Given the rapid, sweeping, and unpredictable changes in the tariff landscape, we return to the force majeure clause, a now-recurring theme following the COVID-19 pandemic and cyberattacks. Although, like many force majeure events, tariffs can significantly disrupt or alter markets, tariffs’ nature, duration, and potential impact differ markedly. Despite renewed attention, the force majeure clause may not be a tariff elixir.
Not Just Another Act of God
Many industries, such as energy storage, are struggling with tariff-related planning and contracting. Global supply chains have developed over the years with certain—typically low—tariff expectations. Such a drastic, unforeseen change in circumstances might seem like a natural fit for force majeure, but it is important to recognize that (1) a substantial portion of contractual relationships were not previously focused on tariffs, and (2) a full force majeure excuse could actually be a blunt, ill-suited instrument if the effects of tariffs are more financial than logistical.
For example, a customer may want the flexibility to suspend purchases of products or services under a contract if the business case has eroded due to financial pressures from tariffs. But simply adding “tariffs” to the list of force majeure events could give the vendor the ability to suspend deliveries or another performance that the customer still wants or needs.
Conversely, a vendor may want the flexibility to suspend shipments as leverage to renegotiate pricing of outstanding orders if margins would otherwise disappear because of tariffs. But, again, simply expanding the scope of the force majeure clause could backfire by giving a key customer the chance to switch to a new supplier or cancel orders, leaving the vendor with revenue shortfalls and excess capacity.
If performance is still feasible, just not as economically fruitful as expected, take a moment to consider some alternatives.
Potential Approaches
One approach is to consider the main risks associated with changes in tariffs. If, for example, the vendor is worried about compressed margins, the agreement could include a price adjustment or renegotiation provision if tariffs change (or if such change exceeds a minimum threshold), similar to inflation adjustments.
If termination is the primary objective, then a specific, mutual termination right could be added to the agreement for a sufficiently material change in tariffs. The parties are more likely to fully assess the pros and cons of a particular consequence, such as termination or a price adjustment, than weigh all possible implications of a broadly worded force majeure clause.
If the explanation is that high tariffs could lead to supply disruptions, consider whether the existing force majeure language already addresses these types of circumstances or whether new language could target those types of disruptions rather than tariffs in general.
Reminders
As always, the force majeure clause should be reviewed holistically and in light of the particular context. For instance, some provisions specifically exclude circumstances like “financial hardship.” If the clause could be considered internally inconsistent, then such statements should be clarified (e.g., financial hardship alone, not the result of a force majeure event, is excluded).
To be clear, tariffs can dramatically alter markets and commercial relationships, and this is another opportunity to dust off standard terms and critical contracts. But the review should start with the particular circumstances and concerns, and proposed revisions should focus on allocating those risks in a practical manner that minimizes broad, unintended consequences.