Managing tariff risk in commercial contracts: when does force majeure apply?

What are force majeure clauses?

FM clauses are incorporated into contracts to excuse parties from contractual obligations when unforeseen events beyond their control render performance impossible or impracticable (i.e. not impossible, but extremely difficult).

Whether an event will fall within the meaning of FM is not straightforward and will largely depend on how the clause is drafted.

A party invoking FM must prove performance was prevented (not just made more costly), and courts typically interpret these clauses strictly based on the contract language.

A difficulty in performing the contract due to increased costs or a reduction in profitability will typically not be a trigger for FM unless clearly specified in the clause.

Typically covered by force majeure clauses:

• Natural disasters (e.g. flooding)
• Adverse weather conditions
• Wars

Typically not covered by force majeure clauses:

• Increased costs alone
• Difficulty in performing the contract due to increased costs or a reduction in profitability (unless such triggers are clearly specified in the clause)  

When tariffs might qualify as force majeure

Whether newly imposed tariffs trigger FM relief depends entirely on the clause’s wording.  Relief is more likely if the FM clause explicitly references government-imposed trade restrictions, such as:

• Export/import bans
• New sanctions
• Supplier insolvency
• Retaliatory controls
• Tariffs

Tariffs alone rarely justify non-performance.  Increased costs typically do not meet the FM threshold unless performance becomes genuinely impossible, e.g. due to unavailable materials from export bans or import restrictions.

Indirect consequences (like supplier insolvency, sanctions or retaliatory export controls) may support a claim, but success hinges on precise contract language.

Businesses should review and, if needed, renegotiate FM clauses to reflect current trade risks (see section below for points to consider).  Clear examples in the clause improve enforceability and understanding.

What if we cannot rely on force majeure?

Review the contract to see if there are any other mechanisms to address risks not typically covered by FM, such as price adjustment provisions, hardship clauses, or bespoke tariff allocation formulas.

Considerations when reviewing existing or drafting new contracts

When (re)negotiating a contract, consider:

1. Specifying tariffs or trade barriers within the FM definition;
2. specifying what will happen if an FM event occurs and whether the contractual obligation stands suspended, renegotiated, or terminated.  It is also important to include clear notice obligations and timeframes; and
3. including additional contractual mechanisms to protect your business, such as price adjustment provisions, hardship clauses, or bespoke tariff allocation formulas.

Comment

Incorporating precise language and anticipating potential trade disruptions in contracts can provide a safeguard against unforeseen tariff impositions.  As the global trade landscape continues to evolve, staying informed and proactive in contractual arrangements is essential.  Review your contracts now to avoid unexpected tariff exposure.

Contact our Corporate & Commercial team if you would like to speak to an expert in trade contract risk.