As U.S. tariff policies continue to rapidly evolve, businesses are under pressure to quickly determine how these changes impact their ongoing contractual obligations. Tariffs are likely to impact global and domestic businesses in numerous ways, not only in the cost of contractual performance, but in the domino effect inevitably caused as parties shift their supply and import strategies. There is no one-size-fits-all answer as each organization must address its own unique challenges. To address these challenges, businesses must first determine whether their goal is to pass on increased costs, hold parties to a contract, renegotiate pricing, delay or pause performance, or exit the contract entirely. If a business desires to be relieved from performance as a result of a new tariff policy, relying on a force majeure clause is unlikely to be a viable solution absent very specific contractual language. The best strategy depends on business needs and the contract's terms.
Here are actions to take today to aid in the development of a tariff response strategy:
Understand Tariff Obligations.
Start with Taft's Six Questions for Assessing Potential Implications of Tariffs on Businesses
Carefully Review Contractual Language.
It is imperative to first understand the contractual terms that apply to commercial transactions. Are there express terms, or is there a potential battle of the forms? In the absence of contractual provisions, does a state-adopted version of the Uniform Commercial Code apply to the commercial transaction?
Determine the Strategic Goal.
Consider the following:
- Is There a Need to Amend or Adjust Contract
Terms?
The agreement may need to be amended to address:- Price Adjustment and Escalation Clauses: Permit contract price changes in response to increased costs, such as tariffs, through automatic increases, cost-sharing, or renegotiation if tariffs rise beyond a set threshold.
- Tariff Allocation Provisions: Clarify which party is responsible for new tariffs or duties, either directly or via Incoterms. If this is unclear, negotiation may be needed to share or clarify the burden.
- Flexible Payment Terms: Allow for deferred or extended payment terms to help manage cash flow during periods of increased costs.
- Hardship and Renegotiation Clauses: Enable parties to reopen negotiations if tariffs fundamentally alter the economics of the agreement, often requiring good faith efforts to reach an equitable adjustment.
- Is There a Need to Delay or Pause Performance?
Consider the following:- Force Majeure Clauses: May excuse or delay performance if tariffs make fulfillment impossible, not just more expensive. Generally, economic hardship does not amount to a force majeure unless explicitly included in the list of force majeure events. Courts are likely to find that "acts of government" and similar phrases do not excuse contractual performance resulting from unprofitability due to governmental action or market manipulation. The express language of the contract and laws of the applicable jurisdiction will ultimately decide whether a party may be permitted to excuse performance as a result of a force majeure event.
- Suspension Rights (for Delay): Some contracts allow for temporary suspension of obligations in cases of material adverse change, force majeure, or other specified events.
- Is There a Need to Exit or Limit Contractual
Exposure?
Consider the following:- Termination Rights (for Exit): Some contracts allow for complete termination in cases of material adverse change, force majeure, or other specified events. As discussed above, the contract must be explicit in order for a termination without penalty to be permissible.
- Purchase Order Flexibility: Contracts that are structured around ongoing purchase orders may provide the right to accept or reject future orders, limiting exposure to future tariff increases.
Case-by-Case Application and How Taft Can Help
These strategies must be evaluated in the context of each specific contract and business objective. Taft can help businesses analyze existing agreements, assess which remedies are available, and develop a tailored approach to address tariff-related challenges to achieve company goals.
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.
