Dealing With Business Contracts in the Face of Tariffs
Since President Donald Trump took office in January, he’s been causing a lot of chaos, to say the least. Budget cuts and layoffs have made news. The current hot topic is his imposition of tariffs. Executive Order 14098 has imposed a 10% tariff on virtually all imports to the United States, changing global commerce in a huge way. The proposed tariffs average 29% across all affected nations, with a 125% tariff on Chinese imports. In response to these tariffs, companies have been scrambling to figure out how to protect themselves and stay profitable.
The good news is that businesses have something in their favor: contracts. By updating their contracts, companies can protect themselves from the uncertainty of tariffs and stay profitable. Here’s how to go about it.
Strengthen Force Majeure Clauses
Contracts should already include force majeure clauses, but they should clearly mention things like major changes in trade policies, tariffs, sanctions, and import/export limits. That way, if sudden tariffs make a deal too expensive to follow through with, both sides can renegotiate fairly. A smart approach is to update the language in these clauses to cover government-imposed tariffs, retaliatory duties, and other serious trade barriers. The clause should also set deadlines for notifying the other party, outline how to renegotiate, and include a plan to share extra costs if tariffs go over a certain limit.
Implement Mechanisms to Share Costs
Contracts can include price escalation clauses that let suppliers pass on tariff increases when costs go up by a certain amount (such as more than 5%). This allows both sides to renegotiate prices. Another option is a shared burden agreement, where the buyer and supplier agree ahead of time how to split extra costs, like sharing anything above a 10% tariff increase equally. Some contracts also use indexed pricing tied to outside benchmarks, such as import duty rates, which automatically adjust when trade policies change.
Allow for Flexibility With Contingency Plans
Contracts should support diversified sourcing by including multi-sourcing clauses that allow buying from different suppliers in various regions. These clauses help reduce risk from trade disruptions. Buyers should also have supplier substitution rights, meaning they can switch to approved alternative suppliers without facing penalties. Also, contracts can include regional reallocation terms that outline how production can be moved (such as from places like China to Mexico, India, or Vietnam) based on cost changes or new tariffs.
Learn More About Business Contracts
Business contracts are not always relevant. Sometimes the terms need to be updated due to economic conditions and other factors.
An Orlando business contracts lawyer B.F. Godfrey from Godfrey Legal can help create an effective, viable contract that fits your needs. We can offer sound legal advice to help you succeed. Schedule a consultation today by calling our office at (407) 890-0023 or filling out the online form..
Source:
hbr.org/2025/04/how-contracts-can-help-firms-navigate-the-uncertainty-of-global-tariffs
