In brief

Following the US administration’s extensive new import tariffs, many companies are grappling with increased costs and supply chain uncertainty. What happens when a deal becomes financially unsustainable due to government-imposed trade restrictions? Companies should consider the force majeure and change management clauses in their contracts, and the doctrines of impossibility, impracticability and frustration of purpose under applicable statutes and the common law, to assess whether they are entitled to relief. This article examines these potential excuses to contractual non-performance from a US law perspective.

Key takeaways

Force Majeure: The specific language of a force majeure clause will dictate its effects. States vary in their approach to force majeure clauses. Some (e.g., New York) interpret such clauses narrowly, excusing non-performance only if the clause explicitly refers to the event in question, while some (e.g., California) uphold force majeure clauses even if the clause does not refer to the event at issue, as long as the event was unforeseeable when the contract was made.

Impossibility, Impracticability and Frustration of Purpose: These are common law doctrines that some states have codified into their commercial statutes. Under these doctrines, courts may excuse a party from performing a contract when unforeseen events make performance impossible or impracticable, or frustrate the principal purpose of the contract. These are narrow and fact-specific defenses that generally only apply in exceptional circumstances.

Practical Recommendations for Companies Facing Supply Chain Uncertainty:

• Review Your Commercial Agreements Now: Examine your supply, distribution, and procurement agreements and the events your force majeure clause covers. Does it list government actions or changes in law? Does it exclude economic hardship or increased costs? If tariffs or trade restrictions are not mentioned, assume that simply saying “it is more expensive to conduct business now” will not excuse non-performance. Beyond force majeure, some contracts have price adjustment, hardship, or material adverse change clauses that may be helpful.
• Open a Dialogue with Contract Partners: Consider initiating a proactive discussion with your business partners to discuss how government actions are impacting your operations and what steps can be taken to preserve commercial relationships. Business partners may prefer to find a middle ground, such as sharing the added costs or adjusting delivery schedules, rather than ending up in a dispute or default. It can be helpful to act sooner rather than later so that all parties in the supply chain have ample notice of changes. Document any modifications in writing.
• Invoke Force Majeure Thoughtfully: If you have a plausible basis to declare force majeure under your contract (for example, your clause explicitly covers “new tariffs” or “government acts” and the tariffs truly impede your performance), make sure to follow the contract’s procedures. Force majeure clauses often require prompt notice and regular updates to the other party. Keep in mind that a force majeure notice can be a double-edged sword: it might buy you time or a legal defense, but it can also sour a business relationship.
• Explore Other Legal Doctrines Cautiously: Outside of the contract’s force majeure clause, the law provides doctrines such as impossibility, impracticability, or frustration of purpose that might excuse performance. Case law demonstrates that courts apply these doctrines sparingly.
• Draft Future Contracts with Tariffs or Similar Government Measures in Mind: When negotiating new deals or renewals, allocate the risk of tariffs and trade disruptions clearly, including by specifying what happens when certain triggering events transpire, such as when applicable tariffs surpass certain thresholds. Many companies, especially after the supply chain crunch of the COVID-19 pandemic and increased economic uncertainty, have started doing exactly this, revising boilerplate terms to explicitly address foreseeable economic disruptions.

In more detail

How Does the United States Approach Force Majeure Clauses?

Force majeure clauses permit a party to delay or avoid contractual performance if certain stipulated events take place. These clauses typically list specific triggering occurrences, such as acts of war, natural disasters, labor strikes and government orders, and may conclude with a catch-all to cover other unforeseen or uncontrollable events. The specific language of the force majeure clause will dictate its scope, applicability and effects. States’ approaches to force majeure clauses vary. Some (e.g., New York) interpret force majeure clauses narrowly, excusing non-performance only if the clause explicitly refers to the event in question, while some (e.g., California) uphold force majeure clauses even if the clause does not refer to the event at issue, as long as the event was unforeseeable when the contract was made.

If the clause expressly refers to new “tariffs” or “import duties” as force majeure events, the clause squarely applies to the White House’s recent trade measures. If the clause refers to “emergencies”, the clause may also apply because the White House declared a national emergency and relied on emergency powers to impose its latest tariffs in Executive Order 14257. Given how frequently the media refers to the current situation as a “trade war”, companies might also argue that certain tariffs constitute “acts of war”, although the likelihood that this argument gains purchase is uncertain. The more clearly the language of the force majeure clause demonstrates that the parties intended to grant a party relief in a particular situation, the more likely a court will be to excuse a party’s non-performance if that situation arises. For example, in a seminal 1983 decision, the Ninth Circuit affirmed that a force majeure clause excused an aluminum corporation from selling certain refined oil products to a buyer because the contract’s force majeure clause specifically covered a scenario in which the seller’s supplier failed to deliver the products, which is what happened when the supplier sold the products elsewhere at a higher price.

However, courts are generally reluctant to relieve a party just because it entered into a bad bargain. For example, in a 2015 decision involving a solar panel manufacturer, the Michigan Court of Appeals refused to enforce a force majeure clause even though it included language that appeared to cover the events at issue. In this case, the buyer had entered into a long-term agreement to purchase polysilicon at fixed prices and quantities, but the contract became unprofitable for the buyer after the Chinese and US Governments introduced subsidies, tariffs and other measures that purportedly caused polysilicon prices to collapse. The buyer sought to limit its liability by invoking the contract’s force majeure clause, which excused parties for delays and failures in performance arising from “acts of the Government.” The court looked beyond the force majeure clause and refused to grant the buyer relief because the overall structure of the contract showed that the parties intended allocate to the buyer the risk of falling market prices in exchange for a stable long-term supply of polysilicon.

Even if a force majeure clause expressly refers to the triggering event in question, the party seeking to rely on the clause must typically prove other elements to obtain relief. For example, the party may need to show that the triggering event made performance impossible or impracticable, or the party satisfied all notice obligations and took reasonable steps to mitigate harms resulting from its non-performance. Every force majeure clause must be examined on a case-by-case basis, but a solid understanding of how courts interpret them and ambiguities therein can help in negotiations and litigation.

How Does the United States Approach the Doctrines of Impossibility, Impracticability and Frustration of Purpose?

US courts may excuse a party from performing a contract when unforeseen events make performance impossible or impracticable, or frustrate the principal purpose of the contract. States vary in their definition of the level of hardship that an obligor must face under the “impossibility” and “impracticability” doctrines. For example, New York law treats “impossibility” and “impracticability” synonymously and permits an obligor to avoid performance only when performance is rendered objectively impossible by an unanticipated event that could not have been foreseen or guarded against in the contract. As counter-examples, California and Colorado define “impossibility” to mean not only strict impossibility but also impracticability because of extreme and unreasonable difficulty, expense, injury or loss involved. The “frustration of purpose” doctrine is distinct from “impossibility” and “impracticability” in that it focuses less on the obligor’s impediments to performance, and more on whether the unforeseen events make the obligor’s performance worthless to the obligee. Frustration is often asserted as a defense alongside impossibility and impracticability defenses.

Additional elements of these defenses are that the party asserting them must not have been responsible for the unforeseen event, the contract must have been made on the basic assumption that the event would not occur, and the contract does not allocate the risk of the unforeseen events to the party asserting the defense. Many states have codified the doctrines of impossibility and impracticability in their statutes governing transactions in goods by adopting Section 2-615 of the Uniform Commercial Code. The Uniform Commercial Code does not refer to frustration of purpose.

Companies that did not anticipate the breadth or magnitude of US administration’s tariffs or other governments’ retaliatory measures, and face severely challenging consequences as a result, could seek to assert impossibility, impracticability and frustration of purpose defenses to avoid performance. However, courts have often refused to treat mere cost increases or lost profits as impossible or impracticable conditions that frustrate a contract’s purpose. For instance, in a 2020 decision involving a US importer of building materials, a District Court in Oregon rejected the importer’s argument that tariffs and the US Government’s “broad trade war against China” should excuse its non-performance by supervening impossibility or commercial frustration, emphasizing that hardships caused by increased costs, particularly in the context of a fixed-price contracts, do not discharge performance unless the hardship rises to the level of practical impossibility and is outside the reasonable contemplation of the parties at the time of contracting.

The bar for showing “impossibility”, “impracticability” or “frustration of purpose” is high. But a rare example of a successful impracticability defense in the trade regulation context is a 1993 Second Circuit decision involving a US radio equipment manufacturer. In this case, the manufacturer had contracted to sell radio units and parts to its Swedish distributor, which would then supply the products to Iran. Recognizing potential trouble, the contracts included a force majeure clause excusing performance for “governmental interference.” In 1986, those fears materialized when the US Government imposed an export ban on military-grade goods to Iran, and US Customs seized a shipment of the radios bound for Iran. The US manufacturer subsequently refused to deliver the remaining orders, which prompted the Swedish distributor to sue for breach of contract. The US Court of Appeals for the Second Circuit held that the US manufacturer was excused because performance had become impossible within the meaning of the parties’ force majeure clause and the doctrine of impossibility.

What Can You Do to Protect Your Company Going Forward?

While force majeure and related legal doctrines may offer limited relief, companies can take proactive steps to manage risk from tariffs and trade restrictions. As mentioned in the “Key Takeaways” section above, companies should review their existing contracts to assess whether they address governmental actions, price volatility, or supply chain disruption. Engage early with counterparties to renegotiate terms if needed. If a force majeure clause might apply, invoke it carefully and in accordance with contract requirements. When drafting new contracts, consider including tailored provisions—such as tariff pass-through clauses, price adjustment mechanisms, or broader force majeure language—to better allocate risk. Taking these steps now can help avoid disputes and preserve commercial relationships in the face of continuing global supply chain turbulence.