Key Takeaways:

• While the U.S. tariff landscape is constantly shifting, the Trump administration’s determined policy stance means that—at the very least—uncertainty is here to stay. This uncertainty, in turn, will continue to create challenges for companies that must navigate the implications of this new reality.
• Companies’ contractual obligations are a major source of potential risk. Supply- chain delays and unprecedented cost increases could prevent companies from performing their contractual obligations. In addition to fixed supply, delivery, and payment obligations, indemnity and pass-through provisions can also create risk and liability.
• Companies’ contractual rights are, at the same time, important tools for mitigating tariff related risk. Force majeure, liquidated damages, renegotiation, termination and dispute resolution provisions, among others, could provide potential avenues of relief and are key factors to consider in the larger commercial and risk calculus.
• Companies should review their existing contracts to better understand their rights and obligations, including how contractual provisions may be optimally deployed to manage and mitigate the uncertainty and tariff-related risks that will undoubtedly persist in the months, and even years, to come.
• Bilateral investment treaties and free‐trade agreements are another potential source of tariff-related disputes. Companies should seek to understand whether they qualify for investment protections, have any viable treaty claims, and have particular strategic interests that may make this a commercially sensible option.

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Introduction

In the first half of 2025, the Trump administration’s far-reaching tariff announcements and policies have precipitated seismic changes in global trade. The country-specific and product-specific tariffs, including on aluminum, steel and automobiles, are leaving few companies untouched. Not to mention the announced tariff-related investigations—including into pharmaceuticals, semiconductors, copper and lumber—which signal the likelihood that more industry-specific tariffs are forthcoming.

Companies across industries have begun experiencing the commercial effects. They have projected increased costs and lower earnings, pulled earnings forecasts altogether, warned of potential supply disruptions or of buyers reneging on purchase commitments, and even declared force majeure.

Commercial contracts—the bedrock of business relationships—will play a major role in how these effects and their associated costs are ultimately allocated. They may be used as a sword (to seek compensation for nonperformance, uneconomic price increases, third‐party liability, or defective goods and services) and also as a shield (to excuse nonperformance including on the basis of force majeure, impossibility or impracticability, or mitigate loss through liquidated damages, renegotiation, mediation, or termination). Investment treaties may provide additional protections for companies’ business interests that may be affected by new tariffs. Understanding one’s contractual and treaty-based rights and obligations will be key to effectively managing and mitigating any tariff-related dispute risks.

In this client alert, we: (i) provide an overview of the prevailing U.S. tariff policies, including the various factors that may affect how they evolve; (ii) examine potential friction points arising out of common contractual provisions; and (iii) consider how the evolving tariff landscape may give rise to investment disputes.

The Tariff Landscape

The tariff landscape is constantly evolving. Frequent policy changes, ongoing domestic legal proceedings, issued or threatened retaliatory tariffs, and bilateral trade talks all contribute to the unpredictability of what tomorrow will bring. For purposes of understanding their impact and scope, however, it is useful to understand the Trump administration’s tariffs in two broad categories—country-specific and product-specific.

Country-Specific Tariffs

The Trump administration has imposed blanket tariffs on products from several major U.S. trading partners under the International Emergency Economic Powers Act of 1977 (“IEEPA”). The IEEPA grants the president the power to regulate importation to “deal with an unusual and extraordinary threat with respect to which a national emergency has been declared.” Declaring multiple national emergencies due to the flow of criminal activity and illegal drugs across U.S. borders, the Trump administration imposed a 25% tariff on all products from Canada and Mexico, a 10% tariff on Canadian energy resources, and a 20% tariff on all products from China. Citing the IEEPA again, the Trump administration later ordered a 10% “reciprocal” tariff on all other countries, except for certain products explicitly exempted (e.g., pharmaceuticals and semiconductors). For certain countries, those rates are scheduled to increase on July 9, 2025.

The future of these country-specific tariffs, however, is uncertain. On May 28, 2025, the U.S. Court of International Trade (“CIT”) held that these tariffs exceed the president’s authority under IEEPA and must be vacated. The CIT’s ruling has been appealed to the U.S. Court of Appeals for the Federal Circuit, which is allowing the tariffs to remain in place and effective pending the appeal. Even if this or other challenges to the country-specific tariffs under IEEPA succeed, however, there are other statutes the Trump administration may rely upon. For instance, Section 122 of the Trade Act of 1974 allows the president to impose tariffs on countries, including to remedy “large and serious United States balance-of-payments deficits”; and Section 338 of the Tariff Act of 1930 allows the president to impose tariffs on countries that “discriminat[e] against the commerce of the United States.”

Product-Specific Tariffs

The Trump administration has also issued product-specific tariffs applicable without regard to the country of origin, pursuant to the president’s authority under Section 232 of the Trade Expansion Act of 1962. Section 232, as well as certain other legal bases for tariffs—including Sections 201 and 301 of the Trade Act of 1974—require a government agency investigation before the president may impose such tariffs. Because these tariffs are supposed to be preceded by a formal investigation and findings, they may take longer to be enacted, but they are also more likely to survive judicial review.

A 25% tariff remains in effect for all aluminum, steel, automobile and auto part imports with some limited exceptions. These and other tariffs issued under the Trade Expansion Act or the Trade Act are not impacted by the CIT litigation, which applies only to the tariffs issued under IEEPA. Several more product-specific tariffs are anticipated in the coming months as ongoing investigations into those products and sectors conclude. For instance, the Trump administration ordered the Commerce Department to conduct formal investigations into whether imports of copper, timber and lumber, pharmaceuticals, and critical mineral products (e.g., semiconductors) threaten U.S. national security, and should be subject to tariffs, quotas or other import restrictions. The results of these investigations are expected between October and December of this year.

Potential Friction Points in Commercial Contracts

While every commercial contract contains unique language and a distinct governing law framework, there are certain common clauses that are likely to give rise to a handful of dispute scenarios—each of which we consider in this section.

Fixed Obligations

Tariffs may cause delays and increase costs along a company’s supply chain. This may affect the ability of companies to meet contractual delivery, payment or timing obligations.

To assess risks in this scenario, companies should identify any price, delivery, timing or payment obligations in their contracts that may expressly allocate tariff risks to any given party. Some contracts, for example, may provide that the purchase price is inclusive of all applicable tariffs, whether existing or imposed during the term of the contract, thereby allocating tariff risks to the seller. Other contracts may establish procedures for determining which party bears the risk of any material change in circumstances, including tariff increases. For example, the seller may be given an opportunity to propose an adjusted price to reflect an increase in tariffs, after which the parties are to negotiate an equitable adjustment in good faith.

But not all fixed price, delivery or timing clauses will account for tariff risk. In many cases the clauses will impose hard deadlines and firm prices with clear consequences if an obligation is not met. Fixed delivery or “time is of the essence” provisions, for example, could allow the buyer to cancel the order, seek liquidated damages, or claim nonperformance for any late deliveries regardless of the cause. Some contracts may account for such risks in other types of clauses, which we describe below. However, where there is any ambiguity in the contract’s accounting of such risk, parties should expect dispute vulnerability to increase.

Indemnity & Pass-Through

If not in fixed obligations clauses, parties may have expressly allocated tariff risk in indemnity or pass-through clauses. A particular clause may, for example, either hold the seller responsible for, or require the buyer to indemnify the seller against, future applicable tariffs.

Even where such clauses do not explicitly cover tariffs, broad terms may be argued to encompass such costs. This may include, for example, a general pass-through clause allowing the seller to adjust pricing in the event of regulatory changes, or significant increases in the cost of materials or an indemnity clause requiring one party to hold the other harmless for legal compliance costs arising out of the commercial relationship. Companies should also be aware of potential complications that may arise from passing on the costs of tariffs that are later retroactively invalidated. Depending on whether the party to whom that cost was passed is entitled to a government refund, they may seek compensation from the counterparty instead, which may lead to a dispute.

If relying on indemnity or pass-through clauses, parties should also take care to understand and comply with any notice or other formal procedural requirements, any liability caps, or any indemnitor rights to control the defense or seek settlement where third-party claims are involved.

Force Majeure & Excuses for Nonperformance

Most contracts contain force majeure clauses that excuse nonperformance upon the occurrence of certain unforeseeable events. However, they do not usually expressly account for tariff risk and should be carefully analyzed to determine whether the text may arguably encompass tariff-related events. For instance, change-in-law clauses included in a force majeure provision may provide a strong basis to argue that tariffs are force majeure events, but these clauses are uncommon. The governing law of the contract is also an important component of this analysis. Some jurisdictions may construe these provisions narrowly and exclude economic hardship, thus potentially excluding any tariff-related impacts.

Non-contractual excuses for nonperformance, such as commercial impracticability, impossibility or frustration of purpose, may also be available. The availability and scope of such non-contractual excuses will depend on the governing law of the contract, including any transnational legal principles or treaties, such as the United Nations Convention on Contracts for the Sale of International Goods (“CISG”).

Liquidated Damages

Some contracts may contain liquidated damages clauses that explicitly provide for payment in the event of contractual nonperformance. Companies should look for these types of provisions in their contract to assess whether they may be liable for, or may be entitled to receive, liquidated damages resulting from tariff-related delays or nonperformance. Companies should also pay close attention to any exceptions provided in liquidated damages clauses, which may be interpreted to excuse delays or nonperformance.

A party facing the prospect of liquidated damages should assess that amount against the costs of performing. If the former is lower, it may be cost-efficient to breach the contract by not performing. However, this will be a fact-specific inquiry that must also take into account the complicated interplay of contractual obligations and potential liabilities—both financial and strategic—outside the liquidated damages clause itself, including the nature of the commercial relationship between the parties.

Contract Termination & Renegotiation

A party may attempt to terminate or renegotiate a contract as a result of tariff-related events. Whether this tactic may be properly deployed either offensively or defensively will depend, in large part, on the relevant preconditions and any cost and liability implications.

Some contracts may expressly allow termination in the event of a change in law, such as tariffs, but many do not. Instead, a party would typically only be allowed to terminate a contract after giving written notice, after a stipulated period of time, and upon the occurrence of a particular event—for instance, if the counterparty breaches the agreement and fails to cure the breach. Given the fast-moving and volatile nature of these tariffs, notice and cure periods may result in significant ongoing costs, and unduly delay a resolution to the dispute.

Termination may also have material cost implications, such as penalties, liquidated damages, or the costs of replacing the goods or services the breaching party was obligated to provide under the contract. These costs should be taken into account in determining whether termination can help mitigate tariff risk.

Renegotiation clauses are less common than termination clauses, but where present also typically require the same kind of notice, timing and substantive preconditions. Some contracts may provide for periodic and regular renegotiation, which may provide opportunities to mitigate anticipated tariff risk. Companies should be aware of and look for these options in their contracts, while ensuring compliance with timing and notice requirements.

Companies may also consider renegotiating the terms of their commercial relationships outside of the formal contractually prescribed process, such as through meditation. Especially if companies expect to be on both the buy- and sell-side of transactions, mediation allows for multiple parties in a supply chain to collectively find a fair and reasonable way of allocating tariff costs, aided by a neutral third party. This could increase predictability, improve outcomes in appropriate scenarios, and help maintain important trading relationships.

Investment Treaty Disputes

Tariffs may lead to treaty-based disputes between companies and foreign governments if they violate investment protections guaranteed under bilateral investment treaties (“BITs”) or free trade agreements (“FTAs”). Depending on a company’s nationality and other qualifying investment characteristics, a company may have claims against the government where it conducts business. For example, BITs and FTAs may protect against sudden or retroactive regulatory impositions that violate foreign investors’ legitimate expectations; proscribe discriminatory or arbitrary treatment of foreign companies; and prohibit government policies that may amount to an expropriation of the foreign company’s investment. Foreign companies whose operations are affected by tariffs should seek to understand whether their investments qualify for protection under any BITs or FTAs, how any parallel contractual claims may affect their treaty claims, and whether it is in their long-term strategic interest to pursue claims against a host government.

Conclusion

More likely than not, the interpretation of and interplay between the above types of contractual and treaty provisions will not be straightforward, and there will be significant ambiguity in their applicability to a tariff-related breakdown in commercial or bilateral relationships. Such ambiguities and breakdowns may lead to disputes, including international commercial or investment arbitration where the relevant contracts or governing treaties include arbitration clauses. As always in high-risk dispute scenarios, these are situations that must be navigated strategically, taking into account all legal options, commercial goals, and long-term business considerations. As the tariff landscape continues to shift, companies must be prepared to defend against breach claims and respond to changing circumstances in contractual and treaty-based relationships.

For over four decades, Debevoise’s International Dispute Resolution Group has offered winning advocacy, commercial judgment and client dedication across a broad range of international commercial and treaty arbitration, public international law and complex commercial litigation cases unmatched by any other firm in the world. Debevoise is one of the only firms to be consistently ranked Band 1 in the Chambers Global international arbitration, public international law and dispute resolution guides.

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