Tariffs and international contracts: managing tariff risk

Why tariffs are also a contractual issue

Tariff changes are not merely a customs or tax matter. 

When an international contract does not clearly address which party bears the increased costs, the risk quickly translates into:

• erosion of margins
• tensions in the commercial relationship
• disputes regarding price adjustments or breach of contract

For exporting companies — particularly small and medium-sized enterprises (SMEs) operating with relatively narrow margins — tariff risk must be addressed already at the contract drafting stage.

Incoterms and allocation of risk

In international sales contracts, the use of Incoterms® rules has become standard practice. The chosen delivery term directly affects how costs and risks are allocated between the parties.

Seemingly technical differences — for instance, between Delivered At Place (DAP) and Delivered Duty Paid (DDP) under Incoterms® — may result in different allocations of:

• customs duties and formalities
• import tariffs
• risks related to customs delays or clearance issues

It is therefore essential that the Incoterm:

• be indicated accurately and completely (specific place and applicable ICC version, e.g. “Incoterms® 2020”)
• be consistent with the other provisions of the contract, especially pricing provisions
• be expressly referenced in transactional documents (order confirmations, framework agreements, general terms and conditions)

A mismatch between the chosen Incoterm and the economic clauses of the contract may lead to interpretative uncertainty and potential disputes.

It is important to point out that Incoterms do not govern transfer of title or price, which must be regulated separately in the contract.
Moreover, the contractual allocation of costs does not necessarily affect obligations towards customs authorities, which are typically borne by the importer of record.

Tariff escalation clauses

In practice, tariff increases are sometimes broadly treated as force majeure events.

However, force majeure clauses are often interpreted narrowly and may not cover tariff changes, unless the clause expressly includes events such as change in law or governmental measures. In simplified terms, force majeure generally refers to an event that renders performance impossible; under Italian law, the general reference is Article 1256 of the Civil Code, while economic hardship may fall within Article 1467 of the Civil Code.

For this reason, it is often preferable to include a specific tariff escalation clause addressing:

• the threshold of tariff variation triggering adjustment
• the method for calculating price adjustments
• the allocation of the additional burden between the parties
• notification and supporting documentation requirements

In the absence of such a clause, the company may be forced to absorb the entire increase. Properly drafted tariff risk clauses may provide for price adjustment mechanisms, including automatic adjustments where expressly provided, in the event of the introduction, increase or reduction of tariffs, preventing the entire economic impact from falling on one party only.

Hardship clauses and renegotiation

When tariff increases significantly alter the economic balance of the contract, it may be appropriate to include a hardship clause (i.e., a clause addressing changed circumstances requiring renegotiation or contractual adjustment). In common law systems, absent an express clause, contractual rebalancing is generally not available.

Such clauses may:

• impose an obligation to renegotiate in good faith
• provide for the involvement of a third party or an automatic price adjustment mechanism
• grant a right of termination if renegotiation fails

When drafting commercial contracts, hardship clauses should also be coordinated with:

• change-in-law clauses
• force majeure provisions
• duration and renewal clauses

Allocation of customs costs, refund management and documentary cooperation

The parties may contractually regulate the allocation of customs costs and duties in greater detail, including by supplementing or adjusting the structure provided by the chosen Incoterm.

The contract should clearly specify:

• who acts as the importer of record
• who ultimately bears the tariff burden
• how potential customs refunds or customs adjustments are handled

Contracts should also include clauses requiring active cooperation between exporter and importer (for example documentation duties, declarations, information sharing or agreed audit rights) in order to manage customs flows effectively.

As a matter of good practice, the contract should also address:

• customs classification (HS code)
• origin of the goods
• supporting documentation
• remedies in case of incorrect or incomplete declarations

A lack of documentary cooperation often lies at the origin of disputes between suppliers and distributors, particularly when supply chains involve multiple intermediaries.

For example, an EU company may sell goods through a trader to a US importer. If the trader fails to provide the required documentation, it may become impossible to apply the “first sale” customs valuation method, and tariffs may instead be calculated on the value of the final sale — which is often higher.

Currency, exchange rates and volatility

In periods of tariff instability, exchange rate volatility may further amplify the economic impact of tariffs.

It is therefore advisable to consider contractual mechanisms allowing dynamic price adjustments, including indexation mechanisms or objective adjustment parameters, linked to tariffs or exchange rate fluctuations. A clear contractual framework should address:

• the currency of payment
• exchange rate adjustment clauses
• periodic price revision mechanisms

When combined, tariff risk and currency risk may significantly affect the overall economic sustainability of the contract.

Implications for exporting SMEs

SMEs operating in international markets — particularly in manufacturing and engineering sectors — are often exposed to unpredictable tariff changes.

Integrating tariff risk management clauses into international contracts may help to:

• avoid emergency renegotiations
• protect profit margins
• reduce the risk of disputes
• strengthen the company’s negotiating position

A periodic review of contractual templates and standard terms is helpful in preventing future issues.

Applicable law and jurisdiction: impact on contractual interpretation

In international transactions, the choice of governing law and jurisdiction significantly affects how contractual clauses — including those concerning tariffs, hardship or force majeure — are interpreted and enforced.

For example, an increase in tariffs might be considered a force majeure event in jurisdictions adopting a broader interpretation of unforeseeability. In other systems — particularly in common law jurisdictions — force majeure depends strictly on the wording of the contractual clause. Without an explicit reference to change in law or tariff variations, increased costs may not justify suspension or renegotiation.

Similarly, the doctrine of hardship or excessive onerousness differs considerably between civil law and common law systems, with concrete consequences for the possibility of obtaining price adjustments or termination.

For this reason, the drafting of economic clauses and risk allocation mechanisms should always be coordinated with the choice of governing law and jurisdiction. The same clause may produce very different legal and economic effects depending on the legal system governing its interpretation. For example, without an express reference to tariff changes or change in law, increased costs may not justify suspension or renegotiation.

Conclusion

Tariff risk in international contracts should not be left to improvised solutions or addressed only after problems arise.

A properly structured contract — consistent in its use of Incoterms and equipped with escalation and renegotiation mechanisms — generally represents an important risk-management tool for exporting companies.

In the absence of express contractual regulation, tariff risk is governed by general legal principles, often leading to uncertain and jurisdiction-dependent outcomes.

Legal notice

This article is provided for general informational purposes only and does not constitute legal advice. It does not contain any promise of results. For advice on specific matters, please contact the Firm.