Global trade tariffs: Impact on contractual arrangements

Given the dramatic effect the Trump administration's recent announcement on tariffs is likely to have on global trade, many commercial parties may be looking again at their contractual arrangements. In some cases, it may be possible to renegotiate terms to address the changed circumstances, or parties may be able to rely on express contractual rights to deal with increased costs or to terminate agreements that have become uneconomic.

In other cases, parties may want to consider whether they can invoke contractual provisions, such as a force majeure or material adverse change (MAC) clause, to suspend or avoid their obligations– or whether they may be able to rely on the doctrine of frustration to bring the contract to an end.

Force majeure

A force majeure clause is a term found in many contracts which excuses one or both parties from performing their obligations if they are prevented (or hindered or delayed) from doing so by circumstances outside their control.

Under English law, the application and effect of a force majeure clause depends on the language used. A typical clause will excuse one or more parties from performing their obligations if they are prevented (or, depending on the scope of the clause, if they are hindered or delayed) from doing so by an event or circumstances outside their control

However, while all will depend on the construction of the clause, a change in economic or market circumstances which makes the contract less profitable is not generally considered to be sufficient to trigger a force majeure clause. This may present a challenge for parties seeking to invoke a force majeure clause as a result of the imposition of tariffs.

Material adverse change (MAC) clauses

Also referred to as "material adverse effect" clauses, a typical MAC clause will allow a party to refuse to proceed with a transaction if a MAC occurs after the contract date. They are most commonly agreed in favour of the buyer in an agreement for the sale of a company or business, or the lender in a loan agreement.

Such clauses may be drafted narrowly to specify particular events that will qualify as a MAC, or may be drafted more widely but made subject to specific carve-outs. Depending on the construction of the particular clause and the surrounding circumstances, it is possible that a change to tariffs could trigger a MAC clause, if for example it had a significant negative effect on a target company or business.

Frustration

Frustration is a common law doctrine that applies where an event occurs after the contract has been entered into, which is not due to the fault of either party, and which makes further performance impossible or illegal, or renders the obligations radically different from those contemplated by the parties at the time of contracting.

The effect of frustration is to bring the contract to an end immediately and automatically. However, the question of whether a contract has been frustrated will often be a contentious point, and so a party may be required to take legal action to obtain a declaration that the contract has been frustrated.

In determining whether frustration applies, the court will consider multiple factors including the parties’ (objectively determined) expectations at the time of contracting. Frustration tends to be applied narrowly, and events which simply make the contract more onerous or less profitable will not necessarily be sufficient. However, given the dramatic impact recent events may have in some cases, it would not be surprising if arguments of frustration are raised.