In the ever-evolving landscape of international trade, the imposition of tariffs has become a hot topic. The recent changes in tariff policies, particularly under the administration of US President Donald Trump, have introduced a new layer of complexity for businesses engaged in global trade. We explore the legal considerations arising and strategies for managing the associated risks.
Understanding tariffs and their purpose
Tariffs are essentially taxes imposed by a government on imports. They can serve multiple purposes: protecting domestic industries from foreign competition, generating revenue, and acting as a tool for political leverage in trade negotiations. The recent tariff policies introduced by President Trump have targeted goods (not services) from various countries, with the intention of (amongst other things) encouraging US consumers to purchase American-made products, thereby boosting the domestic economy. Excluding services from the equation is notable.
Global impact of recent tariff policies
Economists predict that tariffs will lead to increased prices for US consumers once costs are passed on and the cost of imported goods rises.
The recent introduction of increased tariffs has already had far-reaching consequences on the global economy. Some countries have retaliated by imposing their own tariffs on US products, potentially sparking a global trade war. J.P. Morgan Research has indicated a 60% risk of a global recession in 2025, attributing this increased risk to the US administration's shift in tariff policy.
Interestingly, it was Elon Musk who recently highlighted the intertwined nature of global supply chains by posting a video of economist Milton Friedman explaining how a pencil is made:
"Literally thousands of people co-operated to make this pencil ... it was the magic of the price system, the impersonal operation of prices that brought them together and got them to co-operate to make this pencil so that you could have it for a trifling sum. That is why the operation of the free market is so essential, not only to promote productive efficiency, but even more to foster harmony and peace among the peoples of the world."
Impact on commercial contracts and litigation
Such significant and sudden changes in economic policy can cause issues to arise in commercial contracts. What was once a profitable contract may cease to be viable or possible to perform for one or more parties, necessitating changes in accordance with contractual provisions. However, if the contract does not cater for the prevailing circumstances, commercial decisions and negotiations are likely to be required, which could lead to disputes and ultimately litigation if parties are unable to reach an agreed position.
Options and considerations for affected contracts
- Contractual provisions: The starting point for addressing the impact of tariffs on contracts is to review the contract terms. Risk allocation for economic changes may be included in the contract. Clear risk allocation helps prevent disputes and ensures both parties understand their obligations.
- Price adjustments: Contracts involving the supply of imported goods may need to be adjusted to reflect increased costs due to tariffs. Some may include clauses which automatically adjust prices or to effect changes in different circumstances. Disputes can arise if such clauses are unclear or ambiguous. Courts will need to interpret contractual provisions in the event of dispute as to the meaning of the terms.
- Force majeure clauses: These clauses provide relief from obligations due to certain events. Whether tariffs can be considered a force majeure event depends on the specific wording of the clause and the circumstances. Typically, clauses will provide for certain events outside a party's control to excuse or modify expected levels of performance. Notice requirements and steps to mitigate effects are usually stipulated in such clauses.
- Contract termination: Parties may have contractual termination rights in addition to common law rights. The contract should be reviewed to determine the circumstances under which it can be terminated. Termination rights must be exercised with caution, as wrongful termination can lead to serious consequences.
- Frustration: In rare circumstances, the doctrine of frustration may apply, discharging the contract if, due to an event beyond the parties' control, performance becomes impossible, illegal or radically different from what was contemplated by the parties at the time of contracting. However, mere increased expense or situations where there are alternative methods of performance do not constitute frustration.
- Contract renegotiation and variation: Increased costs or supply chain disruptions due to tariffs may necessitate renegotiation of contract terms. Parties may need to agree on new terms reflecting the changed economic environment. Successful negotiations can often depend on the balance of bargaining power between the parties. Reviewing the contract terms on variation is key to understand the parties' rights to vary the contract in different circumstances.
- Alternative Dispute Resolution: Contracts may include mechanisms for resolving disputes more quickly and cheaply than litigation. These mechanisms can be utilised to address issues arising from tariff impacts.
Practical considerations for businesses
Businesses should review existing contracts to establish and assess the risks of their current terms as they stand, focussing on the points raised above. Proactive contract management is essential to navigate the challenges posed by tariffs, which includes monitoring the financial position of counterparties and ensuring that contractual obligations are met.
When drafting and negotiating new contracts, ensure that the potential impact of tariffs is assessed and provisions to address economic risks and changes in law and policy are included from the outset.
Ongoing monitoring of tariff developments is crucial for businesses to stay informed about changes and adapt their operations and legal strategies accordingly, thereby mitigating risks effectively.
Conclusion
The uncertainty surrounding trade tariffs presents significant challenges for businesses worldwide. By understanding the implications of tariffs, reviewing and adjusting contract terms, and adopting proactive risk management strategies, businesses can navigate these challenges more effectively. As dispute resolution specialists, it is our role to guide clients through the complexities of commercial disputes and help them safeguard their interests in a highly unpredictable and volatile global marketplace.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
