Both force majeure and change in law clauses are designed to afford protection for parties entering into contracts. How do they differ, and does your business require one or both in its commercial contracts? We’ve discussed force majeure clauses, so let’s begin with a brief overview of change in law clauses.
The Basics: Change in Law Clauses
A change in law clause typically specifies the terms on which the party supplying goods or services under a contract can recover its increased cost in performance due to a change in the law. The financial relief afforded by a change in law is distinct from the excused performance obligations of a force majeure clause. However, similar to force majeure clauses, change in law provisions require establishing direct causation between the change in law and the adverse financial impact on the party’s ability to complete its contractual obligations and defining each element.
What constitutes a change in law (e.g., industry guidelines, governmental policies) should be defined within the contract. General changes in law, which affect all businesses within a similar industry or market, are often treated distinctly from specific changes in law, which significantly affect costs incurred by the relevant party in comparison to similar businesses. Typically only specific changes in law offer an ability to recover costs under a change in law provision; most companies are expected to address general and foreseeable changes in law as a normal course of business. Additionally, the relevant party often has only incurred those costs as a result of the contract.
Comparison of Contract Clauses*
Force Majeure Clause
Change in Law Clause
|Definition||Any unforeseeable event or occurrence that is beyond the reasonable control of a party, including: (a) extreme weather events (including but not limited to cyclones, typhoons, hurricanes, storms, floods, snow or ice); (b) fires or explosions; (c) terrorism; (d) wars or hostilities; (e) strikes; (f) blockades; (g) cyberattacks; (h) power blackouts; (i) governmental action; (j) imposition of Sanctions; and (k) earthquakes||The contract price shall be adjusted to take account of any increase or decrease in cost resulting from a change in the laws of the country (including the introduction of new laws and the repeal or modification of existing laws) or in the judicial or official governmental interpretation of such laws, made after the base date, which after the contractor in the performance of obligations under the contract.|
|Events Covered||Government action||Introduction of new laws|
|Ability to pay||No||Yes|
|Potential result||Temporarily excuses performance of obligations prevented or delayed only during the force majeure event – if the party complies with the clause.||(1) Entitles time extension if completion is delayed, and (2) adjusts the price.|
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