Dealing with the impact of tariffs on your supply chain

These measures have impacted global markets and introduced economic and geopolitical uncertainty.

In this article we look at the purpose of tariffs, their impact on commercial contracts and supply chains and, from an English law perspective, the measures that businesses may take to deal with this impact.

What is the purpose of tariffs?

How do tariffs impact your existing contracts?

Who is responsible for the tariff – buyer or seller?

Can tariffs trigger a price variation mechanism?

Could tariffs trigger a force majeure clause?

Could tariffs trigger a change in law clause?

Could tariffs trigger a material adverse change / hardship clause?

What about using the variation mechanism to manage the impact of tariffs?

As a last resort, can you exit a contract that’s become too expensive due to tariffs?

Restructuring the supply chain

What should I do?

What is the purpose of tariffs?

Tariffs are a form of tax, imposed by countries to boost revenue, and in turn their economy. Tariffs are charged on goods imported from another country, typically calculated as a percentage of the price of those goods and paid by the importer. Tariffs can also be used as a political tool to support protectionist foreign policy by discouraging people from buying goods originating from other countries. If imported goods cost more than domestically produced equivalents, in theory this will encourage people to buy domestically. Tariffs can also be used to squeeze imports from certain countries out of a market, on the basis that the cost of those imports simply becomes too expensive for the supply chain to bear; in this sense they are a geopolitical as well as economic tool.

How do tariffs impact your existing contracts?

In a supply chain, tariffs are problematic. In the contract for the supply of the goods or materials that are the subject of the tariffs, one of the parties will have to bear the cost of those tariffs. If those goods or materials are then on-supplied, or incorporated into or used in other products that are on-supplied, the price at each level of the supply chain is likely to increase to reflect the impact of the tariffs. The bottom line is that tariffs increase prices because they make goods more expensive to produce and/or supply.

Where tariffs are applied that impact on existing contracts, it’s important to review the contract terms to understand, as between the contract parties, who bears responsibility for them and whether that party can recover the amount of the tariff from or recharge it to the other party. This may be dealt with expressly or through the application of a particular Incoterm rule but, if it isn’t, you need to consider whether there are any other provisions in the contract that could be used to pass the cost of the tariff onto the counterparty, or are at least sufficient to create an argument that the cost should be shared. Longer term, you should be considering options for restructuring supply chains to avoid the application of tariffs (which of course plays into one of the reasons why tariffs have been applied in the first case).

We look at these issues in more detail below.

Who is responsible for the tariff – buyer or seller?

The starting point is to check whether the contract contains express terms dealing with tariffs. Typically this will arise in one of two ways.

An international supply contract may incorporate an Incoterms rule. Incoterms are internationally recognised, jurisdiction-neutral trading terms. There are currently 11 different sets of Incoterms rules, and each of them sets out the responsibilities of the buyer and the seller in respect of matters such as carriage and delivery of goods. They specify which party has to pay which costs, including the costs of export/import clearance. If you use an Incoterms rule, this will determine which party has to pay any tariffs. For example, under FCA (Free Carrier), the buyer is responsible for paying all duties, taxes and costs relating to import clearance, and under DDP (Delivered Duty Paid) the seller is responsible for paying these duties, taxes and costs.

Alternatively, some contracts will contain a clear statement on whether the contract price is inclusive or exclusive of all additional supply costs, including carriage and delivery costs. It may even refer specifically to tariffs. This type of clause should make it clear which party has to pick up the tariffs; generally if the contract price is inclusive of all costs it will be the seller, if the contract price is exclusive of all costs it will be the buyer.

If there is no express term that can be relied upon, or if it is ambiguous how the express term applies, then, under English law, the issue becomes one of contract construction: what was the shared, objective intention of the parties at the time of entering into the contract? Whilst this will be dependent on the wording of the particular contact, broadly it is likely that each party will have to pay the costs associated with performing their obligations, so responsibility for tariffs may well depend on the point at which delivery of contract goods occurs. For example, is this at the seller’s premises, or when goods are handed over to the buyer’s carrier or when they are arrive at the buyer’s premises?

If you are in a supply chain importing component parts which are subject to tariffs, you will need to understand whether you are directly responsible for the introduction or increase in tariffs. Are you able to absorb this cost or can you pass it on through your onward supply contracts – what do these say about varying price? If you are not directly responsible for the tariff, you may find your suppliers seeking to rely on price variation mechanisms in your contracts or seeking to re-negotiate contract terms so that their business can remain viable. Read on to understand what to look for in your contracts and how the impact of tariffs can be managed.

Can tariffs trigger a price variation mechanism?

If the seller is liable to pay tariffs, they will typically look for ways to pass this additional cost onto the buyer. The key here will be whether the contract contains a price variation mechanism, such as a right to increase prices annually or a right to increase prices if the cost base increases. This may be a unilateral right for the seller, or the buyer’s agreement may be required. There may also be a cap on the frequency and/or amount of any price increases.

This also has a consequential impact on pricing down the supply chain, as the seller at each level tries to pass the increased costs onto its buyer.

If there is no ability to vary or renegotiate price as a consequence of the imposition of tariffs, then the impacted party may look at whether there are other contractual mechanisms that may apply, such as force majeure, change in law, material adverse change or hardship or simply a variation mechanism.

Could tariffs trigger a force majeure clause?

Force majeure clauses are included in contracts to deal with the impact of unexpected events and circumstances. Typically performance of impacted contractual obligations is suspended for the duration of the force majeure event.

In principle, if the contractual definition of a force majeure event is broad (e.g. an event or circumstance outside the reasonable control of the affected party) then the imposition of tariffs could come within its scope.

However, force majeure clauses are usually drafted to apply where the force majeure hinders or prevents or delays performance. A tariff is unlikely to have this impact; it just makes performance more expensive or unprofitable. Whilst every force majeure clause will be interpreted on its own wording, English case law indicates that a clause will not usually be interpreted as covering a change in economic or market circumstances.[1] Therefore it is very unlikely that force majeure will apply.

Could tariffs trigger a change in law clause?

Many contracts contain a clause requiring contracting parties to perform their contractual obligations in accordance with applicable law. Some contracts will also contain a clause setting out a process to be followed if there is a change in law that impacts on contract performance.

If your contract contains a change in law clause, whether the imposition or increase of a tariff triggers this clause will depend on how a “change in law” is defined. Conceptually the definition could be broad or narrow, and it may exclude changes in taxes and/or changes that are foreseeable as at the point of entry into the contract.

If a change in law clause does apply, most such clauses are designed to result in a renegotiation of contract terms to the extent required to comply with the change in law. Whether any changes resulting from the imposition of tariffs are required – as opposed to desired by one party – may be open to debate. Typically a change in law clause will also set out a pre-agreed position on how the costs of complying with the change in law are to be dealt with. This can vary considerably, with options including that costs lie where they fall, one party bears all the costs, a cost sharing mechanism whereby certain categories of change in law are borne by one party and some by the other, or responsibility for who bears which costs is to be agreed.

Without a change in law clause, under English law costs lie where they fall, so for supply contracts you are back to examining each party’s contractual obligations. Consider whether to introduce the concept of change in law in your contracts going forwards, who would it most benefit and can you get the drafting right to capture matters such as tariffs? These clauses tend to be most common in longer term supply arrangements.

Could tariffs trigger a material adverse change / hardship clause?

Whilst more unusual in English law contracts than force majeure or change in law clauses, some contracts may contain a mechanism for dealing with changes that make contract performance more expensive or make the contract uneconomical. These tend to take the form of a “material adverse change” or hardship clause.

Typically this type of clause will create a renegotiation mechanism triggered by contract price or the cost of contract performance going outside pre-agreed parameters. Often renegotiation will go via the contractual change control procedure. If this is drafted as an agreement to agree then in practice it gives little comfort to the party that wants to make changes. A procedure that contains a fallback mechanism, such as issues being determined via a dispute resolution procedure or one party having the ability to force changes through, will give more comfort as it will eventually lead to an outcome rather than an impasse.

What about using the variation mechanism to manage the impact of tariffs?

The majority of contracts contain provision for the contract to be varied on the agreement of both parties. In the absence of this express provision, the parties can still agree to vary the contract. The variation should be captured in writing and signed by the parties so you have a record of the change.  As we’ve identified already, the problem with simple change mechanisms is that they offer little comfort if there is no agreed position on the proposed changes so you may end up no further forward.  Discussing these matters with your counterparty may still prove fruitful if you can agree to cost share, or pass through the cost increases (you are both managing the same tensions). It will all depend on the competitiveness of the marketplace and whether the end customer will still buy the end product for the increased price or go elsewhere for comparable goods, in particular if those goods can be sourced easily without incurring tariffs.

Negotiating an outcome that both parties can live with should help to avoid disputes and ultimately court or arbitration proceedings arising. Given the amounts at stake, it is likely that there will be an increase in tariff-related disputes in the coming months.

As a last resort, can you exit a contract that’s become too expensive due to tariffs?

Ultimately, if the imposition of tariffs makes a contract too expensive or unprofitable for a party, and no contract variation to alleviate the situation can be imposed or agreed, that party may look to exit the contract.

In this situation, the contract should be reviewed to establish whether there are any express termination rights that could be used, such as a break clause or a right to terminate on notice without cause, or even a right to terminate if the costs base of the contract becomes too high. Consideration should also be given to whether there are any termination payments or other financial consequences of this type of termination.

If the counterparty stops supplying (if they are the supplier) or accepting (if they are the customer) contract goods, then termination for breach may come into play. In this scenario you would need to consider whether this breach is sufficient to trigger an express right to terminate (for example, for material breach) and/or under English law a common law right to terminate for repudiatory breach.

Restructuring the supply chain

A longer term response to the imposition of tariffs is to restructure your supply chain so that goods and component parts and materials are sourced from countries subject to lower or no tariffs. Inevitably this will be a time and resource intensive process, as it involves terminating or shelving contracts with existing suppliers and going through a procurement process to identify and contract with new suppliers, as well as obtaining any industry specific certifications needed. Care also needs to be taken to ensure that the focus on avoiding the impact of tariffs doesn’t compromise the procuring organisation’s standards on other important aspects of a supply chain relationship, such as ESG, quality and compliance.

What should I do?

• Does your contract contain express terms for who bears responsibility for a change in tariffs?
• Look at the contract obligations to ascertain who bears responsibility at the point the tariff is imposed.
• Does your contract contain a mechanism to vary price?
• Does the contract have a change in law clause and do tariffs fall within scope?
• Check for material adverse change or hardship clauses
• What are your contractual relationships like, can you engineer a discussion to vary the contract to absorb tariff changes?
• If the contract is unviable, what are your rights to exit and can you restructure your supply chain?

For more information on dealing with the impact of tariffs on your supply chain

Please get in touch with Peter McCormack or James Lindop or your usual Eversheds Sutherland commercial contact if we can help you review the position in any of your supply contracts.  We can support, including through the use of legal tech, whether you need help with a small number of key agreements or need to understand the position across your wider supply chain and customer contracts

Further reading on tariffs and supply chain

EU countermeasure tariffs on US steel and aluminium | Eversheds Sutherland

Trump 2.0 - Tariffs and Deal Making | Webcast

President Trump’s “Liberation Day” Tariffs Come Into Force | Eversheds Sutherland

Global Supply Chain Horizons - March 2025 | Eversheds Sutherland

Home - Global Supply Chain Guide

How resilient are your contracts to changing prices? - Part 1 | Eversheds Sutherland

Varying prices once a contract is underway - Part 2 | Eversheds Sutherland

Dealing with pricing disputes - Part 3 | Eversheds Sutherland

[1]                 Tandrin Aviation Holdings Ltd v Aero Toy Store LLC and another [2010] All ER (d) 111; Thames Valley Power Limited v Total Gas & Power Limited [2005] EWHC 2208 (Comm).