Will tariffs Trump transactions?

International businesses are obviously considering the impacts of the ongoing imposition of tariffs and retaliatory tariffs. Legal questions are likely to be on their agendas: who will bear the increased costs? Can we terminate a transaction if it becomes unfavourable? Can we anticipate our counterparty’s actions? This article outlines key issues businesses should consider.

The starting and (often) end point: the contract terms

Contracts, especially those prepared by lawyers, often include clauses that address tariffs. If these issues are not clearly covered, ambiguity can arise, requiring more detailed legal analysis. 

Typically, tariffs are addressed in contracts in the following ways:

• Price provisions: Is the price inclusive or exclusive of tariffs? Does the contract allow for price adjustments due to tariffs?
• Force majeure clauses: These clauses may capture tariffs. Even if tariffs are expressly included as a force majeure event, other conditions must usually be met.
• Change in law provisions: Changes in tariffs may fall under ‘change in law’ clauses.
• Termination rights: Contracts often include termination rights that may be triggered by certain events.

The difficulties tend to arise where:

• the contract is silent about tariffs;
• the contract addresses the impact of tariffs but does so inconsistently. For example, tariffs may be covered under multiple clauses that point to different outcomes. Similarly, the transaction may be comprised of several contracts, which treat tariffs inconsistently;
• the contract uses terms that could capture tariffs without expressly saying so.

Without fully understanding the legal position, parties risk exposing themselves to substantial damages, as explained below.

Termination 

If the contract expressly grants termination rights, either directly or via other clauses such as force majeure, the contractual mechanism for exercising those rights must be followed carefully. For example, notices must be given by the specified deadlines, using the prescribed methods, and with the required details.

Disputes often occur when a party attempts to terminate when the termination rights have not been triggered or does not follow the correct procedure. Businesses sometimes underestimate the importance of getting the legal details right.

However, under English contract law, even seemingly minor errors can lead to significant consequences. For example, if a party has the right to terminate the contract but does so without following the correct procedure, it is the other party that could itself terminate the contract and claim substantial damages. This follows from the English law doctrine of anticipatory breach, whereby, broadly speaking, a party that indicates it will no longer perform the contract may be taken to have breached it.

In short, when attempting to terminate a contract, two radically different outcomes are possible: (1) valid termination or (2) significant damages. This gives the recipient of the termination notice the incentive to carefully scrutinise the terminating party’s actions.  

Whether exercising or challenging a termination, decisions often need to be made quickly. Accordingly, a party that proactively considers its legal options in anticipation of developments will be better placed to act in line with its commercial objectives.

If the contract doesn’t explicitly address termination, common law may allow for termination in cases of repudiatory breach or frustration. Notably, under English law, higher costs alone usually aren’t enough to prove frustration. A party might consider termination if the increased costs prevent one party from performing the contract, but careful analysis is likely to be needed. 

Insolvency risks

Tariffs can increase insolvency risks across the supply chain. Suppliers and buyers may struggle with liquidity due to higher costs and potential uncertainty. 

Businesses should therefore monitor the creditworthiness of their counterparties. If a counterparty is at risk of insolvency, there may be legal options that can improve the prospects of any financial recovery or which may limit exposure. 

Commercial solutions

Many businesses prefer commercial solutions to protracted legal proceedings. Amicable resolution can preserve business relationships, as well as reduce the legal fees and management time that is required during formal proceedings. However, even if seeking a compromise, businesses need a solid understanding of their legal position. Legal advice is crucial to ensure that discussions are informed and that the solutions and compromises reached as a result of tariffs are sound.