Use the force (majeure)? Considering the application of force majeure clauses to tariffs

Torys’ Canadian and New York offices will be providing regular briefs on the legal ramifications of the tariffs and other cross-border policy developments on the horizon.

Tariffs (and threats of tariffs) have been keeping business leaders up at night across Canada and the United States since the inauguration of President Trump. The price of goods ratcheting up significantly, or those goods not being available at all, could be the difference between a good or bad deal in many cases. When deals turn bad as a result of tariffs (or retaliatory tariffs), market participants will sometimes turn to their contracts to see if they have a right to walk away.

In the circumstances, the contractual clause many parties will be assessing is the force majeure clause, if the contract includes one.

What are force majeure clauses?

Force majeure is a common provision in contracts designed to excuse non-performance of contractual obligations for unavoidable events that negatively impact a party’s ability to fulfill its obligations. Force majeure is not a freestanding common law concept. The rights parties have are determined exclusively by what the contract says.

Many force majeure provisions provide relief for events or situations beyond the control of the contracting parties (i.e., natural disasters, wars, strikes, etc.). Definitions are typically either broad-based (“any event or circumstance beyond the reasonable control of the applicable party”) or specific (listing specific events that would constitute such an event; these lists may be exhaustive or illustrative). Whether a specific event falls within the scope of the clause depends on the contract in question.

Parties negotiating tariff-sensitive commercial agreements will want to consider whether and how to address the issue.

Would the imposition of tariffs be considered a force majeure event?

Parties impacted by additional tariff costs will want to consider the wording of their force majeure clauses carefully when seeking to rely on force majeure—both the way that events of force majeure are described and the impact that those events actually have on performance. Different contracts will set different thresholds for performance impact—the terms of the contract are key. There is a difference between an unforeseen or unforeseeable event that “prevents” performance and one that “hinders” performance.

Recent case law on both sides of the Canada-U.S. border—much of which was spurred by the COVID-19 pandemic—is instructive as to the circumstances in which changes in market conditions due to government action may constitute a force majeure event.

U.S. case law

In Kyocera Corp. v. Hemlock Semiconductor, LLC, in 2015, Kyocera sought relief under a force majeure clause, arguing that the changes in market conditions due to subsidies from the Chinese government constituted an “act of government”. Kyocera was badly impacted by this change as it resulted in a plunge in solar panel prices. In its decision, the Michigan First District Court of Appeals noted that although government subsidies lowered the price of solar panels, they did not prevent performance by the contracting party (i.e., it was still possible to complete the contractual obligation, but the transaction was less profitable than anticipated).

Similarly, in Northern Ind. Pub. Serv. v. Carbon County Coal, Northern Indiana Public Service Company (NIPSCO), an Indiana electric utility argued the force majeure clause prevented it from fulfilling its obligation to purchase coal from Carbon County Coal due to (i) a drastic increase in the cost of coal and (ii) its governing body directing NIPSCO to source cheaper electricity sources. The Seventh Circuit Court of Appeals rejected NIPSCO’s argument and stated that the force majeure provision was not “intended to buffer a party against the normal risks of a contract” (i.e., a change in commodity prices).

These two cases illustrate the general trend, present in many contracts, which expressly exclude relief in circumstances where performance becomes more expensive. However, every contract must be assessed on its terms.

Ontario case law

Courts in Ontario take a similar approach.

In Porter Airlines Inc. v. Nieuport Aviation Infrastructure Partners GP, 2022 ONSC 5922 (CanLII), Porter Airlines sought to rely on a force majeure clause to excuse its non-payment of a license fee to a service provider. The clause in question excused performance for the duration of the force majeure event where a party “is bona fide unable to fulfil or is delayed or restricted in fulfilling any of its obligations under [the agreement] by an event of Force Majeure”. “Force Majeure” in that agreement was broadly defined. However, the clause included a standard exclusion for circumstances where non-performance was caused by: “lack of funds or adequate financing”. Rejecting Porter’s arguments, the court concluded that Porter had not shown that COVID-19 or related government restrictions caused Porter to be unable to pay its fees: the fact that a contractual obligation has become more expensive to perform, even dramatically more expensive, is not a ground to relieve the party of its obligation on the ground of force majeure”.

These cases show the potential outcome in disputes where the contract excludes relief for increased cost of performance. Each case required the court to assess the contract in detail to determine whether the specific situation triggered force majeure protection.

Conclusion

A contract is, at its core, a risk allocation mechanism. Force majeure provisions allocate risks of events outside of the control of contracting parties. Courts on both sides of the border will stick closely to the written words of the provision. Where a contract expressly excludes relief for increased cost of performance, these exclusions are likely to be enforced. However, whether such an exclusion applies in the circumstances will depend on the contract in question.

Tariffs may have a variety of impacts on contracting parties. In addition to making contractual responsibilities more costly to perform, tariffs may result in disruptions to supply chains which may, in turn, affect a party’s ability to perform regardless of cost. Parties will want to review their contracts carefully, including assessing the type of business impacts that are protected and the level required to trigger force majeure relief.

 
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