Earlier this year, President Donald Trump announced a sweeping set of tariffs that would apply to almost all trade partners of the United States, with China’s exporters to the country potentially facing significantly higher tariff rates.

The imposition of tariffs can significantly impact various businesses, including those which:

• Export to the U.S.; 

• Have U.S. operations; and 

• Rely on materials from China (which has been hit with some of the highest tariffs).

The new tariffs may have a material impact on a range of contractual relationships and give rise to various international disputes. 

In this note, we cover key issues that businesses may need to consider in relation to their existing or future contractual relationships, as well as whether the new tariffs give rise to contractual claims. 

1. Specific clauses addressing changes in the law. Some contracts may contain specific clauses addressing the consequences of changes in law, such as tariff changes. Given recent events, it may be worth considering the inclusion of such clauses in future contracts. Such clauses may need to be closely examined where they are included in existing contracts.  

2. Events allowing for termination. Contracts often provide for the possibility of termination or suspension of obligations on the occurrence of “force majeure events” or “material adverse changes" (which are often pre-defined in the contract). Force majeure events typically encompass events beyond the control of the parties and may include governmental action. Material adverse change (MAC) clauses provide for certain outcomes if specified events occur that significantly affect the bargain struck. 

Careful examination of the precise wording of any force majeure and/or MAC clauses will be necessary to determine the rights and obligations of the parties. In existing contracts, force majeure and/or MAC clauses may allow for the possibility of termination. 

3. Modification. Some contracts may include clauses which provide for the possibility of modifying the parties' contractual relationship. These may consist of price review clauses, price adjustment clauses or clauses requiring parties to renegotiate specific key terms in the contract. 

4. Obligation to perform despite hardship unless there is an exception. Absent a specific clause, contracts will generally require the performance of contractual obligations even if events, such as the imposition of tariffs, have made performance more difficult than anticipated. However, under some legal systems, general doctrines may be invoked to excuse non-performance if events fundamentally change the parties' contractual relationship.  

5. Termination and/or compensation.   A party may also be entitled to terminate a contractual relationship and/or seek compensation under the contract if there is non-performance. This could be for breach by a counterparty of its contractual obligations or through the operation of other clauses, such as dead freight clauses in charter parties.

6. Dispute resolution. The majority of contracts will contain dispute resolution clauses, either providing for recourse to domestic courts or arbitration. These clauses will need to be carefully examined to make sure that rights are protected and enforced. 

In light of the impact that new tariffs may have on existing and future contractual relationships, it is vital for businesses, when considering their specific circumstances and available options, to look carefully at the wording of the applicable contract and seek early advice to ensure that their rights are properly protected.

Withers: Robert Kovacs, Partner; Mable Lui, Head of Greater China Commercial and Christina Liew, Associate. For more information, email hk.enquiries@withersworldwide.com