What is a Compliance with Law Provision and Why do I Need it in My San Diego Contracts?
A “compliance with laws” provision requires that both parties to a contract must comply with the applicable laws with respect to some core aspect of the contract. These types of provisions are common in commercial leases. A typical short provision might look like this:
“Compliance With Applicable Laws — TENANT shall comply in all respects with the requirements of applicable federal, state, county, city and district laws, ordinances, rules and regulations with respect to the use of the PREMISES. TENANT shall obtain and maintain any permits or licenses necessary for its operations. Neither party shall take any action in violation of any applicable legal requirement that could result in liability being imposed on the other party.”
Note that these types of clauses can be drafted to be mild or to be very strong. This particular version is somewhat narrowly drafted. It requires compliance with laws concerning the use of the premises — a narrow obligation. That limitation could be eliminated, and the tenant could be required to comply with all laws. Even the word “applicable” could be removed making the clause even stronger. Furthermore, the clause could be strengthened by requiring compliance with all laws as “they might be amended during the Term of this Lease.” Such would require the Tenant to comply with changing laws. Finally, the clause could require that the Tenant engage in “curative” actions if it is discovered that there is a violation of some law or regulation. There is some California caselaw that holds that, standing alone, an unqualified covenant to comply with applicable laws “… does not constitute an assumption of the duty to comply with those laws that require curative actions of a “substantial” nature.” See Glenn R. Sewell Sheet Metal, Inc. v. Loverde, 70 Cal.2d 666 (Cal. Supreme Court 1969). Because contracts are based on agreement, how a provision is drafted depends on what the parties intend. An experienced San Diego corporate attorney can provide advice and counsel if you need compliance with law provisions in your business contracts or if you are being asked to sign a contract with such a provision.
In the abstract, such a clause might seem unnecessary since, in general, businesses must abide by the laws and regulations in order to operate. In other words, a business has independent reasons to want and need to obey laws. Why should this obligation be in the contract? In short, a compliance with laws provision makes a violation of laws/regulations a breach of contract. This accomplishes several important goals including these:
- The non-law-breaking party can terminate the contract because the other party is in breach
- The breach may provide the basis for suing and recovery of money damages
- Terminating the contract avoids the potential for joint liability as an aider and abettor to the law-breaking
- Terminating the contract avoids potential reputational damage to your business by being associated with a business that is in violation of the law
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For more information, call corporate attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard’s law practice is focused on business, transactional, and corporate matters, and he proudly provides legal services to business owners in San Diego and the surrounding communities. Call Mr. Leonard at (858) 483-9200 or contact him via email. Like us on Facebook.