President-elect Donald Trump has threatened to impose sweeping tariffs on imported goods immediately upon taking office on January 20, 2025.
Those tariffs could have an immediate impact on the U.S. supply chain for goods, as services do not seem threatened by the potential tariffs. Domestic contracts for the sale of goods will likely be tested by the sudden and possibly drastic changes in the cost of imported goods, including raw materials. With this threat looming, now is a good time to review your contracts for the following key provisions:
- Price adjustment mechanisms. While many contracts include fixed pricing, some offer mechanisms to adjust pricing based on fluctuations in raw material or other variable costs. If your supply contracts have price adjustment mechanisms, these could be invoked in response to cost increases driven by tariffs.
- Force Majeure. Greater focus was placed on contractual force majeure provisions after the pandemic, and as a result, most modern supply contracts now address events of force majeure. These provisions excuse strict performance in the aftermath of natural disasters, fires, or other events beyond the reasonable control of a party, provided strict notice requirements are met. Even if tariffs are not expressly mentioned in a force majeure clause, a seller may be able to invoke the clause based on tariffs. Absent an express force majeure provision in your contract, the Uniform Commercial Code affords relief to sellers when performance becomes “impracticable.” Commercial impracticability, though, may not include indirect cost increases caused by tariffs.
- Termination rights. If a buyer or seller cannot escape the effects of tariffs, a party may elect to terminate a supply contract voluntarily. Some contracts permit, or at least do not preclude, early termination. Under the UCC, contracts of indefinite duration, if they are otherwise silent on termination rights, may be terminated at any time upon reasonable notice. Early termination rights can provide significant bargaining leverage when negotiating price adjustments.
A careful review of your contracts for these key provisions will help you formulate a strategy to combat the effects of tariffs on your supply chain.
