Trump's frequent and unpredictable tariff policy changes have, since April 2025, brought huge uncertainty to global trade, resulting in a sharp increase in tariff risks in international transactions. The sudden increase in tariffs may lead to a surge in the cost of contracts which had already been entered into, and may accordingly engender disputes between the contracting parties. Moreover, future contracts will need to carefully consider whether to adopt tariff clauses. This article will discuss the risks and countermeasures which may be warranted by the issues canvassed above.
I. Impact on Signed Contracts
In circumstances where a company's contractual performance is negatively impacted by tariff policy changes which come into effect after the contract has entered into effect, it is first necessary to confirm whether the contract specifies which party bears the risk of tariffs. In this regard, it is necessary to examine whether the contract includes a risk allocation mechanism for "changes in tariffs". If there are such provisions in the contract, the company should evaluate —based on the provisions and the tariff policy changes — whether the risk allocation mechanism is favorable. If the risk allocation provisions are unfavorable, the company may wish to further consider whether it can mitigate the risk through contract modification or termination mechanisms, or if it can resolve related disputes through other legal remedies. Finally, based on the above analysis, the company should develop a negotiation strategy and a dispute resolution plan.
Generally, the following types of clauses may apply to address changes in tariff policies:
1.Tariff Allocation Clauses
The incidence of tariffs is most commonly allocated in cross-border trade contracts, which generally specify which party bears the tariffs through the incorporation of Incoterms (International Commercial Terms). For example, under the Incoterm "DDP" (Delivered Duty Paid), the seller is required to deliver the goods to the buyer after having paid all applicable tariffs. Conversely, other delivery terms, such as the designation of sales as being FOB (Free on Board) and CIF (Cost, Insurance, and Freight), usually require the buyer to handle customs clearance and pay the applicable tariffs. In other types of contracts, tariff responsibilities may be specified through pricing clauses that clearly indicate which party bears the tariffs, and whether changes in tariffs constitute a valid reason for price adjustments. This helps determine which party assumes the risk of tariff fluctuations.
2.Risk Allocation or Exit Mechanisms for Tariff Changes
If a company is contractually responsible for tariffs and changes in tariff policy lead to adverse consequences, the company may consider invoking certain contractual clauses to share the risk with the counterparty, or to terminate the contract and limit its losses.
1)Change in Law Clause
Tariff policy changes are often regarded as a form of "change in law" under contract terms. Typically, change in law clauses provide that certain legal or regulatory changes allow the affected party to request price adjustments to offset the impact of the said changes. Tariff changes may fall within the scope of a change in law clause, but whether such a clause can be invoked depends on the specific wording of the clause in question. Some contracts explicitly contemplate tariff changes and include them within the definition of change in law. For example, in an engineering project requiring the import of specific steel materials, the contract of supply may expressly state that tariff changes constitute a change in law, enabling the supplier to raise the contract price when such changes occur. If the change in law clause does not clearly include tariff changes, the clause and its applicability fall to be construed by reference to the contract's wording.
2)Material Adverse Effect (MAE)
Complex commercial contracts such as investment agreements and financing agreements often contain Material Adverse Effect clauses. In the event of a tariff policy change, the affected party may consider invoking such a clause to terminate the agreement. For example, if the target company in an acquisition heavily relies on the import or export of goods and raw materials, the tariff policy change could severely impact its business and profitability. The investor may then invoke the MAE clause to refuse to proceed with closing the transaction. This will of course depend on, inter alia, the precise framing of the clause in question, as well as the extent of the effect the change in tariff policy has on the relevant party.
3)Force Majeure
Force majeure clauses typically relieve a party from liability if it is unable to perform contractual obligations due to unforeseeable, uncontrollable, and unavoidable events. These typically include war and natural disasters. Some force majeure clauses also include changes in law or legislation, or the imposition of embargoes, as qualifying events. In such cases, or indeed in cases where force majeure provisions do not expressly exclude changes in tariff levels, a party may consider relying on the force majeure clause to avoid losses caused by tariff fluctuations. This may give rise to issues as to foreseeability of the tariff changes, and will depend again on the precise wording of the relevant clause.
4)Termination Clauses
Contracts usually stipulate the parties' termination rights under different circumstances. These generally include, inter alia, (1) termination by mutual agreement; (2) termination under specific circumstances; and (3) termination at will. If the contract includes a termination-at-will clause, the company may choose to terminate the contract in a timely manner to manage risks or losses. However, it must comply with any notice or other procedural requirements.
In addition, if the contract does not expressly provide a right to terminate in the event of tariff changes, it may still be possible to rely on the governing law of the contract to terminate. This applies in particular to doctrines such as change of circumstance / change of position. If the governing law recognizes such doctrines, they may provide a party with the right to terminate, suspend performance, or to renegotiate the contract if performance becomes excessively burdensome. The latter option may allow parties to maintain performance while managing the extra costs caused by the tariff policy changes. If the parties cannot reach an agreement, the affected party may then claim termination pursuant to a change of circumstances. It bears emphasis, however, that these doctrines typically have strict conditions for application. They accordingly will need to be assessed in light of the specific facts and legal framework.
II.Focus on Future Contracts
1.Inspiration from the "Brexit Terms"
In several senses, tariff policy changes bear similarities to Brexit, in that both involve major policy shifts that create high levels of uncertainty and significant commercial risk. Therefore, the contractual strategies developed during the Brexit transition period can provide valuable reference points for the current tariff climate.
Between June 23, 2016 (the Brexit referendum date) and December 31, 2020 (the formal withdrawal of the UK from the EU), it was unclear whether tariffs or quotas would apply to trade between the UK and the EU. During this period, many contracts adopted "Brexit Clauses", which — though drafted in various forms and with varying degrees of finesse — shared the common goal of allocating costs and risks based on the outcome of Brexit.
Drawing on these precedents, contracts involving cross-border transactions may address tariff-related risks by including clauses that specify how to handle the imposition of new tariffs, increases in existing tariffs, customs duties, or other customs-related measures. These may include cost-sharing arrangements or termination rights, based on the specific transaction and risk assessment.
2.Key Points for Drafting Future Contracts
Taking Brexit clauses as a reference, it is necessary (particularly from the perspective of the party bearing the tariffs) to focus in the drafting of contracts on setting up clauses that trigger adjustment or negotiation mechanisms based on "tariff policy changes". Conversely, parties not bearing tariff responsibilities should also assess tariff-related risks and strive to minimize potentially uncertain and open-ended adjustment mechanisms in the contract. The adjustment mechanisms which parties may wish to consider include the following:
1)Contract Duration and Termination Mechanism
Given the uncertainty of tariff policies, it is advisable — while balancing the need for commercial stability — to prioritize shorter-term contracts or to include flexible termination rights. This will serve to mitigate the legal and commercial risks arising from future tariff changes, the incidence or extent of which the parties may not have foreseen.
2)Scope of Supply and Procurement Obligations
Depending on the party's role (supplier or purchaser), the regularity of supply and procurement obligations may be calibrated to balance commercial certainty with the requisite flexibility for managing risk exposure.
3)Delivery Terms and Incoterms Selection
Selecting appropriate Incoterms to clearly allocate responsibilities for transportation costs, in-transit insurance, and import/export tariffs is another useful mechanism for ameliorating tariff-related risks. For example, a buyer may request Delivery Duty Paid (DDP), where the seller bears all tariff obligations, while a seller may prefer Ex Works delivery arrangements (EXW), so as to transfer all such responsibilities to the buyer.
4)Optimizing Force Majeure Clauses
Force majeure clauses should be carefully refined to explicitly include tariff policy changes as qualifying events (particularly above a de minimis threshold). This will provide a contractual basis for relief in the event of significant adverse tariff developments.
5)Flexible Price Adjustment Mechanism
From the perspective of the tariff-bearing party, it may be prudent to include price adjustment clauses that allow for renegotiation if increased tariffs result in significantly higher production or delivery costs. Such clauses should clearly define triggering events, methods for calculating adjustments, and the procedures for notification and renegotiation.
6)Keep the Possibility of Renegotiation
Contracts should include flexible renegotiation mechanisms to allow both parties to adjust contract terms in the event of significant economic changes. These clauses should also specify how to proceed if renegotiation fails, including potential termination or dispute resolution mechanisms.
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.
