The federal government recently implemented new tariffs on steel and aluminum pursuant to Section 232 of the Trade Expansion Act of 1962. Effective March 23, the government imposed a 25 percent tax on steel and a 10 percent tax on aluminum on imports into the United States from any country other than Canada and Mexico. Other tariffs are being added as well. The newly enacted tariffs raise the question – can a party affected by the tariffs be excused from performance under the force majeure provision included in their respective contracts?
Before tackling this question, it is helpful to understand what exactly a force majeure clause is. Black’s Law Dictionary defines force majeure as “[a]n event or effect that can neither be anticipated or controlled … the term includes both acts of nature (e.g., floods and hurricanes) and acts of people (e.g., riots, strikes, and wars).” In essence, a force majeure clause may excuse a contracted party from performance because of circumstances beyond the contracted party’s control.
Surprisingly, there is minimal case law applying force majeure provisions under North Carolina or South Carolina law. North Carolina and South Carolina state courts have not addressed whether a force majeure provision would apply to price increases from tariffs. However, the Fourth Circuit and South Carolina District Court have each rejected force majeure arguments based on governmental actions’ effect on prices. In both cases, the courts analyzed the language of the specific force majeure clauses at issue when determining whether an event constituted a force majeure, but they did not focus on general or abstract notions of a force majeure.
In Langham-Hill Petroleum Inc. v. Southern Fuels Co., the Fourth Circuit found that price fluctuations arising from foreign government action are not within the scope of a force majeure clause. The parties entered into a fixed-price contract for the purchase of petroleum. In the midst of the contract, Saudi Arabia attempted to regain its share of the world oil market, which resulted in a significant drop in world oil prices. The purchaser attempted to invoke the force majeure clause of the contract so as to be relieved from performing the remainder of its obligations under the contract. The clause at issue stated as follows:
“The term ‘force majeure’ shall include, without limitation by the following enumeration, acts of God, and the public enemy, the elements, fire, accidents, breakdowns, strikes, differences with workmen, and any other industrial, civil or public disturbance, or any act or omission beyond the control of the party having the difficulty, and any restrictions or restraints imposed by laws, orders, rules, regulations or acts of any government or governmental body or authority, civil or military.”
The Langham-Hill court, citing the Seventh Circuit, rejected the purchaser’s argument, holding that “[a] force majeure clause is not intended to buffer a party against the normal risks of a contract. The normal risk of a fixed-price contract is that the market price will change.” Despite the relatively open-ended language of the contract, the court found that Saudi Arabia’s action did not fall within the scope of a force majeure.
Similarly, the United States District Court for the District of South Carolina also held that a contract’s force majeure clause did not include foreign government actions preventing the purchaser’s intended resale in that foreign country. In Coker International Inc. v Burlington Industries Inc., a purchaser of textile looms failed to purchase the contractually agreed upon number of looms, citing “the failure of its intended resale of the equipment to a customer in Peru due to actions taken by the government of Peru.” The purchaser invoked the following force majeure clause in support of its statement:
“Deliveries may be suspended by either party in case of act of God, … or any cause beyond the control of such party, preventing the manufacture, shipment, acceptance, or consumption of a shipment of the Goods …”
The court found that Peru’s actions “did not prevent [the purchaser] from accepting the looms,” and that the clause did not “excuse nonperformance due to failure of a contract of resale, economic disadvantage resulting therefrom, or even a resulting inability to obtain the money for the goods.” The court further noted that “subjective impossibility of performing does not relieve a party from the contract unless the contract so states.”
Other federal district courts have similarly interpreted the contract language and ruled that changes in circumstances based on government regulations do not necessarily constitute a valid force majeure defense.
The takeaway: Look to the specific language in the contract. Even though contracted parties generally cannot avoid their obligations through a generic force majeure provision, the express language in the contract – particularly with respect to what constitutes force majeure – may offer grounds for excusal of performance.
When seeking protection from the risk of future tariffs, companies should include in their supply agreements or terms and conditions of sale a force majeure provision addressing specifically the circumstances and impact of government actions, including on tariffs and quotas. For example, the: “… delay or inability to secure products, parts, materials, fuel, supplies, equipment or power at reasonable prices or in sufficient amounts through usual sources of supply …” Such specific force majeure provisions may offer grounds for excusing a party from performing under the contract.
For more information, please contact us or your regular Parker Poe contact.