Trump 2.0 — The Return of Tariff Uncertainty in Commercial Contracts

At a Glance

• The second Trump administration has implemented tariffs on imported goods into the U.S., causing potential cost increases and supply-chain disruptions for businesses.
• Cross-border businesses need to analyze their contracts to identify vulnerabilities and opportunities for renegotiation in light of changing tariff conditions.
• Key considerations include reviewing governing law, renewal terms, specific tariff terms and risk allocation provisions in contracts.
• Businesses should also examine termination rights, insurance coverage and future contract drafting to mitigate the impact of tariffs, while staying informed and seeking legal advice as necessary.

The second Trump administration started with a bang. There has been an almost weekly focus on implementing and expanding tariffs on a variety of goods imported into the United States. These tariffs are aimed at protecting domestic industries and reducing trade deficits. However, they have far-reaching implications for businesses engaged in international trade and commerce. In particular, the threat of cost increases and supply-chain disruptions looms heavy; and this is making businesses question whether they need to re-evaluate their commercial strategies and contracts.

Given these developments, it is crucial for cross-border businesses to understand what impact the tariff changes have on their existing contracts and future agreements. This includes thorough analysis of their contracts to identify potential vulnerabilities and opportunities for renegotiation. 

Set out below are some points to consider as part of this process.

Review Your Contracts

Initial Considerations

• Governing Law: Examine the governing law clauses in your contracts to understand which jurisdiction’s laws will apply. This can be crucial in determining how any tariff-related disputes will be interpreted.
• Renewal Terms: Assess the renewal terms of your contracts to determine if and when they can be renegotiated in light of changing tariff conditions.
• Specific Tariff Terms: Identify any specific provisions related to tariffs, such as clauses that address changes in import duties or taxes.
• Amendments/Variations: If it is possible to negotiate a contractual amendment, ensure you have a clear understanding of the process for varying the original agreement. Verify that all amendments are properly documented and that you have a complete and up-to-date picture of your contractual obligations.

Risk Allocation

• Contractual Provisions: Examine specific clauses in your contracts that allocate risk related to tariffs. These may include provisions that explicitly state which party is responsible for additional costs arising from tariff changes.
• Incoterms: Any Incoterms incorporated into your contracts may determine who is responsible for bearing the cost of tariffs. Certain Incoterms, such as Delivered Duty Paid (DDP), place the responsibility on the seller; while others may place it on the buyer.
• Tariff Adjustment Clauses: There may be provisions allowing for price adjustments in the event of changes in tariffs, ensuring that the party responsible for bearing the cost can pass it on to the other party.
• Insurance Requirements: Clauses may require one or both parties to obtain insurance coverage for tariff-related risks.
• Shared-Risk Provisions: Clauses may provide for the sharing of additional costs resulting from tariff changes between the parties; however, depending on the tariff scheme, there can actually be penalties in the U.S. for repayment by foreign exporters/manufacturers of duties, so such provisions should be exercised cautiously.

Provisions to Alleviate Consequences

• Price Adjustment Provisions: Check whether your contracts include mechanisms for price adjustments due to changes in tariffs. This could be a pre-defined formula or a clause requiring parties to negotiate in good faith. Not all jurisdictions recognize a contractual obligation to negotiate future terms in good faith (or otherwise), so be aware of potential issues related to agreements to agree.
• Force Majeure: Analyze whether tariff impositions could be considered a “force majeure” event, potentially excusing nonperformance. Note the importance of complying with notification requirements if force majeure is engaged. 
• Frustration/Impossibility: Though unlikely, consider if the imposition of tariffs could render the contract impossible to perform, thereby invoking the doctrine of frustration. 
  
• Illegality: Evaluate if countermeasures taken in response to tariffs could make the contract illegal under applicable law.
• Change in Law/Circumstances: Check for any contractual mechanism that caters for changes in law or circumstances that could impact contract performance and determine if this can be invoked.

Termination Rights

• Termination/Suspension Provisions: Identify clauses that allow for termination or suspension of the contract. Understand the conditions under which these provisions can be invoked.
• Legal Advice: Seek legal counsel to understand your common law and contractual rights regarding termination. Ensure that you are fully aware of the legal implications before taking any action.
• Consequences: Consider the supply-chain impacts and potential consequences of wrongful termination. Evaluate the broader implications for your business operations and relationships.
• Stakeholder Consultation: Engage with stakeholders, including suppliers, customers and financiers, to discuss potential impacts and collaborate on mitigation strategies.
• Proper Exercise: Ensure compliance with notice provisions and other requirements when exercising termination rights. Follow the correct procedures to avoid disputes.

Insurance Coverage

• Policy Review: Examine your insurance policies to determine if they cover scenarios involving tariff impositions. Check for clauses related to business interruption, trade disruption or other relevant coverage.

Future Contract Drafting

For new contracts, consider the following points (discussed above) to alleviate some of the potential pitfalls of future tariff discussions.

• Risk Allocation: Incorporate lessons learned from the current situation into future contracts. Explicitly allocate risks related to tariffs and other trade disruptions.
• Price Adjustment Mechanisms: Develop clear and effective price adjustment mechanisms to address changes in tariffs and other cost factors.
• Force Majeure Clauses: Enhance force majeure clauses to cover a broader range of scenarios, including tariff impositions and other trade-related events.

In Conclusion

The renewed focus on tariffs under the second Trump administration necessitates careful review and potential adjustment of commercial contracts. By taking proactive steps and seeking appropriate legal counsel, businesses can better navigate these changes and mitigate their impact.

Remember: 

• Stay Informed. Continuously monitor tariff developments and regulatory changes. Be aware of the potential for U.S. False Claims Act liability related to tariff compliance.
• Seek Advice. When in doubt, seek legal and regulatory advice to ensure compliance and mitigate risks.