The Hot Potato of Tariffs: Which Contract Party Will Pay?

By Association of Corporate Counsel 

You may be familiar with the game of hot potato - participants pass around an object (representing the “hot potato”), and the person holding the item when the music stops loses. The rule is simple. 

For businesses impacted by the current tariff increases, it is critical to work out which party to their contracts should bear these added costs. This directly impacts the company’s bottom line. And the rules are not so simple. In-house lawyers can help the business navigate how to allocate these risks in commercial contracts. 

Below are five tips for in-house counsel dealing with this issue. These tips and more are developed in the ACC Docket’s Contracts Corner: Navigating Tariff Hikes and Contractual Risk in Commercial Agreements, by Billie Munro Audia, Partner and Retail, Marketing & Media Practice Area Leader at Outside GC, and Stephanie Penninger, Associate General Counsel, Supply Chain, at Wayfair. 

• Identify the origin of the goods, and analyze if they are subject to increased tariffs, which rate applies, and if any exemption applies. 

• Review existing contracts and identify if there are clauses that anticipate which party will bear the cost of changes in tariffs (or, more broadly, costs imposed by governments). 

• Depending on applicable law and jurisprudence, increases in tariffs might not fall within the scope of force majeure clauses. 

• If the contract doesn’t include clauses addressing tariff increases, identify what applicable law says regarding who is responsible for paying tariffs (such as the importer). 

• Even when a contract places the burden of tariff increases on the other party, a business may want to negotiate a solution that preserves the economic balance for both parties. 

• In future contract discussions or renegotiations, consider including clauses that allow price adjustments or that require timely good faith renegotiations in the event of tariff increases, perhaps with options such as modifications in volume, duration, geographic scope – or termination. 

In the face of a rapidly evolving tariff landscape, in-house have a key role to play to help the business adapt its contracting practices. 

Also check out the ACC Webcast: A New World: Adjusting Your Supply Chain to Rising Tariffs and Protectionism, featuring Anthony Rapa, Partner, and Rachel D. Evans, Associate, from Blank Rome. 

Disclaimer: The information in this document or in any linked resource should not be construed as legal advice or legal opinion and should not be considered representative of the views of its authors, its sponsors, and/or ACC. These resources are for informative purposes only, they are not intended as a definitive statement on the subject addressed.