Contract Strategies for a Volatile World | Tariffs & Trade

April 10, 2025 at 3:57 pm

Tariffs & Trade: Contract Strategies for a Volatile World

In today’s unpredictable global trade environment, tariffs are no longer just taxes—they are powerful geopolitical instruments that can reshape supply chains, pricing, and long-term commercial relationships. Companies engaged in international trade must understand not only what tariffs are, but how contract terms determine who ultimately carries tariff-related costs.

What Are Tariffs?

Tariffs are customs duties imposed on goods crossing borders. While they may apply to both imports and exports, they are most commonly levied on imports, often serving political or strategic objectives. Tariffs may be:

Product-specific – applied to certain categories of goods
Geographically targeted – linked to a specific country or trade bloc
Revenue-driven or politically motivated – shaping trade relations

Regardless of origin, tariffs directly influence the cost base, pricing structure, and delivery timelines of cross-border trade.

How Tariffs Affect Cross-Border Trade

Tariffs can quickly change the economics of an international transaction. More importantly, contract terms—not customs law—often decide who pays the tariff. Without clear contractual allocation, the importer may unexpectedly bear additional costs.

Well-drafted agreements can shift, share, or control tariff exposure—giving companies commercial flexibility in a turbulent environment.

Key Contract Clauses That Mitigate Tariff Risk

1. Cost Allocation & Incoterms®

Delivery terms, such as Incoterms® 2020, play a central role in identifying who pays duties, taxes, and customs formalities.

EXW (Ex Works) or FCA (Free Carrier) → Buyer pays import duties
DDP (Delivered Duty Paid) → Seller bears all import costs

Contracts should specify:

Who is the importer of record
Whether prices include or exclude duties
How new tariffs imposed mid-contract are handled

This ensures risk is aligned with commercial intention and prevents disputes.

2. Price Adjustment Clauses

Tariff changes can erode profit margins instantly. A price adjustment clause allows the contract price to change if duties increase.

Common mechanisms include:

Automatic adjustments based on agreed formulas or indices
Renegotiation triggers when tariffs exceed a threshold
Cost-sharing arrangements between the parties

These provisions reduce financial shocks and support business continuity.

3. Force Majeure

Force Majeure clauses excuse non-performance due to unforeseeable and uncontrollable events. Tariffs rarely qualify because they generally make performance more expensive—not impossible.

However, a Force Majeure clause may apply if drafted to include:

Governmental actions
Trade restrictions
Sudden tariff surges or economic sanctions

Review and update Force Majeure clauses to reflect real-world trade vulnerabilities.

4. Hardship Clauses

Hardship applies when performance remains possible but becomes economically unreasonable—for example, when tariff increases exceed 10–15%.

A well-drafted hardship clause should:

Define what constitutes hardship (e.g., tariff increase threshold)
Enable renegotiation of prices or terms
Specify a fallback mechanism if renegotiation fails

This gives parties a structured method for restoring commercial balance.

5. Termination Rights

When contractual adjustments are no longer feasible, termination rights offer a critical safety valve.

Termination for convenience
Rights triggered by excessive cost increases
Exit options tied to supply chain disruptions or economic events

Clear exit pathways reduce legal exposure and protect long-term business interests.

Building Resilience Into Future Contracts

To safeguard international operations, companies should incorporate the following best practices:

Define tariff responsibilities and cost-sharing
Select the right Incoterms® rule
Use dynamic pricing and renegotiation triggers
Broaden Force Majeure and hardship provisions
Include clear termination pathways

With rising global uncertainty, regularly reviewing existing contracts—and ensuring new ones are resilient—is essential.

Need Help Navigating Tariffs or Cross-Border Contract Risks?

LKOS Law Office advises businesses on international trade, sanctions, customs, and contract structuring. We help clients review existing agreements, draft tariff-resilient contracts, and manage cross-border risk exposures.

Explore our service: International Trade & Sanctions Advisory

For tailored advice on tariffs, trade clauses, Incoterms®, or supply chain risks, contact Oscari Seppälä.

*This article is for general information only and does not constitute legal advice.*