Accounting for tariffs in commercial contracting: Practical considerations

As a result, businesses operating in the global economy are evaluating the impact tariffs will have on their operations and their profitability. While that is a multifaceted exercise, one thing businesses can do is evaluate pre-existing and future contractual arrangements with both their suppliers and customers. Clear contractual terms and conditions can mitigate against some of the risk and uncertainty presented by tariffs.

Below, we provide a brief overview of some useful considerations for businesses.

Force majeure clauses

Force majeure clauses can be relied on to minimize the liability of a contracted party unable to fulfill its contractual obligations due to an unforeseen or unavoidable event occurring, that is beyond the control of the parties. Examples of force majeure acts can include natural disasters, acts of war or certain government action. Parties in default may be able to suspend, delay or even absolve themselves from performance.

It is questionable whether tariffs could fall within traditional force majeure clauses. While tariffs may well be introduced unexpectedly and have a considerable impact on the commerciality or profitability of transactions — it may be said that in a global economy tied to a political landscape, tariffs are not necessarily unforeseeable or of the nature required to satisfy a force majeure clause.

The applicability of force majeure clauses to a change in circumstances due to tariffs may also be subject to the relevant jurisdiction that governs the contract, or the specific wording of the clause.

Change in laws or taxes clauses

Change in laws or taxes clauses are also worth considering. Subject to the wording and scope of the clause, they may be more applicable to tariffs than force majeure clauses.

Typically, change in law or taxes clauses result in a change to the price of a contract upon adjustments to the cost of goods or services due to the introduction or amendments to law or taxes, after the contract is entered formed. Subject to wording, they may also extend more widely. This includes, for instance, allowing more time to parties to perform contractual obligations. Unlike the bulk of force majeure clauses, change in law or taxes clauses generally do not fully relieve parties from performing obligations.

Change in laws or taxes clauses may relate to domestic or international laws — meaning that the change need not necessarily take place in the location in which the contracting parties are located, or that which governs the contract (although the clause should be clear in relation to the jurisdictions that it covers).

Termination clauses

Businesses may also consider how termination clauses can assist them in mitigating against the risk and uncertainty associated with tariffs.

A clause allowing for termination for convenience is the most flexible. This means that parties can terminate the contract without providing cause or a reason. In addition, at least under Australian law, parties can insert express conditions into their contracts allowing the parties to terminate upon certain events occurring or not occurring — such as, potentially, tariffs being introduced or prices rising as a result. Clear wording of what the relevant events are will be critical.

Pricing terms

It is also useful for contracting parties to consider, and contracts to stipulate, who should bear the financial burden if and when tariffs are imposed. Businesses should consider what their current pricing arrangements are and whether they should be changed. For instance, the price of goods may be fixed — thus leaving the seller/supplier exposed to the increase in prices due to tariffs. On the other hand, businesses may insert certain clauses to transfer exposure to the customer. This includes, for example, change in laws or taxes clauses as noted above. Again, clear wording is essential in ensuring parties understand their exposure.

Timelines

Particularly where supplies or materials are being sourced from overseas, tariffs can cause increased costs or a shortage of material — forcing businesses to find alternative suppliers. These changes can lead to the delay in performance of contractual obligations. Contracting parties should be aware of the timelines applicable to their contracts and understand how they address liability and cost, if and when delays occur. Parties should also consider whether timelines within their contracts are conditions or warranties. This will be important in parties understanding whether they are entitled to exit contracts upon delays in the other party’s performance.

Preparing for disputes

While business should do their best to avoid formal disputes, and clear contractual terms and conditions will assist in doing so, disputes should nonetheless be prepared for as a form of risk management.

It is important to consider what the contract says about dispute resolution. It may require parties to submit to a particular process, such as arbitration or litigation. To save costs and preserve relationships, parties may be required to hold mandatory negotiations or mediation to resolve a dispute before formal action is taken, or may be required to engage in expert determination. Given tariffs will often impact cross-border transactions with parties based in different jurisdictions, thought should be given to the jurisdiction that governs the contract and any dispute that arises in relation to it.

Ultimately, clauses relating to dispute resolution provide parties with the opportunity to mould the process in a way that best suits them. This can be very important when a dispute arises — particularly where the value of the contract is significant.

Feel free to reach out to your contacts at Bird & Bird if you have questions or would like strategic advice in accounting for the risk presented by tariffs.

Authors: Jonathon Ellis, Nick Boyle, Tom Nicholls, Cassandra Wong