Force majeure and other contractual issues

Tariffs (and threats of tariffs) have been keeping business leaders up at night across Canada and the United States since the inauguration of President Trump. The price of goods ratcheting up significantly, or those goods not being available at all, could be the difference between a good or bad deal in many cases. Join our conversation on force majeure clauses and other key terms in business contracts in the current environment.

Our speakers reference a slide throughout this session that discusses the anatomy of a force majeure clause. If you would like to read the slide itself, it is available for download: https://www.torys.com/FMClausePDF

Transcript

Erica Goldman (00:09): Good afternoon, everyone, and thank you for joining us. We're really excited to have you and to spend a bit of time today discussing force majeure and other contractual issues against the backdrop of what is a new and apparently volatile era of U.S.-imposed tariffs. I'm Erica Goldman, I'm a partner in the Torys New York office, and I lead the firm's U.S. litigation group.

I'm here today with my colleagues Steven Slavens and Shalom Cumbo-Steinmetz, both resident in our Toronto office. I will turn it over to Steven and Shalom to introduce themselves quickly.

Steven Slavens (00:44): Sure. So, I'm Steven. I negotiate contracts. I negotiate contracts for everything from IT services and SaaS agreements to the supply of things like aluminum and steel, and meat and produce, and everything kind of in between. So, soft stuff, hard stuff, services, goods, whatever you've got. If it's a commercial arrangement, I've probably had to look at something similar at some point in the past. Shalom? 

Shalom Cumbo-Steinmetz (01:18): I'm Shalom. Like Erica, I litigate contracts. I litigate really anything that's commercial in nature, so my practice is focused on complex commercial cases. I have a bit of a focus in the construction realm and also in the insurance area. So, I'll speak about that a little bit, where it makes sense, but generally speaking, we've litigated a lot of force majeure clauses, particularly recently with Covid, and so we'll be layering some of that experience into what we talk about today.

Erica Goldman (01:46): So, we're going to spend a little bit of time discussing what we call the anatomy of a force majeure clause and some other contractual mechanisms to address the impacts of tariffs and risk allocation, and relatedly, how you can think about documenting tariff-related impacts as amendments, accommodations or workarounds to existing agreements that you may have. We plan to leave a bit of time at the end for a Q&A, so if you'll please drop your questions in the Q&A function at the bottom of your screen, we'll do our best to get to each of those at the end. 

Before we dive in, I just wanted to take a moment to provide a quick update on some of the pending U.S. litigation as relates to tariffs in general.

So, there are now five distinct lawsuits pending that are challenging the imposition of the tariffs by President Trump. Most are pending in the U.S. Court of International Trade. These suits variably seek temporary and permanent restraints against imposition of the tariffs, among other relief. Yesterday, the court for the first time denied one of those motions and one of those actions for temporary restraints on grounds that the plaintiffs there had not demonstrated that there was an immediate harm.

And so those plaintiffs will have to wait until the hearing—the full merits hearing—which is set to occur on May 6th. All of these suits allege that President Trump has overstepped his authority in implementing the tariffs. So, as some of you may know, these tariffs were implemented under the International Emergency Economic Powers Act. 

This Act, while it does give presidents very broad authority to regulate certain transactions in response to national emergencies, those are defined as unusual or extraordinary threats. So, for example, this Act has been used in the past to sanction foreign nations like Russia after its invasion of Ukraine, but it has never been used to impose tariffs. And that is because tariffs historically have been required to have congressional approval. And so, the President's use of the Act in this situation was a way to streamline and circumvent—circumvent—the congressional approval.

Legal commentators believe that many of these cases are quite strong on the merits, and then it just becomes a question of whether this particular Supreme Court would seek to limit President Trump's authority in this particular circumstance. So, we will continue to push out email and video updates as we typically do on these pending cases and others. So, stay tuned.

If you'll look at the slide here, we're going to shift over to talk about what we've called the anatomy of a force majeure clause, and how those clauses might apply to tariff-related business impacts.

Steven Slavens (04:39): Sure. Thanks, Erica. So once these tariffs were announced, I started getting—and I'm sure a number of my colleagues started getting—a lot of questions about their existing contracts and the contracts that they were in the midst of negotiating. And one of those questions that came up invariably was, “is this a force majeure event?” And like any good lawyer, the answer that I gave was something like, “it depends”. 

The reason it depends is because except in a few limited circumstances, force majeure as a concept is a contractual concept. It's not a free-floating doctrine that you can pull out of the air to apply to your commercial arrangement. In most instances, it's one that parties negotiate and put into contracts or fail to do. And so, to talk about a couple of, like, the exceptions to that basic construct.

So, there are a few extrinsic sources of force majeure clauses that are, are force majeure concepts and force majeure-like concepts that are worth talking about. The first is the doctrine of frustration. So, doctrine of frustration is a common law concept. And there are also some statutory versions. A frustration of con, contract concept. 

Those generally require the obligations under an agreement to be impossible to fulfill, and there's usually a concept of unforeseeability or, you know, radically different means of fulfilling a contract that have to be in place there. And so, it's a very high bar, speaks not to things being more expensive, but to things being actually impossible. You're going to see that that's like a bit of a theme that runs through a few of these concepts.

In Québec, the Civil Code has a, has a similar concept: unforeseeable, irresistible, impossible. Right? Those are kind of like the three key words there. So, the event that you're relying on has to be something that you didn't foresee at the time you entered into the agreement. There can't be an effective way to mitigate around it, so it’s got to be irresistible, and then finally, impossible. Your performance has to be impossible. Again, like, that's a very high bar in order to rely on that Québec version of a, a force majeure that’s set in the Civil Code. 

Also worth looking at, depending on what your agreement does, whether the UCC provisions apply, the universal—not universal—the Uniform Commercial Code provisions apply. This is probably the, of all of these kind of extrinsic sources, I think it's the most common source that is the broadest, and it speaks to that commercial impracticability. And so that, I think you can differentiate from frustration and the Québec version of force majeure that sits in the Civil Code. Right? It is, by its nature, speaking about commercial impracticability.

And so, things that are much more expensive may, depending on the facts and circumstances, actually be something that you can squeeze into that clause and rely on it. The UN Convention on the International Sale of Goods, I think that's the right title, is another source, and that reverts back to something closer to that frustration or the Québec version of force majeure where it's talking about actually preventing performance. And so those are all kind of extrinsic sources of force majeure-like concepts that you may or may not be able to rely on in the midst of the impact of tariffs on your business. 

Looking at force majeure clauses—and again, these are things that are negotiated and put into agreements, and hopefully are tailored to the circumstances of what that agreement is for in the context of the deal that you're working on—there's a, there's a way that these things tend to be put together, and the order of these elements may be in different places, in different clauses, and there may be some elements that are missing and one or two that you look at, but most of them generally follow the form that you see up on the slide here.

And this isn’t our example of the perfect force majeure clause, and it's not our example of a terrible force majeure clause, it's just a force majeure clause. But it's helpful because it fits on one slide and it was easy to colour-code. So, I think that the most relevant piece here, or maybe the two most relevant pieces, are what you see highlighted in that light blue colour and the red colour.

Right? So, when somebody asks me, “does force majeure apply to the impact of tariffs?” I say, “I don't know, what was your clause say?” And where I'm going to first is probably the red area that's highlighted, so, the definition of what is captured within that construct of an event. Right? And so, sometimes you see these as broad inclusive lists, which this one is, you can see “acts beyond its reasonable control including,” and so, this whole big laundry list that comes after is just helpful context to figure out what we mean by “outside of reasonable control”, and others you'll see are exclusive where they just define those circumstances. 

So, looking at this one, depending on what your views are of world leaders, “acts of God” is probably not going to be relevant, but you may see, but you may see “government action” or “change of laws” included in force majeure clauses, and you may see “shortage of supply” as it is included in this one, included as well. 

Those may be relevant not just for your own failure as a company to be able to, to fulfill your agreement, but you can look to that shortage of supply element to try to see if there are downstream impacts of tariffs that can be captured, that can help excuse you as you're trying to rely on the force majeure clause. So, that, that red piece, right? That's a list of events or circumstances. If you're defining quote unquote, “force majeure event”, these are the types of events you're thinking of.

The other most relevant factor here is that blue highlighted piece to figure out, like, does this thing apply to me? And so, in blue here, we've got “unable to perform”. That's basically “impossibility”, right? It’s preventing you from performing. There are other verbs or descriptions of impacts that you'll see here sometimes that will offer sort of tighter or looser versions of whether that impact is sufficient to provide relief.

And so, you'll see “unable to perform”, you'll see “impossible to perform”, you'll see “prevented to perform”. I would say that in most instances, these are going to be largely synonymous. And then you will see things that are perhaps a lower threshold. Right? So “hindered” is, I think, a lower threshold. That's—I, I, think you can find some case law in that as well and I'll defer my litigation colleagues for the specifics on it, but a, but “hindered” is a sort of lower bar than “prevented”.

“Delayed”, there's another one that you often see here. What we don't see as often, but we do see sometimes, is “a threshold of impact”: that speaks to financial hardship or commercial reasonability or unreasonably in the circumstances.

You see those less often, but those you do sometimes do see. And, and sometimes you can see those concepts creeping in to the red highlighted section too, right? So “shortage of supply”, sometimes you'll see that modified to be, you know, shortage of supply from, you know, ordinary sources of supply and things like that that can speak to like, well, if I've got to go and find supply from somebody I've never spoken to before from a country that I've never done business in before, perhaps that is a triggering event as well. 

Shalom, do you want to speak to some of the, some of the other elements here on the anatomy of the clause?

Shalom Cumbo-Steinmetz (12:30): Sure. Why don't I…  I'll speak a bit about mitigation and notice, and then I'll let Erica talk a bit about causation and the relief part. So, I'll speak about, you know, the back end of that, which is the purple part of the language on the slide, and these two components, they work together and they are almost always in every force majeure clause.

But as Steven said, the end of the day, whatever the requirements of the clause are, are the requirements that are written in the contract. So, all of this is really sort of building block components that you see in a typical clause. But almost without fail, you're going to see some sort of mitigation obligation. And the reason you're going to see that is that you have that obligation, whether it's written or not, as a matter of contract law: you have to mitigate the harm that you say you're suffering if you're going to make a claim.

And typically, that's baked directly into the clause. The thing that's interesting about Covid—we saw it with Covid and the thing that's interesting now to think about with tariff-related impacts—if you're trying to construct a force majeure claim, and I think at the front end, it's fair to say a lot of these clauses that are drafted pre- the period we're in right now, it's a bit clunky trying to, to stick your impact into that clause.

It all turns on the terms, and if you've got a term like the one on the screen that has “shortage of supply”, and if the shortage—you know, the issue that you are experiencing because of tariffs is a shortage of supply, then maybe you've got a better  ability to, to try to construct a claim. And if you're on the other side, maybe you've got a worse ability to defend that.

But as a general matter, generally tariffs aren't in there. And generally—the specific reference to tariffs—and generally, force majeure clauses do not provide relief for the increased cost of performance. They typically provide relief only for, as Steven was saying, impacts to your ability to perform. So that's just a general comment. 

If—Once you're into the world of constructing a claim and thinking about the claim, you got to think about mitigation. And mitigation, in the tariff context, is interesting. Primarily this comes up in the concept of supply. You've got to get some things. Maybe you're building a project, maybe it's normal, you know, manufacturing process and you've got inputs and now those inputs are tariff-impacted. So, mitigation asks the simple yet complex operational question of, can you find an alternate to replace that tariff-impacted component?

Often the answer may be no. But in order to demonstrate this, you've actually got to go out there and take a look. Now, the operational folks will probably be doing this anyway. But from a legal perspective, it's important to have the legal involved in that, to understand that you're actually going through those steps. And the things that may impact the conclusion that you can't actually find an alternate are, you know, are the alternates capable of being readily scalable? Can, you know, if your main supply is coming from an American or Canadian source (depending on which side of the border you're on, and where the tariffs play out). you know, is there somewhere else, Scandinavia say, that is actually capable of meeting the current supply demand that your source was capable of meeting?

Other questions are logistical issues: even if you can get it, does it take longer to ship? Ten months to ship across the ocean at a very good economic price is maybe not good when you were used to being able to be supplied within a week. How long? This is the case, is key. 

So, in the moment you might say, you know, your commercial folks may conclude, well, we cannot substitute today, but things are going to change. It's a constantly changing environment. The longer that those conditions are in place, as everybody knows, others are going to seek to fill those gaps. And so, when we're thinking about mitigation, we're thinking about it within the moment. And we’re also thinking about the long term. 

If you come to the conclusion, you know, that you've got unmitigable prevention of, of performance… that's true today, is it true tomorrow? Is it true the day after tomorrow? Got to be looking at that long-term. And then as part of that process, you've got to be looking at whether or not you can change your own processes to overcome. So, the simple question—which is the one I was just talking about, whether you can substitute out your components—may be answered in a different way. You know, can we change our manufacturing process such that, rather than use that component, we now get it from somewhere else? We do our process in a different way. 

Those are the types of questions that you need to ask operationally and that from a legal perspective. You've got to assess in order to come to a conclusion about whether or not the impact is one that can be mitigated. And that dovetails nicely into the notice component, because typically these clauses require very fast notice.

And often, the notice requires that you outline the ability—if you're the ones submitting the claim, and of course, if you're the one receiving the claim, you're going to be looking very closely at whether this has been met—but you outline the ability to mitigate this, or the plan or attempts to try to have mitigated this. So, the mitigation exercise is one that every business will do from an operational perspective, because you're trying to do business, and you want to keep doing it.

From a legal perspective, you want to be there with the operational folks thinking about that: thinking about whether it meets the force majeure clause, if you're thinking about a force majeure claim, and then incorporating that, of course, into any notices that need to be given, because that's often a requirement, the notice, but also because it sets you up for the best chance of success to negotiate one of these at the back end.

So, if a claim goes in and you actually find yourselves trying to negotiate a resolution—or ultimately doing what Erica and I do, which is litigate them—documentation of this exercise is key. The fast pace at which this moves, it cannot be understated. And having real time documentations protects you against the reality of institutional turnover, the loss of this kind of information, the fact that the speed of all of this means that looking back and trying to figure out what could we have sourced or could we not have sourced becomes a very complex question six months hence, 12 months hence, but today is quite simple to answer because the operational folks are doing that exercise anyway. 

The thing about notice is that, as you'll see on the screen, they're often very, quite short fuses. So, if the business is thinking about putting in a notice or putting in a claim, think about the notice very early on. Often your claim is not fully baked. Often, and it will just go in as a notice very early in order to set the stage, while you continue to build the claim and, and frankly incur the impact that you say you're about to impact.

Steven Slavens (19:54): Yeah, it's actually, you know, one of the things that we've helped clients with, like really early on in this, you know, tariff mess that we all find ourselves in, as clients are sort of looking at their supply chain, and they weren't actually sure what—

Shalom Cumbo-Steinmetz (20:08): Yeah

Steven Slavens (20:08): —the impact would be and how, and whether that was going to prevent their performance and whether the nature of the impact on their performance was going to take shape, that was going to fit within the force majeure clause. 

And so, what they were really careful to do, which I think was smart, was—I mean, we help them do it, but they, [laughter] they were smart enough to, to sort of put a flag down and say, you know, like, we're not sure whether the impact of these tariffs is going to cause us to fail to perform. We haven't failed yet. If we do, it very well may fit into, you know, either this branch, this branch, this branch, this branch or this branch of the force majeure clause. Like, we're working on it. We want to work with you to make sure that we've got a solution. Because at the end of the day, from these things, like, these are business problems, and the best solution is going to be a business solution, right? Like, some way of dealing with the hardship and keeping a relationship intact and weathering the storm that's caused by, by these tariffs.

Shalom Cumbo-Steinmetz (21:06): Yeah. I think we think about it typically in the same way you think about an insurance claim, where the claim is not fully baked but then the notice will go out to the insurer very early on. 

Steven Slavens (21:17): Yeah. 

Shalom Cumbo-Steinmetz (21:19): And both sides will think about it that, that way and should be thinking about that way. The, the side that's thinking about constructing the claim will want to think about putting in notice very early, before you even are sure you have a claim.

Steven Slavens (21:30): Right.

Shalom Cumbo-Steinmetz (21:31): Because if you don't pursue it, you don't pursue it. And the receiving side, you know, will be thinking about the same thing and documenting what the contract requires and thinking about that if a notice is received very late. 

Erica, do you want to take us through, you know, the triggering events and whether or not, and in what circumstances, you know, how those interact possibly with, with tariffs?

Erica Goldman (21:50): Sure. So, we'll talk just a bit about causation. So—but right before the red text here in our sample clause, you have sort of, you've got the parties unable to perform under the terms of this agreement “because of”, right? And so, there is this element of causation that you'll need to prove. So, did this event actually cause the non-performance?

And as Shalom indicated earlier, you know, at the outset, of a, of a tariff being implemented, maybe the causation is easier to prove, but as we sort of get down the path here and as the supply chain issues, you know, become more sprawling, that link can often become a bit more attenuated. So, something to, to keep in mind, you will be required to prove that link. And so, the, the, the better we can document that and, and I think the earlier we can make the claim as, as Shalom said, the better. The note on foreseeability, we've used this term in other contexts today, but force majeure clauses typically— and at least as the case law has interpreted them in the U.S. and I believe in Canada as well— typically require that the event be unforeseen, right? Such that the parties couldn't have reasonably contemplated or provided for it elsewhere in the agreement, which is precisely the problem we find ourselves in with some of our existing agreements.

So, for those existing agreements, you may think, oh, well, great, how could we have known? But in fact, you know, President Trump in his first term did impose some tariffs, obviously far smaller in scale and didn't impact, you know, the economy the way that these are, but I think that an argument could be made that they certainly were foreseeable in the second term, and then, you know, we did hear sort of during the campaign that, that President Trump was seeking to use tariffs as a tool here. And, and so I think foreseeability also plays in though it is not, you know, expressly contemplated in this, this sample force majeure clause. 

Shalom talked a little bit about the relief. So, force majeure clauses don't provide relief when it comes to costs, right? So, increased costs, ratcheting up of costs. It typically just provides relief in terms of the timing. So, the delay, the supply chain issues, that sort of thing. So, if your agreement had elsewhere included, like, purchase price adjustment mechanisms or a price adjust mechanism or price escalation clause—and some of these we'll talk about a bit later in another context—then you may find some, some assistance there.

Steven Slavens (24:37): And Erica, like, I would just jump in, like, like sometimes you do see force majeure clauses actually set out, like, the nature of the relief. I wouldn't say it's particularly common, usually you see something that looks more or less like what we've got up on screen. But, you know, like, Shalom and I were talking about the case that came out, like, through Covid, that was about, like, a leased business space that was basically uninhabitable as a result of the Covid-19 epidemic.

But what the force majeure clause said in that agreement was basically, like, you keep paying rent and, like, we’ll extend the term of your lease afterwards in order to account for that time. And so, the court looked at it and was like, well, you know, there you go. And so, you do sometimes see it, but often, you know, due to the unforeseeable nature of these things that we're trying to account for, the consequences and the type of relief is usually something that gets left—less picked over by lawyers as they go through these things. Because, you know, it's tough to say what the outcome should be when you don't know what the actual trigger is.

Erica Goldman (25:41): Right. And to Shalom’s point earlier, and I think you'll get to this too, Stephen, we're all sort of working here trying to, to put the square peg in the round hole and figure out, you know, what terms and the agreements as they're drafted today might fit. And it is, you know, a bit cumbersome and clunky. So, and, I think that's a good segue to our next topic.

We're going to take a bit of time and move away from the force majeure clause itself and look at some other contractual mechanisms that can be used to address tariff impacts: allocate risks, shift risks, that, you know, may be useful whether it provides, you know, a roadmap for existing agreements, or for agreements that you may be currently or in the future negotiating. We'll spend some time there.

Steven Slavens (26:28): Yeah. Like, I, you know, like, part of the attention that force majeure clauses are getting now are for negotiations that are in flight. And people will say, like, what do you think about the force majeure clause for tariffs? I’d say, like, it's probably the wrong tool to be using at the moment to address this issue, which doesn't mean don't pay any attention to your force majeure clause, because who knows what's going to happen next year, but, like, if it's a known issue and both parties know that it's an issue, we may be uncertain as to what the impact will be, but almost certainly if you're doing cross-border business or if your supply chain is stretching across borders, like, there's going to be some impact, and it makes sense for the parties to actually think about it and approach it head on. 

Some of the ways that we do that are things that we may see in agreements today. And so, some of the flexibility that you're looking for, even in existing agreements like you'll find in clauses like exceptions to volume commitments, exceptions to exclusivity, that contemplate things like, you know, impact of particular market events and depending on how you've defined it already, that may include tariffs, but if you're looking at it today, like, think about tariffs! Right? Like, should that be an exception on an exclusivity provision? Like, should you have to go with an existing supplier or the supplier that you're planning on negotiating an agreement with, even if the cost of goods to you is going to be 25% higher? That may be a, that may be a pretty tough pill to swallow, right?

Shalom Cumbo-Steinmetz (27:55): And that comes into the mitigation point—

Steven Slavens (27:59): Right.

Shalom Cumbo-Steinmetz (27:59): —which is, when you're looking at your alternate supply, you've got to look at your downstream impacts, and do you have supply commitments? So—

Steven Slavens (28:05): Yes.

Shalom Cumbo-Steinmetz (27:59): —one of the ways to think about that in real time is, yep, now you know this may come up.

Steven Slavens (28:08): Yeah. And, and it's not just your ability to get the stuff that you're using to provide a service. And it's not just the impact directly on that relationship between you and your supplier, but it’s, it's downstream in sort of both directions, right? You've got to look back through your supply chain to figure out, like, how you got the goods that you're creating or selling, and you've also got to look at your market, right? Like, how is this affecting your customer market? 

If you're a Canadian company and everything is sourced and manufactured, you know, company of—or a country of origin is all Canada, but all of your customers are in the U.S., like, that supply agreement that feels like a domestic supply agreement actually is going to get impacted potentially by, by tariffs if, if you're always selling into, into the U.S. 

And so, like, these are things to consider, you know, hopefully at the outset as you're putting these agreements together, particularly like—I'm looking at them every day, I'll tell you the truth, in supply agreements I'm putting together. If you're looking at your existing agreements and again, thinking to the future, you may also think about restrictions on where you're getting the supply of things like raw materials or where you're permitted to subcontract, right? Like, this may be an area where you'd need an exception to make sure that the cost of goods isn't going to increase to you or your customer by a huge amount. 

If you can take steps to mitigate that by sourcing things within either their home jurisdiction or your home jurisdiction, if you're providing services cross-border, you know, maybe the, maybe the simplest place to look at is like how your pricing is structured in an agreement, right? 

Like, if your customer is always on the hook for tariffs and you're never on the hook for tariffs, then arguably that's not your problem. But don't worry, it will become your problem when your customer doesn't want to pay those tariffs [laughter]. But your ability to pass on costs may be baked into your pricing structure already. 

And so, like, that's another place to look when, you know, if somebody were to, like, hand us a diligence project, like, what are the impacts of tariffs are going to be on all these supply agreements? Like, we would look at the way that your pricing is structured and look for price adjustments, including for things like CPI, right? Because I, I think we can expect that CPI is going to start to creep up as the impacts of tariffs run through the economy. 

That's not going to be, you know, a 25% increase, most likely, as the extra cost of goods is going to get allocated among all the parties in the, you know, the value chain. But you're going to see that number start to creep up, similar to the way it did during Covid probably, right? I think we were seeing kind of, you know—at least in my lifetime, it felt like historically high CPI numbers.

And so, you know, those price adjustment clauses are things to think about, both at the negotiation phase today, but also to look at your existing agreements and figure out, like, what does it say? Like, what is the right of my supplier to change my pricing and what's my ability to limit that impact? 

And then, you know, like, maybe the most comprehensive version of dealing with things like tariffs—and these may sit in your existing agreements and they may be things that you're looking to incorporate this year in negotiating today—are clauses that specifically address changes in law and market conditions.

And so, I've put those together in the absence of a current crisis. And I'm putting those things together today in the midst of a potential crisis. And so, you know, there we’re often looking at, like, what is the triggering circumstance, right? Like, can you—if for an existing clause, can you squeeze tariffs into, into that construct? Often you can, and then what happens next, right? So, can you immediately suspend supply and purchase of stuff if it's going to be much more expensive and you don't want to incur that cost either on the production side or the purchase side? Or is that something that you've got to live with while you're trying to negotiate an outcome?

If you can negotiate an outcome, what happens, right? Where does it default to, or do you pass it to an independent auditor or some other form of arbitration to figure out what the adjustment should be, and put your faith in the hands of some third party who knows nothing about your relationship? Or is it some form of an off-ramp, right? And is that off-ramp the whole agreement, or is it just the impacted portion of that agreement? 

And so, you know, like, my suggestion is, like, parties should be looking—in most circumstances anyway—should be looking at these tariffs as, like, a certainty that they are going to impact performance of their agreements over the short term by recognizing that exactly what that impact is going to be is going to be uncertain.

And so, you need to think about clauses that can build, build in enough of a flexible construct to capture tariffs, and not just their impact necessarily on the direct relationship, but on the full value chain from, you know, raw material, the customer… And also, that are tailored so that the relief that you're providing or the impact of not being able to agree on an outcome isn't going to totally destroy a commercial relationship where there's still maybe some value.

But that’s a lot of content [laughter]. I'm going to say, but like, that's… those are some of the dynamics that we're seeing in supply agreements, some of the clauses that we're looking at in existing agreements, and some of the ways that we're trying to address tariffs as we look to, as we look to negotiate terms.

Erica Goldman (33:36): So, there are also similar type clauses in M&A agreements, so, we'll shift just a little bit. I want to talk about maybe—MAE or MAC clauses in acquisition agreements, for example. They can provide an avenue for relief for buyers from the impacts of tariffs, for example. So, the short answer on whether an MAE clause might be something that would assist is probably not—in especially in the United States, but we'll talk a bit about that. 

So, MAE clauses effectively are a type of termination clause which would allow a buyer, for example, give an out from closing a deal, in the occurrence of certain enumerated events. So, if you've got an agreement, obviously the first place you'll want to start is by looking at the clause itself and see how it defines what an MAE is.

We typically already see carve-outs from the definition of an MAE for things like change in law or government action, but then you would see, like, a carve-back to account for circumstances where those acts of, you know—government acts or changes in law or something that amounts to, you know, having devastating or sort of disproportionate impacts on your company.

So, for example, where the effective tariffs are either, you know, something in magnitude or in scope that is truly devastating to your business, or where your business has been impacted by these tariffs in a way that is unique as compared to others in the industry, then it could trigger a right to excuse performance. But again, it's not one-size-fits-all and it really comes down to what your, your contract says. 

In the United States, there was sort of the first and only, in the seminal case on whether an MAE can be found, in Delaware. And that was quite recent. And in that case, the court found the facts there, meaning that the duration and the magnitude of the impact to that party there did constitute an MAE and then did justify the buyer ultimately backing out of the transaction, but it is quite rare. 

The bar is, is pretty high. So, you know, we think aside from, you know, turning your mind to the MAE clause in your agreement, if you, you know, you may be actively negotiating or won in the future, obviously, you could, you know, attempt—depending on which side of the, of the bargaining you're sitting on, you could attempt to include the tariffs as an MAE, though you may get some pushback on that.

But there are some other levers that we think, you know, in the M&A context, for example, may be worth thinking about. As you're negotiating, those would be—so your indemnity provisions, for example. And some of these will dovetail with, you know, if you are seeking to get RWI insurance, for example, some of this will dovetail there.

And so, with the indemnities and then the reps and warranties, for example, is another area you may want to turn your attention. You may want to incorporate, you know, tariff relief, for example, in some of those reps. Or alternatively, you know, revisit the process for bringing down those reps at closing to account for, you know, to account for the tariffs.

Another provision—so, imposing a closing condition, for example, based on tariffs, to allow termination if a particular threshold were met. So in, you know, in the pre-2025 era, this may not have been significant. But when, you know—we're now in the universe where we're looking at tariffs that, in some cases are exceeding 100%, you know, you may want to put a threshold there that automatically triggers, you know, an out for the buyer in that particular situation, if, if you happen to be representing the buyer party in a transaction.

The earn-outs, hold-backs and purchase price adjustments—I know I said we would come back to this a bit later—these are also, you know, areas that are sort of ripe for creative ways to include provisions to account for tariffs. So, for example, you know, through the purchase price adjustment process, if there was an ability on the back end to, you know, have a view, have some visibility at that point into what, just what we're looking at, that would be a place we may be able to account for that.

On an earn-out, for example, if the buyer has a lot of leverage, you know, you, you might be able to put a placeholder there in the EBITA calculation for those tariffs or include, you know, an express agreement on a particular lookback period, just to account for those. And then finally, you know, there's been some discussion in the industry about, you know, how do we build in flexibility for parties to deviate, you know, sellers to deviate from what would otherwise be deemed ordinary course, when you find yourself in a situation where you have these, you know, these tariff impacts, and so, you know, putting in some, some language that allows some flexibility to take actions that might otherwise be deemed outside the ordinary course, in order to, you know, to get the deal across the finish line. These are all, you know, areas where we, we think there may be some ability to get out in front of this.

Shalom Cumbo-Steinmetz (38:58): I'm just going to—

Erica Goldman (39:01): So—

Shalom Cumbo-Steinmetz (39:02): Yeah. Pause to say we've got some really great questions rolling in. And the plan is to address those at the back end. So, we've got a couple, two other topics we want to roll through. But just to encourage people to keep sending in questions because they're terrific. And we'll get to you soon.

Steven Slavens (39:14): We're going to hit them in the lightning round at the end. I'm excited.

Shalom Cumbo-Steinmetz (39:17): [Laughter] That's right. We've got good ones on force majeure. So, keep peppering them on these other topics. So, I wanted to talk a little bit about insurance and what are some of the insurance questions that, we, we're seeing as they relate to tariffs, the insurance questions are really just flavours of what we've already been speaking about so far.

So, the interesting one, I think, of course, that, you know, we saw during Covid and you see occasionally come up now is business interruption insurance. And the experience in Covid—again, this is very much a question that's driven by the policy language. And so they're, you know, thinking about the courts, because that's what I do. We saw these claims go a couple of ways. 

Certain industries, court decisions, you know, if the industry was such that—take dentists, for example, the court order, there was a government order that prevented people from literally going into those places. Then, you know, there were, under the right policy terms, the abilities to claim on those policies because some of those policies—and I'll just take back, a step back and say, the way business interruption insurance works is obviously similar to a force majeure clause, it is a mechanism, a purchase mechanism, outside of your contract, through a separate contract with an insurer, by which you can get coverage for impacts to, you know, your ability to carry out business, which is, you know, basically revenue: your ability to generate revenue.

And the way that those policies work is that there are triggering events. Similar to a force majeure clause, you've got to have a covered peril, and the covered perils will be triggered by specific circumstances. And again, based on the terms of your clause, but your clause covers, you know, a government order, then, you know, what we saw during the pandemic was, in certain circumstances, those government orders would have been sufficient to fully shut off the ability to carry out business.

Other circumstances, it didn’t, right? If you were restaurants or other places of business, it curtailed, but didn't fully prevent business from being carried out. And there were claims nonetheless, under policies in those circumstances, and they were largely unsuccessful. Many of the business interruption policy coverage terms will relate to damage to property or damage to—or physical loss of property.

And so, there were some very creative claims in the courts about Covid damaging—having a damaging effect on a place of business because it, you know, resulted in people's fear of actually going to that place of business. And the courts took a very hardline approach and said, no, that the place of business remains physically intact, it is not damaged by a fire, it is not damaged by a flood. It is open for business. And if people don't want to come, that's not something that's covered by the policy. 

So the thing that's interesting to think through with, you know, BI claims these days, you know, the interesting claim, I think, which we, you know, don't see because it hasn't yet happened is, are the suggestions by politicians about directions that could be given not to sell products: the orders that products not be sold rather than imposing reciprocal tariffs. If governments started preventing, through order, the supply of products across borders. That could generate interesting insurance questions. 

The one, of course, that we see right now, which is just the impact to cost of performance, increased cost of performance through tariffs, generally, you know, not one that, you know, much from the Covid experience is not going to generally trigger those types of clauses. But again, you've got to look at your specific clause. 

The other interesting insurance topics to think about or that we see arising are, of course, bonding questions. A lot of insurance companies are also bonding companies, and so on project—construction projects—you see, if there's a dispute between the owner and the contractor over a force majeure claim, that may result in the owner withholding payment to the contractor and then the contractor facing subcontractor bond claims, and then you find the bond company in the middle of that dispute, trying to figure out what to do. And trying to figure out whether there is a legitimate commercial dispute between the contractor and the subcontractor, or whether this is a claim that, you know, does actually engage the bond and require a bond payout.

The last one, of course, is just the cost to replace things. If, you know, in an insurance context, it's a property loss claim, the fact of tariffs is that they are driving up the cost of replacement, which, you know, then impacts what the insurance payout may be requested to be, may need to be. Again, it depends on the context, but we see that question coming up. 

In the last moments, I think maybe we'll just turn to the topic before we get to questions—

Steven Slavens (44:27): Sure.

Shalom Cumbo-Steinmetz (44:28): —Steven, of, you know, documenting real-time agreements to deal with tariff impacts. 

Steven Slavens (44:33): Yeah. So, I mean, we saw this a lot during Covid, and we're seeing it now as well. As I sort of said before, like, these are business problems and the answers are generally and hopefully going to be business solutions. And what that often means is looking at your contract and figuring out, like, so what are the things that are creating hurdles to our relationship continuing on mutually beneficial terms? And how do we solve for that, right?

And so, documenting a workaround, it's very easy for a party to say, like, hey, can we just source from a less good raw material source supplier that doesn't have a tariff impact? And it being an emergency, you say, like, yeah, yeah, go, go ahead, we just need the stuff. 

I guess that kind of gets you there in the short term. But what are the potential long-term impacts that that may have for both parties? And so, like, we strongly suggest that if you're going to be, you know, coming up with workarounds, ad-hoc solutions, accommodations to allow for a relationship to continue on good terms, you should be documenting these things. And when I say documenting these things, I'm saying, you know, figuring out what is permitted to do, or to be done, I should say, in this context, right?

So, if, you know, you no longer are going to be stuck with only the approved subcontractors, then what subcontractors are you allowed to use? It's always good to know what specifically you're trying to override in your contract to the extent that's feasible, right? So, if you say, like, well, that’s section five, right? Then, like, say it in that little amendment that you're putting together that documents that workaround to say, you know, like, notwithstanding on everything great in section five, like, we're going to be using this subcontractor or any other subcontractor that we can find within, you know, this jurisdiction for the remainder of… Takes me to my next point, which is what's the scope, right?

Like, how long are you going to be able to do that for, how long do these workarounds stay in place? It's one thing to say, like, go use a subpar supplier because of these tariff impacts for the moment; it's another thing to say use them forever until this agreement is finished, right? And so, if it's a workaround, I think it's important to think about the timing considerations. Is, is, you know, once the tariffs are lifted, everything snaps back into place, is there a transitional period after that snap-back of the tariffs that you need to account for in order to make sure that you've still got an agreement with somebody else that's more desirable? Or is it just something that, notwithstanding the fact that tariffs are in place for a longer period, do you want your counterparty to check in with you every 30 days or 90 days to make sure that that's still the right workaround, and if it's not, what the solution is. 

And so, process updates through that, through that term, figuring out, like, you know, how's it going with this other supplier? Tell me about all the steps that you're taking to make sure that, you know, to the extent that the supplier’s subpar, that the things that you're doing to try to bring them up to par, all that stuff is all helpful if, if you can put your mind to it as you're documenting these workarounds.

And then finally, like, what's the consideration, right? Like, that is in some cases just going to be like a really technical legal point, like, you just want to make sure anytime there's an amendment to your contract that there is fresh consideration so that the thing’s enforceable. But also think about it, right? Like, if you're a business that's being asked for relief from one of your suppliers, or if you're asking for relief from one of your suppliers because you no longer want to buy their stuff, like, how does it make business sense?

And can you figure out a way to get consideration for going back and forth that both parties can defend as they're trying to pass it by executives to make sure that they've done the right thing, and shareholders and other stakeholders to make sure that it's appropriate. 

And so, like, that's, you know, that's a bit of a—I'm not even going to call it a sales pitch, like do it yourself, that's fine [laughter] if that's, if that's how you want to do it, but you should be documenting these things. Like call us, we can help, but you can do it, you can do it yourself too. What's important is that the parties know the scope of the accommodation so that everybody's expectations are, are set down there and you're going to avoid disputes in the future.

So, Shalom, then, that—you want to talk a little bit about, like, releases and all those things that we do from like a formal perspective to make sure that those claims don't pop up and bite us later?

Shalom Cumbo-Steinmetz (48:47): Yeah, totally. So again, these sorts of agreements, what I would call agreements of convenience, they often are, like Steven said, they, they may be triggered because there is a contractual clause that sends you down this path, or they may simply be agreements you make because you've got a business and you need to keep operating. So, you agree to modify some things in the contract to do that.

Covid is a great example, again, where many of these agreements were entered into. The view that the impact would be short lived. People weren't, you know, un—not thoughtful about it, they did think it would be a fair amount of time. But I think a lot of people and, you know, rightly assumed that it wouldn't be as long as it ended up being.

And the result of that is that there are now disputes. And, you know, certainly, we've seen them. We are, we have litigated them in, which, these contracts of convenience, you know, there are arguments around the breadth of what was actually—if there are formal releases released or if not just, as Steven put it, like, what are the expectations of the parties, what is being covered during this period?

So, in terms of practical stuff, it's really important to be very specific, like you said, Steven. Often you can have a schedule setting out exactly what items are being substituted or are being covered. An example during Covid was PPE, you know: so, is this change order or sub-agreement dealing with just PPE for this period for this specific site? Or is it covering all costs of Covid, you know, for this entire period of time? 

Those are questions very easily answered after the fact, if the agreement is very specific about PPE and then being very specific that it is PPE exclusively, not PPE— 

Steven Slavens (50:48): Right.

Shalom Cumbo-Steinmetz (50:48): —and other possible costs of Covid. So, specificity is always your friend. And, and like with mitigation and notice in real time these things are easier. After the fact, they become more complex. 

So, these agreements don't need to be, you know—what I'm suggesting it’s not that they need to be massive, but rather that they be very targeted, because you will know, and your commercial folks will know, are negotiating it right now, what exactly you're trying to deal with. So it's important just to have that articulated in a very clear sense, possibly with the commercial terms, not just the legal terms, to say, you know, this is what we're purchasing, this is why we're doing it.

Steven Slavens (51:22): Nice. Are we ready for the lightning round?

Shalom Cumbo-Steinmetz (51:24): I think so. 

Steven Slavens (51:25): Boy, I'm excited. I'm going to I'm going to cheat and look at this laptop a little bit.

Erica Goldman (51:33): Alright, I think—

Shalom Cumbo-Steinmetz (51:33): Maybe just to get us started, there was one question about basket clauses in force majeure clauses. So that's what we were talking about at the front end, which is you've got a list of things, acts of God and sundry, and then you've, you know, that list is preceded by “including but not limited to” language. And so, you know, the question was—and the answer is, yes—are we seeing, you know, people ask the question, you know, “what about things that are not in that list?” And as Steven said, you know, at the front end, I mean, you got to look at, is “and including but not limited to” or is it specifically “just”?

Steven Slavens (52:06): Yeah. 

Shalom Cumbo-Steinmetz (52:07): If it's in the, you know—I'll give you my view and I think Steven's probably got one as well. 

Steven Slavens (52:10): Yeah.

Shalom Cumbo-Steinmetz (52:10): Like this… Where it's “including but not limited to” it is a basket clause. So, these are illustrative but not exhaustive examples. When you're assessing those, you have to be looking at the full clause. So, what's the lead-in to that? Typically, as Erica was saying, it's a—these clauses are anchored on the ability to reasonably control. So, is the event something that's beyond the reasonable control of the party that's seeking relief?

Again, you got to look at how the clause is phrased, but that's how they're generally structured. True foreseeability is often actually a question of, you know, frustration if the parties—you know, that's when you get into that auction of frustration. But what's generally really engaged in the force majeure context is, can you control this? 

Steven Slavens (52:58): Yeah.

Shalom Cumbo-Steinmetz (52:58): That's the mitigation piece. If you can control it, you need to.

Steven Slavens (53:02): And in terms of like what we're seeing in agreements, like, I'm not sure there's quote unquote, like, “market” on this point.

Shalom Cumbo-Steinmetz (53:06): Yeah

Steven Slavens (53:06): Like, these are things that either got negotiated or ignored. [Laughter] And so, and so what that means is you tend to see, like, a bit of variation— 

Shalom Cumbo-Steinmetz (53:16): Yeah.

Steven Slavens (53:06): —in clauses as to whether they are, you know, that type of inclusive list or whether they're an exclusive list. I'm not sure that there's, you know, there's—of course, one is more common than the other, but I'm not sure that there's, like, good data on that. Like, I don't think that there's a market of, like, you know, how dare you suggest that it's, you know, only these things that is quote-unquote, “off market”. Like, I don't see that.

I see parties who are interested in this actually approach it from a more principled perspective and try to figure out, you know, how they feel about things being, you know, excluded on a technicality because it wasn't stuck in a list somewhere. 

Let's go to another question. That was a good one. I'm going to… Oh, nice to see you, Andrea. [Laughter]

I'm going to, I'm going to answer the question about the difference between impracticality and practicability versus impossibility. So, like, I think that, you know, if there's a point to drive home about the way that most force majeure clauses are put together, it's that most of them (again, not all of them) speak to performance being “prevented”, “made impossible”—you see “hindered” less, right? 

You see “lower thresholds” less often, doesn't mean that they're not more appropriate in a given circumstance, but we see a lot of “possible”, or “impossible”, as the, as the frame there, right? That, like—the key distinction to take home with you on this is that “more expensive” is not the same thing as “impossible”, right? And so, what the UCC approach speaks to is commercial impracticability, which gives you a little more wiggle room to say that, like, things have become so much more expensive as a result of the supervening event that it doesn't make any sense to fulfill this contract at all.

Right? Like I, like I would say that, like, it's still a fairly high bar, but it's markedly lower than the impossibility framework that most other kind of extra-contractual versions of force majeure or frustration look at, and probably a little different than the way a lot of force majeure clauses are, are put together. And so, like, that is the distinction, right? That commercial impracticability does take into account the thing is more expensive.

Again, your force majeure clause may do that, right? Your force majeure clause may say, it's become commercially impracticable and so I don't have to do it. You can negotiate that. You're free to do so. You're free to call me to do it on your behalf. That's fine, right? Like that, that's a, that's within your give as somebody, you know, entering into an agreement to push for.  But that, that is, I think, the distinction on that point. What’s next?

Shalom Cumbo-Steinmetz (55:47): There's a good question, it's probably a good one for Erica, about, you know, the exclusion of—you know, we've talked about the obligation to pay more and why that's excluded from force majeure.

Steven Slavens (55:59): Yeah. I mean, I think the question, Shalom—sorry Erica—

Shalom Cumbo-Steinmetz (56:05): Yeah, go for it.

Erica Goldman (56:06): No, go ahead.

Steven Slavens (56:07): I think this question is about like a common piece—

Shalom Cumbo-Steinmetz (56:08): Yes.

Steven Slavens (56:09): —that you see in force majeure clauses quite often. So, I'll just read the question. So: “Can you discuss the exclusion of the obligation to pay money from the obligations excused from a performance by force majeure?”

So, our example of a force majeure clause didn't have that. But a lot of the time what you see is, like, a party is excused from performing its obligations, in brackets, “other than payment obligations”, to the extent caused by… and there's your laundry list, right? So, the reason that's often excluded is for, like, just this type of thing, right? 

Like, the idea here as we're not trying to account for your business failing: whether your business is failing as a result of a government act or act of terrorism or whatever, that's not what this force majeure clause is about. This force majeure clause is about things that are made—again, in the context of that particular type of force majeure clause, it's a force majeure clause that is about your inability to actually do something. 

That's not like your, you know, the need for you to go sell off assets so that you can pay your service providers, right? That is not the thing that's intended to be covered by that type of force majeure clause. They would say, like, you got to pay us! I don't care if that means you got to lay off your people. I don't care if that means you've got to sell your property in order to do it, or discount your product so that you've got cash on hand, like, pay me my money! I'm a service provider. And, like, I've done my part, you need to do yours. And so, I think that's the, kind of, conceptual principled framework—

Shalom Cumbo-Steinmetz (57:29): Yeah.

Steven Slavens (57:31): —for why you often see that exception.

Shalom Cumbo-Steinmetz (57:32): It's organized around the, the basic contractual point, which is just that the party putting, negotiating the pricing is expected to meet that pricing. And so, you know, a bad bargain after the fact is not one that you can get out of simply because it's commercially a bad bargain. And that tends to inform the drafting behind force majeure clauses, is a real distaste for reopening the financial aspects of a contract.

Steven Slavens (58:01): Yeah, and, like, you see that through the case law as well, right?

Shalom Cumbo-Steinmetz (58:06): Yeah. Yep. If the relief’s in there, you know, courts will go there, but they're not inclined to actually read that relief in—

Steven Slavens (58:14): Yep.

Shalom Cumbo-Steinmetz: —it’s got to be very express. 

Steven Slavens (58:16): Erica, do you want to pop something in on that question or no?

Erica Goldman (58:16): Yeah, I think that is also consistent with generally the type of relief that's available there under those provisions is, you know, accounts for delays and additional time and that sort of thing, but does not account for cost. And that's because there are other places in the agreement where that would be taken into account. And so, you just want to be sure that if you're, you know, you're negotiating those, that that's something you provide for outside that clause.

Steven Slavens (58:38): I've got, I've got a quick one from the question list: “Has the Québec Civil Code definition of force majeure meshed with different contractual definitions?” So, consult a lawyer in Québec about this. Our colleagues in Montréal are the best. But I believe that the answer is you can contract out of the Civil Code definition of force majeure and include your own clause there.

And so, they don't mesh per se, but you can overwrite the Civil Code version of it. But again, like, that's not legal advice. Like, let's go talk to a Québec lawyer if we have to, I'm called in Ontario. I'm pretty sure that that's the answer that you cannot rely on. But yeah. Qualification, qualification, qualification.

What else is, what else is on the list?

Shalom Cumbo-Steinmetz (59:19): Is that, just, last one on medical devices? You know, this is a great illustration, you're trying to substitute in components when we’re talking about mitigation. One of the reasons, if you're documenting your mitigation thought process and why you say you can't mitigate, is that potentially you can't just substitute in and out components because those components actually require regulatory approval.

So, maybe a very obvious answer to the operational team. Great one to document from the legal perspective, if you're putting in a claim or thinking about your obligations under a contract.

Steven Slavens (59:53): Yeah, for sure. Like, I look at medical device manufacturing, distribution, supply agreements a lot in my practice and, you know, different from a lot of other types of agreements, like, they will be very specific, not just about, like, what the thing is that you're using, but where you're getting it and what the certification is and all that.

And so, if you need a workaround, like, you need to agree to one. Like, you can't just assume that, you know, the same spec plastic is going to meet the requirement if you're getting it from a different supplier. 

What else was on the last that we can do? I think we're getting over time though! The lightning round may be coming to a close.

Erica Goldman (01:00:27): We are. I just want to say thank you to everyone who has joined us. Fantastic turnout. We're really grateful that you spent a bit of your lunch hour with us. And if there are questions that were not answered—I think we may have had just a few. Please, please feel free, reach out to us. Our email addresses are obviously online, and will also be in the invite, and we'd be happy to continue this discussion with you. So, thanks very much.