April 2025 – Trade Risk Update

Introduction

With tariffs once again taking center stage in U.S. trade policy, suppliers or sellers who import products, goods, components, or raw materials are finding themselves exposed to abrupt and sometimes drastic cost increases. These developments can threaten margins, disrupt delivery timelines, and create legal and financial uncertainty. While many buyers may attempt to cancel, delay, or renegotiate orders in the wake of tariff-related price increases, suppliers or sellers are not without recourse. In fact, with careful legal positioning and reliance on well-drafted contract clauses, suppliers and sellers can not only preserve their economic expectations but compel performance or recovery.

At the core of any seller or supplier strategy is the fundamental principle that a valid, accepted purchase order or supply agreement is binding. Once the buyer has accepted goods or the supplier/seller has begun performance, the buyer generally cannot walk away merely because tariffs made the transaction more expensive. Courts have long held that economic hardship, even when driven by government action like tariff increases, does not alone excuse performance under most commercial contracts. In these cases, suppliers or sellers are entitled to enforce the buyer’s obligation to accept goods and pay the agreed price. Nonetheless, legal enforcement becomes even more effective when grounded in the contractual provisions discussed below.

Golan Christie Taglia recently saw the effect a well-drafted provision under a Purchase & Sale Agreement can have for a company, where a price adjustment clause for the seller-client resulted in them passing on the million-dollar increase in costs due to tariffs to the buyer entity.

Early Termination Clauses: Limiting Buyer's Ability to Exit Unilaterally

Early termination clauses, particularly termination for convenience provisions, pose a significant risk for suppliers or sellers during times of price volatility. These clauses allow a buyer to walk away from a contract without cause, typically with advance notice and limited liability. If left unchecked, such provisions can be used by buyers to escape rising costs caused by tariffs, even after the supplier has made financial investments in materials or production.

Suppliers and sellers should carefully negotiate limitations on early termination rights. One approach is to require that any termination for convenience obligates the buyer to reimburse all non-cancellable costs, including materials purchased in reliance on the contract, labor already performed, and potentially a reasonable allocation of overhead. Suppliers and sellers may also negotiate a restocking fee, or require a deposit up front to secure the order against premature cancellation. In more favorable bargaining positions, suppliers may insist that termination for convenience is not available once production has begun or a certain threshold of performance has been completed.

Critically, suppliers and sellers should avoid accepting contracts that allow for unilateral buyer termination without meaningful compensation. Where such provisions exist, suppliers and sellers should enforce reimbursement rights aggressively and ensure that notice procedures are followed exactly. If a buyer purports to terminate early without observing contractual formalities, the supplier or seller may be entitled to damages under breach of contract theories.

Price Adjustment Clauses: Preserving Profitability When Costs Rise

Many long-term or volume-based contracts include price adjustment or price escalation provisions. These clauses enable the supplier to revise pricing if the cost of key inputs—such as materials, labor, fuel, or freight—rises above a defined threshold. To be effective in the current climate, suppliers should ensure these clauses include language covering tariffs, customs duties, and government-imposed fees, not just general market indices.

When triggered, a price escalation clause allows the supplier or seller to raise prices during the contract term without risking a breach. However, suppliers and sellers must be prepared to provide documentation demonstrating the increased costs directly resulting from the new tariffs. That may include revised customs declarations, shipping invoices, or supplier quotes. The clause should also include reasonable notice procedures so that the buyer is informed of the adjustment before delivery. Courts are generally receptive to these adjustments if the underlying contractual language is clear and the supporting documentation is timely and credible.

A GCT client based in Canada, who sells products to buyers in the United States, recently saved $1 million due to a clear provision in the sale contract that allowed for a price increase at the time of delivery to reflect “state or federal tax rate changes”. If you are a foreign company who sells products into the United States, or a US based company with buyers outside of the country, there is a high likelihood that tariffs will affect those transactions. In these circumstances, a simple six-word price-adjustment provision can result in huge savings. 

Force Majeure Clauses: Using Tariffs to Justify Delay or Suspension

Force majeure clauses traditionally excuse performance when unforeseen events render a party’s obligations impossible or impracticable. While force majeure is not typically triggered by economic hardship alone, many modern contracts include broad definitions of force majeure to include government actions, trade restrictions, or regulatory changes. In this form, force majeure may cover the imposition of new tariffs.

For suppliers and sellers facing extreme cost increases, invoking force majeure may allow for temporary suspension of delivery obligations while new terms are negotiated. While courts are cautious in applying force majeure to financial challenges, if a tariff fundamentally alters the supply chain or renders key components unavailable, the clause may offer short-term relief or legal cover to renegotiate the deal.

It is important for suppliers and sellers to strictly follow all notice requirements and mitigation duties outlined in the force majeure clause. If the event persists beyond a defined period—often thirty or sixty days—the clause may also permit termination, which suppliers and sellers can use to minimize further losses.

Impracticability Under the UCC: Legal Justification for Withholding or Modifying Performance

Even in the absence of favorable contract language, suppliers and sellers may seek relief under Section 2-615 of the Uniform Commercial Code, which permits a seller to delay or cancel performance where it has become “impracticable” due to an unforeseen contingency. Courts have acknowledged that substantial, unforeseeable cost increases caused by new government action—such as tariffs—may trigger this protection.

The supplier or seller must show that the tariff was not anticipated at the time of contracting and that its economic effect is so significant that it would be unjust to require full performance. This argument is especially strong in cases where the tariff raises the supplier’s cost of goods by 25%, 50%, or more, and where the supplier operates on already narrow margins. While the doctrine does not excuse performance lightly, it remains a useful tool in litigation or negotiation when contract performance becomes commercially devastating.

Indemnification and Exposure from Buyer Conduct

Suppliers and sellers should be wary of indemnification provisions that expose them to downstream liability for delays, cancellations, or penalties resulting from a buyer’s refusal to accept goods or pay increased prices due to tariff changes. If a buyer walks away from a binding order citing cost increases or asserts a unilateral right to terminate without covering incurred costs, the supplier or seller may be entitled to indemnification for breach-related losses, including material costs, restocking fees, and freight expenses. Suppliers and sellers should also ensure that indemnity provisions do not require them to bear responsibility for post-delivery issues caused by the buyer’s resale practices, re-export, or failure to comply with local regulations. When drafting indemnification clauses, suppliers and sellers should affirmatively exclude liability for tariff fluctuations unless those costs are explicitly addressed through price adjustment elsewhere in the agreement. Where possible, suppliers should seek indemnification from the buyer for any penalties or losses resulting from the buyer’s misuse, misrepresentation, or downstream regulatory violations.

Conclusion

Suppliers and sellers impacted by tariff increases should not view buyer cancellations or renegotiation demands as inevitable. With a firm understanding of their contractual rights—and with properly drafted provisions—suppliers and sellers can enforce buyer performance, adjust pricing, or legally withhold delivery when necessary. Buyers are rarely excused from their obligations solely due to increased costs, and economic discomfort is not a defense to nonperformance.

Through the combined use of escalation mechanisms, force majeure rights, early termination protections, and the UCC’s impracticability doctrine, suppliers and sellers can preserve their economic interests and maintain commercial stability. In a tariff-heavy world, it is not enough for contracts to be enforceable—they must be strategically designed to absorb volatility and deter opportunistic behavior. Suppliers and sellers who assert their rights early and decisively will be in the best position to maintain margin, ensure payment, and remain competitive.

This is a rapidly changing landscape, and GCT is watching to see how relevant contract provisions and tariff disputes will be dealt with by the Courts. If you are a supplier or seller who may be affected by tariff, GCT is available to assist.