Tariff Clauses in Supply Agreements: What You Need to Know

Tariff Clauses in Supply Agreements

Introduction

In today’s globalized trade landscape, supply chains span continents, and goods routinely cross borders. Yet with the benefits of global sourcing come the risks of regulatory shifts—none more significant than tariffs. Governments impose tariffs to protect domestic industries, respond to geopolitical tensions, or retaliate in trade wars. For companies engaged in cross-border transactions, tariff clauses in supply agreements are not just recommended—they are essential.

Whether you’re sourcing raw materials, components, or finished goods, understanding how to structure and negotiate tariff clauses can mean the difference between stable profit margins and unexpected losses. This article explores everything you need to know about tariff clauses in supply agreements, from drafting considerations to risk allocation strategies.

1. What Are Tariff Clauses?

A tariff clause is a provision in a supply agreement that determines how the parties will handle the impact of tariffs or other government-imposed duties on the imported/exported goods covered by the contract.

These clauses typically address:

  • Responsibility for tariff payments
  • Adjustments to pricing in the event of tariff changes
  • Procedures for renegotiation or termination
  • Force majeure or hardship provisions

They act as legal and financial safeguards, ensuring that neither party bears an unfair burden due to external policy changes.

2. Why Are Tariff Clauses Necessary?

Supply agreements often span months or even years. During this time, governments can impose, remove, or adjust tariffs—sometimes overnight. Notable examples include:

  • The U.S.-China Trade War, which led to a series of unpredictable tariff escalations
  • Brexit, which restructured trade terms between the UK and EU
  • Emerging digital tariffs and regulatory controls on software and cloud services

Without tariff clauses, one party may be forced to absorb additional costs, eroding margins or even making performance financially unviable.

3. Types of Tariff Risks in Supply Agreements

There are three major categories of tariff risks that supply agreements need to address:

a. Existing Tariffs

Tariffs in place at the time of contract execution. Agreements should clearly define whether prices are inclusive or exclusive of these tariffs.

b. New or Increased Tariffs

Unexpected hikes that occur during the term of the agreement. These often create price volatility and disputes if not addressed by adjustment mechanisms.

c. Retaliatory Tariffs

Tariffs imposed in response to political or economic actions. These may target specific sectors or countries and can be highly disruptive.

4. Core Elements of a Tariff Clause

To ensure enforceability and clarity, a tariff clause should contain the following core components:

a. Definition of Applicable Tariffs

Clarify whether the clause covers:

  • Import/export tariffs
  • Duties or surcharges
  • Other government-imposed levies

b. Responsibility Allocation

State clearly who pays:

  • The supplier
  • The buyer
  • Shared responsibility

This is often tied to Incoterms, which determine delivery obligations and risk transfer points.

c. Price Adjustment Mechanism

Specify how changes in tariffs will affect:

  • Unit pricing
  • Delivery schedules
  • Total contract value

Include thresholds (e.g., ±5%) beyond which price renegotiation is triggered.

d. Notification Obligations

Define timelines and documentation needed to notify the other party of a tariff change. This ensures transparency and auditability.

e. Renegotiation or Termination Rights

If tariffs render performance uneconomic, the clause should allow for:

  • Good faith renegotiation
  • Suspension
  • Contract termination (with or without penalty)

5. Sample Tariff Clause Template

Tariff Adjustment: The parties acknowledge that import and export tariffs may affect the pricing and delivery of Goods under this Agreement. In the event that any applicable tariff, duty, or governmental surcharge is imposed or changed after the Effective Date, and such change materially impacts the cost of performance, the affected party shall notify the other in writing. Upon receipt of such notice, the parties shall in good faith negotiate an equitable adjustment to the Price. If the parties are unable to reach an agreement within 15 days, either party may terminate this Agreement without liability.

This example includes the basic elements: impact trigger, negotiation window, and exit provision.

6. Common Contract Structures for Tariff Allocation

a. Fixed Price Contracts (Risk on Supplier)

Price remains static regardless of tariff changes. Suppliers may charge a premium to hedge risks.

b. Cost-Plus Contracts (Risk on Buyer)

Buyers agree to cover all variable costs, including tariffs. Tariff fluctuations are passed through.

c. Indexed Contracts (Shared Risk)

Price adjusts based on a published index or formula that accounts for tariff impact.

Each structure has trade-offs in cost certainty vs. flexibility.

7. Tariff Clauses and Force Majeure

Force majeure clauses excuse performance when unforeseen events arise. But do tariffs qualify?

  • Most courts do not accept tariffs as force majeure unless explicitly mentioned.
  • Smart contracts include tariffs, trade restrictions, embargoes, and similar events under force majeure triggers.

In addition, a hardship clause can provide relief for economic disruptions that don’t rise to the level of impossibility but still make performance unreasonably difficult.

8. Tariff Mitigation and Strategic Drafting Tips

a. Use of Incoterms

Choosing the right Incoterm (e.g., EXW, DDP, FCA) helps clarify who pays the tariffs.

b. Tariff Cap or Buffer Zone

Specify that price adjustments only occur if tariff changes exceed a certain percentage (e.g., ±5%).

c. Audit Rights and Transparency

Allow parties to request documentation proving tariff payment to avoid disputes and fraud.

d. Country of Origin Protections

Specify product origin to leverage free trade agreements (FTAs) and avoid unnecessary duties.

e. Change of Law Clauses

Broader than just tariffs, these clauses cover any legal or regulatory change that materially impacts the contract.

9. Negotiation Strategies for Buyers and Suppliers

For Buyers:

  • Push for price certainty
  • Include termination rights if tariffs make imports unaffordable
  • Demand compliance warranties from suppliers

For Suppliers:

  • Include tariff pass-through mechanisms
  • Retain the right to suspend or delay delivery if tariffs spike
  • Request indexed pricing tied to duty levels

Both parties should aim for transparency, data sharing, and cooperative renegotiation models.

10. Real-World Examples and Legal Precedents

a. U.S. Auto Industry

During the 2018 steel tariffs, car manufacturers renegotiated supply agreements with global parts suppliers. Contracts with no tariff clauses faced costly litigation and supplier defaults.

b. Agriculture Exports

Soybean exporters to China included renegotiation clauses due to rapid tariff shifts during the trade war. Those with flexible pricing clauses survived better.

c. Digital Products

Software vendors now add “non-tariff barrier” clauses as governments impose cross-border digital service taxes or licensing barriers.

These examples illustrate the real monetary and legal consequences of ignoring tariff clauses.

Conclusion

Tariff clauses in supply agreements are no longer optional—they are a strategic necessity. As governments increasingly use tariffs as economic and political tools, businesses must be equipped to protect themselves contractually.

The best tariff clauses are clear, adaptive, and based on mutual trust and transparency. Whether you’re a multinational buyer or a specialized supplier, integrating robust tariff language into your contracts helps mitigate risk, stabilize operations, and maintain profitability.

Failing to address tariff risks upfront can expose parties to unexpected costs, disputes, and legal liability. In contrast, a well-drafted supply agreement ensures resilience in the face of geopolitical and economic volatility.

Did you find this article worthwhile? More engaging blogs and products about smart contracts on the blockchain, contract management software, and electronic signatures can be found in the Legitt AI. You may also contact Legitt to hire the best contract lifecycle management services and solutions, along with free contract templates.

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FAQs on Tariff Clauses

What is the purpose of a tariff clause in a supply agreement?

A tariff clause defines how the parties will handle the impact of government-imposed tariffs on the goods involved in the contract. It clarifies cost responsibilities, price adjustments, and potential renegotiation rights.

Who typically pays the tariffs in a supply contract?

It depends on the contract structure and Incoterms. In some cases, the supplier bears the tariff cost (e.g., DDP), while in others, the buyer does (e.g., EXW). A well-drafted clause explicitly defines this.

What happens if a new tariff is introduced during an ongoing contract?

If a tariff clause is included, the parties follow the agreed adjustment or renegotiation mechanism. Without one, disputes may arise over who bears the added cost, possibly resulting in breach or litigation.

Can tariff increases be considered force majeure?

Not usually, unless explicitly included. Most courts require that force majeure clauses specifically mention tariffs or economic barriers for them to qualify.

Are tariff clauses only relevant for import/export contracts?

Primarily, yes. However, they may also apply to domestic contracts affected by global supply chains or where components are imported.

How can I protect my company from sudden tariff hikes in supply contracts?

Use indexed pricing, include pass-through or renegotiation provisions, define notification timelines, and incorporate country-of-origin clauses to mitigate exposure.

Do digital goods or software licenses require tariff clauses?

Emerging forms of “digital tariffs” and regulatory duties (e.g., data taxes) can impact digital goods. Including relevant language in SaaS or IP licensing contracts is becoming more common.

Can we renegotiate or terminate a contract if tariffs make it unprofitable?

Yes, if the contract includes a hardship clause or renegotiation rights triggered by material changes in costs, including tariffs.

What’s the difference between a cost-plus and fixed-price structure for tariff risk?

In a cost-plus contract, buyers absorb variable costs like tariffs. In a fixed-price deal, the supplier bears the risk. Shared risk models can include escalation clauses for flexibility.

How often should tariff clauses be reviewed or updated?

Tariff clauses should be reviewed annually or when:
• Entering a new market
• Changing suppliers
• Significant regulatory shifts (e.g., new FTAs, trade conflicts)

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