Are tariffs cause for force majeure, and should we draft with tariffs in mind? These are just one of the many topics addressed at the annual legal symposium sponsored by the International Franchise Association (the IFA). The IFA held its annual legal symposium in Washington, D.C. with two days of formal sessions, followed by a day of joint sessions with the International Bar Association. Between the two events there were over 50 speakers, plus roundtable discussions about all things related to franchise and distribution. I attend with colleagues from my firm and the learning is transferable to our broader legal practices.

Can Tariffs be a Defense to Performance?

My colleague, Eleanor Vaida Gerhards, was struck by the tariff discussions. The tariffs were center stage at the breakout rooms and sidebar conversations. The tariff policies impact supply chains, vendor relationships, and even risk disclaimers in franchise offering documents. She advises that a strong consensus exists in courts and among practitioners that tariffs are not true force majeure events because they only increase the price of performance but do not prevent performance. As long a performance is possible, then force majeure will not likely be found to be an effective defense. In negotiating documents, be careful when tariffs are within the list of force majeure events.

Courts have consistently rejected arguments that tariff-related price increases could support a defense of commercial impracticality. The speaker panel on supply chains cited only one case that held a 572% price increase constituted commercial impracticality, but apparently that was a special case where the customer received a windfall to the detriment of the supplier. Normally, governmental action rarely excuses performance unless it alters fundamental contractual obligations. I will add that given the vacillating impositions of tariffs, a party may be able to invoke the doctrine of temporary impossibility, which could excuse late performance.

Should Tariffs be Included in Offer and Sale Documents as Risk Disclosures?

Franchise offer and sale documents are regulated by the Federal Trade Commission (FTC) and by states that choose to regulate the offer and sale for franchises. Cost estimates in Item 7 affected by tariffs should mention the tariffs and the cost increases expected. As to mentioning tariffs as risk disclaimers elsewhere in the franchise disclosure document, no official guidance is available but an inquiry is pending to a project group of the regulators for some guidance as the franchise disclosures are regulated to avoid extraneous information. In comparison, documents offering the sale of securities and similar items are replete with risk disclosures regarding tariffs. The reality is that tariffs affect businesses directly and indirectly and best practices suggest over disclosure of risks.

Lessons About Dispute Resolution Worldwide

The best education probably results from informal discussions among colleagues at meals and between breaks in the CLE. The formal classes had about 500 attendees learn about franchise law and best practices, as well as legislative and business initiatives affecting worldwide franchising and distribution. One of the more interesting topics for me was the different methods of dispute resolution worldwide.

In the United States, the default dispute resolution is through litigation, with arbitration being a close second in commercial contracts. Overseas, arbitration is by far the most common method of dispute resolution because of insecurities concerning national courts. The rules of international arbitration particularly are intended to eliminate local bias in decision-making and conflict resolution. What I found interesting was that the same problems in the United States may be examined differently overseas.

In Australia, labor regulators imposed back pay on a franchisor for its failure to detect and deter underpayment of wages by its franchisees. With the concept of franchisor joint liability and vicarious liability with their franchisees, expect more verdicts against the franchisor. For this reason, franchisors must be more vigilant in detecting and deterring conduct that can trigger joint liability or vicarious liability.

With respect to franchise standards brand enforcement, most of the talk was about whether to terminate a franchise where the franchisee just will not comply with the system. Suppose that the service areas and bathrooms are mandated in a particular color scheme, but the franchisee simply does not want to comply. Termination over this one issue may be impossible under local law because you must convince a court that this is a material breach and good cause exists for termination. But there were other alternatives discussed. An alternative to termination is a court order for specific performance of what is required for uniformity of the system. Another is having a standby group of unaffiliated franchisees in the system serve in an advisory capacity to address whether system standards have been met as a condition precedent to any mediation or legal proceeding. The franchisee peer group may have enough peer pressure and credibility to convince the recalcitrant franchisee to comply.

The wise learn from continual learning, and the programming from the IFA provided continual wisdom for those fortunate enough to attend and listen.

Reprinted with permission from the May 23, 2025 issue of The Legal Intelligencer© 2025 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.