Mitigating Tariff Risks in Contracts

Changes in Most Favored Nation tariffs. Uncertain reciprocal tariff rates. Pending bilateral trade deals. International business faces unprecedented challenges navigating overseas supply chains. Every day routine business decisions on pricing, supply, and manufacturing contracts are now fraught with unpredictability. The security and predictability of trade policy is now over. So how do businesses address the new trade environment and mitigate the associated tariff risks? One effective tariff risk mitigation tool is careful and deliberate contract drafting.  

Common risk mitigation provisions such as force majeure clauses in commercial contracts and price escalation clauses in construction or supply contracts may no longer provide sufficient protection. Businesses should consider including new clauses tailored specifically to tariff unpredictability.  

A tariff-tailored adjustment clause can accomplish what typical force majeure or price escalation clauses may not. A force majeure clause excuses a party’s non-performance due to unforeseen events beyond their control. These “acts of God” may include natural disasters, war, terrorism, or government actions.

In theory, a dramatic tariff change could fall within some common force majeure definitions. However, the absence of the words tariffs, quotas, embargoes, or trade restrictions leave doubt and a potential gap in protection. This is especially true in light of courts’ tendencies tend to interpret these clauses narrowly and restrictively to excuse non-performance only for specified events.

Economic hardship is typically not enough to excuse performance or trigger price changes through a force majeure. As a result, if tariff changes completely wipe out business margins, the parties may still have a contractual obligation to perform. We recommend including key words such as “tariffs,” “duties, “quotas,” “embargoes,” or “trade restrictions “to clarify and improve typical force majeure clauses. These small changes can provide a stronger legal basis for relief in the face of sudden cost increases caused by government-imposed tariffs or similar trade barriers. 

Similarly, price escalation clauses can be clarified and expanded to address tariff risks. These clauses allow for contract price adjustments when the cost of certain supplies, like lumber, steel, or labor, rise beyond a baseline price. While they’re often used only to account for price changes, escalation clauses may be tailored to respond to regulatory changes like tariff volatility. By drafting escalation provisions that explicitly include tariff-related risks, contract drafters may establish a built-in pricing mechanism to address this regulatory uncertainty. 

Below are some sample clauses that may be used to mitigate tariff risk. 

• Price Escalation
  Any increase in Seller’s cost of supplying the Product caused by any law, regulation, tax, common carrier, tariff, or otherwise, imposed or increased after the date of this Agreement on or respecting the ownership, storage, processing, production, transportation, distribution use or sale of the Product covered by this Agreement will be reflected in the price of this agreement.  
• Tariff Adjustment Clause
  In the event that any new or increased tariffs, duties, import taxes, or similar governmental charges (“Tariff Adjustments”) are imposed or take effect after the Effective Date of this Agreement, and such Tariff Adjustments materially increase the cost to Seller of any goods, components, or raw materials required to fulfill Seller’s obligations under this Agreement, Seller shall be entitled to adjust the prices charged to Buyer to reflect such increased costs. 
• Force Majeure 
  Seller shall not be liable for any failure or delay in performance under this Agreement  the extent such failure or delay is caused by or results from acts beyond the reasonable control of the affected party, including but not limited to acts of God, natural disasters, war, terrorism, civil unrest, labor strikes or lockouts, pandemics, epidemics, embargoes, or any action or inaction by any governmental authority, including without limitation the imposition of new tariffs, changes in tariff classifications, quotas, embargoes, trade restrictions, export or import bans, sanctions, or changes in applicable laws or regulations. 
• Price Escalation
  The anticipated invoice for this sale has been provided to Buyer and is attached as part of this Contract. However, Buyer acknowledges and agrees that fluctuations in the cost of the sale, components, labor, supplies, or transportation may occur due to factors beyond Seller’s control. Such factors include, but are not limited to, supply chain disruptions, raw material shortages, transportation delays, and the imposition of new or increased tariffs, duties, embargoes, trade restrictions, or other governmental actions. All increases or decreases to the pricing, whether resulting from tariff changes, supply chain shortages, or other external market conditions, shall be borne by Buyer, unless otherwise agreed in writing. 

As trade policy evolves, contract drafters should consider tailoring commercial contracts to address these specific concerns. By tailoring force majeure and price escalation clauses to explicitly address tariff-related risks, or including tariff-escalation clauses, businesses can better withstand the economic volatility of modern international trade policy. In a time where uncertainty is the only constant, clarity in contracts is more essential than ever.