Tariffs and Legal Remedies: Excusing Contractual Performance in Virginia

Contracts are critical to commercial relationships, but unforeseen events, such as high tariffs, can disrupt performance. This article discusses how Virginia courts may handle doctrines like force majeure, commercial impracticability, and frustration of purpose, and explores related issues such as price adjustments, tariffs as taxes, and cost allocation.  It includes considerations that apply to contract drafting, contract interpretation and contract litigation.

Doctrines to Excuse Performance Under a Contract in Virginia

Excuse of performance obligations evidenced by a written contract is an option in light of extraordinary circumstances when renegotiation may not be an option. Courts often strictly interpret force majeure clauses and related doctrines based on contract terms and established legal principles:

1. Force Majeure: Virginia courts enforce force majeure clauses narrowly. [1] The clause must explicitly list the triggering event or include a category broad enough to encompass it.[2] The unique and dynamic nature of the tariffs being placed on trading partners with the United States may lead to a broadening of force majeure clauses and inspire even primarily domestic entities to consider the impact of tariffs on their business.
2. Impossibility: Virginia common law has adopted the modern doctrine where impossibility excuses performance when an unexpected event renders the circumstances so different from what was anticipated that the contract that performance is impossible.[3] Courts require that the event not due to the fault of the non-performing party.[4]
3. Commercial Impracticability: Codified under UCC § 2-615(a) and Code of Virginia § 8.2-615, this doctrine applies when unforeseen circumstances make performance excessively burdensome. Virginia courts consider whether the event fundamentally altered the agreement’s assumptions. Failure to deliver under a contract may not be a breach where performance as agreed under the contract is made impracticable by the occurrence of an event that the non-occurrence of such event was a basic assumption of the contract.[5]
4. Frustration of Purpose: This doctrine excuses performance when an unforeseen event substantially frustrates the contract’s principal purpose.[6] Virginia courts require proof that the frustrated purpose was central to the agreement.[7]

Can Tariffs Excuse Performance Under Virginia Law?

The impact of tariffs on a business’s ability to perform under a contract will often need to be extreme to justify excuse of performance under Virginia law. For an average business, the increase in operations costs or a manageable increase in the costs to perform under a contract will not rise to the level to excuse performance under a commercial contract. Below are some examples where tariffs may trigger the above doctrines:

• Force Majeure: High tariffs could qualify as force majeure if explicitly included in the clause or if they fall under broad terms like “governmental actions.” However, Virginia courts will not presume their inclusion unless clearly stated. Even where a force majeure clause may list tariffs in the clause, the tariffs will still need to rise to a certain level to justify the application of the force majeure excuse.
• Commercial Impracticability: Tariffs may render performance impractical if they result in significant cost increases that were unforeseeable at the time of contracting. However, mere economic hardship is generally insufficient under Virginia law unless it creates an excessive and unreasonable burden.
• Frustration of Purpose: If tariffs undermine the fundamental purpose of a contract—such as making imported goods prohibitively expensive—this doctrine may apply. Courts will assess whether the frustrated purpose was central to the agreement.

Can Contract Prices Be Increased Due to Tariffs or Force Majeure?

Contract prices can only be increased pursuant to the terms of the contract.  Force majeure clauses excuse non-performance rather than allow for price adjustments. Unless a contract explicitly includes a price adjustment mechanism tied to force majeure events or tariffs, parties cannot unilaterally increase prices due to tariffs or other disruptions without facing a potential breach of contract claim.

Is a Tariff Considered a Tax Under U.S. and Virginia Law?

Yes—a tariff is a tax that is applied to the import or export of goods.

Is a Surcharge Considered a Price Increase Under U.S. and Virginia Law?

A surcharge is generally treated as a price increase because it represents an additional charge imposed on goods or services beyond their agreed-upon price. Whether a surcharge constitutes a breach depends on contractual terms governing pricing adjustments. Absent explicit authorization in the contract, unilateral surcharges may expose sellers to liability for breach of contract.

Can Tariff Costs Be Passed Along to Customers?

In the commercial context, passing tariff costs to customers depends on contractual provisions:

• If the contract includes clauses that allow for price adjustments due to external factors like tariffs, sellers can increase prices according to the terms of such clause.
• Absent such provisions, sellers cannot unilaterally pass tariff costs onto customers without risking breach-of-contract claims.
• Whether such provisions exist can be a legal question based on the use of various contractual vessels from terms and conditions attached to purchase orders and confirmations, applicable provisions under the UCC and Virginia equivalent, to whether the parties negotiated the terms of their agreement. It is important to know what terms govern the contractual relationship, and that determination can require legal analysis.

Virginia courts enforce contractual terms and often require clear language in the contract rather than implying rights or obligations. Consumer facing sellers have more flexibility in what prices can be passed on to customers than those business entities contracting with their customers.

What Happens if a Seller Increase Prices Without Justification Under a Contract?

If a seller raises prices without contractual justification in Virginia, customers have several remedies:

1. Breach-of-Contract Claims: Customers can sue for damages resulting from unauthorized price increases.
2. Specific Performance: While specific performance is typically an uncommon last resort, there are instances where courts may compel sellers to adhere to their contractual obligations.
3. Termination Rights: Depending on contract terms, customers may terminate agreements for material breaches and seek damages.

Courts will hold parties accountable for unjustified deviations from contractual obligations.

Conclusion

Virginia law provides clear guidance on excusing performance under contracts through doctrines like force majeure, impossibility, commercial impracticability, and frustration of purpose. However, these defenses are applied narrowly and require careful analysis of contractual language and circumstances. Entities and individuals concerned about the impact of tariffs on their ability to perform under existing contracts should seek legal counsel to determine their options. Furthermore, customers should ensure that sellers are complying with their contractual obligations.

To address tariff-related risks effectively there are several practices to employ going forward:

• Include tailored force majeure clauses or price adjustment mechanisms during contract drafting.
• Engage in early renegotiations when disruptions occur.
• Seek legal advice to navigate disputes while preserving commercial relationships.

By proactively addressing these issues within contracts governed by Virginia law, businesses can mitigate risks while ensuring compliance with legal obligations.

[1] Christopher Assocs., L.P. v. Sessoms, 245 Va. 18, 22 (1993) (where the terms of a contract are clear and unambiguous, the terms will be construed as written).
[2] Id.
[3] Opera Co. of Bos., Inc. v. Wolf Trap Found. for Performing Arts, 817 F.2d 1094, 1101-1102 (4th Cir. 1987)
[4] Id.
[5] See id (impossibility and impracticability have virtually identical elements as a result of the recent adoption of the modern doctrine); see also Code of Virginia § 8.2-615
[6] Drummond Coal Sales, Inc. v. Norfolk S. Ry. Co., No. 7:16CV00489, 2018 U.S. Dist. LEXIS 143047, 2018 WL 4008993, at *15 (W.D. Va. Aug. 22, 2018) (outlining the elements of frustration of purpose).
[7] Id.

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