Import-Tariffs: Acts of God or just another Thursday?

Many of us are quietly watching and waiting to see how newly imposed tariffs will affect the U.S. and global economy in the coming weeks, months, and potentially – years.[i]  Anticipating these changes and protecting your transactions is going to be crucial, but what about deals that have already been negotiated and signed?  Which party will bear the greater risks and burdens of tariff-related cost increases? There are several theories that may provide relief.

A widely used contract provision that will bear considerable scrutiny is the ‘Force Majeure Clause,’ which allows a party to avoid liability if it cannot fulfill its obligations due to circumstances beyond their control or unforeseen events.[ii]  The motivator behind this provision is to protect parties against defined disasters, calamities, and acts (and wraths) of God.[iii]  Numerous courts have considered such clauses, and many have declined to invoke the force majeure clause.

Kyocera Corp. v. Hemlock Semiconductor, LLC:

In 2015, the Michigan First District Court of Appeals considered this question in Kyocera Corp. v. Hemlock Semiconductor, LLC.[iv] This case arose in the midst of upheaval within the solar industry caused by tensions between the United States and China. Chinese companies began engaging in the process known as “large-scale dumping,” in which a foreign producer, perhaps with state support, sells a product at a price that is lower than its cost of production to intentionally manipulate an industry and capture market share. Global solar prices began to decline (including the price of polysilicon, a critical component used in solar panels), causing numerous manufacturers to go out of business. In response, the United States imposed anti-subsidy and anti-dumping import tariffs.[v]

Kyocera, a Japanese solar panel manufacturer, had previously entered into a ten year, take-or-pay supply contract with Hemlock Semiconductor, a Michigan based polysilicon manufacturer, to purchase its polysilicon. The very nature of a take-or-pay contract allocates the risk of a rise in prices to the seller (Hemlock) and a fall in prices to the buyer (Kyocera). Kyocera argued that purchasing polysilicon at this higher price would cause its “solar business to cease to exist.” Kyocera tried and failed to negotiate a satisfactory price change with Hemlock and ultimately provided Hemlock with notice that it was excused from performance under the contract’s force majeure clause.[vi]

The Michigan First District Court of Appeals was unsympathetic, finding that economic hardship and unprofitability alone, including increased costs due to tariffs, are insufficient to invoke force majeure unless explicitly covered by the clause. The risk of falling prices fell squarely on Kyocera under its contract, and Kyocera “opted” not to protect itself.[vii] The court refused to “manufacture a contractual limitation that it may in hindsight desire by broadly interpreting the force majeure clause to say something that it does not.”[viii]

Further, the court addressed the issue of foreseeability. The court rejected Kyocera’s argument that they did not foresee the illegal actions of the Chinese government, simply stating that “markets are volatile” and that the fact that “prices may rise and fall was known to both parties and such risk was precisely allocated by the take-or-pay nature of [a]greement.”[ix]

Kyocera is one of many cases illustrating that unless very carefully drafted to say otherwise, economic hardship and decreasing profits may not be enough for a court to intervene and apply the protections of a force majeure clause.  Under these cases, the most that an aggrieved party may receive is more time to comply with its contractual obligations.

So, what type of language would a court consider explicit enough to apply the force majeure clause against tariffs? We will consider this issue in an upcoming post!

[i] See Robert McClelland et al., Tariffs, Trade, China, and the States, Tax Pol’y Ctr, Urb. Inst. & Brookings Inst. (Oct. 17, 2024), https://taxpolicycenter.org/briefs/tariffs-trade-china-and-states.

[ii] See Force Majeure, Legal Info. Inst., Cornell L. Sch., (last visited Mar. 26, 2023) https://www.law.cornell.edu/wex/force_majeure#:~:text=Force%20majeure%20is%20a%20provision,or%20both%20parties%20from%20performing.

[iii] See Mark Trowbridge, Acts of God and Other Force Majeure Events, Supply Chain Mgmt. Rev. (May 2, 2022), https://www.scmr.com/article/acts_of_god_and_other_force_majeure_events.

[iv] See Kyocera Corp. v. Hemlock Semiconductor, LLC, 886 N.W.2d 445 (Mich. Ct. App. 2015).

[v] See id. at 449.

[vi] See id. at 447, 450.

[vii] See id. at 453.

[viii] See Kyocera Corp, 886 N.W.2d at 453.

[ix] See id. at 452-53.