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.