Mitigating Commercial Contracting Risk in Uncertain Times

Introduction

Contractual relationships thrive on certainty. Yet the far-reaching scope of tariffs imposed and deferred over the last several months has raised concerns that businesses may not be able to perform their own contractual obligations or depend on others to perform theirs. Drafting contracts and closing deals in progress have already been impacted. And recent lawsuits by at least 13 states and several U.S. small businesses are challenging tariffs imposed between February and April 2025 as unauthorized.

In the current volatile environment, provisions regarding pricing and forecasting, amendment, termination, alternative dispute resolution (ADR), and force majeure are likely heavily negotiated and front and center in any contract dispute. For a variety of reasons discussed below, tariffs are unlikely to be a basis for allowing a contracting party to avoid contractual obligations. But as the federal government’s tariff policy continues to evolve, there are steps that businesses can take now to mitigate their impact and plan for future disputes related to pricing, operations, and supply chain, as well as to assist them in current contracting efforts in a dynamic environment.

Key Contractual Concepts

Litigation involving nonperformance in an uncertain economic environment commonly involves one or more of four key contract or common law doctrines:

• Force majeure is a bargained-for contractual term that can excuse delay or non-performance when unforeseen circumstances beyond the parties’ control arise. Courts typically interpret such clauses narrowly and do not give them expansive meaning.
• Impossibility is a common law defense that may apply if an unexpected event occurs, the non-occurrence of that event was a premise of the parties’ agreement, and the unexpected event made performance under the contract either impossible or economically impracticable. However, economic hardship, in and of itself, is unlikely to render performance under a contract impossible.
• Impracticability is also a common law defense that may apply if an unforeseen event not caused by one of the parties makes performance excessively burdensome, inordinately more difficult, or extremely expensive.
• Frustration of purpose is another common law defense that may apply if the principal purpose of the contract is substantially frustrated without fault by the occurrence of an unforeseen event.

Changes in Economic Policy and Commercial Contract Litigation — “A Deal Is a Deal”

Courts have not looked favorably upon defenses to breach of contract claims based on the impacts of government economic policy, including tariffs or sanctions. Instead, courts typically have followed longstanding contract interpretation principles, particularly among sophisticated parties, in rejecting contract defenses such as commercial impracticability, impossibility, frustration of purpose, and force majeure.

For example, in Chainworks, Inc. v. Webco Indus., Inc., a commercial broker of steel tubing sued its supplier for having unilaterally raised prices as a result of revoked steel tariffs and prevailed despite the significant financial impact of the change in tariff policy.¹ In short, the court accepted the broker’s straightforward contract argument: “a deal is a deal.”²

In Sage Realty Corp. v. Jugobanka, D.D., the Southern District of New York rejected both commercial frustration and force majeure defenses raised by a commercial tenant Yugoslavian bank subject to a presidential executive order implementing sanctions against Yugoslavian entities that prevented the tenant from using or accessing any of its assets located in the United States.³ The tenant was not excused from performance under the frustration of purpose doctrine because the imposed sanctions were reasonably foreseeable to the tenant at the time of executing the lease.⁴ The lease’s force majeure provision similarly was not an effective basis to excuse performance because it unambiguously required the tenant to continue to pay rent even in the event of a government action that prevented the landlord from performing its contractual duties.⁵

More recently, in Shelter Forest Int’l Acquisition, Inc. v. COSCO Shipping (USA) Inc., the District of Oregon rejected force majeure and supervening impossibility defenses raised by a shipping merchant based on the federal government’s imposition of tariffs against China as applied to wood products.⁶ The tariffs were not unforeseen or unexpected because the merchant was aware of their impending impact at the time the merchant entered into the services contract at issue, and the language of the parties’ force majeure provision demonstrated the merchant’s knowledge that the new tariff policies could impact the profitability of its business.⁷

Lessons From COVID

Even an unforeseen worldwide pandemic did not impact courts’ bedrock approach to rejecting breach of contract defenses premised on the impact of unforeseen economic events.

For example, in BAE Indus., Inc. v. Agrati-Medina, LLC, the Eastern District of Michigan rejected an argument that a supplier was entitled to refuse to ship parts until the manufacturer paid increased prices under the parties’ fixed-price requirements contracts.⁸ The court opined that an increase in steel prices as a result of pandemic and war in Ukraine, among other things, was not enough to render contract performance impracticable.⁹

This lesson applies beyond the supply contract field, as well. In CAI Rail, Inc. v. Badger Mining Corp.,¹⁰ the Southern District of New York rejected a similar attempt to invoke frustration of purpose and impossibility defenses by a lessee of rail cars that could not make monthly payments due under the parties’ lease documents after the onset of the COVID-19 pandemic when the pandemic and attendant regulations “caused more than a third of Badger’s business to disappear virtually overnight.”¹¹ The court rejected defenses based on “the general economic consequences from the pandemic” absent any invocation of “specific[] government orders and regulations” that impacted the lessee’s performance.¹²

In Dover Mall, LLC v. Tang, an individual defendant was unable to pay rent on his nail salon in a mall when his business “lost viability in early 2020 during the State-mandated closure that accompanied the COVID-19 pandemic.”¹³ A Delaware court rejected the tenant’s impossibility, frustration of purpose, and force majeure affirmative defenses premised on his contention that the pandemic “frustrated the lease’s purpose and made his performance impossible” and the mall’s “declining occupancy rate and accompanying decrease in foot traffic prior to the pandemic further frustrated the lease’s purpose.”¹⁴ Because the force majeure provision in the defendant’s lease, among other things, “contemplated a State-mandated closure” and “preserved [the defendant’s] obligation to pay rent,” it covered the risk of pandemic-related government closures and allocated any risk to the defendant.¹⁵ This case also highlights the importance of drafting force majeure clauses to cover (or not cover) certain events, as that clause will often be outcome-determinative in these types of disputes.

But courts will occasionally allow for nonperformance in narrow circumstances, including crediting impossibility defenses where the impossibility of performance is based on illegality. Indeed, one New York court excused breach of a tuition agreement based on a COVID-era law that outlawed in-person classes and other functions.¹⁶ Another New York state court credited a force majeure defense to breach of contract where the plaintiff cancelled a wedding following the governor’s executive order banning “large gatherings and events” during the COVID-19 pandemic and the force majeure provision identified “circumstances beyond the control of either party — such as … government regulations.”¹⁷

Accordingly, while the COVID-19 pandemic did not meaningfully upend courts’ approach to assessing issues of contract nonperformance based on unforeseen economic events, it presented the extreme circumstances that could occasionally lead to decisions excusing nonperformance under similar circumstances.

Despite a handful of choice decisions in the immediate aftermath of the pandemic that upheld the impossibility and force majeure defenses, there is no reason to think that, absent illegality, the legal framework for supply contract disputes will change due to the imposition of tariffs.¹⁸

Tips To Mitigate and Plan for the Impact of Tariffs

Although the full scope, impact, and timing of current U.S. tariff policy is yet to be determined, there are several measures businesses can take imminently in anticipation of contract disputes.

1. Be proactive now: contract counterparties located abroad may attempt to renegotiate provisions as a result of tariffs on a number of raw materials and products. Legal counsel can help with reviewing major supply and purchase agreements and distribution agreements to ensure you are familiar with your pricing and forecasting provisions and anticipate what manufacturers, suppliers, and customers may try to do to mitigate increased costs. Become familiar with any other clauses that may afford you (or your counterparty) the opportunity to renegotiate or terminate the contract.

2. It may be necessary to invoke dispute-related clauses (or defend against a contract counterparty invoking the same). Be familiar with those clauses in your agreements, including the dispute escalation and venue provisions. Consider whether and under what circumstances an expedited court proceeding or ADR may be appropriate.

3. Should a contractual dispute arise as a result of tariffs, be mindful that common contract defenses such as impossibility, impracticability, frustration, and force majeure are unlikely to be viable defenses to a breach of contract claim.

4. Going forward, consider how you can negotiate more flexibility into the pricing and forecasting provisions of your new supply contracts to leave room for unexpected economic events, such as tariffs. On the other hand, consider how best to tighten up those same provisions in contracts in which you are the purchaser to avoid unexpected pricing increases.

5. Consider explicitly including tariffs in any force majeure provision in your new supply contracts to allocate the risk to your counterparty and ensure you can rely on that provision in future disputes over commercially unfeasible prices resulting from tariffs, or consider exclusion depending on the circumstances of the contract at issue.

© Arnold & Porter Kaye Scholer LLP 2025 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.