Trump Tariff Relief Hinges on Getting Contract Language Right

President Donald Trump’s tariffs have companies scurrying to revise commercial contracts to mitigate the damage.

Force majeure and change-of-law clauses are among the measures companies are employing to avoid bearing the full brunt of 25% increases in the price of goods crossing the Canadian or Mexican border into the US, as well as reciprocal tariffs going the other way—depending on how they’re written.

Since taking office, Trump has expanded tariffs he imposed on China during his first term, and slapped imports from Canada and Mexico with a 25% tariff—though he’s postponed parts of those measures multiple times. He’s also threatening new duties on products from the EU, Brazil and South Korea.

Provisions in existing contracts may not be much help if they don’t explicitly mention the taxes, attorneys said. They’re advising clients to specifically use the word “tariff” in any new contract they draw up going forward, as businesses brace for the duties to remain for the long haul.

Ron Oleynik, a partner at Holland & Knight, said a first step would be to seek an exclusion—though no exclusion process has yet been announced.

Companies should also look to their supply chains to soften the blow, he said, asking themselves if material or a product can be procured domestically, or from a country outside the scope of the taxes. But some items aren’t easily or cheaply available in the US, and there’s no guarantee that countries that have avoided Trump’s list won’t be targeted next.

If both of those options fail, Oleynik said, the company then looks at how to pass on the cost—especially if the costs are so high they would destroy its profit margins. At this stage, the company negotiates with its business partners for more favorable pricing.

“Twenty-five percent might take away all profit margin, and might take away the ability to continue an operation,” he said. “So then we’ve got to figure out a way, if we can’t reduce it, to pass it on.”

If all of that fails, it will look to its contract provisions like force majeure.

Managing Risks

Amid the bewildering flood of tariff news, clients are asking their outside counsel, “Is this a force majeure? What is a way that we can get out of the contract? Is there any legal basis to ask for a price increase? What happens if we don’t continue to supply?” said Chauncey Mayfield, a partner at Honigman.

The responsibility for paying tariffs usually falls on the importer of record, and it’s usually clear which party that is, said Ginger Faulk, a partner at Eversheds Sutherland. Either the tariff would be baked into the agreed contract price, or the buyer would pay the tariff cost separately, she said.

Provisions in existing contracts might specify otherwise. Change-of-law clauses allocate the cost risk to either the seller or buyer in a transaction, Faulk said. “That’s the best way, I would say, to protect yourself in the event of future changes.”

If an existing supply contract contains a change-of-law clause broad enough to cover tariffs, companies can try to renegotiate, amend the contract, or claim additional costs, said Zachary Song, a partner at Steptoe.

Force majeure often focuses only on events that prevent or delay performance, and it isn’t helpful when a company wants to pass along an unexpected cost, Faulk said.

Another problem with relying on force majeure clauses is that they are often defined as covering “unforeseen” events.

The tariffs Trump is currently enacting wouldn’t be considered unforeseen by parties negotiating a contract right now, said Linda Klein, a shareholder at Baker Donelson. For contracts negotiated earlier, there might be a question: Were tariffs unforeseen for contracts negotiated last year, when they were a frequent talking point of then-candidate Trump?

Many companies tried to invoke force majeure when they were unable to fulfill contract obligations during the pandemic—an event it was easier to argue was unforeseen, she said.

After Covid-19, many contracts now include pandemics as a force majeure event, Mayfield said.

Existing contract clauses will likely only be helpful to companies if they specify that they cover tariffs, attorneys said. A force majeure clause, for example, might cover government regulation—potentially raising questions if there is a dispute or litigation among the contract parties about whether a tariff is covered.

Song said he hadn’t seen many contracts mention tariffs as a pre-existing issue in the context of change-of-law clauses. But since Trump took office and rhetoric about tariffs heated up, newer contracts are including clauses that address tariff changes.

New Contracts

Going forward, parties may contractually stipulate which party is responsible for the tariffs, allocating responsibility differently than it falls in existing contracts, Faulk said.

Many are considering cost-sharing arrangements, where parties agree to each bear some burden of a tariff, Mayfield said. In such contracts, it’s important to separate the impact of the tariff from the agreed price of the good, he added, in case the tariff later goes away.

Meanwhile, those facing the hardest tariff hits are pursuing every possible solution, Mayfield said.

“I think companies are trying to throw really anything at the wall,” he said. Some companies are simply telling their partners, “I don’t have the money to pay this 25% tariff,” he said. “Whether I point to this piece of the contract or not, I don’t have the money.”