Here Come The Tariffs: Tips for In-House Counsel Reviewing Contracts
Here Come the Tariffs - What In-House Counsel Can Do Now with Contracts
Analyzing Contractual Provisions That May Affect Impact of Tariffs
As the proverbial curse provides, “May you live in interesting times.” We now live in such interesting times. Import tariffs, which have not been something that many suppliers or customers have focused on, may be an increasing part of our lives. With the significant increase in import tariffs, the contracts that govern relationships between suppliers and customers will become ever important. With the possibility of significant tariffs being a part of buying or selling products in countries other than the country of manufacture or assembly, counsel should immediately begin a review of all supplier and customer contracts. This review needs to particularly focus on those provisions in the contract that may include language that will be helpful in determining who is responsible for the tariffs.
Contractual Provisions and Tariffs
Here are the most common provisions that in-house counsel should examine to determine who pays any tariffs, whether suppliers may refuse to supply products for the agreed price, or a supplier may pass through any tariffs to their customers:
Force Majeure
Force Majeure clauses generally allow a party to delay or refuse performance if performance is made impossible or more difficult by certain events. Force Majeure clauses may also include a clause that a party is not only excused from performance but also does not have any liability for delays or inability to perform as a result of a force majeure event. Finally, some force majeure provisions may include language that a party is completely excused from performance if a force majeure event occurs – or is excused while the force majeure condition exists. Force majeure clauses generally list a number of specified events that constitute a force majeure event and may include language that force majeure also includes other events that are beyond a party’s reasonable control. There are several problems that practioners may encounter trying to use a force majeure clause to pass through additional charges. First, import tariffs or governmental action may not be included as a force majeure event. Without it being listed it may be difficult to convince a court that an event that is not listed is still a force majeure event. Second, many force majeure clauses merely allow for no liability for delays in performance, not a complete refusal to perform. Some courts have taken the position that a mere price increase is not sufficient to trigger the ability to completely refuse to perform an agreement. Indeed, most courts that have looked at force majeure clauses in the context of UCC transactions have not found tariffs to constitute a reason to refuse to perform. Finally, the specific language used is very important. A force majeure provision that merely allows for a delay in performance may be interpreted differently than one that allows a party to be completely excused from performance. A court might find that a delay as a result of a tariff does not excuse performance, whereas a provision that specifically states that performance is excused might allow a party to completely avoid performing.
Tax Provisions
Many agreements have a provision that the products are provided exclusive of taxes or allows the supplier to pass through or assess the tax onto the customer on an invoice. Many times the provision will say that the customer is responsible for all federal, state, or local taxes, including sales taxes, but do not address tariffs. These same provisions typically will also exclude certain taxes, such as taxes on the income of the supplier. This becomes a matter of contract interpretation. A tariff can be considered a form of tax since it is imposed on the sale or importation of a product and varies by the value of the product. However, the exact language of the provision is very important. For example, if the provision says that the customer is responsible for all federal excise, state and local sales taxes, a supplier may argue that a tariff, while federal, is not an excise tax, and thus not covered.
Pricing Clauses
It is worthwhile to examine the pricing provisions of an agreement. First, does the pricing provision allow the supplier to increase prices, and if so when and by how much. Many multiyear supply contracts have pricing provisions that allow the supplier to raise prices annually, usually up to a specified limit, such as the consumer or producer price index. This may allow a supplier to pass through some of the tariff costs to the customer through an annual price increase. Second, a pricing provision may state that the price of the products excludes taxes. Many times this is stated as “sales taxes”, but it may be broader. To the extent that the “excluding taxes” provision is not limited to sales taxes, a supplier may argue that it may pass through any tariff charges as it constitutes a tax on the products. Parties that find themselves responsible for the tariff charges may also want to examine how the price is calculated. For example, a distribution agreement may provide that the distributer will pay a fixed price, but will earn certain credits for sales. It may be difficult to convince customs authorities that the price structured in such a way means that the actual price of the products is less. While products are tariffed at the market value of the products, if a party can show that parties to an arm’s length agreement have set the price, it is substantial evidence of what the product’s market value truly is. Therefore, parties may want to make the pricing provisions as clear as possible and include in the price any discounts or credits that they may earn to help show that the market price of the products.
Delivery and Title and Risk of Loss Provisions
Many supply and customer contracts provide where the products are to be delivered and who pays shipping. In some cases, the parties may have used the term “FOB location”. If the location happens to be outside the country of ultimate sale, the supplier can argue that the customer, not the supplier, is responsible for any tariffs as the tariffs are imposed on the importation of products into the ultimate country. Even if the contract does not use the term “FOB location”, if the contract provides that the customer has to pay for shipping into the United States, or that title or risk of loss passes to a customer outside the United States, the supplier will undoubtedly argue that since the customer is responsible for shipping and/or that title passes outside the United States, the charge will also include any necessary customs or tariff charges. A supplier might also argue that risk of loss without a statement of where title passes is tantamount to the customer, not the supplier, being responsible for any customers or tariff charges.
Customs Provisions
These provisions are typical in contracts which are between a foreign manufacturer and a customer. While rare in the typical domestic supplier contract, a contract may include a provision stating who is responsible for getting the products through customs. If a party explicitly agrees to be responsible for getting the product through customs or that it has the right to reject products outside the United States before it is shipped to a point inside the United States, the customer will probably also have the burden of paying any import tariffs.
Term and Termination Provisions
While more remote, it is worth examining the term of the agreement and the provisions dealing with how the parties may terminate the agreement. In some cases, an agreement may be past its initial term and be in some form of renewal term. Also, a termination provision may allow a party to terminate a contract if the other party delays or fails to perform for a specified period of time.
Product Provisions
Many supply contracts specify the products that are covered by the agreement. In some cases, the supplier had the ability to discontinue products. Further, in many supplier or customer agreements, the parties can add products with the mutual agreement of the parties. It is worth reviewing whether a supplier unilaterally can make the decision to discontinue a product and whether there are any limits on such a decision to discontinue a product. A supplier faced with an inability to pass through increased costs as a result of an increase in import tariffs may decide to discontinue a product unless the customer agrees to pay an increased price. A supplier that can discontinue products and add new ones might also discontinue an existing product and make minor changes to the product and claim that the product is now a new product with a new price to reflect the increase in costs resulting from tariffs.
Final Thoughts on Tariffs and Contractual Provisions
Even with the temporary reprieve in the tariffs for most countries, it is likely that there will be a need to review all agreements that are for products that are manufactured or assembled outside the country where the product will ultimately be sold. Klemchuk stands ready to assist its clients in determining whether its contracts are impacted by an increase in tariffs.
Klemchuk PLLC is a leading IP law firm based in Dallas, Texas, focusing on litigation, anti-counterfeiting, trademarks, patents, and business law. Our experienced attorneys assist clients in safeguarding innovation and expanding market share through strategic investments in intellectual property.
This article is provided for informational purposes only and does not constitute legal advice. For guidance on specific legal matters under federal, state, or local laws, please consult with our IP Lawyers.
© 2025 Klemchuk PLLC | Explore our services