The tariff measures introduced on 2nd April by US President Trump on imports into the United States may have significant implications for the contractual relationships underpinning international commercial transactions and supply chains.
For UK businesses engaged in international trade—whether as exporters, importers, suppliers, or customers—it is imperative to understand how these developments may affect both existing and future commercial contracts, and to explore ways to mitigate the economic disruption that could follow.
Commercial Consequences of the Tariffs
Increased Costs
At their core, tariffs function as taxes on the importation of goods. For instance, a 10% tariff applied by the US on goods imported from the UK would mean that an importer must pay an additional sum equivalent to 10% of the goods’ value to the US government. These costs may be borne by the importer, shifted to the exporter, passed on to consumers, or shared between the parties in some combination.
As a result, some US importers may find themselves unable or unwilling to absorb these additional costs. In such cases, they may seek to renegotiate pricing with their suppliers or, alternatively, terminate the relationship if termination proves more economically advantageous than continuing under the current contractual terms.
Legal and Commercial Uncertainty
The tariffs are accompanied by a notable degree of uncertainty. The Executive Order underpinning them permits the President to adjust tariff levels—up or down—at will, and explicitly reserves the right to escalate tariffs in response to retaliatory measures from other countries.
Further, the duration of the tariffs is indeterminate. The Executive Order states only that they will remain in place until the “underlying conditions”—such as trade imbalances or barriers faced by US exporters—are “satisfied, resolved, or mitigated”. This lack of clarity complicates long-term planning and decision-making for businesses.
What Can Your Business Do?
Review Existing Commercial Contracts
One proactive step businesses trading with the US may wish to take is to conduct a comprehensive review of all their current commercial contracts. This can help identify which agreements are likely to be most severely impacted, evaluate their ongoing commercial viability, and consider the potential for renegotiation where maintaining the business relationship remains desirable.
Key Contractual Terms to Review
The impact of the tariffs will vary depending on a business’s position in the supply chain and whether it is acting as supplier or customer. Key contractual provisions to review include pricing mechanisms, variation clauses, and termination provisions.
Price Adjustment Clauses
An essential consideration is whether the contract contains an agreed fixed price or includes provisions for price adjustment. Contracts with such clauses will allow suppliers to increase prices if costs rise elsewhere in the supply chain. It should be assessed whether prices are inclusive of additional costs such as taxes and customs duties, and who bears responsibility for these charges.
Contracts may also include references to Incoterms, which determine responsibility for tariffs and taxes in cross-border transactions. If the supplier bears these obligations, they may be unable to pass on the cost of new tariffs to a US-based customer.
Variation Provisions
Where parties aim to preserve the commercial relationship, renegotiating terms may be appropriate. Some contracts contain explicit mechanisms for variation, usually requiring any changes to be formally agreed between the parties in writing. It is important to observe the formalities stipulated in variation clauses and avoid unintentional amendments through informal discussions or conduct.
Where a US customer attempts to pass on tariff-related costs to the supplier (exporting directly to the US), and the supplier declines to renegotiate, continued performance under the existing terms may be insisted upon. If the customer subsequently refuses to pay, this could amount to a breach of condition, potentially giving rise to a right to terminate. In such cases, dispute resolution and jurisdiction clauses become especially relevant.
Termination Rights
If absorbing tariff-related cost increases proves unfeasible or undesirable for one of the parties, they may consider ending the contract. It will then need to be determined whether the contract allows termination for convenience or only in the event of specific breaches, such as a material breach by the other party.
Where termination rights are restricted, a party is unlikely to be able to exit a contract simply because it has become economically disadvantageous. Misjudging this could expose the terminating party to claims for wrongful termination or enforcement of continued performance under the agreement—so caution is essential.
Berry Smith Comment
The imposition of tariffs by the United States introduces considerable complexity into cross-border commercial arrangements. Businesses should act swiftly to assess their current contractual exposure, consider renegotiation where appropriate, and seek legal advice where uncertainty exists.
Taking a strategic approach to contract management can help mitigate the risks associated with an evolving global trade environment.
Please contact us if you would like more information about the issues raised in this article or any other aspect of commercial law, at 029 2034 5511 or commercial@berrysmith.com.