Trump Trade Orders Create Need for Tariff Clauses in Contracts

Recent changes to US trade policy have raised the importance of incorporating and updating prior contracts with provisions on tariffs and potential tariff increases.

President Donald Trump’s executive orders have imposed and adjusted tariff rates for all imports into the US. As a result, all US businesses face greater uncertainty in pricing, supply chain disruptions, and overall project costs.

Tariffs, particularly on key imported materials or products, can overwhelm a seller’s costs, profit margins, and delivery timelines. As these tariffs can change or escalate at any time, businesses should address the risks of tariff-driven price fluctuations in their contracts.

A clause addressing tariffs can serve as a risk allocation tool to reduce potential disputes. Without a clear contractual provision on tariffs, businesses may have to absorb unexpected costs or face conflicts with customers over price adjustments.

If a contract doesn’t address tariffs and related price increases on goods, the seller generally must honor the agreement at the stated price, absent any additional terms and conditions.

Provisions addressing tariffs in contracts for selling and manufacturing goods, construction, and other commercial agreements offer clarity, security, and flexibility to both sellers and buyers in the face of tariff-related cost increases or delivery delays.

Including such provisions, or amending an existing contract to include such provisions, allows businesses to adapt to shifting economic conditions without needing to renegotiate contract terms or absorb unexpected costs.

They can then clearly allocate responsibility for tariff-related cost increases between the buyer and seller and ensure both parties understand who is responsible for absorbing additional costs from tariffs after the contract is signed.

Price Increases

The allocation of tariff-related costs among parties should be addressed through clear formulas and thresholds. Provisions can specify the conditions for adjusting prices, such as when a tariff exceeds a certain threshold or when new tariffs are enacted.

Buyers can demand limits on the percentage of any tariff increase that they would have to absorb. A contract could provide a minimum of a X% tariff-related increase affecting specific goods for a seller to impose higher prices. This would ensure that only a significant increase would lead to modifying the product price.

Buyers also could negotiate a cap on the percentage increase due to tariffs, allowing them to terminate the contract if the price exceeds a certain percentage threshold.

Another approach a seller may adopt to protect itself from tariff-related price increases is to structure the contract so that the pricing of goods is calculated at the time of delivery, instead of at the time of contract signing. This allows the seller to adjust the final price to reflect any increases in tariffs after the contract is signed and avoid locking in a price that later becomes unreasonable or unprofitable.

While buyers may be wary of accepting terms for pricing upon delivery, it ensures up-to-date pricing and fairness among the parties. However, such provisions should be carefully drafted to avoid giving a buyer access to the seller’s “secret sauce,” including the seller’s anticipated profit margins.

Delivery Delays

Tariffs also can delay deliveries of goods because of longer customs processing times, changes in international shipping routes, or the need to source goods from new suppliers.

Contract provisions addressing delivery timelines or allowing for reasonable extensions to account for supply chain disruptions can protect sellers from being penalized for tariff-caused delays to the supply chain and offer assurance that they won’t face costs for circumstances outside their control.

Alternatively, a contract could include a provision allowing termination upon the occurrence of tariffs reaching a specific threshold amount or an expanded force majeure clause that addresses tariffs, generally or with specificity. Most standard force majeure clauses cover unforeseeable events outside of the parties’ control (such as natural disasters, wars, and pandemics), but may not include economic changes such as increases in tariffs.

As we saw with the Covid-19 pandemic, force majeure provisions may not be as specific or protective as one thought before March 2020. Parties to a contract, particularly the seller, should expand the scope of a force majeure definition to include that, when the imposition of tariffs can materially adversely affect the economics of the subject transaction, the force majeure provision permits the termination or modification of the contract.

A contract also may include a termination provision that permits either party to terminate the contract without penalty if tariffs make continued performance impractical or impossible. A similar provision may allow termination if a change in law renders performance no longer commercially viable.

Next Steps

Given the current volatility and uncertainty surrounding recently announced tariffs, businesses should discuss whether provisions addressing tariffs should be in their contracts and amend their contracts to include such a provision.

Doing so will allow for better risk management posed by potential tariff increases and disruptions, as well as help ensure that costs are appropriately allocated between the parties.

Sellers gain a legal basis to adjust prices in response to tariff changes, helping them avoid absorbing unexpected costs that could affect profitability. Buyers, in turn, benefit from greater transparency and predictability in pricing, allowing them to plan and budget more effectively.

By including a clause addressing tariffs, businesses can safeguard their financial interests, reduce the likelihood of disputes, and navigate an increasingly unpredictable trade environment with greater confidence.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Dennis C. O’Rourke is partner at Moritt Hock & Hamroff and chairs its corporate, M&A, and securities practice group.

Joseph A. Giglio is an associate at Moritt Hock & Hamroff focusing on corporate law.

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