When a new law suddenly changes how a business must operate, how does this affect risks in contracts already signed?

When a new law suddenly changes how a business must operate, it introduces significant risks into contracts already signed by potentially altering the fundamental assumptions and feasibility of performance. This situation primarily affects existing contracts through several key legal principles and contractual clauses. Firstly, the performance required under the contract might become impossible. Impossibility of performance occurs when, due to an unforeseeable event like a new law, a party simply cannot fulfill their contractual obligations. For example, if a new law bans the manufacturing or sale of a specific product that is the subject of a supply contract, delivering that product becomes legally impossible. In such cases, the contract may be discharged, meaning both parties are released from their obligations. Secondly, the new law might lead to impracticability or frustration of purpose. Impracticability arises when performance is not strictly impossible but becomes excessively burdensome, expensive, or difficult due due to the new law, going far beyond what was contemplated when the contract was made. For instance, if a new environmental regulation requires a specific manufacturing process to be upgraded with extremely costly equipment, making the original contract price unprofitable and commercially unreasonable, the performance could be deemed impracticable. Frustration of purpose occurs when the new law destroys the fundamental reason for the contract, even if performance remains technically possible. If a new law bans a specific event, a contract for services to be provided at that event would lose its purpose. Under both impracticability and frustration of purpose, courts may excuse performance or discharge the contract. Thirdly, many contracts include a force majeure clause, which is a contractual provision designed to excuse a party from performing its obligations when certain extraordinary events, beyond its control, prevent or hinder performance. These clauses often list events such as “acts of government,” “changes in law,” or “governmental regulations.” The specific language of the force majeure clause determines whether the new law falls within its scope and what remedies are available, such as suspension of performance or termination of the contract. If a force majeure clause is invoked successfully, it allocates the risk of such events between the parties. If the new law does not render performance impossible or impracticable, and there is no applicable force majeure clause, or if the clause is narrowly defined, a party failing to perform due to the new operational requirements could be in material breach of contract. A material breach is a significant failure to perform an important part of the contract, which can entitle the non-breaching party to damages or to terminate the contract. Additionally, some contracts contain specific change of law clauses or material adverse change (MAC) clauses that explicitly address how new laws or regulations affecting the business operations will impact the contractual obligations, often requiring renegotiation or allowing for price adjustments or termination. The impact of a new law on existing contracts therefore depends critically on the nature of the new law, the specific terms written into the contract, and the legal jurisdiction governing the contract.