Tariffs, Trade Disruptions: time to review international contracts
Proactive Measures to Mitigate Contractual Risks Arising from Tariffs and Trade Disruptions
I. Overview
Recent geopolitical tensions, trade wars, and supply chain fragility highlight the significant risk that tariffs and broader trade disruptions pose to international contracts. These events can fundamentally alter cost structures, delay performance, or render obligations commercially impossible. This note outlines key legal and contractual strategies to proactively mitigate these risks and minimize disputes.
II. Key Risks Identified
Cost Escalation: Unexpected tariffs impact profitability and potentially make performance uneconomical.
Supply Chain Failure: Trade disruptions (embargoes, sanctions, port closures, customs delays) may prevent the sourcing or delivery of goods/services.
Performance Delays/Impossibility: Disruptions can make contractual performance genuinely impossible.
Force Majeure Disputes: Uncertainty over whether tariffs/trade disruptions qualify as force majeure events under most existing clauses.
Price Adjustment Disputes: Lack of clear mechanisms to adjust pricing in response to new tariffs.
Breach Claims: Failure to perform due to these issues may trigger breach claims if risks are not contractually allocated.
III. Proactive Contractual Mitigation Strategies
Robust & Tailored Force Majeure (FM) Clauses:
Explicit Inclusion: Define "Force Majeure" to explicitly include "changes in trade policy," "imposition of new or increased tariffs," "export/import restrictions," "embargoes," "customs delays," "sanctions," and "supply chain disruptions arising from governmental actions." Courts generally construe force majeure clauses narrowly and are reluctant to apply them to events that merely make performance more expensive or economically burdensome.
Exclusion of Foreseeability: Consider carefully defining whether foreseeable events (trade tensions) are excluded, or if a new tariff or sanction affecting a contract shall qualify as Force Majeure.
Mitigation Obligation: Impose a clear duty on the affected party to mitigate the impact (alternative suppliers, routes, or tariff classifications).
Notice Requirements: Specify strict timelines and methods for invoking Force Majeure due to trade disruptions.
Consequences: Define if Force Majeure entitles suspension, termination, price renegotiation, or merely an extension of time.
Price Adjustment Mechanisms (PAMs):
Tariff-Specific Clauses: Include clauses specifically triggered by the imposition of increased tariffs, duties, or customs fees affecting the contracted goods/services.
Formula-Based Adjustments: Define clear formulas for cost-sharing (e.g., 50/50 split, capped increases, pass-through with evidence). Example: "Any new tariff rate exceeding [X]% shall be shared equally between Buyer and Seller."
Re-Negotiation Triggers: Include an obligation to renegotiate pricing in good faith if tariffs exceed a specified threshold or impact costs beyond a certain percentage.
Exclusions: Specify if adjustments apply only to new tariffs post-signature, or also to increases beyond a baseline rate.
Flexible Sourcing & Delivery Terms:
Alternative Sources: Grant the supplier the right (or obligation) to source goods from alternative countries not subject to the disruptive tariffs, subject to meeting specification requirements.
Delivery Alternatives: Allow flexibility in shipping routes or ports of entry to circumvent disruptions.
Stockpiling/Advance Shipping: Permit (or require) advance shipping/building of safety stock to buffer against anticipated disruptions (cost allocation needs agreement).
Clear Risk Allocation & Liability Limitation:
Tariff Cost Allocation: Explicitly state who bears the risk of existing tariffs at signing and future changes.
Liability Caps: Consider caps on liability for delays or failures directly caused by qualifying trade disruptions, especially if tied to Force Majeure invocation.
Exclusion of Consequential Damages: Ensure standard exclusions of consequential, indirect, and special damages apply, particularly relevant for ripple effects of disruptions.
Termination Rights:
Material Adverse Change (MAC): Define MAC to include significant, long-term trade disruptions or tariff increases that fundamentally alter the contract's economics.
Tariff-Specific Termination: Include a right for either party to terminate if a specified tariff threshold is exceeded and renegotiation fails within a set period.
Long-Term Disruption Termination: Right to terminate if a qualifying trade disruption prevents performance for a continuous period (90 or 180 days).
Governing Law & Dispute Resolution:
Choose a Neutral Forum: Select arbitration in a jurisdiction experienced in complex international trade disputes.
Governing Law: Choose a law well-developed in commercial contract interpretation (CISG). Take care with civil law jurisdictions that extend the concept of Force Majeure and hardship.
Expedited Procedures: Consider clauses allowing for expedited arbitration or interim relief for urgent matters arising from disruptions.
IV. Beyond Contract Drafting
7. Proactive Monitoring & Communication:
Implement processes to monitor relevant trade policies, tariff schedules, and geopolitical risks.
Conduct periodic "tariff impact assessments" on key contracts.
Documentation:
Meticulously document all impacts, mitigation efforts, costs incurred, and communications related to a disruption. This is crucial for invoking Force Majeure or defending against claims.
9. Key Recommendations
Review Existing Contracts: Audit key agreements for vulnerability to tariff/trade disruption risks.
Future-Proof New Contracts: Do not rely on boilerplate clauses.
Define "Trade Disruption": include contractual definition of what constitutes a qualifying event.
Prioritize Clarity: Explicitly define triggers, obligations, and consequences.
Operation adjustment: consider strategies that diversify supply chains, optimize customs compliance, and leverage free trade agreements.
Response Team: Establish a dedicated team comprising legal, procurement, finance, and logistics experts to coordinate responses to disruptions.
V. Conclusion
Tariffs and trade disruptions are not mere possibilities but persistent realities of global commerce. Proactive contractual drafting, incorporating explicit risk allocation, flexible mechanisms, and clear dispute resolution pathways, is essential to protect commercial interests and minimize costly litigation.