There has been a lot of discussion regarding Canada-U.S. tariffs lately, and the agriculture industry is not immune from the impact. In fact, it may be one of the main victims.
This has led many to consider the issue of whether they can cancel their contract because of the tariffs.
Cancelling contracts – force majeure
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There is a provision in most contracts that allows a party to terminate the contract if something happens that is unexpected or beyond a person’s control.
This provision is called a force majeure clause, or an “act of God” clause.
If something happens that is covered under the force majeure clause, the parties to a contract may be able to cancel the contract.
While many contracts have a force majeure clause, they are often different. If you are thinking about cancelling a contract as a result of tariffs, it is important to review the contract to determine if the wording in the contract applies.
Force majeure clauses can range in length and complexity, and they can be tailored to specific industries.
However, they normally have two key features:
- It will list or define the circumstances that are considered to be force majeure events. This will often include things such as acts of war, rebellion, terrorism, natural disasters (floods, earthquakes, tornadoes, etc.), civil unrest, strikes and government action.
- If a party is able to establish that a force majeure event has occurred, they will be relieved of some, or all, of the their obligations under the contract.
Generally speaking, the event that engages the force majeure clause does not have to be catastrophic, but it does have to prevent a party from being able to perform their contractual obligations.
This is because force majeure clauses are not supposed to be escape clauses. They should be seen as very narrow instances that allow you to get out of a contract when you are not able to perform the contractual obligations.
The impact of the triggering event is also a critical feature. For example, a flood that does not have any impact on the operations of a business will probably not be enough to trigger a force majeure.
Are tariffs a force majeure?
With respect to tariffs, there is not one clear answer. For example:
- If the “imposition of tariffs” or “material price increases” are listed as force majeure events and the tariffs have a significant impact on a contracting party’s ability to perform the contract, then it is possible that the contracting party could declare a force majeure.
- If the wording is more general, such as “government action,” and tariffs do not impact the contracting parties’ ability to perform the contract, it is unlikely that this will be considered a force majeure event under that contract.
- Even if a party’s profitability is impacted because of the tariffs, that does not change the analysis: force majeure clauses are not escape routes for bad bargains.
There is not one single answer to the question of whether the imposition of tariffs is a force majeure event because it will depend on the wording of the contract and the force majeure clause.
The impact any tariff has on a party’s ability to perform the contract is also critical. If tariffs only impact profitability, this is normally not enough of a reason to cancel a contract because of a force majeure.
Don’t cancel without advice
If you are considering terminating a contract because you believe the tariffs are a force majeure under your contract, you should seek the advice of a lawyer. The consequences of incorrectly cancelling a contract because of a force majeure could be severe.
The other party may decide to sue you for breach of contract, and you could end up having to pay the other party’s losses.
Tristan Culham is a partner with MLT Aikins LLP and Mark Roney is an associate with MLT Aikins LLP. This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation. If you have a topic or question you would like us to address in future issues, please email kkriel@mltaikins.com.
