Managing Supplier and Customer Contract Risks

July 2025

Business relationships can be sensitive. This year, dramatic shifts in politics and proposed legislation, not to mention pivotal court decisions, have fed ongoing volatility introduced by changes in tariffs, trade, and other governmental policies. The rules of business engagement are in flux as all parties try to maneuver the changing landscape while keeping important relationships sustainable. Mitigating additional risks and costs caused by fluctuating global policies and potential supply chain disruptions means companies need to review and possibly fortify their current (and future) contracts.

Suppliers and customers have similar concerns around the impacts of tariff policy on business continuity, but view them through different lenses:

• Availability of products/services
• Costs of products and related impacts on forecasting and budgeting
• Delayed shipping
• Changes in service level/extended lead time
• Reduced demand

Some risk mitigation techniques and anticipatory hedging strategies to consider in supplier and customer contracts include:

• Tariff adjustment clauses that allow for cost-sharing in the event of regulatory changes instead of strict reliance on Incoterms
  • FOB (Free on Board; responsibility/risk transfers from seller to buyer at port of departure)
  • DDP (Delivery Duty Paid; places full responsibility, including tariffs, on the seller until goods reach the buyer)
  • CIF (Cost, Insurance, Freight; seller pays shipping, freight, and insurance to buyer’s port, buyer assumes risk of loss when goods board the vessel and pays import fees, taxes, and custom duties)
  • Clauses that share liability for products (that traditionally lies with importer of record) under certain events; possibilities include:
  • specific language to address how “extraordinary” events, such as increased tariffs or supply disruptions, should be measured or recognized
    • e.g., recognize tariff expense when the goods are imported, or upon sale of those goods, or at a different time
    • define “extraordinary” events
• Clarifying representations and warranties related to compliance with current/future export laws/regulations
• Flexible pricing clauses (pricing triggers) that permit the parties to renegotiate pricing or automatic adjustments if tariffs or product availability change significantly (e.g., clause that enables automatic recalibration of prices in response to tariff fluctuations, clause identifying the party responsible for managing tariff impacts)
• Use of escrow accounts for future payments
• Force majeure clause to allow a party to suspend or terminate; explicitly address unforeseen financial liabilities that may result from government action or changes in law (e.g., draft force majeure threshold to only require that change in tariff policy materially affect performance, not that performance is rendered impossible—performance being more expensive is typically not a force majeure)
• Escalation clauses to enable renegotiation; MAC (material adverse change) clause to restore equilibrium in a contract—clarify when tariff changes make performance sufficiently burdensome to allow recourse
• Dispute resolution clause to address how parties will resolve tariff-related or supply-related disputes
• Termination clauses to address costs/delays: assess whether the tariff changes or supply availability materially affect contract viability
• Insurance coverage provisions for protection against losses due to tariff or international disruptions
• Additional or augmented transition or continuity provisions (is current supplier required to assist in the event the service or product must be transitioned; identify what would trigger the transition/obligation to assist)
• Transparent communication protocols between the parties for timely updates on tariff modifications to mitigate exposure and share tariff risk and product availability or changes in demand
• Other mitigation tools:
  • Employ personnel/tools to monitor regulatory and overall business developments
  • Diversify supply chain to reduce dependence on a single geographical region or supplier; prepare to mitigate loss (can supplier identify customers in other geographical regions that will purchase goods if a buyer cancels order due to additional/revised tariff cost)
  • Leverage automation tools to help manage supply chain disruption and compliance, scenario planning and forecasting
  • Review current key contracts to identify potential vulnerabilities to macroeconomic and policy changes
  • Increase engagement between legal and sales/procurement departments to better understand and respond to market forecasts and trends in the context of an evolving international trade environment

In summary, the business community is witnessing a reconfiguration of global trading relationships – much of which has yet to be inked and translated into predictable costs or timetables. In preparation for greater visibility, as well as protection against continued uncertainty, there is no time like the present to review active contracts and prepare future contracts for the sharing of these new risks.