Trump’s Tariffs – navigating the contractual challenges
The recent imposition of Trump’s tariffs has significantly changed global trade policy, creating widespread disconcert, uncertainty and disrupted commerce.
The uncertainty is exacerbated by the regular changes to the levels of tariffs that will be imposed on different countries or states.
Our Commercial colleagues, Pete Maguire and Rebecca Stratford, have previously discussed the impact of President Trump's tariffs on supplier contracts in England and Wales, emphasising the importance of reviewing your supply chain. They highlighted several key contractual clauses that parties may seek to invoke in such unprecedented circumstances, such as force majeure and termination rights.
In this article, we will revisit these clauses from a commercial litigation perspective and explore their implications for businesses grappling with unforeseen financial burden resulting from the tariffs. We will also outline key options to consider if you find yourself in, or in anticipation of, a tariff-related contractual breach.
Key Contractual Clauses
Force Majeure
Force majeure clauses are drafted into contracts to cover the occurrence of unexpected events which impact a party’s contractual obligations under the contract. As a result of the imposed tariffs, it is likely that associated costs will increase and there is the potential for disruption to supply chains, accordingly businesses may seek to rely on a force majeure clause in attempt to suspend performance of their contractual obligations.
There is no definition of force majeure under English law, however, most force majeure clauses require that fulfilling the contractual obligations be physically or legally impossible rather than simply more costly and less profitable. The ability to rely on a force majeure clause will be dictated by precise wording of the clause in the relevant contract.
It is unlikely that the wording of an existing force majeure clause will expressly refer to an increase in trade tariffs. However, there could be scope to argue that tariff increases can be included by implication in references to more general events and/or wording such as “disruption in supply chains”, “trade war”, “export restrictions” or some other government action.
It may even be possible that the force majeure clause is drafted even broader than the above examples, for example “an event or circumstance outside of the reasonable control of the parties” which may offer wider application for the party seeking to rely upon it.
Following the decision of Tandrin Aviation Holdings Ltd v Aero Toy Store LLC and another [2010] EWHC 40 (Comm) which determined that a change in economic circumstances is not considered a force majeure event, we can expect the courts to similarly take a narrow approach to these clauses and as such, parties will be better protected where the wording expressly provides for an increase in trade tariffs. If there is doubt that the force majeure wording includes the trade tariffs increase, a non-performing party may be exposed to liability for breach of contract.
Frustration
If you are unable to rely on a force majeure clause, the doctrine of frustration may also be considered by parties struggling to fulfil contractual obligations. Similarly to force majeure clauses, the doctrine of frustration applies where some event occurs after entering the contract which renders performance under the contract impossible or illegal or render the obligations under the contract radically different from those contemplated at the time of entering the contract. The result of frustration is that the contract is discharged.
As with force majeure clauses however, the courts are unlikely to accept events that make performance under a contract more onerous, more expensive or less profitable as capable of frustrating a contract (Davis Contractors Ltd v Fareham UDC [1956] AC 696). For this reason, the doctrine of frustration is likely to only provide limited protection for parties in this situation and cannot necessarily be relied upon to suspend contractual obligations.
Termination
If price increases resulting from the tariff’s cannot be absorbed by a business, there may be an option to terminate the contract if the contractual termination rights allow parties to do so. You should check the term of the contract to establish whether the contract is drafted such that early termination is possible.
Before terminating a contract, you should first look to see whether the terms include a contractual grace period. A grace period is a specified period of time which enables the party in breach to seek to remedy the breach i.e. make the necessary payment for the goods without facing immediate repercussions. The ability to rely on a grace period and the duration of this period will depend entirely upon the wording of the contract. If a contract is terminated without considering the contractual grace period, the termination may be deemed invalid. [IML1] The contract may have been drafted such that it is possible to terminate the contract on the basis of convenience (i.e. without the need for a material breach to have occurred). Such action will be entirely dependent upon the drafting of the termination clause, which should be carefully considered and, potentially, legal advice sought on the construction of the relevant term. Where termination clauses are narrowly worded, it is unlikely that the contract can be terminated on the basis that it has become economically burdensome. In these circumstances, it may be possible, as an alternative, to construct an argument that a material breach has occurred which justifies the contract termination.
Another point to consider in terminating the contract is there is often a contractual requirement for ‘reasonable notice’ to be provided. There is no certainty regarding what constitutes ‘reasonable notice’ as it is case-specific and you should seek clarification regarding the contractual wording and comply with the requisite notice in order to prevent a breach on those terms.
Some contracts will refer to a specific notice period in relation to termination for convenience, and this must also be complied with to avoid a potential contractual breach.
As has been discussed, force majeure clauses, frustration and termination provisions are likely to provide only limited protection for companies who find themselves facing significant impact in relation to their contractual obligations as a result of the tariffs and, depending on their precise contractual wording, it may not be feasible to exit the contract. Therefore, it's also crucial such companies are also aware of the available options they may consider if a contract is breached and to be aware of proactive measures they can take if a breach is anticipated.
Anticipation of a Contractual Breach
Renegotiation/Variation of Contract
If you anticipate a potential breach of contract due to the tariffs but wish to maintain the contractual relationship between the parties and keep costs minimal, you can seek to renegotiate or vary the terms of the contract in the first instance. This is feasible if the contract includes a renegotiation or variation clause that permits variation subject to agreement between the parties.
Contract variation may allow parties to pre-empt and prevent contractual breaches, which accommodate changes in the market. For example, this may include extending time frames for the supply of goods or altering prices to make the contract less economically disadvantageous for a party concerned.
It is crucial to pay attention to the variation clause within your contracts, as this will dictate whether and how a contract can be varied and to avoid liability for breach of contract, the variations clause must be followed to the letter. Variations should be documented in writing as this will negate disputes over what varied terms have been agreed, reducing the risk of liability for breach of contract.
Key Considerations Following a Breach of Contract
Alternative Dispute Resolution (ADR)
Particularly in the current volatile economic climate, the concern regarding litigation costs if contracts can no longer be fulfilled is likely to be heightened. There are however a number of more effective ways to resolve contractual disputes without the need to incur the time and costs associated with court proceedings.
In particular, there are a number of alternative dispute resolution (“ADR”) methods used to navigate disputes between parties as a result of contractual non-performance. These include negotiations, mediation and arbitration as just a few examples.
In recent times, there has been a particular shift towards ADR as parties are now encouraged to settle disputes outside of the court process.
The highly publicised case of Churchill v Merthyr Tydfil County Borough Council [2023] EWCA Civ 1416 emphasised the importance of considering ADR as it was held that the court can lawfully order parties to engage in non-court-based ADR before a civil claim can proceed. It follows that you should consider alternatives to civil action such as mediation in the earlier stages of the dispute to establish if you can settle tariff-related disputes amicably.
In addition, many contracts contain a dispute resolution clause which dictates how disputes are to be handled. Such a contractual clause will oblige parties to handle disputes in a particular way in the first instance i.e. to attempt to settle any disputes by mediation before issuing a claim. Given the Churchill judgment above, we can expect to see these type of dispute resolution clauses appear more frequently within commercial contracts.
If the contract to which the particular dispute pertains includes such a clause, you will need to be compliant with the specifics of the terms in order to avoid breaching the contract
ADR can help you reach an amicable solution at an earlier stage without incurring extensive costs. This should provide some comfort that if clauses such as force majeure and frustration cannot be relied upon, there may be alternative options to help navigate the contractual challenges.
Without Prejudice Discussions
Parties should consider engaging in ‘without prejudice’ settlement negotiations with the other contracting party to seek an agreement on the future contractual position.
Without prejudice discussions are protected discussions that cannot be referred to in Court if said negotiations fail and the dispute proceeds to litigation. Without Prejudice discussions can be a valuable tool for resolving disputes outside of the court process. They allow parties to make concessions and explore settlement options freely, knowing that these communications will remain confidential. For example, it may be the case that one contractual party is agreeable to terminating the contract in exchange for a lump-sum payment agreed between the parties.
If a without prejudice discussion arises, it is important to engage as the courts generally take an unfavourable view against a party that refuses to engage or rejects a reasonable without prejudice offer to settle a dispute, particularly when awarding costs.
Fixed Recoverable Costs
It is also worth noting the fixed recoverable costs regime was introduced for certain civil claims issued on or after 1 October 2023. Fixed recoverable costs specify a set amount in fees that can be recovered from a losing party in litigation depending upon the complexity band the claim is allocated to and the stage at which the litigation is settled.
This new regime allows businesses to pursue or defend claims valued between £25,000 and £100,000 with certain knowledge as to the level of their legal fees
How can we help?
Aside from supporting with disputes, our team can also advise clients on risk management as a core part of our Commercial Dispute Resolution offering. As the extent of the tariffs and their application remains unclear and seemingly ever-changing, we are able help businesses navigate the changing trade landscape and develop strategies to avoid risk and mitigate the effects of the tariffs in so far as possible.
