Unprecedented worldwide tariffs were recently announced by President Donald Trump, many of which were subsequently deferred for 90 days. Tariffs targeting goods and materials from China were hiked up to previously unforeseen levels, leading to retaliatory actions by the Chinese government. Both finished goods as well as raw materials and component parts are now burdened with significant added cost, interfering with supply chains that have been developed over the past decades. Businesses across the country face uncertainty as to where this trade war will end. So what should be top-of-mind as they navigate this rapidly changing terrain?
Businesses should review contracts with suppliers and customers to clarify who bears ultimate responsibility for paying the tariffs and identify where ambiguity exists that contracting parties may use in challenging or seeking to renegotiate terms. A key question to answer is whether a contracting party can recover the amount of the tariff or pass it back to the other party.
Contractual provisions that may address tariffs include: 1) those that relate to payments of taxes, 2) delivery terms such as Incoterms that allocate responsibility for paying import or export duties, as well as shipping costs, and 3) pricing terms, including provisions relating to price adjustments. Generally speaking, if a contract price is inclusive of all costs, then the seller will be responsible for paying the tariffs. Conversely, if the contract price is exclusive of all costs, then the buyer likely bears responsibility.
Some parties may use the opportunity to renegotiate or even terminate contracts to escape the tariffs. Identifying the various modification and termination provisions may lend leverage to a party seeking to get out from under the burden of the tariffs. Parties may seek to exit a contract because performance is cost-prohibitive. If so, whether a contract may be terminated for convenience, and on what terms, may take on added importance. Likewise, the remedies available for breaching or terminating a contract may help determine whether continued performance is the best strategy.
One question that has been posed is whether the imposition of these tariffs constitutes a material adverse change or triggers a change in law clause. Closely related are the force majeure terms of a contract. Whether any of these circumstances exist so as to excuse performance depends largely on how the terms are defined in the contract. If a change in law clause does apply, many of these types of clauses are designed to lead to a renegotiation to enable the parties to comply with the change in law. Not surprisingly, efforts to avoid contractual obligations due to cost considerations alone are disfavored, whether the argument is based on force majeure or commercial concepts such as impracticability or impossibility of performance. Cost alone generally won't suffice.
Careful attention to a broad array of contractual provisions will be key as companies attempt to navigate this period of change and uncertainty.
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.
