SPOTLIGHT #13: US Trade War Vol. 2 – Impact on International Contracts
At Lead up, we are committed to providing our clients with the most innovative dispute resolution solutions to fit their specific industry contexts. To do that, we have to stay on top of the recent developments in our clients’ sectors, and analyse these developments in line with our clients’ needs. Every month, in “Lead up Spotlight”, we share with you – our colleagues, clients and prospective partners – our analysis on a recent development relating to dispute resolution in an industry that matters to us and to our clients.
This month’s Lead up Spotlight focuses on the impact on international commercial contracts of the recent avalanche of US executive orders seeking to apply additional tariffs on goods coming into the US from abroad.
Trade War Vol. II: Disruptions on Commercial Contracts and Supply Chains
The US government has issued executive orders to impose duties on several countries or regions (Canada, the PRC, Mexico, all countries importing Venezuelan oil and soon the EU) and types of goods (chemicals, oil, aluminium products).
UPDATE: On 2 April, the US President announced a sweeping set of tariffs, starting with a baseline tariff of 10 % on all goods imported into the US, topped up with higher rates depending on the goods’ country of origin. For example, goods imported from China will see a 54 % tariff rate applied, goods imported from the EU will have a 20% tariff rate applied, while goods from Switzerland will face a 32% tariff rate.
UPDATE 2: On 10 April, these measures were paused for 90 days by the US administration.
As was the case during his first term, Mr. Trump has thus started a trade war that will, as in the past, result in disruptions in contractual relationships in the US and abroad.
Such additional duties have already resulted in the price of goods being increased, in the automotive industry for example. As a result, car purchases have already slowed down, and car manufacturers’ profit are dipping. Yet, the price of the components and materials necessary to the manufacture of such cars either stay the same or rise too because raw materials providers also are impacted by general rise in import duties. In other words, US importers must pay more to import targeted goods into the US, while exporters into the US must charge more to US exporters to counter the rise in import duties.
As a result, consumers are impacted by the general rise in the price of affected goods, but professionals in their B2B relationships are also impacted, and the economy of their contracts is disrupted. If price of material has been agreed at the start of the Contract, with payment upon signature for example, and the economic circumstances surrounding the implementation of the contract (e.g. in the case of the construction of an industrial facility) dramatically change, the price quoted at the start of the Contract which took into account the prices of materials at the time of contractual negotiations is no longer relevant to actual costs of materials when the trade war hits. And all contracts relating to the same project down the supply chain may also be affected and their economic balance jeopardized.
Changes in Economic Circumstances: What can Parties do to Restore the Economic Balance in their Contract?
- Include a Clause to Renegotiate the Contract in Case of “Changes of Circumstances” or “hardship”: If the price of goods or services for which the relevant contract has been entered into is agreed between the Parties in the relevant Contract (or if it can be calculated using an agreed upon formula), the Parties can include a clause in their contract providing for the opportunity to revise the price by agreement or in accordance with a procedure or formula that can take into account changes in economic circumstances relating to price of raw materials, for example. More generally, Parties can provide a mechanism to account for economic circumstances relevant to the performance of the contract (e.g. spike in raw materials trading price, or import ban targeting certain products).
To be efficient, the relevant contract will also need to include a clear dispute resolution clause, so that any dispute arising out of the need to renegotiate the contract pricing terms can be resolved quickly and fairly (for example, through arbitration or ADR).
- If French law Applies, AND Your Contract Does not Include a “Changes in Circumstances” or “Hardship” Clause: Under French law, the judge can rescind, or modify the terms of a contract, if the aggrieved party can show that changes to the economy of the contract resulted for unpredictable circumstances, not attributable to them, to the point that performance of the contract becomes unreasonably onerous (“imprévision”). French law also provides for the possibility to invoke force majeure to excuse non-performance of the contract, but among other conditions (i) performance must have been rendered impossible, not just more onerous; and (ii) a party cannot invoke both force majeure and imprévision concurrently to be excused from performance.
Other international law sources, such as the UNIDROIT principles, which are regularly included as applicable law in international law contracts, also provide for the possibility to invoke the hardship concept (Article 6.2.2).
- Regardless, Document any Event That Impacts the Economic Balance of the Contract: It is important to document the impact of the new tariffs on the relevant contracts, and to inform your counterparty of this impact on your ability to perform your obligations under the Contract. First, it may create a useful opportunity for the Parties to confer and adjust, even temporarily, the contractual obligations to ensure the Contract can be ultimately performed (for example, by adapting payment schedules, or identifying alternative, and cheaper, sources of material). Second, if a dispute cannot be avoided, it will be a useful paper trail to show, to a judge or arbitrator(s), good cooperation, transparency and good faith in the contractual relationship.