What Every Multinational Company Should Know About … Managing Import Risks Under the New Trump Administration (Part IV): Contractual Provisions to Cope with Increasing Tariffs and Trade Wars

In an increasingly volatile global economy, suppliers and buyers face unforeseen challenges that may impact their ability to perform under commercial contracts. Longstanding assumptions about the level of tariffs, even under free trade agreements like the US-Mexico-Canada Free Trade Agreement (USMCA), can no longer be assumed. Tariffs, government actions, supply chain disruptions, and financial distress can create significant economic burdens, leading parties to invoke force majeure or commercial impracticability as defenses to nonperformance. While these legal doctrines provide potential avenues for relief, courts have been reluctant to excuse performance based solely on increased costs. Understanding how these doctrines work, as well as how to structure contracts to explicitly allocate tariff-related risks, is essential for companies seeking to mitigate financial exposure.

This section explores the legal framework surrounding force majeure and commercial impracticability, analyzes key case law, examines contractual provisions that impact responsibility for tariffs, and provides recommendations for incorporating tariff-related protections in future supply chain contracts.

Force Majeure and Commercial Impracticability as Defenses to Performance

Both force majeure and commercial impracticability are defenses to performance, meaning if a valid event occurs that makes performance impossible or impracticable, a party is not in breach for failing to perform. These doctrines, standing alone, do not provide a mechanism for obtaining price increases. Although suppliers frequently cite them in commercial negotiations to justify price adjustments, they frequently fail as a mechanism to allow companies to back out of contractual commitments.

• Force Majeure: A contractual provision that allows a party to suspend or delay performance due to unforeseen events beyond its control, such as natural disasters, labor strikes, government actions, or supply chain disruptions. Many contracts include broad catchall language covering “other circumstances beyond a party’s reasonable control,” which can provide flexibility in negotiations.

• Commercial Impracticability: Under Article 2 of the Uniform Commercial Code (UCC), performance may be excused when an event occurs that (1) was a basic assumption of the contract and (2) makes performance impracticable. Unlike common law impossibility, impracticability does not require that performance be literally impossible, only that it is so excessively burdensome that it would be unreasonable to enforce the contract.

In general, these provisions are intended to deal with unexpected and drastic changes, not unexpected changes to the profitability of a transaction or even economic changes that would move a transaction from a profit to a loss. The application of these mechanisms accordingly can vary depending upon the circumstances, which can be grouped as follows:

Tariff-Induced Price Increases: Legal Precedents and Challenges

Key Takeaways from the Case Law: Courts have consistently rejected arguments that tariff-related price increases justify nonperformance under force majeure or commercial impracticability. Instead, they view cost fluctuations as foreseeable risks that parties assume when entering into fixed-price contracts. Since 2018, no cases have successfully invoked these doctrines under the UCC, based on changes to tariff levels:

• Price increases alone rarely constitute commercial impracticability.[1]
• The only court to accept a price increase argument required a 572% cost increase and a buyer receiving an unjustified windfall.[2]
• Courts typically rule that financial hardship, even due to extreme price increases, does not excuse performance.[3]

Specific Rulings Underscore Broad Rejection of the Use of Force Majeure or Commercial Impracticability to Address Unexpected Cost Increases: Because tariff increases are just another form of increases in the cost structure — and often to a degree less than those involved in these cost-based cases — we do not see any realistic chance of achieving a different outcome where the sole contractual justification is a force majeure of commercial impracticability clause to deal with unexpected tariffs.

Government Emergency Actions and Force Majeure

Courts rarely excuse performance based on government actions unless they fundamentally alter contractual obligations. Regulatory changes, tariffs, or emergency orders that increase costs are generally considered foreseeable risks.

• American Trading & Production Corp. v. Shell International Marine Ltd.: A 33% increase in costs due to the Suez Canal closure did not excuse performance.
• BAE Indus., Inc. v. Agrati – Medina, LLC: A supplier’s claim of commercial impracticability due to COVID-19-related steel price hikes was rejected because its contract excluded price changes from force majeure.
• Rohm & Haas Co. v. Crompton Corp.: Increased compliance costs due to EPA regulations were deemed foreseeable and did not justify nonperformance.

Bankruptcy or Insolvency as Grounds for Nonperformance

Courts consistently reject arguments that financial distress, including insolvency or bankruptcy, constitutes force majeure or commercial impracticability. Performance under a contract is excused “only when [it] is rendered objectively impossible either because the subject matter is destroyed or by operation of law.”[4] When the difficulty of performance “is occasioned only by financial difficulty or economic hardship, even to the extent of insolvency or bankruptcy, performance of a contract is not excused.”[5] The distinction lies between:

• Subjective impracticability (specific to the party, such as financial hardship) → Not excusable
• Objective impracticability (truly impossible for anyone to perform) → Potentially excusable

In Siemens Energy, Inc. v. Petroleos de Venezuela, S.A., the Second Circuit held that even the imposition of U.S. economic sanctions, which blocked payment to a Specially Designated National without a specific license from OFAC (which it would not give), did not make debt repayment “objectively impossible,” demonstrating the high burden required for this defense.

Contractual Provisions Impacting Tariff Responsibility

We also commonly encounter situations where contractual provisions do not explicitly mention tariffs. When this occurs, the responsibility may be determined by key contractual provisions, including:

• Pricing Provisions: Fixed-price contracts typically assign cost risk to the seller. If tariffs increase costs, suppliers cannot unilaterally demand price adjustments unless the contract allows for cost-sharing mechanisms.
• Price Indexing Clauses: Some contracts tie prices to commodity indexes, mitigating the impact of sudden market changes. If a supplier anticipates tariff risks, an indexed pricing structure may provide protection.
• Incoterms: These international trade terms define which party is responsible for tariffs, duties, and transportation costs. Many automotive contracts specify that the seller covers export costs and the buyer covers import costs, making Incoterms a useful starting point for tariff responsibility. Here are some additional common incoterms and how they impact responsibilities for tariffs:
• EXW (Ex Works): Buyer bears all costs, including tariffs.
• DDP (Delivered Duty Paid): Seller assumes all import duties and tariffs.
• FOB (Free on Board) & CIF (Cost, Insurance, Freight): Responsibility depends on the shipment location and agreed-upon terms.

Strengthening Future Supply Chain Contracts to Address Tariffs

For the reasons detailed above, companies should not assume their contracts provide the flexibility to deal with unexpected increases in tariffs of general international trade conditions. Given the unpredictability of tariffs and what appear likely to be an escalation of trade wars, companies should proactively include tariff-related provisions in their contracts. These provisions can take the following forms:

• Explicitly Specify Which Party is the Importer of Record: Because the importer of record is required to take care of all importing arrangements, including the payment of customs duties, including this provision effectively dictates which party will pay any tariffs.
• Explicitly Allocate Tariff Costs: Contracts also can specify which party bears responsibility for tariff-related costs, avoiding ambiguity. Note that it is permissible for parties to share or shift tariff costs behind the scenes, such that one party is responsible for initially paying the tariffs but will receive a partial or total reimbursement from the counterparty.
• Mandate Tariff-Triggered Price Renegotiations: These types of provisions include a requirement for renegotiation upon a specific tariff-triggered event. An example would be: If new tariffs, duties, or similar government-imposed charges are introduced after contract execution, the parties will renegotiate pricing in good faith to reflect the impact of such charges.
• Include Price Adjustment Rights in the Quotation or Quote Updates: This type of provision is designed preserve flexibility to reflect unexpected changes in tariffs and thus avoids the problem of force majeure or commercial impracticability clauses not being triggered by even sharp changes to tariff levels. An example would be: Supplier reserves the right to adjust prices to reflect the impact of any tariffs, duties, or similar governmental charges imposed after the date of this proposal. These adjustments will be calculated to ensure fair allocation of the increased costs. Supplier will provide advance notice of any such adjustments along with documentation supporting the changes.

Conclusão

Force majeure and commercial impracticability provide limited relief when tariffs or government actions increase costs, as courts generally view these risks as foreseeable. While suppliers can use these doctrines in negotiations to seek price adjustments, sophisticated counterparties will push back at attempts to invoke these legal doctrines in the tariff context. To prevent this, and to mitigate risks at the frontend, companies should carefully structure contracts to allocate tariff responsibility, incorporate price adjustment mechanisms, and require renegotiations when new tariffs are imposed. By proactively addressing these issues in supply chain agreements, businesses can better navigate economic volatility while maintaining contractual clarity and financial stability.

Se tiver dúvidas ou preocupações sobre este artigo, não hesite em contactar qualquer um dos autores ou o seu advogado Foley & Lardner. Se desejar receber futuras actualizações sobre "O que todas as empresas multinacionais precisam de saber" sobre como operar no complicado mundo do comércio internacional de hoje, inscreva-se na nossa lista de correio eletrónico quinzenal. Clique aqui para se registar.

Para ver todos os artigos da nossa série "O que todas as empresas multinacionais precisam de saber", clique aqui.

[1] See, e.g., Seaboard Lumber Co. v. United States, 308 F.3d 1283, 1285 (Fed. Cir. 2002); Steel Industries, Inc. v. Interlink Metals, 969 F. Supp. 1046 (E.D. Mich. 1997).

[2] Aluminum Co. of America v. Essex Group, 499 F. Supp 53 (W.D. Pa. 1980).

[3] See case table.

[4] Unite Here Health v. ML Plaza Owner, LLC, No. 19 C 5314, 2020 WL 12441956, at *2 (N.D. Ill. Dec. 9, 2020).

[5] Siemens Energy, Inc. v. Petroleos de Venezuela, S.A., 82 F.4th 144, 154 (2d Cir. 2023) (quoting 407 E. 61st Garage, Inc. v. Savoy Fifth Ave. Corp., 23 N.Y.2d 275, 281, 244 N.E.2d 37, 41 (1968)).