Compliance issues are far from the only tariff-related operational challenges facing companies.  This Debevoise memo discusses some of the friction points in commercial contracts that may arise due to tariffs.  Here’s an excerpt addressing the potential contractual implications of supply chain disruptions:

Tariffs may cause delays and increase costs along a company’s supply chain. This may affect the ability of companies to meet contractual delivery, payment or timing obligations.

To assess risks in this scenario, companies should identify any price, delivery, timing or payment obligations in their contracts that may expressly allocate tariff risks to any given party. Some contracts, for example, may provide that the purchase price is inclusive of all applicable tariffs, whether existing or imposed during the term of the contract, thereby allocating tariff risks to the seller. Other contracts may establish procedures for determining which party bears the risk of any material change in circumstances, including tariff increases. For example, the seller may be given an opportunity to propose an adjusted price to reflect an increase in tariffs, after which the parties are to negotiate an equitable adjustment in good faith.

But not all fixed price, delivery or timing clauses will account for tariff risk. In many cases the clauses will impose hard deadlines and firm prices with clear consequences if an obligation is not met. Fixed delivery or “time is of the essence” provisions, for example, could allow the buyer to cancel the order, seek liquidated damages, or claim nonperformance for any late deliveries regardless of the cause. Some contracts may account for such risks in other types of clauses, which we describe below. However, where there is any ambiguity in the contract’s accounting of such risk, parties should expect dispute vulnerability to increase.

The memo points out that parties to a contract may have allocated tariff risk through broad indemnity or pass-through provisions, even if tariffs are not specifically called out in the language of the contract. It also addresses the potential role of liquidated damages provisions, force majeure provisions and non-contractual excuses for non-performance, and issues surrounding contract terminations and renegotiations.

– John Jenkins