Tariffs, sanctions and embargoes in supply contracts (part I)

I. Who bears punitive tariffs?

Against the ongoing backdrop of uncertainty caused by the US administration regarding future punitive tariffs, including in the trade dispute with the EU, in which the deadline for reaching an agreement expires already on July 9, 2025, companies with business relationships e.g. in the US are faced with the question of who bears punitive tariffs. The company based in Germany or another country or the business partner based in the US.

As in many cases, the agreements between the parties can provide clarification.

1.) INCOTERMS® 2020 have been agreed

Companies regularly base their agreements on the ICC's INCOTERMS®. These trade terms can set out, among other things, who is responsible for transporting the goods and who has to pay any applicable customs duties. The parties will often agree on EXW (Ex Works) delivery. This clause is particularly advantageous for sellers, as it imposes the fewest obligations on them. This is because the place of delivery is usually the seller's premises. As a result, the buyer, for example a US business partner, must bear all further costs of delivery from the seller's premises, including any punitive tariff duties. However, the situation is different if the parties have agreed on a DDP (Delivery Duty Paid) delivery. This means that the seller must deliver the goods to the buyer, cleared of duty and ready for unloading at the agreed destination. The seller must, therefore, bear all costs until the goods are delivered to the buyer at the agreed destination. This also includes any punitive tariffs for deliveries to the US. Regardless of these two instances, the use of INCOTERMS® trade clauses should always be carefully examined with regard to other possible implications.

2.) No provisions agreed on

In the absence of any reference to INCOTERMS® and any other provisions regarding the obligation to bear custom duties, the following shall apply (at least under German law) in case of doubt pursuant to Section 448 (1) German Civil Code (Bürgerliches Gesetzbuch/BGB): "The seller [...] shall bear the costs of transferring the goods, the buyer shall bear the costs of acceptance and shipment of the goods to a place other than the place of performance." This means that the seller bears all costs until the goods are handed over and the buyer must accordingly bear the costs of acceptance and the costs of shipping the goods to a place other than the place of performance. This may result, in particular in the case of mail order purchases (“Versendungskäufe”) (Section 447 BGB), in the buyer having to pay punitive tariffs if these are classified as transport costs. In any case, legal literature is largely in agreement that tariffs constitute transport costs. However, there is no explicit decision by the Federal Court of Justice (Bundesgerichtshof/BGH) on this subject to date; the BGH has only explicitly recognized as transport costs the “direct transport-related material expenses for postage, packaging, and, if applicable, insurance of the purchased item” (BGH, NJW 2019, 47 [50]).

II. Further options for drafting contracts

1.) Price adjustment clauses

When drafting price adjustment clauses, the Price Clause Act (Preisklauselgesetz/PrKG) applies in Germany and must be taken into account, even in individual agreements. In addition, the requirements of law governing general terms and conditions must also be taken into account when drafting price adjustment clauses.

In general, there are three types of price adjustment clauses: price reservation clauses, cost element or index clauses, and reference price clauses.

Price reservation clauses give the user some leeway to raise or lower the price. However, the user must remain within the limits of fairness and must be able to provide objective reasons for any price changes. Cost element clauses allow the user to adjust the amount owed in proportion to the development of certain cost elements, such as material or labor costs. Alternatively, a cost index (e.g., the consumer price index) can be used for price adjustments. Reference price clauses are comparable to cost element clauses; however, they refer to the price development of another, comparable product.

If, on the other hand, only a right to (re)negotiate prices at regular intervals is provided for, the problem often arises that the parties have not provided for any legal consequences in the event of failure of the price negotiations. Parties should therefore provide for legal consequences in the event of failure of the price negotiations. In addition, parties should consider termination options so that, as a last resort, they have the option of terminating the agreement, for example in the form of a regular right of termination, if the parties cannot agree on a price.

2.) Force majeure clauses

Force majeure clauses are agreed upon to protect parties from liability if the agreement can no longer be fulfilled due to force majeure. Therefore, events such as wars, natural disasters, terrorist attacks, currency and trade restrictions, embargoes, and sanctions are regularly listed in the clause itself.

However, punitive tariffs are not expressly covered by force majeure under the model clause for international contracts published by the International Chamber of Commerce (ICC) in 2020. Currency and trade restrictions, embargoes, and sanctions are expressly mentioned. Accordingly, it will have to be assessed on a case-by-case basis, with reference to the specific force majeure clause, whether the punitive tariffs fall under the specifically agreed force majeure clause. If a force majeure clause is to be agreed between the parties, an attempt can be made to expressly include punitive tariffs in order to avoid uncertainties.

3.) Hardship clauses

Beyond that, there's an option to agree on hardship clauses. Unlike force majeure clauses, hardship clauses stipulate that the parties' obligation to perform remains in place, but that in the event of unforeseen circumstances that upset the contractual balance, there is a right to adjust the contract in order to eliminate the imbalance. This can be structured, for instance, as a right to renegotiate. However, if a right to renegotiate has been agreed, the parties should provide for the course of the negotiations and the legal consequences of their failure. One option would be to agree on a right of retention that could be exercised either during the renegotiations or if they fail. In addition, the failure of the renegotiations should be defined as specifically as possible. In order to avoid the invalidity of a right of retention, the provisions of the General Terms and Conditions must always be taken into account. Without the agreement of framework conditions and a legal consequence, however, a right to renegotiate may prove to be a rather ineffective provision. In addition, as with price adjustment clauses, the parties must keep an eye on the termination options.

III. Legal framework in Germany

1.) Right to refuse performance, Section 275 (2) BGB

In addition, it could be considered (again, if German law applies) whether the seller can refuse performance in the event of punitive duties in accordance with Section 275 (2) BGB.

Performance may then be refused pursuant to Section 275 (2) BGB “if it requires an effort which, taking into account the content of the obligation and the requirements of good faith, is grossly disproportionate to the creditor's interest in performance.” Consequently, there must be a gross disproportion between the costs and the benefits. However, the relationship between the effort required by the seller to provide the service and the value of the consideration is not relevant, which is why punitive tariffs do not regularly trigger the seller's right to refuse performance pursuant to Section 275 (2) BGB.

2.) Fundamental disruption of circumstances, Section 313 BGB

Fundamental disruption of circumstances exists if the circumstances on which the parties based their agreement have changed significantly after the conclusion of the agreement and taking into account the respective distribution of risk. In this case, the agreement must be adjusted by the parties. However, withdrawal or termination due to a fundamental change in circumstances can only be considered if one party cannot reasonably be expected to adhere to the agreement in light of the circumstances of the individual case.

Insofar as the seller has to bear punitive tariffs, the question arises as to whether the imposition of punitive tariffs was unforeseeable at the time the agreement was concluded. This will depend largely on the time at which the agreement was concluded. The Trump administration already used punitive tariffs during its first term in office. It is, therefore, at least questionable whether the imposition of punitive tariffs by the US administration has been unforeseeable/unpredictable since then. In particular, case law sets very high standards for the requirement of unpredictability. Another argument against the unpredictability of punitive tariffs is that the EU, among other things, adopted Regulation (EU) 2023/2675 of November 22, 2023, on the protection of the Union and its member states against economic coercion by third countries (the so-called anti-coercion instrument) in order to be able to respond to punitive tariffs and similar economic coercion in the future.

Ultimately, it will have to be assessed in each individual case whether the disruption of the basis of the transaction can be affirmed or not.

3.) Exemption from the obligation to perform, Art. 79 CISG

According to UN sales law (CISG), Article 79 CISG also provides an exculpatory cause for non-performance if the party concerned can prove that the non-performance is due to an incident which was not caused by them and which they could not reasonably have foreseen, avoided or overcome.

As with the provision in Section 313 BGB, case law often sets high requirements for the conditions of Article 79 CISG to be met. Whether punitive tariffs imposed by the US administration are unforeseeable is a complex question that depends on the intentions of the parties at the time the contract was concluded. In principle, as already explained in relation to Section 313 BGB, it is likely to be very difficult to establish the unpredictability of the punitive tariffs. Nevertheless, each individual case should be assessed separately.

IV. Recommendations and outlook

As the above remarks indicate, issues relating to the handling of punitive tariffs in connection with supply relationships should be carefully considered, particularly from a contractual perspective. Affected companies should therefore ensure that their supply agreements contain carefully drafted provisions in order to reduce risks and enable them to effectively pursue their own business interests.

In this context, it is also essential for companies to keep an eye on compliance with the increasing number of provisions on embargoes and sanctions. We will discuss these provisions on embargoes and sanctions, as well as the consequences of any violations, in the second part of this article.