NY Courts Offer Little Escape for Contracts Upended by Tariffs

The current trade war is placing stress on contracts where the price of imports affects performance. Sometimes the impact is direct as in a sale of goods contract, or it can be indirect, as in a contract where the use of imported goods is necessary to performance.

Anytime a contract party’s cost of performance rises dramatically and unexpectedly, there is a risk of default. But New York’s courts have long been reluctant to cancel contract commitments, including during the Covid-19 pandemic.

However, there are several legal theories that parties have used to release themselves from a contract’s stipulations—force majeure, impracticability, impossibility, frustration of purpose, and failure of consideration.

While we can’t be optimistic that the courts will let a party claiming tariff distress out of its contract obligations, these theories offer room to argue, and soon we will see cases brought and theories tested.

Act of God

A force majeure, or act-of-God clause, excuses performance impeded by an extreme and unforeseeable occurrence beyond a party’s control. The courts construe such clauses narrowly, excusing nonperformance only if the force majeure clause includes the event that prevents a party’s performance.

Courts have been reluctant to interpret broadly catch-all language like “or any other event beyond the parties’ control” and have held such provisions only cover events of the same general kind or class as those specifically mentioned.

Even a specific reference to tariffs might not work because the party invoking force majeure must prove the event was unforeseeable. That hurdle will be high because President Donald Trump imposed tariffs in his first term, promised more during his 2024 campaign, and has spent years promoting tariffs as a panacea for US economic problems.

Force majeure clauses specifically focused on government action have worked on occasion. During the Covid-19 pandemic, a court released a couple from a wedding venue contract that included in the definition of force majeure a governmental act making it “illegal, impractical, or impossible” to provide or use the venue’s facilities.

Impracticability

Uniform Commercial Code Section 2-615 states that a seller’s failure to deliver goods isn’t a breach if performance was made impracticable by “the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made” or by compliance with foreign or domestic regulations.

The seller must notify the buyer “seasonably” of the delay or nonperformance and where partial performance is available, allocate the partial production among customers fairly and reasonably.

The courts have found a valid impracticability defense when there is “a severe shortage of raw materials or supplies due to war, embargo, local crop failure, unforeseen shutdown of major sources of supply or the like, which either causes a marked increase in cost or altogether prevents the seller from securing supplies necessary to his performance.”

However, neither a rise nor a collapse in the market is a justification itself, because that’s exactly the type of risk which business contracts made at fixed prices intend to cover.

Government interference can’t be an excuse unless it supervenes in a way as to be beyond the seller’s assumption of risk. For example, a court held that a Department of Agriculture-ordered increase in raw milk prices didn’t relieve a milk dealer of its contract obligations because, among other things, it wasn’t the department’s first time doing so.

Impossibility

Performance made objectively impossible by an unanticipated event can be excused by the doctrine of impossibility, which may offer a defense where unforeseen government action prevents the performance of a contract.

For example, a fabric supplier was excused from performing a contract where the government requisitioned all cloth to meet wartime needs, and an insurance company was excused when President Ronald Reagan fired air traffic controllers.

However, courts have been reluctant to excuse nonperformance if the difficulties that made performance impossible could have been reasonably foreseen by the promisor when the parties entered into contract.

New York also requires performance to be objectively impossible—allegations of financial difficulty or economic hardship won’t suffice. Proving objective impossibility due to the imposition of tariffs would be easiest if the tariffs directly prevented performance, such as by making a needed product unavailable.

Frustration of Purpose

Frustration of purpose occurs when a change in circumstances makes one party’s performance virtually worthless to the other, frustrating the purpose of making the contract.

Courts have required that the frustration be substantial and go to the contract’s core: “the frustrated purpose must be so completely the basis of the contract that, as both parties understood, without it, the transaction would have made little sense.”

It’s not enough that a transaction becomes less profitable for the affected party or even that the affected party sustains a loss. During the pandemic, courts repeatedly held that economic hardship caused by government orders was not frustration of purpose.

The doctrine is unavailable when a contract makes provision for the particular calamity that eventually befell the parties. For example, a court refused to excuse performance of a lease for frustration of purpose where a force majeure clause anticipated government orders or regulations.

Like impossibility, the non-occurring frustrating event must have been an assumption on which the contract was made, and the event must have been unforeseeable.

For example, frustration of purpose was found where a tenant was unable to operate a restaurant on leased premises until a public sewer was completed, and where a tenant leased an office only to learn the building’s certificate of occupancy allowed only residential use.

Last Best Hope

Where the bargained-for performance becomes worthless or of little value, a court might find there has been a failure of consideration.

There is precedent for basing failure of consideration on a change in law: at least one court held the consideration for a contract had failed after legislation made a contract worthless to the defendant.

A hallmark of common law is its flexibility to adapt to new situations. While one can’t be optimistic the courts will let a party claiming tariff distress out of its contract obligations, there is room to argue, and we will soon see cases brought and theories tested. Moreover, further policy shifts could improve difficult claims by imposing overwhelming hardship.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Chris Paparella is a partner at Steptoe in New York.

Justin Ben-Asher is of counsel at Steptoe in New York.

Kirsten Bickelman is an associate at Steptoe in Washington, D.C.

Steptoe partner Nate Kritzer contributed to this article.

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