Contracts in the Crossfire: Implications of Potential Trade Wars

Apart from the general market impact of increased US tariffs, agreements involving Norwegian companies may face additional challenges, directly or indirectly, if Norwegian trade also becomes subject to tariffs or other protective measures from the European Union. This uncertainty complicates strategic planning and financial forecasting for Norwegian stakeholders.

If adopted, new tariffs and other protective measures will have legal implications, particularly concerning contracts, both new and existing ones. We recommend that businesses currently negotiating new contracts consider explicitly addressing the risk of increased tariffs by including specific risk allocation clauses. For existing contracts, the allocation of risk for new or increased tariffs should be reviewed. Absent such risk allocation, parties may need to explore protection through various generally applicable legal mechanisms for contract revision to mitigate the impact of these unforeseen changes.

Legal Implications for Existing Contracts

To evaluate the potential consequences of a trade war on your existing contracts, a good starting point is to examine if and how the risk of tariff costs is allocated in the agreements. For instance, if the contract specifies Incoterm DDP (Delivered Duty Paid), the seller carries the tariff risk, which may limit the possibility for adjustments or require more substantial justification. On the other hand, with an Ex Works (EXW) clause, the buyer carries the costs and risks, including increased tariffs, once the goods are available for pickup.

Even if the contract in question allocates the risk of tariff increases to one party, such party may, in exceptional cases, be entitled to revision of the contract. However, generally, contracts must be performed as agreed, especially contracts entered into between professional parties. That the performance simply becomes more burdensome or unfavourable is clearly not sufficient for revision. Hence, it should be emphasised that the various legal principles discussed below will only apply in exceptional circumstances and after a broad assessment of a number of relevant factors .

In exceptional cases introduction of new, unforeseen and significant tariffs might qualify for revision if the cost of performance rises substantially due to the adaptation of new tariffs. Contracts with force majeure or Change of Law clauses may address such events. Even without these clauses, revision might still be possible under principles of “economic force majeure”. This may be supported by section 36 of the Formation of Contracts Act or the doctrine of failed contractual assumptions.

As stated above, in order to potentially qualify for revision, the increased tariffs must have been unforeseen at the time of entering into the contract. It should further be notated, that increased tariffs and other protective measures have been foreseeable for some time. Consequently, the exact time for when this will should no longer be considered as an unforeseen event, may be debatable. This must be determined based on the information available at the different points in time. Without providing any firm opinion, it is obvious that based on the history from President Trump’s last term in office and his statements during the election campaign, the US election on 5 November 2024 will be a key point in time for this determination.

Doctrine of failed contractual assumptions (Norwegian: “læren om bristende forutsetninger”): In Norwegian contract law, each party assumes the risk for their own assumptions at the time of agreement. Consequently, increased costs generally do not excuse a party from fulfilling the contract, even with unforeseen events like “trade wars”. As a starting point the same applies to situations where the relevant market collapses or is significantly reduced as a consequence of the imposed tariffs. However, the doctrine of failed contractual assumptions allows a party to argue that an unforeseen substantial increase in tariffs may constitute a relevant failed assumption. If the conditions for this doctrine are met, it may, in extraordinary circumstances, be possible to revise or rescind the contract. Similarly, sudden and significant market reductions may also constitute a relevant failed assumption.

The Formation of Contracts Act Section 36: Another basis that might allow a contract to be set aside or modified, is the Formation of Contracts Act section 36. In short, the provision permits revision if enforcing the contract would be unreasonable. This applies both to contracts that were unreasonable at the time they were formed and, more importantly to the matter at hand, to those that have become unreasonable due to unforeseen events, such as substantial and unforeseen increases in trade tariffs. Section 36 provides adaptable remedies to address such unreasonableness, including complete or partial annulment or other adjustments. However, it must be reiterated that this will only apply in extraordinary circumstances.

Change of Law Clauses: Another basis that may be relevant to consider invoking, is a “Change of Law” clause. Such clauses typically address the impact of changes in laws, regulations, or new government directives issued after the contract is concluded. When included, such a clause provides a for a more suitable basis to invoke for the affected party, as such basis will entitle the party to adjustments of the compensation (as opposed to force majeure, which, as stated below, typically only allow for postponement of performance).

Force Majeure: Most commercial agreements include force majeure clauses that cover events like war and natural disasters. Generally, force majeure requires that the event be beyond the parties’ control and unforeseeable at the time of contracting. These clauses might also apply to cost increases from a trade war as an economic force majeure event or even address this in a specific hardship clause. Since the wording of these clauses can vary, parties should review their contracts to understand what is covered.

However, in most contracts, the force majeure clause excludes compensation adjustments, meaning that the legal effect normally will be limited to postponement of contractual obligations. This suggests that it may be more relevant to consider the above alternative legal grounds for addressing what is referred to as “economic force majeure”.

Legal Implications for Future Contracts

Drafting Considerations: When drafting new contracts, parties should consider including provisions that specifically address the risks and consequences of future increases in tariffs and other consequences of future trade conflicts, as the ability to adjust or exit agreements will be reduced now that trade wars can no longer be considered unforeseen.

This may involve incorporating bespoke risk allocation mechanisms, such as price adjustment mechanisms and/or a “hardship” clause. An alternative approach may be to include indexation clauses which provides for price escalation in accordance with the developments in the selected index or indexes. The suitability of this approach is of course dependent upon that the index in question will include the tariffs increases in a relevant manner. It should be considered if such future contracts should also address more indirect market effects of the potential trade wars, such as the parties’ entitlement to cancel or reduce their offtake obligations in situations where a certain market collapses or is significantly reduced.

Governing law of the contract: Please note that the governing law of the contract may influence the interpretation as well as the existence and effectiveness of the above principles, hence, parties should evaluate the governing law applied to the contract.

Key Takeaways

• The performance of existing contracts may be negatively affected by the potential trade wars, increased tariffs and unforeseen market fluctuations.
• In this regard, it is essential to determine how the contract allocates the risk of increased tariffs if it contains other clauses that address the issue, or if the parties, in exceptional circumstances may rely on other legal grounds for contract revision, such as Section 36 of the Formation of Contracts act or the doctrine of failed contractual assumptions.
• When entering into future agreements, it is suggested to consider including provisions that specifically address the risks of tariffs and trade conflicts, as the ability to adjust or exit agreements will be reduced now that increased tariffs and trade wars can no longer be deemed unforeseen.