Whilst we now have a pause on the implementation of the US government's tariffs, what appears clear is that we are going to see some kind of US-instigated shift in global trade, which is bound to have an effect on trading relationships across jurisdictions. This will impact parties to commercial contracts who struck their deals before the announcement of the US tariff policy.
Ultimately, the possible increased cost for non-US businesses supplying their products into the US market has the potential to make their contracts commercially unviable. Questions will therefore arise around whether the supplier or customer is responsible for bearing additional costs, and what each party's rights are if it cannot afford to do so.
Even businesses which are not engaged in trading goods directly with the US will be impacted by knock-on effects to supply chains and the resulting increases in costs. For example, data centres in the US are dependent on equipment manufactured all over the world. The resulting price increases, particularly where parts are sourced from China and subject to exorbitant tariffs, will likely have a knock-on effect on the services which use these data centres to operate, such as AI platforms.
Below we look at some important issues to consider from an English law contracting perspective where an agreement becomes unprofitable or impossible to fulfil.
Force Majeure
When COVID and geo-political events such as Brexit and the war in Ukraine began to impact commercial contracts, this shone a spotlight on the infamous 'force majeure' clause, and opened up debate as to their scope.
There is no implied principle or definition of force majeure in English law, so unless an express clause is contained in a contract, this cannot be relied upon. Whilst we do have a principle of 'frustration' (which might excuse contractual parties from performing their future obligations), there is a high bar in order for this to be invoked – it must have become physically, legally or commercially impossible to fulfil the contract.
Ordinarily force majeure clauses will only relieve a party from performing its obligations if it is prevented or delayed as a result of the force majeure event. This is a high threshold and the party seeking to rely on this will have to demonstrate that the introduction of the tariffs has directly prevented or delayed performance. Furthermore, force majeure clauses will not apply where performance has simply been made unprofitable, unless the clause has been drafted to specifically allow this.
Although force majeure can be helpful in principle, it is important to consider the consequences of invoking this process. In some contracts the parties' obligations to perform are suspended for the duration of the event, and in others the contract will terminate. In some cases, express wording may provide that the paying party must continue to pay during a force majeure event.
Force majeure clauses are also often subject to a duty to mitigate, and this may be implied even if not expressly required by the contract. A party impacted by the tariffs may therefore be forced to consider whether alternative, more affordable, products can be sourced or if a reduction in price can be negotiated along the supply chain.
Price increase
Supply contracts often contain rights for the supplier to increase prices in certain circumstances. This may apply where the supplier's costs have increased. However, this right often requires a supplier to absorb the costs up to a certain threshold. For example, it may only apply to an increase in costs over 10% against the previous year.
If the contract does not contain an express right for a supplier to pass on increases in third party costs, some protection may be available under other price review mechanisms, such as an annual right to increase costs by a fixed amount or in line with inflation. Parties should consider whether any options to increase prices under the contract can be used to help mitigate the financial consequences of the tariffs.
Change control
Longer term agreements will often contain a prescriptive change control mechanism, which may well be invoked by changes in law or other adverse events. This may allow the parties to renegotiate the commercial terms of the agreement, although the precise drafting and definitions will need to be assessed to see whether this option has been triggered. For example, often in this context a distinction is made between general changes in law (for which the supplier will usually be responsible) and those which are specific to the contract.
Term and termination
If it is not possible to mitigate the effects of the new tariffs or to obtain relief using any of the options above, parties may wish to consider termination options if the contract cannot be performed or has become unprofitable. This is where rights to terminate for 'convenience' will come into play, and it may also be possible to formulate arguments that the agreement has been breached or materially breached, depending on the circumstances.
Going forward businesses should take even greater care when structuring the term of a particular commercial agreement and when negotiating contractual exit provisions – as we face continued economic volatility, having more flexibility is going to become increasingly important.
Conclusion
Whether or not the direct impact of the new tariffs has been felt in your supply chain, it is good practice to proactively review key contracts to address any potential issues and renegotiate if needed. This will assist both parties to the contract to maintain business continuity and prepare for future uncertainty, in relation to the knock-on effects of these tariffs and the next potential 'force majeure' event.
