When Parliament Rewrites the Deal: Allocating Regulatory Risk in Long-Term Contracts

Long-term commercial contracts are, in effect, wagers on a stable regulatory environment. A supplier prices its services on the rules it understands at signature; a customer budgets on the assumption that the bargain will not be quietly re-priced by a statutory instrument. When the rulebook shifts mid-term, that assumption is tested. The question is not whether the supplier must obey the law — it must — but which party bears the incremental cost of doing so, and on what evidence.

As at 2026, the pressure points are familiar: FCA rulebook updates, data protection reform, consumer-duty expectations, ESG disclosure requirements and sector-specific licensing conditions. Each can require new systems, additional reporting, retrained staff or revised processes. A generic clause requiring compliance with all applicable law confirms an obligation but says nothing about price, timetable or liability. A change-of-law clause should be an allocation mechanism, not a statement of the obvious.

Compliance is a duty, not a risk allocation

A supplier’s duty to comply with law is ordinarily non-delegable. The customer cannot consent to illegality, and a contract cannot excuse a breach of regulatory obligation. But compliance obligations and cost allocation are different questions. If a new rule requires additional monitoring, the supplier may be obliged to implement it. Whether the supplier absorbs the cost, passes it through or shares it depends on the contract.

Generic wording often produces a predictable dispute. The customer argues that the supplier warranted compliance and must bear the cost of remaining compliant. The supplier argues that its price assumed the regulatory regime in force at signature and that a mid-term change is a variation, not a breach. Both propositions can be plausible. The clause should decide between them before the dispute arises.

Defining the trigger with precision

The definition of ‘Change in Law’ does most of the work. It should identify the sources of law that count: Acts of Parliament, statutory instruments, regulator rules and binding codes, court and tribunal judgments, licensing conditions and, where intended, formal guidance. It should also address changes in interpretation, not merely changes in text. A regulator’s revised reading of an existing rule can have the same commercial effect as a new rule.

The temporal test needs equal care. A change should ordinarily mean something enacted, made or formally published after the effective date, and not already known or reasonably ascertainable by the parties when pricing the deal. Drafters should consider whether announcements, consultations and transitional provisions count. A consultation paper may signal direction without creating obligation; treating it as a trigger can produce premature cost claims. Conversely, ignoring published guidance that a regulator expects firms to follow may leave the supplier carrying a foreseeable burden.

A further test is scope. Does the clause capture changes specific to the customer’s sector, or all general law? Does it apply to changes in the supplier’s own regulatory status, or only to the services? Broad definitions increase certainty for suppliers but can expose customers to open-ended price adjustments. Narrow definitions protect budgets but may leave suppliers unwilling to bid for long-term work.

Sharing the cost, not the blame

Once a trigger is established, the contract needs a cost mechanic. The simplest is a pass-through of demonstrable incremental costs, subject to evidence and audit. A more balanced structure uses a threshold: the supplier absorbs the first tranche as a cost of doing business, the parties share the next band, and the customer bears the balance above an agreed cap. This can be paired with a de minimis threshold to filter routine compliance noise.

The definition of recoverable cost should be explicit. Direct implementation costs, third-party charges, additional licence fees and reasonable staff time may be included; general overhead, lost profit and speculative revenue effects should not. One-off and recurring costs should be distinguished. Savings arising from the change — reduced reporting, lower licence fees or simplified processes — should be returned or netted off. Without a savings mechanism, the clause becomes a one-way ratchet.

Price adjustment formulas should state when the adjustment takes effect and how it is evidenced. A supplier should not be able to recoup costs before they are incurred without a clear provisional mechanism. A customer should not be able to delay agreement indefinitely by disputing every line item. A joint working group, expert determination or staged approval process can keep the commercial relationship intact.

Notice, evidence and the duty to mitigate

Notification duties are often drafted too harshly or too loosely. A strict condition precedent — no notice within ten business days, no relief — may be unenforceable in practice or may penalise a supplier that discovers the impact later. A purely optional notice regime invites late claims. A workable compromise requires prompt notice once the supplier becomes aware of a material change, with relief running only from the date of notice where the delay has prejudiced the customer.

The notice should be accompanied by an impact statement: the obligation, the steps required, the estimated cost, the timetable and any feasible alternatives. The supplier should be under a duty to mitigate, and the customer should have a right to challenge the proposed response. Neither party should be deemed to have accepted a cost estimate simply by continuing to perform.

Where change of law ends and force majeure begins

Change-of-law clauses and force majeure clauses are often confused. A change in law that makes performance illegal may trigger a force majeure or illegality provision, permitting suspension or termination. A change in law that merely makes performance more expensive should not. The change-of-law clause is the cost-allocation tool; force majeure is the excuse for non-performance. Drafters should state which clause prevails and should prevent double recovery.

If performance becomes unlawful, the contract should provide a clear route: suspension for a defined period, a duty to explore compliant alternatives, and termination if no reasonable alternative exists. Termination for illegality should be distinguished from termination for convenience, particularly on cost recovery and wind-down obligations. A supplier should not be able to use a change-of-law clause to recover costs and then rely on force majeure to avoid the service altogether.

Drafting tests for 2026

A robust clause should answer five questions. What counts as a change, and from when? Who bears the cost, subject to what threshold, cap and savings adjustment? What must be notified, to whom and with what evidence? How does the clause interact with force majeure, termination and dispute resolution? And how are disagreements over cost or interpretation resolved without bringing the service to a halt?

Long-term contracts cannot anticipate every regulatory turn. They can, however, decide in advance how the parties will respond when the ground moves. A well-drafted change-of-law clause does not eliminate regulatory risk; it makes that risk visible, priced and capable of resolution. In a climate of continuing reform, that is a commercial advantage in itself.