Trade Tensions: 10 things for businesses to think about in their contracts

Tariffs – essentially "taxes" imposed on imported goods – have long been tools of economic policy. The United States' April 2025 tariffs, levied on imports from trading partners around the world, have exemplified how quickly such measures can disrupt global commerce. Global markets have reacted with volatility: supply chains once optimised for cost-efficiency now face existential risks, while investment in affected sectors has stalled. Beyond the tariffs themselves, and actual and potential counter-measures by affected states, businesses in various sectors are grappling with cascading disruptions to their commercial relationships. Suspension of some tariffs provides respite, but uncertainty about the future of global trade remains.

Ashurst's trade team has explored the US legal frameworks behind the United States' policies and identified the sectors that may be affected the most (see here). 

See our trade and investment in transition resources page for other Ashurst publications on this topic.

The present article outlines ten key considerations for businesses to think about in their existing and future commercial agreements amid ongoing trade tensions.

1.  Governing Law 

As a starting point, the availability of contractual relief both for the consequences of tariffs themselves, and resulting market disruption, will depend on the specific wording of the relevant contracts and the applicable governing law. It is essential for businesses to strategically consider the choice of governing law in pending or future contracts, and to consider the implications of the governing law of existing contracts. 

As further discussed below, common and civil law legal systems offer varying levels of protection, and therefore impose different consequences, for unexpected events affecting performance of a contract. Understanding these differences, and the benefits and drawbacks of the law of the chosen jurisdiction, can help businesses better prepare for potential disputes. 

2.  Force Majeure 

Force majeure is often the legal concept considered first by parties affected by unexpected events. 

1. Consequences of force majeure

Under English law, "force majeure" (literally, "greater force") is a creature of agreement, which renders its exact effect subject to the drafting of the force majeure (FM) clause. The reliefs available upon an occurrence of an FM event, which depend on the contractual terms, may be favourable to a party which cannot perform – it could be suspension of the obligation to perform, reduced performance obligations, a right to terminate (either immediately or after the lapse of a period of time), or a combination of these. It is, therefore, worth carefully reviewing the FM clause (if any) in commercial agreements, determining whether reliefs sought align with the party's objectives, and ascertaining the possibility of making such a claim. 

2. Event that qualifies as a force majeure event 

The party seeking to invoke the FM clause needs to first assess the precise nature of the event and the degree of interference with contractual performance obligations, in order to ascertain whether a particular event qualifies for the relief provided. FM clauses usually set out a list of indicative events which may be considered to be beyond a party's reasonable control. Many contracts require that the qualifying event must "prevent" performance (rather than merely act as a "hinderance" or "delay" – although some agreements do include this lower threshold).¹

As the United States' tariffs were effected through presidential executive orders² (i.e., declarations by the US president which have the force of law based on existing statutory powers), the imposition of tariffs could qualify as an FM event where the FM definition includes "any rules or regulations of governments or any interference or acts or directions of governments", or similar wording.³ Also, a subcontractor's or third party supplier's default that occurred as a result of the tariffs might qualify as an FM event if it is expressly provided for in the definition. 

In the absence of any express reference, tariffs, as well as the consequential effect of a wider market disruption, may not trigger FM relief. Generally, a change in economic or market circumstances which reduces the profitability of a transaction is not considered to be beyond the parties' reasonable control and is unlikely to fall within the usual definition of FM in the contracts. Parties are usually required to pursue alternative solutions to perform the contract (e.g., to restructure a supply chain to source materials from elsewhere), even if on more costly terms.

Even if FM is defined sufficiently widely to cover the imposition of tariffs, parties will need to ascertain whether, and if so to what extent, causation is required under the contract between the FM event and the interference with contractual performance. This is likely to be challenging, as the claiming party will need to demonstrate that the non-performance is not caused by other existing risk factors negatively affecting contractual performance. If a causal link is not currently present, the factual matrix may change if additional tariffs are imposed by the United States – and if counter-measures are levied by impacted countries.  Any FM analysis should therefore be subject to ongoing review and update.

3. Other pre-conditions and requirements

Provided that a particular event relied upon qualifies as an FM event, a party should, carefully and in a timely manner, follow the contractual mechanics of invoking such a clause, which usually include a notice requirement and potentially also a continuous reporting obligation. The claiming party may be required to demonstrate its reasonable endeavours to mitigate the effects of the event by adopting alternative modes of performance, even in the absence of an express obligation to mitigate. If contract parties do not want their ability to claim FM relief to be restricted in such manner, clear words to that effect should be used in the FM clause (see our previous article discussing the implications of the UK Supreme Court decision in RTI Limited v MUR Shipping BV [2024] UKSC 18). Otherwise, the claiming party may not be entitled to the relevant FM relief and an invalid reliance upon the FM clause could amount to a repudiation of the agreement, triggering claims for damages (or even that the contract should be terminated). 

For a more detailed summary of the operation of FM under common law, see here. 

4. Codified doctrines under civil law 

Most civil law jurisdictions have a stand-alone codified doctrine of FM, or one that has been developed by case law. The general requirements under many civil laws are broadly similar to the concepts discussed above – that the event is unforeseeable, no alternative solution is possible regardless of the cost, and a causal link exists between the unforeseeable event and the non-performance.  However the threshold for claiming FM under civil laws often will be higher than that prescribed in a contract clause – requiring evidence of impossibility of performance, rather than performance merely being "hindered" or "delayed". The requirements for a successful FM claim necessitate an objective assessment of the cause of the non-performance, in order to ascertain the strength of a potential claim.  Parties should be aware that civil laws can apply as mandatory laws at the place of contractual performance.  A choice of common law to govern a contract will, therefore, not necessarily preclude parties from relying on civil law remedies.

3.  Material Adverse Change

1. Consequence of a material adverse change 

The occurrence of a Material Adverse Change (MAC) is commonly listed as one of the events of default by the borrower in loan agreements and as one of the representations and warranties regarding the target in M&A transactions. A MAC clause may enable a party to avoid contract performance, such as allowing a lender to cancel any outstanding commitments and accelerate repayment under a loan facility in the event of a material decline in the borrower's financial conditions, or a buyer to avoid closing an acquisition where a significant deterioration in the target's value occurs. In some contracts, the MAC clause imposes an obligation on the parties to renegotiate, which has been upheld by the English courts as enforceable and requiring a certain degree of good faith.⁴

2. What constitutes a material adverse change 

The first issue to ascertain is whether the conditions of a trigger event as defined in a MAC clause have been met. The scope of the trigger event could be drafted as wide as to involve the "business or financial condition" of a party,⁵ or be much more prescriptive.⁶ It is therefore important to carefully review the MAC clause to determine its applicability.

While the operation of a MAC clause is a matter of drafting and contractual interpretation, under English law, the degree of change required in these clauses is typically subject to a high threshold of the materiality and the lasting effect of the impact. The adverse change often must significantly affect a party's ability to perform the contract and it must not merely be temporary. The fact that a party has recently experienced a dramatic collapse in the supply chain or a considerable reduction in profitability often would not qualify as a MAC, given that the market, at least for the time being, expects the effect of the tariffs to be temporary and profitability to bounce back in the near future when tariffs are removed. MAC clauses are not viewed by the English courts as "get out of jail free" cards whenever things do not go according to plan. However, the circumstances may further develop and the likelihood of invoking MAC clauses may change. 

3. Foreseeability of the adverse material change 

As for pending contracts to be entered into, given that MAC clauses are intended to address unforeseeable events at the time of the agreement, it is difficult for a party to invoke a MAC clause for tariffs after the contracts are entered into unless it could show that the conditions worsen in a way that makes them materially different in nature. 

4.  Other performance impediment principles 

1. Frustration under common law  

Where contractual performance becomes impossible or radically different to what was contemplated by the parties due to unforeseen circumstances, even if they do not strictly qualify as an FM or a MAC, the English law doctrine of frustration may be an alternative pathway for a party. If frustration occurs, then obligations to perform are discharged and the contract is automatically brought to an end. This may or may not be a desirable commercial outcome. The application of this doctrine, however, is limited and frustration cases are rarely successful.⁷ The bar is generally high. 

2. Hardship under civil law  

Where the governing law of the contract is civil law, separate legal doctrines of hardship may operate in addition to a contractual FM or MAC provision, or provide for relief where such a contractual provision does not exist. These civil law doctrines are often grounded on the concepts of a material unforeseen event, and in some jurisdictions, they may cover the situations where the changed circumstances have rendered performance excessively onerous such that insistence upon performance on the original bargained terms would impose hardship. Depending on the governing law, invoking these doctrines may void the contract (and the associated performance obligations and the compensation of losses suffered), trigger a right to renegotiate the contract, or a modification of the contract terms. Parties should also pay close attention to the perils of any delay in seeking hardship relief. 

5.  Change of Law / Change in law 

A change in law clause typically provides the terms on which the party supplying goods and/or services under a contract can recover the increased cost or be entitled to additional time in contract performance due to a change in the law, rather than excusing the party from performance completely. These clauses are often seen in construction contracts and sales of goods contracts. 

The application of a change of law provision depends largely upon the drafting of the clause as to what specific laws are caught. Particular attention needs to be paid to ascertain whether the definition of "law" under the commercial agreements envisages primary legislation only (in the form of statutes enacted by the legislators and/or administrative regulations announced by the governments) or is intended to extend to secondary legislation and other instruments such as guidelines, industry codes and governmental policies. General changes in law, which widely affect all businesses operating within a similar sector or industry, are commonly distinguished from specific changes in law which only have a designated impact on a particular entity. Usually only the latter may engage change of law relief.

Parties should assess the legal standing of the relevant government act and consider how this ties in with the change in law clause under their particular commercial agreements. Looking specifically at the United States' tariffs, the presidential executive orders imposing the tariffs are likely to fall under the general definition of "law", but a party may struggle to invoke a change of law clause which carves out any general market-wide changes in law. This position may differ if the United States levies further tariffs targeting a specific sector or an individual company. Establishing the causal link between the change in law and the adverse impact on the relevant entity calls for attention. This will often require evidence to illustrate, for example, how the particular tariff policy has led to increased costs of materials within the supply chain. Early strategising for the collection of evidence, which could be challenging for a party sitting in a complex and extensive supply chain, would be necessary and advantageous to a successful resolution of potential disputes. 

6. Other flexibility mechanisms in the contracts 

1. Liability cap and liquidated damages provisions 

Supply contracts often predefine the calculation and/or the maximum level of financial remedies available for particular breaches through liquidated damages and/or liability cap provisions. These mechanisms are often intended to address non-performance or partial performance of contractual obligations. Suppliers may strategically leverage these clauses and intentionally breach a contract, either to retain goods for more profitable resale opportunities, or to limit their exposure to the financial liability for non-performance where the continued performance of the contract imposes a greater extent of loss. 

Deploying the liability caps and provisions for liquidated damages for a deliberate breach of contract will, however, require close analysis of the commercial agreements as a whole. Some contracts expressly disapply the liability cap provision where there is wilful misconduct or deliberate default. Depending on the facts, such drafting may encompass behaviour involving an intentional and calculated breach,⁸ thereby rendering the liability cap provision inapplicable and depriving the defaulting party of its benefit. 

2. Risk allocation mechanisms    

Some contracts may include provisions allocating the burden of certain types of changes. For example, in construction contracts, penalty waivers provide contractors with an entitlement to additional time and/or additional costs, if the delay and/or the increase in costs is caused by an event deemed as an employer risk. Tariffs-related or tax-related risks, however, have not been commonly listed in this way to date. However, other forms of contract may expressly allocate the risk of import tax changes to a specific party (often the buyer in a sales transaction).  

7.  Renegotiation 

Broadly speaking, and if realistic in practice, renegotiating the terms of the contract carries the least legal risks and often produces desirable commercial outcomes. 

In order to have a holistic picture of their respective positions, parties contemplating renegotiation of their commercial agreements need to carefully consider the implications of not only the contractual clauses discussed above, but also any other relevant clauses in the agreements and any other applicable legal principles. For example, the termination right, the right to insist on specific performance, and any good faith obligations. Insurance cover issues may also arise and have an impact on the decision-making process. 

Parties also need to be disciplined with the formality of the outcome of renegotiation. Parties should be aware of the need to ensure that any agreed changes, including waivers and amendments to the contract, are properly documented and can be evidenced in anticipation of a potential subsequent dispute. Under English law, oral modifications to a contract will likely not be effective if the contract contains a "no oral modification" clause. Such clauses are commonly included in commercial agreements. 

8.  Dispute resolution mechanism 

Parties to a dispute arising from the imposition of tariffs, or wider market disruption, should consider the dispute resolution mechanism in their contracts.

Ashurst's international arbitration team discussed their practical experiences of handling contractual performance issues in light of geopolitical crises and events in this webinar. 

Alternatively, mediation, which is well-suited to the preservation of an existing commercial relationship, may be a desirable mechanism. Expert determination is also an available route for its speed and cost-efficiency in resolving specific technical disputes (such as the operation of a MAC clause and the finalised valuation of a target at the closing of an M&A transaction). 

In addition, as commercial agreements generally prescribe the procedure of conducting dispute resolutions, parties need to pay attention to a tiered dispute resolution clause and ensure timely and proper compliance with those prerequisite steps before commencing any proceedings. 

9.  Future drafting 

Every transaction inherently carries a certain level of risk of market fluctuation; no commercial entity can be entirely immune to such risks. However, geopolitical risk is something different. Where the global market is significantly distorted by the sudden imposition of tariffs, a well-crafted commercial agreement will allow a way for unpredictable risks to be allocated between the parties, for parties to effectively address emerging and unforeseeable challenges, and for transactions and trades to continue. This becomes increasingly important given the evolving global landscape, which extends beyond the United States' current tariff policies, as it encompasses broader issues of geopolitical uncertainty. 

Commercial entities would be best served by addressing the risk through the flexibility mechanisms discussed above that could be built into the contracts to reflect the parties' mutual agreement and to achieve the parties' intended outcome.

10.  Foreign investment protection  

Tariffs and counter-measures are only one example of the broad range of acts that may negatively affect foreign investments in an era of geopolitical uncertainty. Foreign investors who have existing, or are contemplating new, investments should give early thought to whether those investments are adequately protected under the framework of the investment treaties that the host state has signed up to. We further discussed the tools available to protect foreign investment in this article.