Tariffs and Your Contracts: Why do delivery terms matter?
"Tariffs and Your Contracts” Series: Article 2
In light of a trade landscape rife with tariffs, companies are examining their commercial contracts to judge the exposure to increased costs of production. One area of a supply contract that cannot be overlooked when determining this type of exposure is the delivery terms for the product sale. This is because the delivery terms of a contract may identify the party responsible for payment of tariffs.
Incoterms 2020 Delivery Terms
Delivery terms are commonly expressed as Incoterms, which are a set of 11 individual delivery terms with a prescribed set of responsibilities issued by the International Chamber of Commerce, a global business organization. The most favorable delivery term for suppliers under Incoterms 2020 is EXW (Ex Works), in which the supplier makes the goods available at its facility, and the buyer is responsible for transportation, including payment of tariffs. Conversely, the most favorable delivery term for buyers under Incoterms 2020 is DDP (Delivery Duty Paid), in which the supplier is responsible for paying tariffs and transporting the goods to the buyer’s facility.
Contractual Shifts in Delivery Responsibilities
Particular attention should be paid to determine whether other aspects of the delivery section or the remainder of the contract modify the delivery term in a way that shifts responsibility for payment of tariffs when it would otherwise not be that case for that specific Incoterm.
Want to learn more about other contract strategies that may mitigate tariff-related risks? Visit our “Tariffs and Your Contracts” series home page here.
For insights on other trending supply chain topics and to get to know our supply chain team, visit Foley’s Supply Chain Team page.
