Trump Administration Potential 301 Tariffs

Time to Review and Update the Force Majeure Clause

by
S. George Alfonso
Of Counsel
Carstens Allen & Gourley, LLP
and
The Law Offices of S. George Alfonso, PLLC

Summary:

This article outlines a critical issue for international U.S. businesses regarding the potential impact of 301 tariffs on the imported products and components, which may be imposed by the Trump administration on numerous nations, and the potential relief which businesses may seek through the invocation of the “Force Majeure” clause in tehri international commercial contracts.

The Result of the First Trump Administration’s 301 Tariffs on U.S. Businesses:

The first Trump administration introduced 301 tariffs on the Peoples Republic of China (“PRC”), in 2018.(1) The 301 tariffs levied against the PRC from the outset, had a significant financial impact on U.S. businesses who were importing products or components from the PRC. The second Trump administration is now threatening to expand 301 tariffs (as well as other tariffs potentially) to several other nations who engage in substantial trade with U.S.

History of 301 Tariffs Hearings for Exclusion and Denials by The 301 Committee:

In order to afford U.S. companies an opportunity to seek an exclusion from the 25% 301 tariffs levied against the PRC, in the summer of 2018, the Trump administration initiated the “301 Hearing Process”. I represented several clients seeking exclusions for both group 2 and group 3 of the 301 tariffs. As part of my representation, I testified in Washington, D.C. on behalf of each client’s respective behalf. The 301 Hearings for Groups 2 and 3 took place for a full week in both July and August, 2018 respectively. As with all representatives of businesses seeking exclusion, my testimony was heard before the tribunal comprised of several U.S. Departments “The 301 Committee”. (2)

Effects of Denial of Exclusion for U.S. Companies Under 301 Tariffs:

The vast majority of exclusions sought were denied by The 301 Committee. In many instances, the resultant imposition of the 25% tariff on designated imports from the PRC immediately disrupted business’s ability to meet their ongoing contractual obligations. In a very short window of time, businesses found themselves between a rock-and-a-hard-place, in that continuing to fulfill their contractual obligations, substantially reduced or even wiped out the business’s profit margin. In some instances, imposition of the resultant 25% 301 tariff actually reversed the financial discourse, placing businesses in a negative cash flow position. In such cases, the cruel reality was that the imposition of 301 tariffs against the PRC were in most instances, not even contemplated when the international commercial contracts were negotiated and signed. The resultant financial negative impact left some businesses with the highly undesirable choice of walking away from contractual obligations (thereby risking breach of contract claims in U.S. litigation or international arbitration), or possible bankruptcy.

Potential Relief from 301 Tariffs Through the Force Majeure Contract Clause:

After facing denial by The 301 Committee of exclusion from the 301 tariffs, some businesses looked to the “Force Majeure Clause” in their international commercial contracts for potential relief from or even release of their contractual obligations as a result of the negative financial effect of the impact of the new tariffs on the business’s bottom line.

What is a Force Majeure Clause:

There is no such thing as a Standard Force Majeure Clause. Each Force Majeure Clause (sometimes referred to as an “Act of God Clause”), is a contractually drafted insurance policy agreed-upon between parties to the contract. This negotiated Clause is intended to codify instances in which delay, or even release for one or more party’s obligations under the contract may be rightfully obtained, should certain events beyond the control of the parties occur that would render a party’s ability to fully perform and satisfy its obligations under the contract impracticable, substantially delayed or even impossible.

The Force Majeure Clause will identify and define specifically enumerated types of events which are often divided between “Acts of Nature” and “Acts of Man”. The occurrence of one of these events may be sufficient to temporarily, or even possibly permanently excuse one or more party from performance under the terms of the contract. Such a valid excuse under the Force Majeure Clause include a standard in order to successfully invoke the Clause, such as an event causing further obligations under the contract to become; i.) Illegal, ii.) Impossible, iii.) Impracticable, iv.) Prevent (or substantially hinder) the party from compliance with its contractual obligations, or; v.) Renders the full performance of the party’s contractual obligations as being not reasonably possible.

The successful invocation of the Force Majeure Clause can establish a valid defense for the contracting party as a legitimate in its failure to not fully satisfy its contractual obligations, in the event of litigation in the U.S. or international arbitration brought by other party(ies) regarding the commercial contract. (3)

Events that May Casuse the Successful Invocation of Force Majeure:

It is common in Force Majeure Clauses to divide the type of events which could trigger the successful invocation of the Clause into “Acts of Nature” and “Acts of Man”.

Acts of Nature:
Acts of Nature typically include natural disasters and other non-man-made events such as earthquakes, hurricanes, fires, tornados, floods, tsunamis and pandemics, which are sufficient in severity to directly negatively affect the party(ies) ability to successfully satisfy its obligations under the terms of the contract.
Acts of Man:
Acts of Man typically include man-made/created events such as war (“hostile state actions”), national emergency, rebellion, insurrection, riots, embargos, commerce-related strikes, failure of carriers to transport or furnish facilities for transportation, sanctions, terrorism by a government or collection of individuals, (which if not careful, can be insufficiently defined), that are sufficient in severity to directly negatively affect the party(ies) ability to successfully satisfy its obligations under the terms of the contract.

Issues in Invoking Force Majeure Clause (The Devil is in the Details):

As with all terms in negotiated contracts, the ability to effectively invoke a Force Majeure Clause is based upon the specific language and requirements of the international commercial contract. Several factors which would allow a business to successfully invoke a Force Majeure Clause may include but are not limited to; i.) Specificity of the basis or reason for invoking the Clause, ii.) Contractually required elements regarding notification to the other party(ies) of the attempted invocation of the Clause, including but not limited to timing/deadlines (if any exist), iii.) Whether or not the alleged event triggering the Clause is specifically enumerated in the Clause (or satisfies the Catch-All section [if a Catch-All section exists]).

Steps to Take in Oder to Better Protect your Business from the Imposition of New 301 Tariffs:

If your business is at risk of being financially damaged by potential Trump administration future tariffs (301 and/or additional tariffs) with nations whom your business has or may soon enter into international commercial contracts, there are specific steps which can presently be undertaken in order to better prepare for such an event.

Be Prepared – Review Your Business’s Current Force Majeure Clause(s):

Preparation should include both a thorough review of each of your businesses international commercial contract’s Force Majeure Clause, as well as a re-evaluation of the drafting for any potential commercial contracts currently in negotiation or possible contracts in the future. (4)

Updating Force Majeure Clause for New International Commercial Contracts:

Based upon the administration’s representations and actions, in all likelihood the threat of the imposition of 301 tariffs against additional nations will exist throughout the next four years. The best opportunity to address the terms of a Force Majeure Clause is during contract negotiations, as once a dispute has arisen the time to negotiate and clarify any issue has in all likelihood passed and the parties may be faced with a dispute that may not be resolvable save for litigation or international arbitration.

Review Current Force Majeure Clause(s) in International Commercial Contracts:

The Force Majeure Clause(s) for the current international commercial contracts should also be reviewed, in order to both i.) Determine if the occurrence of the imposition of new Trump administration tariffs would, or at least could be argued to provide relief under said Clause, as well as, ii.) Reconfirming all notice and timing requirements and deadlines for the valid claiming of a Force Majeure event within the terms of each contract (including any/all deadlines). (5)

Consider Exploring the Possibility of Renegotiating Current Contracts:

While the intent of parties signing contracts is to bind all such parties to the terms, obligations, rights and duties as set forth therein, parties are always free to propose to renegotiate terms, sections or clauses. Such a proposal may be more favorably received by the other party(ies) prior to the occurrence of a negative incident, such as the actual imposition of new U.S. tariffs (rather than the mere possibility presently). While the other party(ies) are not required to agree to enter into or even contemplate renegotiations, there is always the possibility that other party(ies) are aware of certain terms, rights, obligations and interests which said they may desire to renegotiate which could result in the mutual/all-party tit-for-tat agreement to enter into contract renegotiations which may result in part to the modification of the contract’s Force Majeure Clause.

S. George Alfonso
The Law Offices of S. George Alfonso, PLLC
SGeorge@WorldWideCounsel.Net

AND
Of Counsel
Carstens Allen & Gourley, LLP
SGeorge@CAGLaw.com

(1) The 301 tariffs against the PRC remained in effect throughout the Biden administration until the present.

(2) Although The 301 Committee varied in some instances, primarily I testified before one representative from The Department of State, The Department of Commerce, The Department of Homeland Security, The Department of Labor and two representatives from the International Trade Commission. The 301 Committee heard five minutes of testimony from each company representative, which was provided in groups of six-to-eight company representatives at a time. Upon conclusion of the testimony from each of 6 – 8 representatives in the Testifying Group, The 301 Committee was afforded opportunity to ask follow-up questions directed at some-to-all of the testifying company representatives. In addition to the days in which I testified for each client, I also attended the other days for both the group 2 and group 3 hearings in July and August.

(3) The Force Majeure Clause may also contain a “Catch-All” section for events not specifically enumerated within the stated examples for Acts of Nature and Acts of Man. However, parties should be aware of the doctrine of ejusdem generis (when specific items in a list are followed by a catch-all section, the latter must be limited to things like the former). As such, there exists a potential that an ill-drafted Catch-All section could be subject to or even the cause for U.S. litigation or international arbitration.

(4) It’s never safe to assume that the same [verbatim] Clause exists between multiple contracts.

(5) Some Notice requirements may be as short as 48 hours after the occurrence of the event upon which Force Majeure is being claimed.