The ongoing tariffs debacle has got lawyers around the world feverishly advising on if and how much their clients’ supply contracts are impacted by the various tariffs. Here is a quickfire Q&A:
Who pays the tariffs?
- Generally speaking, the importer or buyer pays any import duties or tariffs and that is certainly the case under most Incoterms but, as ever, it depends on the terms of your contract.
- The main exception to that is if the products are being delivered DDP Incoterms 2020 which explicitly makes the supplier responsible for all import duties, tariffs etc therefore the risk of any increase to such taxes etc sits with the supplier.
Can force majeure provisions in the contract be used to avoid the impact?
- It is unlikely that suppliers can rely on FM because typically the definition is based on the occurrence of certain defined events (eg Act of God, war, flood) to the extent it prevents or delays a party from performing its obligations under the contract
- FM would therefore not apply in the case of tariffs as they would not ‘prevent or delay’ performance they just change the price.
- Under English law it is a well-established principle that a change in economic or market circumstances, affecting the profitability of a contract or the ease with which the parties’ obligations can be performed, is unlikely to be regarded as being a force majeure event.
Can the supplier just terminate the contract to avoid the impact of tariffs?
- Typically termination provisions would not allow suppliers to terminate in these circumstances. In any event, the supplier would not want to terminate they would just want to charge a higher price.
Is your import contract directly impacted by tariffs?
- If the products are being imported into the UK then currently there are no relevant tariff increases on imports into the UK.
- However, let’s say company A is buying a product from company B which is based in the USA and the product or many of its components were manufactured by company C in China, then the supplier (company A) may still want/need to pass on the price increased to its customer or terminate the contract altogether.
- But the ramifications of President Donald Trump’s trade war will be much larger than just price increases. For example, at the time of going to press, “essentially all shipments out of China [for shipment to the Port of Los Angeles] for major retailers and manufacturers have ceased,” according to the Port’s Executive Director Gene Seroka. The uncertainty around tariffs has led to a decrease in shipping volumes from China to North America, with cancellations currently at 50%, according to global logistics firm Flexport. Such cancellations will lead to disrupted supply chains in every direction and shortages of key products.
How do I protect myself going forward?
Going forward, doubtless suppliers would be looking at protecting themselves by adding in specific wording regarding tariffs/price increases which apply not only to their products (ie so their customer is responsible for any tariffs/import duties which apply directly to their products) but also on all the raw materials or spare parts in their supply chain (ie their products may be not caught by tariffs but some of their component parts may well be).
We may see wording whereby suppliers will accept the risk of price rises of up to say 5% but then propose that if their price went up by more than 5% due to tariffs or raw material price rises then they would be looking to pass it on to the customer. So in future we might see the price being agreed on the basis of delivery DDP except if prices increase more than a certain percentage due to external events such as tariffs.
The commercial law team at arch.law are always happy to take a quick look at any contract and advise on the position please do get in touch with Jane directly or contact marketing@arch.law for an introduction.
