In an era of evolving global trade policies, organisations and institutions engaged in international commerce (both buy- and sell-side) will likely 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.
Understanding how to structure and interpret contracts to explicitly allocate tariff-related risks, is essential for organisations seeking to mitigate financial exposure. Right now, they must be able to quickly review their trading contracts and identify which of their agreements have been impacted by the tariffs imposed by U.S. President Donald Trump on imports from Canada, Mexico, and China as well as retaliatory tariffs. This is particularly important considering the speed at which positions are changing.
Moving forward, they may also want to consider how to ensure their legal agreements are resilient to changing tariff structures. In essence, the latest tariff changes underscore the importance of carefully drafted contracts that provide clarity, mitigate financial burdens, and offer protective mechanisms against unforeseen regulatory changes.
The current position
- It is important to emphasise that the current position may continue to keep changing.
- Significant tariffs have been imposed on US imports. There has been a 10% baseline tariff imposed on nearly all foreign imports to the US, including the UK and EU. However, there are country and product specific exceptions to this.
- As a result of the significant tariffs introduced by President Trump, retaliatory tariffs are being threatened, such as China’s 125% tariff on the US, as well as some countries attempting to enter into negotiations. This initiation of a tariff war has incited not only turbulent times for international trade, but the current (at the time of writing) 90-day pause further adds to the level of uncertainty businesses are facing.
- The rapid changes in circumstances, including the inevitable deals that will be done, may result in the need to consider renegotiation of contracts or alternative approaches to be used in the initial negotiation. Consequently, it is imperative to get a handle on legal agreement data sooner rather than later.
The Impact of Tariffs on International Trade
Trade tariffs are not just economic measures; they significantly impact the legal and financial obligations of businesses. President Trump’s proposed tariffs originally included a 25% levy on imports from Canada and Mexico, alongside a 10% additional tariff on Chinese imports. While certain energy imports from Canada were subject to a lower 10% tariff, these measures were primarily geared towards reshaping U.S. trade relations.
What is Needed to Amend Contractual Wording
Mutual agreement is usually required to change any contractual wording and/or the price in a trade confirmation. Depending on the exact provisions in the contract, parties may be able to approach their counterparty to amend pre-existing terms. If a party would like to make changes to protect it against new tariffs being imposed, the change would require the consent of the other party, unless, in limited circumstances, the original contract says explicitly that one party can make changes without seeking agreement from the other. This would most likely be thanks to a “Change of Law” provision in the original contract.
In most cases, changing the price in a trade confirmation will be subject to mutual consent. This would ultimately result in an amendment to the original trade confirmation.
Legal Considerations in Contract Negotiations
Legal agreements should be structured to account for tariff fluctuations and prevent unexpected liabilities. A well-drafted legal agreement should explicitly outline which party is responsible for covering tariff costs. In agreements such as the North American Energy Standards Board (NAESB) contracts, various provisions can shift tariff-related obligations between buyers and sellers.
For instance:
- Tariff costs may be embedded within the published index price or treated as a separate tax.
- NAESB Section 6 allows for the allocation of tax responsibilities, specifying whether the seller or buyer bears the burden.
- In the NAESB transaction confirmation, the ‘Special Conditions’ section is a dedicated area where any unique terms that deviate from the standard NAESB contract provisions are explicitly outlined, allowing for customisation to the specific deal between the buyer and seller, beyond the standard contract details. Any pricing adjustments could be included here, e.g. a special pricing formula or calculation that differs from the standard NAESB pricing structure.
- The definition of “taxes” in contracts should be scrutinised to determine whether tariffs qualify as government-imposed levies.
Additionally, when dealing with entities based in China, Canada, or Mexico, contracts should be reviewed to ensure governing law, tax clauses, and force majeure provisions provide adequate protection against current and further unforeseen tariff impositions.
Key Contractual Protections
Certain contractual provisions can help businesses navigate the impact of tariffs and trade policy changes:
1. Change in Law Provisions
As mentioned, contracts may include Change in Law provisions that provide relief when legislative or regulatory changes significantly impact financial obligations. The applicability of such clauses depends on how broadly “Law” is defined in the contract. To ensure protection, the definition should explicitly encompass government-imposed tariffs.
This type of clause can be added as an additional clause to the special conditions to include protection against tariff changes. This can include wording which means that in the event of a change in law (as specified in the clause and defined in a way that includes tariff changes as being within scope) the seller has the right to increase the price or amount payable by the buyer to take into account the change in price that has occurred.
2. Tax Event Termination Clauses
Certain agreements, such as the ISDA 2002 Master Agreement, contain tax event termination clauses that may allow parties to exit contracts due to tariff-related tax burdens. Section 5(b)(iii) enables termination if:
- A tax authority’s action leads to increased payments,
- A substantial likelihood of additional tax obligations arises.
3. Force Majeure Clauses
Force majeure clauses may provide relief in cases where governmental actions, such as the imposition of tariffs, render contract performance impracticable. There are examples of this in case law, however, the burden of proof is significant, as courts often require that every reasonable effort to fulfil contractual obligations has been exhausted. Also force majeure is unlikely to be successful where there is an explicit “Tax Event” clause in the contract, which is often the case in trading agreements.
Challenges in Seeking Relief
Despite these risk-mitigation clauses, businesses must be mindful of potential barriers, such as:
- Strict notice requirements, which demand timely action to claim relief,
- Ambiguous contract language that may leave room for disputes,
- The need for proactive renegotiation strategies to adapt to evolving trade policies.
Conclusion
In the volatile landscape of international trade, legal agreements must be meticulously drafted and regularly reviewed to ensure they provide comprehensive protection against tariff fluctuations. Businesses that proactively incorporate robust contractual safeguards can mitigate financial risks and maintain operational stability amidst global trade uncertainties. By understanding and leveraging key contractual provisions, companies can navigate tariff-related challenges effectively, positioning themselves for long-term success in international commerce.For now, though, there is a degree of urgency for any organisation who has any lack of clarity or uncertainty as to whether their trade agreements have been impacted by the latest tariff changes imposed by the Trump administration. Once again, contract management and legal agreement data deserve a much closer look.