Navigating tariff-related risks in the negotiation of supply contracts

Both suppliers and buyers should review their contracts to determine who bears the risks of higher costs and disruption resulting from the constant changes to global trading conditions. Disputes are likely to arise where existing contracts are not sufficiently clear as to who bears tariff hikes and trade disruption related risks.

It is typical for contracts to be silent on tariffs, but suppliers and buyers alike should review existing contracts to understand what contractual mechanisms exist within their current contracts that may assist. For example, the ability to require changes under change control clauses or any potential position under widely drawn force majeure provisions. The question of which jurisdictional law governs the contract is also extremely relevant, not least in relation to the question of whether the performance of a contract has been frustrated.

Suppliers and buyers should also look to mitigate risks going forward by carefully considering the implications of tariffs for any future contracts. Here, we set out some example areas to reflect on.

Tariffs

Contracts may or may not deal specifically with tariffs. If they don’t then this should be a point for negotiation between buyers and suppliers. Suppliers can make the degree to which they are willing to absorb tariff hike costs a part of their marketing or pricing position.  

Contract drafting should be very clear on what the parties mean by tariffs and how changes to tariff policy that affect the performance of the contract will be treated.

Pricing

In the face of global trade disruption, pricing mechanisms within commercial contracts have become a critical area of focus for both suppliers and buyers.

Suppliers should consider whether they are able to include flexibility in pricing to absorb tariff-related costs and look at models such as open book pricing or cost plus margin. These models allow for transparency and adaptability as well as annual price reviews to adjust for market fluctuations.

Conversely, buyers should aim to lock in fixed, inclusive pricing which will shield them from unexpected cost increases. Buyer entities should aim to ensure pricing remains competitive and look out for uncertainty or ability to vary pricing thus allowing a supplier to pass on tariff-related expenses.

Other effective buyer friendly positions could be to include cost reduction plans if suppliers fail to actively mitigate tariff impacts and ensure renewal quotes exclude any attempt to recover tariff-related costs.

Changes in law and regulation

Changes in law or regulation modifying tariffs pose a significant risk to commercial arrangements. Carefully managing these risks through well drafted change control provisions is vital.

From a supplier’s perspective, there may be an inclination to treat new tariffs or regulatory changes as grounds for revising pricing or other commercial terms. This is especially relevant where contracts include general provisions allowing for adjustments due to changes in market conditions or cost bases.

Buyers need to consider these types of provisions, balancing the requirement for flexibility with the risk of changes becoming a back door for cost escalation.

Insurance

Businesses should review the scope and effectiveness of their business interruption insurance. A key consideration is whether such policies will respond to losses stemming from tariff-related impacts, particularly in light of insurers’ restrictive positions during events like the Covid-19 pandemic.

Suppliers should assess whether their policies cover loss of profit due to supply chain disruptions or increased costs arising from higher tariffs or new trade barriers. Buyers, meanwhile, may wish to understand the extent of their suppliers’ insurance coverage as part of broader risk management and due diligence efforts.

Insolvency

The risk of supplier insolvency is heightened in volatile trade environments, especially for those operating on thin margins or heavily reliant on tariff-affected markets.

It is therefore hugely important for buyers to evaluate the robustness of their supply chains to withstand such volatility. Suppliers should also audit their own upstream dependencies to identify vulnerabilities. Both parties should consider the financial health of their counterparties and those within the supply chain more widely given the interdependencies of many supply chains. It could be that parties look to incorporate protective clauses or early warning mechanisms into contracts to mitigate the risk of disruption due to insolvency.

Exclusivity

In times of trade turmoil, exclusivity provisions can become a liability for buyers. Suppliers should consider whether their customers have the ability to source from alternative suppliers, particularly as buyers may seek to diversify supply chains and reduce reliance on a single region or vendor, which could undermine income streams.

Exclusivity in supply chains might also be an issue for the supplier where they also rely on a supply chain for the performance of the contract. They too will want to consider the possibility of maintaining flexibility and, indeed, may be required to do so where the buyer requires that the supplier should ensure that it relies on a supply chain which minimises costs in light of tariff and other trade policy changes. 

Ability to supply

The ability of suppliers to maintain consistent delivery is a critical concern. It is therefore important to audit the supply chain not only to identify potential insolvency related issues, but to identify any other weak links that may be vulnerable to tariff-related disruptions. Suppliers are encouraged to assess whether any part of their supply chain may struggle under new trade conditions, particularly where reliance on specific regions or material is high.

From a customer’s perspective, it is important to ensure that suppliers cannot use tariffs as a justification for non-performance. Contracts should be reviewed and amended to exclude tariff changes from force majeure provisions, for example. The goal is to maintain operational continuity and avoid disruptions that could cascade to the buyer’s own supply chain.

Termination rights and contract duration

Suppliers should consider whether they are operating under long-term frameworks or on a per-order basis, and whether they have the flexibility to exit or renegotiate contracts if market conditions shift unfavourably.

Buyers are likely to value flexibility by seeking to enhance their own termination rights. This includes the ability to terminate without cause or to renegotiate terms if suppliers fail to remain competitive or reliable. Additionally, buyers are advised to update survival clauses to ensure that key protections – such as tariff-related indemnities – remain enforceable even after termination.