Corporate Law / 1 min read
February is supposed to be the month of love, but instead of Cupid’s arrows, goods coming into the United States are being hit with Trump’s tariffs! The new administration is imposing taxes on goods imported from other countries.
On February 1, the president issued three executive orders imposing significant tariffs on imports from Canada, Mexico, and China. The tariffs on imports from China took effect on February 4, while the tariffs on Canada and Mexico are temporarily suspended until March 4.
On February 10, President Trump signed two proclamations reinstating a 25% tariff on steel imports and increasing tariffs on aluminum imports to 25% from 10%. Four days later, Trump announced his plans to impose tariffs on auto imports beginning April 2, 2025.
In light of these tariffs, and potentially more to come, businesses should consider including tariff-related provisions in their contracts. Force majeure clauses can harness this formerly standard provision to contractually safeguard against economic uncertainties.
Force majeure refers to a contractual provision that relieves parties from performing their obligations when certain unforeseen events occur, such as natural disasters and labor strikes.
Increased costs due to tariffs are generally not considered a force majeure event because economic hardship is viewed as a foreseeable business risk. As the Fourth Circuit once explained, force majeure applies to objective events which directly affect the parties’ ability to fulfil the contract in question, not the ability to make a profit. Although courts will not reallocate risks established by the contract, parties are free to, and should, proactively allocate risks in their contracts.
Given the limitations of traditional force majeure clauses, parties should consider explicitly addressing potential tariff increases and include cost adjustment terms in their agreements.
Courts interpret force majeure clauses narrowly, excusing nonperformance only for events clearly articulated in the contract. Some ways to specifically address the economic impact of tariffs include:
- Provide for price adjustments if certain costs increase beyond a specified threshold
- Broaden the scope of force majeure clauses to include economic disruptions, such as new or increased tariffs
- Require price renegotiations upon a specific tariff-triggered event
- Clearly define the conditions under which tariffs or other government actions will trigger the force majeure clause
In the current economic climate, it is crucial for parties to be proactive and carefully draft their contracts to best protect against tariff increases. By explicitly addressing these risks, businesses can better manage their contractual obligations and avoid potential disputes.