Fixed-price contracts often offer predictability for buyers and sellers. However, they do not automatically insulate companies from tariffs unless the agreement explicitly allocates responsibility for those costs. Tariffs, which are government-imposed fees on imported goods, can significantly raise expenses for importers, if the contract does not account for such changes.
Why fixed prices are not always enough
A set price in a supplier contract typically covers goods and services as outlined, but tariffs introduce additional external expenses. Without clauses that address how these fees will be handled, the importing party usually bears the extra cost. This dynamic can create serious financial strain if tariffs rise unexpectedly.
Contract clauses that address tariff risk
Businesses can negotiate clauses to mitigate the impact of tariffs. One common provision is a price escalation clause, which permits adjustments if new or increased tariffs inflate costs. Another is the force majeure clause, which may excuse or postpone performance if unforeseen events, such as sudden tariffs, make fulfilling the contract substantially more difficult. A change-in-law clause can also allow renegotiation or termination if regulations (tariffs included) alter the legal landscape surrounding the agreement.
Potential for breach of contract
When tariffs make a deal unprofitable, parties might consider breaching the contract. In Maryland, a breach of contract claim requires proof of a valid agreement, a breach by the defendant and damages resulting from that breach. Tariffs alone do not excuse performance unless the contract explicitly addresses them. If a party ignores this reality, they risk legal consequences.
Strategies for minimizing exposure
Contractors working with federal entities sometimes rely on provisions like FAR 52.229-3, which classifies tariffs as an “after-imposed tax” and allows for recovery. Commercial contracts can include similar protections, such as shifting the tariff burden to suppliers or enabling renegotiation if tariffs become burdensome.
Fixed-price contracts create stability, but they do not inherently safeguard against government-imposed tariffs. Including clauses that anticipate these potential costs is essential to minimizing legal and financial risks.