownst to its user,  try to break into other computers on the Internet to try to steal their data.)

    I guess what I'm wondering is why a vendor would want to put that into the contract in the first place?  Is the reason so that if some violation of some law is discovered the vendor can claim that its not the vendor's fault because it contractually obligated us not to do that?

    I mean, aren't we required to follow the law without being contractually obligated to do so?  Is this just "contract overkill" or is there a legitimate reason they all seem to want to put that kind of clause in their contracts?

     

     

  • Wed, Nov 30 2016 1:32 AM In reply to

    Re: Why Would This Clause Be In A Contract?

    LegalSecy:

    I mean, aren't we required to follow the law without being contractually obligated to do so?  Is this just "contract overkill" or is there a legitimate reason they all seem to want to put that kind of clause in their contracts?

    In most contracts that kind of provision would indeed be overkill and not serve much real purpose. But there are circumstances in which it is useful. Particularly where more than one jurisdiction might be involved and the contract deals in some kind of regulated activity it is not practicable to specify each of the different rules that the parties must follow in each jurisdiction and yet if one party violates some legal requirement it could cost the other party to suffer a loss that would not otherwise be compensable unless the violation were also a breach of the contract.

    Consider a very basic example. Alan contracts with Big City Construction (BBC) to build a theater. In addition to specifying the design of the theater, the contract says that BCC will comply with all applicable laws and regulations in constructing the theater. BCC misses obtaining some required permits while constructing the theater. As a result, the city will not issue the necessary authorization for Alan to open the theater. That delay in opening the theater forces Alan to cancel several events he had already agreed to host in the theater, causing him a loss. With the provision in the contract that the BCC had to comply with applicable laws and regulations in constructing the theater, it makes for a fairly straightforward breach of contract case here because BCC's faillure to follow the law and obtain the necessary permits caused Alan’s loss. The contract did not have to lay out exactly what permits BCC had to get. Simply requiring BCC to follow the law does the same thing.

  • Wed, Nov 30 2016 9:23 AM In reply to

    Re: Why Would This Clause Be In A Contract?

    LegalSecy:
    I get to read the lots of pages of 4 pt type

    No legitimate contract will contain 4 point font.  Why make stuff up?

     

    LegalSecy:

    I kept seeing clauses that required us to agree to follow all applicable laws (or some variation on that).

    I finally asked our attorney about that, who told me to try to get that out of the contract.  When I asked, "Why?" the answer was that if we're already violating some law, perhaps inadvertently, we don't want to also be in breach of contract at the same time for the same thing.  (A circumstance when this might happen would be, for example, if one of our computers gets a virus that causes it to, unbeknownst to its user,  try to break into other computers on the Internet to try to steal their data.)

    I can't conceive that the example would violate any law.

     

    LegalSecy:
    why a vendor would want to put that into the contract in the first place?

    Ask the vendor.

    While you didn't provide any contract language, you did mention that this relates to "contracts for [s]oftware as a [s]ervice."  If you're using software to violate the law, why wouldn't the vendor want that to be defined as a breach of contract?

     

    LegalSecy:
    Is the reason so that if some violation of some law is discovered the vendor can claim that its not the vendor's fault because it contractually obligated us not to do that?

    Again, ask the vendor, but I think the answer is unlikely since the vendor "can claim" anything it likes, regardless of what the contract says.  Also, a provision of the sort you described has nothing to do with "fault," which would be a fact-specific inquiry.

     

    LegalSecy:
    I mean, aren't we required to follow the law without being contractually obligated to do so?

    Yes.

     

    LegalSecy:
    Is this just "contract overkill"

    Unlikely.  If you violate the law and the contract doesn't say violation of the law is a breach, then the vendor might have no remedy if, for example, the violation would otherwise make the vendor want to terminate the contract.

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