As the adage goes, you can’t change the wind, but you can adjust the sails. Manufacturers and other businesses engaged in cross-border transactions should adjust their sails to proactively address the uncertain tariff landscape in their commercial contracts. 

Over the past weekend, President Donald Trump directed 25% tariffs on imports from Canada and Mexico, with 10% tariffs placed on specific Canadian energy products. Trump also ordered a 10% tariff on China. By Monday, Trump agreed to a 30-day pause on the Canadian and Mexican tariffs following talks between Trump and President Claudia Sheinbaum from Mexico, and with Canadian Prime Minister Justin Trudeau, addressed concerns over border security and drug trafficking. The tariff on China took effect Tuesday morning, as that country quickly responded with retaliatory tariffs of its own on certain United States products. 

Increased costs and supply chain disruptions can significantly impact profitability, making it essential for businesses to mitigate risks through careful contract structuring. As businesses review their contracts, it is important to keep in mind some key contract considerations that can help navigate the evolving tariff future.

Tariff Shifting Mechanisms. Tariffs can significantly alter the cost structure of a contract. Businesses should incorporate flexible contractual mechanisms to adjust to these changes efficiently. For example:

• Price Adjustment Clauses: Evaluate whether there is a provision that allows for pricing adjustments (up or down) if tariffs increase or decrease during the term of the contract. Also consider whether there should be a cap on price increases and whether tariffs are an exception to that cap. 
   
• Force Majeure Clauses: Evaluate whether force majeure provisions specifically address tariffs, trade restrictions, and government-imposed duties, which would allow parties to renegotiate or terminate the agreement in response to major trade developments.
   
• Material Adverse Change: Evaluate whether there is a clause that would permit renegotiation or termination in the event a new tariff materially impacts the cost structure of the contract. 
   
• Supplier Diversification: Consider whether the buyer should have the right to source from alternative suppliers if tariffs make the original supplier’s goods too expensive or whether the seller should be required to use reasonable efforts to find alternative suppliers to keep their costs low (i.e., sourcing the products from countries subject to lower tariffs).

Strategic Use of Incoterms. Selecting the appropriate International Commercial Terms, otherwise known as Incoterms, in international contracts is crucial for allocating tariff-related risks effectively between buyers and sellers.

• Incoterms define the responsibilities of buyers and sellers in global trade. Selecting the appropriate Incoterm can help allocate tariff-related risks.
   
  • Ex Works (EXW): The buyer assumes all costs and risks, including tariffs, from the seller’s facility.
  • Delivered Duty Paid (DDP): The seller bears responsibility for duties and tariffs, which may necessitate price adjustments or risk hedging.
  • Free on Board (FOB) and Cost, Insurance, Freight (CIF): These terms define the point at which buyer assumes risk and costs, helping structure duty obligations accordingly.

Term. Businesses should consider the duration and flexibility of their contracts to ensure they can adapt to changing tariff regulations. 

• Shorter- or Longer-Term Agreements: Shorter contract durations allow periodic renegotiation in response to shifting tariff policies, while longer-term agreements while prices are low can prevent price changes due to tariffs. 
   
• Renegotiation Triggers: Evaluate whether there are specific economic conditions, such as tariff increases beyond a certain percentage, that allow for contract modification or early termination.

With tariff policies in flux, businesses must proactively address these issues in their contracts to minimize financial exposure and maintain supply chain stability. Reviewing and updating your agreements and terms and conditions of sale to include tariff mitigation strategies will help safeguard your business interests.

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