Key points

• Increased cost is generally not enough to excuse performance. Most force majeure clauses and common law doctrines respond poorly to tariff-driven price increases unless the contract says otherwise.
• Who bears a new duty depends on the pricing basis and delivery terms. Incoterms, importer of record status and the definition of the price are decisive.
• Change in law, price adjustment and tariff-sharing clauses are the clauses that do the work, and they must be specific about trigger, calculation, notice and evidence.
• Under the Uniform Commercial Code, commercial impracticability is a narrow defense, and courts rarely accept it for cost increases that were foreseeable.
• Retailers should review their top supply contracts now, prioritizing those with fixed pricing, long terms and offshore suppliers, before a dispute forces the question.
• Negotiation records, notice letters and consistent conduct will influence how a dispute is resolved.

The problem retailers face

When tariffs change, the cost of imported goods moves quickly, but retail pricing and supply contracts do not. A retailer committed to buy at a fixed price may find that its supplier wants to pass through new duties. A supplier with a fixed price may find its margin has disappeared. Both sides then read their contracts for a way out, and both often discover that the contract does not address the point directly.

This note sets out the framework we use to analyze those disputes and the drafting changes that reduce the chances of having one. It is general guidance. Outcomes depend on governing law, the exact wording and the facts.

Start with who pays the duty

The first question is whether the contract allocates the duty at all. In a sale on delivered duty paid terms, the seller bears import duties, and a tariff increase falls on the seller unless a clause shifts it. On ex works, free on board or cost, insurance and freight terms, the buyer typically pays duty and is often the importer of record. Many retail contracts use a mix of terms, or refer to Incoterms without stating who bears duties, and some quote a landed price that is silent on the components.

The definition of price matters. A price that is stated as inclusive of all taxes, duties and charges will normally be read to put new duties on the seller. A price stated as exclusive of duties may allow a seller to invoice an increase, but only if the contract says the buyer pays duties as imposed from time to time. A clause that refers to duties in effect at the date of the contract may freeze the allocation.

Force majeure

Force majeure clauses excuse performance when specified events beyond a party's control prevent or delay it. Tariffs sometimes appear in the list, as acts of government, new laws or trade restrictions. But even where tariffs are listed, most clauses require that the event prevent performance, not merely make it more expensive, and many explicitly exclude increased cost or reduced profitability. Courts in the United States and England construe these clauses by their words, and a party relying on one must show that the event falls inside the clause, that it caused the failure, and that required notices were given on time.

Where a clause lists government action broadly, a tariff announced before signing is unlikely to be treated as unforeseeable. A party may also have a duty to mitigate, for example by switching sources, if the contract does not specify that it need not.

Common law doctrines

Under the Uniform Commercial Code, a seller may be excused for failure to deliver if performance has become commercially impracticable by a contingency whose non-occurrence was a basic assumption of the contract. Courts have held that a rise in cost, even a substantial one, is not enough unless it is extreme and unforeseen, and tariffs that were being discussed publicly at the time of signing are hard to present as unforeseeable. Under English law, frustration requires a radical change in the obligation and is not triggered by increased expense. Other jurisdictions have hardship doctrines that may offer more room, which is a reason to consider governing law at the outset in cross-border supply agreements.

Clauses that do the work

Price adjustment and tariff-sharing clauses give parties a defined process. A well-drafted clause identifies which measures qualify, such as duties on specified harmonized tariff codes from specified origins; sets a baseline date and baseline rate; calculates the adjustment by a formula, often sharing the increase between the parties or capping it; requires notice and documentary evidence such as customs entries; provides for reversal when the duty is reduced; and says what happens if the parties cannot agree, whether termination, renegotiation or an audit right.

Change in law clauses are related. They typically allow price or other adjustments when a change in applicable law increases cost, and whether tariffs count depends on whether they are laws applicable to the supplier's performance or to the goods. Specific language avoids debate.

Other provisions to review include minimum purchase commitments, exclusivity, most favored customer pricing, termination rights for convenience, origin warranties, and supplier obligations to give notice of changes in country of origin or sourcing. Origin matters because the duty rate often depends on it, and a supplier that quietly shifts production may alter the tariff outcome.

What to do now

Review the top supply contracts by spend, starting with fixed price and long-term agreements with offshore sources. For each, record the delivery term, the party that acts as importer of record, the price definition, and the existence of change in law, force majeure and price adjustment clauses. Identify contracts where the retailer's own downstream commitments, such as promotional pricing or customer agreements, are fixed and out of line with upstream flexibility.

In negotiations, put communications in writing, reserve rights, and avoid conduct that could be read as a waiver or as an agreed modification. Check notice requirements and deadlines. Consider the tax and customs position with advisers, because duty drawback, first sale valuation and tariff classification may change the economics.

For new contracts, build in a tariff mechanism that suits the commercial relationship, align it across suppliers where possible, and align downstream terms with it. Dispute resolution provisions should anticipate commercial arbitration or court proceedings in a forum that both sides accept.

Corvane Ryle's Litigation & Trial team and our retail and consumer lawyers advise on supply chain contracts and disputes. For related deal considerations, see our consumer and retail M&A outlook.