Who is this article intended for?
This article series is aimed at new or junior lawyers and can also be shared by in-house legal teams with their commercial colleagues who deal with contracts. The aim of the series is to provide a foundational understanding of common contracts, offering insights into what key legal aspects need to be considered. Whether you are just starting in the legal field or need to ensure that your business colleagues are well-informed about contract essentials, this guide will help with navigating the complexities of commercial agreements effectively.
Key considerations when contracting in uncertain times
Given that we are in a period of heightened geopolitical uncertainty (everyone is talking about tariffs!), there is currently much discussion about how that uncertainty impacts business contracts and so in this article we set out some key considerations.
From the customer’s perspective:
Prices: Where possible, aim to fix prices, bearing in mind that if you are importing goods into your country then the onus will be on you to pay any applicable import duties, taxes and tariffs. Tariffs are not normally charged on services and so they should not directly impact on the cost of services.
Exchange rates: If you are dealing in non-sterling currency, be aware that exchange rate fluctuations can have a material impact on price. Try and insist on payment in sterling but if that is not possible. and if there will be a series of transactions with the supplier, consider with your finance team and bank whether there are ways of hedging against currency fluctuations.
Stock building: Not only do tariffs and trade wars impact on the price of goods, they can also cause problems with logistics as businesses try to navigate the changing international trading landscape. The upshot is that it may be difficult to secure shipping or other transportation, or there may be delivery delays caused by customs checks, so plan the logistics well in advance and consider whether it is possible to build up a safety stock of the goods to help mitigate any supply problems.
Order cancellation: If you anticipate that price may be adversely affected by currency fluctuations or tariffs, try and include in your contract the ability for you to cancel your order and/or stop placing further orders. There may be a penalty for cancelling an order, depending on when the cancellation occurs, but it may be cheaper to cancel than to complete an order where the price has markedly increased as a result of changes to the exchange rate or tariffs.
Force majeure: The fact that a contract becomes more expensive, less profitable or commercially unattractive is not likely to be regarded by the English courts as a force majeure event or grounds for the frustration of the contract unless expressly provided for. Therefore in your contract, you might try including the imposition of tariffs as a force majeure event, although a well advised supplier will understandably (especially now) resist that.
From the supplier’s perspective:
Ability to increase the price: Unless you are delivering goods into the customer’s country on a “delivered duty paid” basis, the customer (and importantly not you!) will be responsible for paying import tariffs. If you are delivering the goods into the customer’s country, make sure that the contract allows you to pass on associated costs, including import taxes, duties and tariffs.
Aside from tariffs on the delivery of the finished goods, tariffs or other costs may be incurred by you on the raw materials and parts required to create your goods therefore increasing your cost. Therefore it will be important to ensure that the contract gives you the ability to increase your price to reflect those higher costs.
Rejection of orders and flexibility of delivery: Given that the direct and indirect impact of a trade war may affect your ability to supply goods or services (on time or at all), your contract should make clear what happens in these circumstances i.e. right to reject orders, ability to cancel orders and specifying that any dates for delivery are merely estimates and are not contractually binding.
Force majeure: Since a trade war may cause supply chain issues which impact on your ability to supply your goods or services to your customers, you should include a force majeure clause in your contracts with your customers which is drafted broadly enough, and explicitly, to cover delays or non-performance by you which are caused by your own suppliers being delayed in supplying, or unable to supply, you with raw materials, parts or other resources.
Key takeaway
Uncertainty is now a constant feature of the commercial landscape. Contracts need to be drafted and negotiated with that in mind and understanding how to mitigate risk through careful contract drafting is essential. While every situation is different, taking the time now and going forward to review your contracts with these considerations in mind will help protect your organisation from the unexpected.
Disclaimer
This information is intended for general informational purposes only and does not constitute legal advice. We recommend seeking professional advice before taking any action on the information provided. If you would like to discuss your specific circumstances, please feel free to contact us on 0800 2800 421.
