April 2025 – Trade Risk Update

Introduction

With the sudden tariff increases, international trade has become increasingly volatile, with shifting geopolitical alliances, and escalating costs all contributing to heightened uncertainty for businesses engaged in cross-border commerce. Tariff policy, in particular, has become a recurring source of disruption. From retaliatory duties between major economies to sweeping import levies on critical goods such as steel, semiconductors, and electric vehicles, the landscape remains in constant flux.

This volatility poses significant challenges for buyers, who often operate on fixed-price agreements or long-term supply commitments. As suppliers pass on rising costs or seek to renegotiate terms, buyers must ensure their contracts contain the tools necessary to navigate sudden price shocks. With strategic contract drafting and careful attention to termination, adjustment, and renegotiation provisions, buyers can avoid being locked into economically unsustainable obligations and retain flexibility in the face of unpredictable global trade policy. The contract strategies outlined below are especially critical for buyers looking to manage risk and preserve commercial stability in today’s uncertain environment.

Early Termination Clauses: Preserving a Legal Exit

Among the most powerful and flexible tools available to buyers is a termination for convenience clause. This provision allows a buyer to exit the contract unilaterally and without having to prove breach or wrongdoing, provided that the buyer gives sufficient notice as defined in the agreement. In a tariff-driven economy, this right is essential to preserving business agility and avoiding long-term commitments that may become commercially impracticable.

To be effective, the termination for convenience clause must be drafted with precision. The notice period—often ranging from thirty to ninety days—must be clearly specified, as must the scope of allowable termination liability. Buyers should ensure that liability is limited to direct costs actually incurred by the supplier prior to notice, such as expenditures on raw materials or partially completed goods. Recovery of consequential damages, lost profits, or claims based on anticipated future orders should be expressly excluded. Buyers should also confirm that any exclusivity or minimum purchase obligations do not survive the termination, unless such terms are separately negotiated.

In industries characterized by fast-moving consumer trends, complex logistics, or fluctuating component prices—such as electronics, apparel, or packaged goods—buyers may also benefit from short cancellation windows tied to individual purchase orders. These so-called “zero-liability windows” typically permit cancellation within a set number of business days following issuance of a purchase order, assuming production has not begun. This allows buyers to adapt quickly to tariff announcements or market shifts without incurring penalties.

Courts have generally upheld early termination provisions when clearly stated and mutually agreed to in advance. Including this type of clause as standard practice in supplier agreements, particularly in sectors exposed to geopolitical risk, is a prudent and enforceable strategy for buyers.

Price Indexing Clauses: Benchmarking for Transparency

In contracts where input costs are heavily influenced by commodity markets or global indices, a price indexing clause can help maintain pricing alignment with external market forces. These clauses tie the price of goods to a recognized index—such as the Producer Price Index or commodity-specific benchmarks for steel, aluminum, or electronics components.

To function effectively, the contract must identify the precise index to be used, set a clear frequency for price adjustments (such as quarterly or biannual), and include provisions to cap or limit drastic fluctuations in either direction. In the event that the index becomes obsolete or unreliable, the parties should have a process for agreeing to a substitute. By aligning the contract price with transparent third-party data, indexing helps prevent disputes and protects buyers from unjustified price increases unrelated to actual market conditions.

Renegotiation and Force Majeure Provisions

For long-term contracts, especially those involving international sourcing or complex logistics, buyers should ensure the agreement includes a renegotiation clause triggered by significant changes in law or economic conditions. While not all such changes will warrant termination, a renegotiation clause ensures that the parties are contractually required to revisit the agreement and adjust it as needed to reflect current realities.

In addition, buyers should revisit their force majeure clauses to determine whether they adequately capture government-imposed trade restrictions or tariff-related disruptions. Although traditional force majeure clauses often exclude economic hardship, some jurisdictions may interpret broad governmental action as excusable nonperformance. The inclusion of tariffs, sanctions, or other regulatory barriers in the force majeure definition, along with provisions for temporary suspension or termination after a defined period of disruption, can offer an additional layer of protection.

Indemnification Risks and Mitigation

Buyers should carefully evaluate indemnification provisions in supply contracts to avoid inadvertently assuming liability for tariff-related costs or regulatory noncompliance by the supplier. Broad indemnity clauses that obligate the buyer to cover “any and all losses” or “governmental penalties” may expose the buyer to unforeseen duties, customs violations, or penalties arising from the supplier’s sourcing decisions or import misclassifications. To mitigate this risk, buyers should ensure that indemnification provisions are narrowly tailored, exclude tariff-related consequences unless explicitly agreed upon, and shift liability for compliance with trade laws and import documentation squarely onto the supplier. Additionally, buyers may consider affirmative indemnities from the supplier for costs stemming from mislabeling, country-of-origin errors, or false declarations, which could result in secondary liability even where the buyer was unaware of the issue.

Substitution Clauses and Contingency Planning

Some buyers may benefit from including substitution clauses that allow them to source alternative goods or components if the original materials become cost-prohibitive due to tariffs. For example, if a contract specifies materials originating from China that are suddenly subject to a 60% duty, the buyer may seek to substitute those materials with comparable inputs from non-tariffed countries. The supplier may then adjust pricing to reflect the change, subject to mutual approval.

Contingency planning can also take the form of capped cost overrun allocations or budget buffers built into the contract. These mechanisms can help absorb the short-term shock of a new trade policy while preserving the long-term supplier relationship.

Conclusion

In a trade environment marked by unpredictability, buyers must take a proactive and strategic approach to contract negotiation. The resurgence of aggressive tariff policy under the Trump administration has reminded businesses that pricing assumptions can collapse overnight. Early termination rights, change-in-law provisions, tariff adjustment mechanisms, and careful attention to purchase order language all provide buyers with the flexibility and legal tools necessary to manage these risks.

Engaging legal counsel to review or revise supplier agreements before new tariffs take effect is not merely advisable—it is essential. With thoughtful drafting, buyers can ensure their contracts serve as shields, not snares, in an increasingly volatile global economy.