In light of the ongoing uncertainty over increases in US tariffs, we look at the contractual implications for both suppliers and customers involved in international trade. This briefing discusses who pays, including the impact of Incoterms, and whether parties can avoid their contractual obligations based on force majeure clauses, material adverse change (MAC) clauses or frustration.
What are tariffs and who pays?
What are tariffs?
Tariffs are duties imposed on imported goods, generally used to generate government revenue and also to protect domestic industries from foreign competition. Although the position continues to evolve and the US has lifted some of its more extreme tariff increases, measures still in place at the time of writing include a baseline 10% tariff on imports from all countries for 90 days (unless these restrictions are suspended). Although the markets have reacted with relief to the suspension of some of the initial "Liberation Day" measures, the fact remains that for most products, a 10% tariff is likely to have a significant economic impact. For example, in the EU, a 10% tariff on non-EU cars has historically been sufficient to ensure that most manufacturers produce vehicles for the EU market within the EU itself, or in the UK, where the Trade and Cooperation Agreement allows tariff-free trade (subject to meeting rules of origin requirements).
Who pays tariffs?
The usual rule is that the importer pays tariffs, which may then be passed on to the end consumer – but, as between the parties, it is of course possible to agree other arrangements e.g. some form of burden-sharing or even that the supplier/exporter will pay the relevant tariff. In international trade, the contractual position is often set out by reference to Incoterms.
What are Incoterms?
Incoterms (International Commercial Terms) are standard provisions drawn up by the International Chamber of Commerce (ICC), which define some of the key responsibilities of buyers and sellers in international supply contracts. They address transportation, the allocation of shipping risks and costs, and customs duties, including who pays tariffs (but they do not address numerous other important issues, such as remedies for breach or passing of title). For more detail, see our previous briefing here.
Which Incoterms make suppliers based outside the US liable to pay tariffs?
If a supplier based outside the US has agreed to provide goods to US-based customers using the DDP (delivery duty paid) Incoterm, it will normally be obliged to pay any applicable US tariffs. If any other Incoterm has been used, then unless the contract includes a separate mechanism for recovering costs from the supplier (or the agreement purports to modify the relevant Incoterm to make the supplier pay), the customer/importer is likely to remain responsible for payment of tariffs.
Given this position, we may see US customers looking to rely on force majeure or material adverse change clauses in order to avoid being held to their obligations to purchase from suppliers based outside the US at rates which – for them – may be uneconomic owing to the increase in tariffs. We may also see non US suppliers subject to DDP terms reaching for the same provisions (on the basis that paying the increased tariff makes the deal uneconomic from their perspective). The doctrine of frustration may also be invoked. These issues - where English Law applies to a supply contract - are considered further below.
Could force majeure clauses apply?
A force majeure clause will list specific events, outside of a party's control, which excuse a party from performance of the contract. Most clauses require performance to become impossible, not just more difficult, which is a high bar – but where the bar sits will depend on the precise drafting of your contract. Narrowly defined force majeure clauses may not cover economic disruptions, such as Trump's new tariffs, unless explicitly stated.
As noted in our previous legal briefing, the English courts typically interpret force majeure clauses narrowly, requiring specific language to include economic changes like tariffs. The fact that Trump's tariff plans were widely trailed before his election will also make it difficult to argue that they fall within any broad, general category of disruptions which were not reasonably foreseeable (assuming the clause includes such drafting) – although this may depend on when the contract was entered into.
If a force majeure event has occurred, what's the impact?
If they apply, force majeure clauses will typically suspend the relevant contractual obligations for the duration of the force majeure event. However, many contracts also contain provisions allowing the party which is not seeking to rely on the force majeure event to terminate the contract after a prolonged period of non-performance, such as 3-6 months. It follows that in some cases, reliance on a force majeure clause by one party raises the prospect of the counterparty being able to terminate.
Businesses affected by Trump's tariffs may want to consider redefining their force majeure clauses to explicitly include such economic disruptions – but much will depend on which party is legally responsible for paying the tariffs (see section 1 above).
Could material adverse change clauses apply?
Material Adverse Change (MAC) clauses serve as another protective mechanism, allowing parties to renegotiate or terminate contracts when significant changes impact contract performance. Unlike force majeure, MAC clauses do not require performance to become impossible. Although "material" can be difficult to determine, it is arguable that Trump's new tariff regime could be considered a substantial material adverse effect, potentially triggering MAC clauses (caselaw relating to Brexit suggests that the English courts may be receptive to such arguments).
Drafting tips for MAC clauses
When drafting MAC clauses, it is crucial to specify the triggers and consequent actions, whether it's total or partial termination, renegotiation, or liability shifting. Clear definitions in MAC clauses are imperative for ensuring protection against economic disruptions caused by tariffs. For more insights on MAC clauses, see this previous briefing.
Could frustration apply?
When dealing with unexpected tariffs, if neither force majeure nor MAC clauses provide relief, businesses may explore frustration.
When is a contract frustrated?
The doctrine of frustration applies where:
- a contract has become physically, legally, or commercially impossible to perform, or
- the obligations are radically transformed due to unforeseen events that occur after formation of the contract and are beyond the control of the parties.
However, frustration is often applied very narrowly by the English courts. In particular, the fact that the contract has become significantly more expensive to perform is not usually sufficient. In our view, it is likely to be challenging to persuade a court that tariff increases on their own, however extreme, make the contract impossible to perform or result in a radical change to the parties' original obligations.
What can businesses do to mitigate their risk?
As noted above, the US's tariff position continues to evolve and remains unpredictable – and there may be merit in adopting a "wait and see" approach, at least in the short term. However, it is also worth planning for the worst:
- Review key contracts: Work out who's
responsible for paying tariffs and whether there are any mechanisms
(such as force majeure or material adverse change clauses) that
could result in the parties' obligations being suspended.
- Can you perform your obligations - and if not,
what's your strategy? Whilst many businesses will
prefer a negotiated solution, the strength of your legal position
will be a key factor in determining your strategy. Remember that
the risk of proceeding with non-performance of a contract under any
of the options outlined above is a potential breach of contract
claim – which can be costly.
- Can counterparties perform their obligations – and if not, how will they act? Are key buyers or suppliers likely to seek to avoid their contractual obligations? How strong is your position – both legally and commercially - if they take such action?
New contracts
As regards new contracts, it may be worth looking again at the following:
- Should force majeure clauses include wording designed to cover
economic disruptions due to tariffs?.
- Should greater use be made of material adverse change (MAC)
clauses? As noted above, these may be better suited than force
majeure to provide protection against tariff disruption.
- Does the position on who pays tariffs – including relevant Incoterms – need review?
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.
