Tariffs and Supply Chain Contracts: Key Considerations When Reacting to Tariffs

Introduction

Recent trade developments—including sweeping U.S. tariffs and subsequent retaliatory measures by key trading partners—have significantly changed global supply chains. Businesses are facing rising costs, administrative burdens, and uncertainty.  This article sets forth a high-level framework for how to respond to tariff-driven disruptions by outlining key legal considerations for supply chain contracts.

Step 1: Identify Who Bears the Tariff Risk.

First, determine who bears the risk of tariffs or increased prices. Delivery terms are especially important to review because only the importer of record is responsible for paying tariffs. Other relevant contract provisions are fixed pricing terms or tax provisions that, for example, include or exclude taxes, tariffs, and duties from the price.

Further, some contracts will specify the consequences of a “change in law.” Since tariffs may constitute a “change in law,” it is important to identify the attendant consequences, which can include requiring price renegotiation or specific contract modifications. Be sure to identify any such provisions and analyze whether the clause requires mandatory variation or permits termination (and who bears the burden of compliance costs).

Step 2: Analyze the Strength of Available Contract Defenses.

A. Force Majeure Clauses

Force majeure clauses are often an initial consideration when a major government action disrupts contract performance or results in economic hardship. Many contracts that contain a force majeure clause will list “acts of government” among the series of events considered to trigger a force majeure. However, courts routinely reject mere economic hardship as a sufficient basis to claim force majeure. Courts usually require a showing that physical performance was rendered virtually impossible (e.g., supply chain collapse due to component unavailability).

Relatedly, it is important to evaluate whether the force majeure provision determines the consequences flowing from a “governmental act,” which may, for example, include a right to suspend performance temporarily or require advance notice to terminate. Ultimately, force majeure provisions are construed narrowly—and whether a tariff constitutes a force majeure event will depend on the language of the contract.   

B. Impossibility / Impracticability

In the absence of a force majeure clause, parties may invoke the doctrine of impossibility or impracticability. Under these doctrines, a party’s contractual obligations may be excused when an unforeseen event prevents performance.  Importantly, mere increases in difficulty or cost, such as rising wages, raw material prices, or construction expenses, typically do not constitute impracticability—and, since the impact of a tariff is typically a mere increase in cost/price, these doctrines are unlikely to assist. Indeed, cost increases are risks that fixed-price contracts are presumed to allocate (unless, of course, there is a price provision allowing modification). Moreover, a party must make reasonable efforts to overcome performance obstacles, and only if those efforts fail may performance be deemed impracticable. Notably, in some jurisdictions, these doctrines impose a higher threshold than force majeure—requiring a more substantial and demonstrable disruption.

C. Illegality

Domestic or foreign government regulations or orders—related to international trade and tariffs—may render the performance of a contract unlawful. But performance will not be excused on the basis of illegality if the downstream import or export of goods is unlawful—performance itself must be rendered unlawful by the government order. See Pierson & Co. v. Mitsui & Co., 181 N.Y.S. 273, 274 (Sup. Ct. 1920) (because performance was still “possible and lawful,” the contract was not void for illegality due to executive order restricting downstream export of goods to Japan); Miehle Printing Press & Mfg. Co. v. Amtorg Trading Corp., 124 N.Y.S.2d 5, 7 (Sup. Ct. 1948) (even though goods were being sold “for the purpose of shipping them to the U. S. S. R.,” which had been barred by an executive order, contract was not deemed illegal because performance was to take place within United States); see also Restatement (Second) of Contracts § 264. Under these circumstances, it is important to examine whether there is a clause in the contract that allows any unlawful provisions to be “severed” from the agreement. If the illegal provision can be severed without frustrating the nature or purpose of the agreement, the parties need to consider whether to reform the contract in its entirety, or whether to simply reform the illegal provision to cure the illegality.

Step 3: Consider the Repercussions of Continued Performance or Economic Breach.

If the negative impact of continued performance cannot be adequately mitigated, economic breach (also known as “efficient breach”) may be the only viable course of action. Before considering an economic breach, it is important to evaluate whether any provisions allow for termination upon the occurrence of certain triggering events. Absent such a clause, consider whether the contract permits termination for convenience with advance notice. Where this right exists, it may carry exit costs, which must be weighed against the financial impact of the imposed tariffs to determine the most cost-effective path forward.

If moving forward with an economic breach—or early termination of a contract—seems like the most practical business decision, it’s important to consult with litigation counsel early in the process. Experienced attorneys can help assess the risks, including possible damages and legal costs, and guide you through your options before any steps are taken.  

Conclusion

In today’s rapidly changing trade environment, businesses with international operations are reassessing their supply chains, investments, and key contracts.  Now more than ever, proactive contract management and a thoughtful legal strategy are essential. Companies should evaluate both the financial impact of tariffs and the legal tools available—within their contracts and under common law—to help manage risk and protect their interests.

If you have questions about the impact of tariffs on commercial contract obligations, please contact a member of Honigman’s Automotive and Manufacturing or Commercial Transactions practice groups, which advise OEMs, Tier 1, and Tier 2 suppliers, and aftermarket companies on supply chain contracts, litigation, and risk mitigation.