Tariffs and other trade matters: why businesses should consider contractual protection
Why should businesses consider contractual protection for tariffs and other trade matters? In the present political and business climate, there is much uncertainty on the level of trade tariffs. Similar considerations apply to currency exchange rates, border delays, and the availability of supplies. Businesses concerned about adverse effects on their commercial arrangements should consider contractual protection. A specific contractual provision can provide clarity on the parties’ intention in the event of a change of this type, and so may be preferable to seeking to rely on standard variation or contract change provisions or on general law. In addition, it may be difficult or less favourable to seek to rely on force majeure or material adverse change or similar clauses, depending on their scope and wording.
Contractual provisions
For some contracts it may be possible to specify consequences of certain events.
For other contracts a clause could provide a binding framework for the re-negotiation of specific terms due to the adverse impact of trade-related matters.
For a re-negotiation a clause may specify response times for the parties during the re-negotiation. A clause may also provide for resolution of any failure to reach agreement, for example referral to an expert and allocation of the expert’s costs. It may potentially provide ultimately for termination of the contract on notice in the event of a failure to agree the change and the effects of service of a notice of termination on other provisions of the contract.
The risks
The risk of not drafting to address uncertainty on trade tariffs and other trade matters is that a party may be obliged to continue to perform its obligations in full, even if, as a result of the changes, doing so has become commercially unattractive or worse. If an affected party is unable to renegotiate its contract, it may find itself in breach of contract and faced with termination for default and a claim for damages.
A potential difficulty in seeking to rely on force majeure, material adverse change or similar clauses is that they generally do not cover events which were foreseeable when the contract was entered into. Similarly, it is likely to be difficult to rely on an argument that the change has “frustrated” the contract if the event was within the parties’ contemplation at contract formation and the event does not make further performance impossible, illegal or radically different, a high bar.
Conclusion
Businesses should consider the merits of including specific clauses in contracts to protect against increases in tariffs or border delays, adverse movements in currency exchange rates or lack of availability of supplies. Clauses of this type may facilitate a re-negotiation of the contract or specify consequences of certain events. They may enable parties to avoid being tied to contracts which have become commercially unattractive or worse and to avoid breaching contracts and facing claims for damages.
On the other hand, parties with short term contracts or with rights to terminate without penalty on short notice, or which would not be adversely affected by increases in trade tariffs or other changes in trading matters, may consider that there is no need to include specific clauses to cover these risks.
If you would like legal advice on contractual protection for tariffs and other international trade matters, find out how we can help here.
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