The continuous reciprocation of tariffs between the United States and China could leave businesses and suppliers in a bind. With rising costs of supplies, contracts that once appeared lucrative for a business could soon become a financial liability. As there appears to be no end in sight to the tariffs, can a company claim force majeure or seek to pass on the burden of the tariffs to the other party?
Generally speaking, force majeure refers to unforeseeable circumstances that prevent a party from fulfilling a contract. As with almost any legal question, whether force majeure excuses contract performance will depend on the circumstances.
A company should first look to the terms of its agreement to determine if the parties contemplated the fortuitous event. Frequently an agreement will have an express force majeure clause. Unfortunately, agreements all too often use a general, standardized force majeure clause that is not tailored to the specific agreement. Further, some standard force majeure clauses provide no more protections to the parties than what the applicable law already provides.
If the force majeure clause does not cover the fortuitous event, or the agreement does not contain any force majeure provision, the next step is to see if the controlling law provides relief. For agreements governed by Louisiana law, that’s Louisiana Civil Code article 1873.
Louisiana Civil Code article 1873 provides relief to a party when 1) there is a fortuitous event and 2) the event makes the performance impossible.
Courts generally take a strict interpretation to “impossible.” In Payne v. Hurwitz, 2007-0081 (La. App. 1 Cir. 1/16/08), 978 So.2d 1000, the Louisiana First Circuit explained that even though Hurricane Katrina was undoubtedly a force majeure, that fact satisfied only one part of the contractual defense. The court continued, “under settled Louisiana jurisprudence, a party is obliged to perform a contract entered into by him if performance be possible at all, and regardless of any difficulty he might experience in performing it.”
Rising costs due to tariffs, while arguably fortuitous, will not make a performance impossible. Thus, a company will not likely find relief under Civil Code article 1873.
Mitigating Future Risks:
In drafting new agreements, parties must pay close attention to each and every provision. Just as important, parties must be proactive instead of reactive in their drafting. While a fortuitous event, by its own definition, is hard to predict, companies should attempt to identify all potential future and uncontrollable risks to the agreement. They must then identify how the event may affect the specific agreement and provide for contingencies if certain conditions are met. This may include outside factors that, while not making the performance impossible, make the performance impracticable or unprofitable.
A key to success in this endeavor is to engage knowledgeable counsel who understand the specific industry from the bottom-up and how outside factors, such as the current global economic and political environment, may affect future operations in the industry.