President Trump – A force majeure?
We had planned to write a blog on force majeure clauses this week, and then a series of events occurred to make this even more timely – thank you Mr. Trump and the MAGA Movement!
At the time of writing, the US initial hardline approach has been rolled back, however most countries still face a 10% baseline tariff, and 25% on imports of cars and car parts, with the notable exception of China. Trump has hiked Chinese import duties to 125%, with retaliatory tariffs coming back at 84%, as the trade war between the world’s two biggest economies escalates.
Whilst the rest of the world grapples with the sheer level of self-inflicted pain at play, American companies are having to manage increased production costs and even greater supply chain uncertainty, as well as a cliff-edge drop in consumer confidence and demand. The question is – do commercial counterparties have any recourse when existing trade deals become financially unsustainable due to government-imposed restrictions?
The answer is potentially, yes. They could explore the option of enforcing force majeure clauses in their trade contracts and associated common law principles. Indeed, US aerospace supplier Howmet has already declared Trump’s tariffs to be a force majeure event.
So, what are force majeure clauses? Why do they need drafting with precision? And what classes as an exceptional event which prevents or hinders the performance of a contractual obligation?
Let’s explore…
What are force majeure clauses?
“Force majeure” translates as “irresistible force” and in contract law, force majeure clauses are commonly used to protect against the ‘unexpected’, i.e. extreme, unforeseeable and irresistible events which could prevent or delay a party from performing its contractual obligations; and can also stipulate that a party will not be in breach of contract for any delay or non-performance due to a force majeure events.
Force Majeure clauses are written in to a wide variety of contracts including product, service, distribution, or trade agreements.
What is a force majeure event?
Typically, a force majeure event is an event for which no human is responsible – such as a natural disaster or extreme weather; or an unforeseeable event such as strike, war, pandemic and other such events “beyond a party’s control”.
Could Trump’s sweeping global tariffs be considered unforeseeable? Perhaps – if a well-drafted contractual force majeure clause or another provision expressly covers “economic hardship” or “extreme price fluctuations”. Alternatively, if a contractual definition of a force majeure event is broad enough, even if brought about by a deliberate human intervention, then again Trump’s tariffs could fall within its scope.
However, case law in the UK presently indicates that a force majeure clause does not typically cover a change in economic or market circumstances.
Alternative options
There are a couple of obvious alternatives which businesses impacted by tariffs could rely on:
- Material adverse change clauses: this allows a party to walk away from a commercial transaction or seek compensation if an event has happened that has had a material adverse effect. Again, the definition of what constitutes a material change can be drafted in a narrow or a broad way depending on the needs of the business
- Frustration: This is a common law principle that applies where an event occurs after a contract has been entered into, which is not due to the fault of either party, but which makes contractual performance impossible or illegal, or renders the obligations radically different from those contemplated at the time of contracting. Frustration tends to be applied narrowly, and events which render contracts less profitable may not be sufficient.
The big lesson here is to ensure commercial contracts are well drafted.
Take the time to understand what can impact your business and its ability to fulfil contractual obligations
It is critical for businesses entering into a trade, or any other type of, relationship to have a strong force majeure clause that is well defined, whilst broad enough to cover the unforeseen, that provides relief from contractual obligations.
Given the current situation with US trade tariffs – and the associated economic disruption it has caused and is likely to continue causing for months or even years to come – it’s crucial to review your current commercial contracts, including the existence, or not, of force majeure clauses.
The best thing you can do to protect your business, its interests, stakeholders and trading relationships, is to seek specialist advice from a commercial law firm.
Get in touch with Leverets and take advantage of our free 30-minute no obligation consultation.
