The Rising Cost of Tariff-Imposed Imports
Tariffs imposed on imported goods can increase the cost of goods sold in the U.S. and, as we are learning, those increases can be drastic. In the current environment of dramatic increases in actual or proposed tariffs, businesses with long-term contracts that are based on pre-tariff pricing may watch what was a profitable deal turn into a money losing nightmare. For example, a construction company working on a large development under a contract with a fixed price may find that the cost of imported lumber, nails, and other construction supplies has doubled, destroying their planned profit margin and even resulting in a loss on the project. Construction companies currently preparing bids must struggle with predicting the impact of tariffs on their costs when tariffs are continually changing; one day they are on, the next day they are stayed; one day they increase by 15%, the next day they increase by 150%.
Legal Pathways for Relief from Unpredictable Tariffs
Since U.S. tariffs wax and wane based on the goals of a particular administration, every four years businesses are faced with potential changes, good or bad. These changes were previously predictable to some degree and changes were within a known range. Under the current administration, those predictions may no longer be valid, and changes can be well beyond prior known ranges. Businesses will be left wondering if they can get out of a contract that has become uneconomical due to tariffs. There are various clauses in standard contracts that may provide some relief.
Commercial Reasonableness and Renegotiation
Under the law in some jurisdictions, the parties may have a duty to renegotiate in good faith when tariffs or other forces beyond their control change drastically. This begs the question of what good faith under the specific circumstances is and what to do if the other party to the contract refuses to renegotiate.
Impracticability and frustration of purpose
Where an unforeseeable event drastically changes the economics of a contract, under common law, performance may be excused. Financial hardship alone, such as increased costs due to tariffs, is rarely enough, however. Courts typically require that performance has become impossible, not just unprofitable.
Clauses meant to address contingencies, included to avoid conflicts, will likely lead to litigation when a party seeks their protection because it has become financially disastrous to perform due to unexpected tariffs. As more contracts are affected, conflicts are escalating. Courts and arbitration venues are being asked to interpret these clauses or apply equitable principles to protect parties from the current trade realities resulting from tariffs
Contract Drafting Strategies in the Tariff Era
One solution is to try and avoid the issue by drafting contracts that directly address the impact of tariffs. Parties should scrutinize how risks are allocated in contracts, specifically who will bear the cost of new or increased tariffs. Parties can include detailed clauses that explicitly mention tariffs and other trade restrictions and regulatory changes. The contracts can provide for price adjustments and hardship clauses giving the impacted party the option of terminating the contract.
When to Seek Legal Advice on Contract Enforcement
The impact of new and significantly higher tariffs on imported goods will resonate in a multitude of contracts requiring imported goods. As contract parties become victims of political strategies, the ability to enforce or avoid contract provisions will depend on how well a contract is drafted and sometimes, a judge or arbitrator’s interpretation of the parties’ good faith performance on a playing field in flux.
If you are struggling to perform or enforce a contract due to unpredictable tariffs and you want a free consultation to discuss your options, contact Kristi Browne at Patterson Law Firm. kbrowne@pattersonlawfirm.com.
