09 Apr The Trump Hazard
The introduction of 25% tariffs risks upsetting the balance of contracts already signed, in progress or to come.
After the Covid19 episode, which gave rise to much debate, we now have a new storm, the Trump episode.
For the moment, the topic relates to customs duties, i.e. the “price” part of the contract.
At a later date, there may be other issues to deal with, such as embargoes.
We therefore need to focus on the date of transfer of the risk, depending on the Incoterm chosen by the parties.
The seller increases their price.
The buyer considers that the contract has been modified.
The incoterm determines who bears the burden of customs duties.
This can lead to disputes.
But this could relate to a brutal breach of contract by the American co-contractor.
The French Cour of Cassation has just handed down a ruling allowing the French supplier to bring an action before a French court if the damage is suffered in France.
What are the legal references for resolving this issue?
- Refer to the Seller’s General Terms and Conditions of Sale and the Buyer’s General Terms and Conditions of Purchase to determine the liability of the parties.
- Invoke force majeure.
However, force majeure is not defined in the same way in all countries, nor is it interpreted in the same way.
In the United States, for example, it has been established that the risk of price increases due to customs tariffs or government action does not constitute force majeure. Parties to international contracts are aware of the risks involved, and define, notably through incoterms, which party is to bear the burden of customs duties.
In France, in the absence of a force majeure clause, the law can be applied, i.e. article 1218 of the Civil Code. Force majeure prevents performance of the contract due to an event beyond the control of the debtor of the obligation.
In the UK, a clause relating to force majeure must be included in the contract.
By analogy, we can refer to the “Unidroit” principles – article 7.1.7, which take up the traditional principles of force majeure.
- Embargo
Generally speaking, an embargo is considered a category of force majeure.
An embargo clause in a contract is perfectly valid. The problem is to know whether it will apply, given the State which has decided on the embargo and the place where the embargo is to be carried out.
If such a clause exists, it normally exonerates the party required to provide the service from its obligation to perform it.
The clause may be worded separately, or the embargo may be provided for as a cause of force majeure.
- Unforeseeability/Hardship
Unforeseeability differs from force majeure in that it relates to the additional cost of the product due to an external event, but which does not prevent performance of the contract.
In France, there is a specific text concerning unforeseeability (article 1195 of the Civil Code) when circumstances unforeseeable at the time of the conclusion of the contract and which arise during its performance, make the performance of the said contract excessively onerous for one party. This leads to renegotiation of the terms and conditions, failing which the contract is rescinded.
Under English law, such a clause must be included in the contract for it to apply.
There are a number of references on the subject.
The Unidroit rules provide model Hardship clauses, notably article 6.2.
There are also ICC Force majeure and Hardship clauses.
- Vienna Convention
Articles 72 and 73 of the Vienna Convention on Contracts for the International Sale of Goods contain provisions concerning the non-performance of the parties’ obligations, particularly in the case of contracts involving successive deliveries.
These include cases where one of the parties fails to perform an essential part of its obligations, or where, before the date of performance of the contract, it is clear that one of the parties will commit an essential breach of contract.
- Limitation of liability / Penalty clauses
Should one of the parties fail to perform all or part of its obligations, it is possible to apply the liability limitation clauses contained in the parties’ general terms and conditions.
These liability limitation clauses are valid as long as they do not exonerate one of the parties from its essential obligation.
The French Civil Code (article 1170) stipulates that “Any clause which deprives the debtor’s essential obligation of its substance shall be deemed unwritten”.
Penalty clauses, which provide for the payment of a certain sum as damages for non-compliance with an obligation, are valid in France and provided for in article 1231-5 of the French Civil Code, with the possibility for the judge to moderate or increase the amount of the penalty.
In English law, however, this notion does not exist, and reference must be made to the “liquidated damages” provided for by the parties in their contract.
In conclusion, the parties have at their disposal a legal arsenal enabling them to find an amicable solution.
Thierry CLERC
www.tclerc-avocats.fr