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. The rights of each party are determined generally by the written contract.
Many force majeure provisions provide relief for events or situations beyond the control of the contracting parties such as natural disasters, wars, strikes, and even global pandemics. The definition of a force majeure contract is subjective and determined during the contract drafting stages. It can be either broad-based or specific. 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.
Are Tariffs 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. Different contracts will set different thresholds for performance impact. For example, there is a difference between an unforeseen or unforeseeable event that “prevents” performance and one that “hinders” performance.
Recent case law in Ontario is instructive as to the circumstances in which changes in market conditions due to government action may constitute a force majeure event.
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.
This case shows the potential outcome in disputes where the contract excludes relief for increased cost of performance.
Conclusion
Force majeure provisions allocate risks of events outside of the control of contracting parties. Courts 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.
If you have questions about your contracts or force majeure clauses reach out to the Froese Law team.
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