Tariffs

In this month’s Legally Speaking column, I am sharing a few ideas and strategies concerning the impending tariffs that may impact your supply contracts and procurement processes. The column proposes optional clauses to insert into supply contracts to provide your agency with maximum flexibility, while ensuring our suppliers are not unduly harmed.

Current Situation

The global trade environment has become increasingly volatile, with new tariffs being announced, implemented, and then rescinded. These tariffs can significantly affect the cost and availability of goods and services, impacting your ability to maintain a steady supply chain. It is essential that government agencies and suppliers work together strategically to navigate these changes and minimize disruptions.

Impact on Procurement and the Supply Chain

Tariffs have the potential to increase the cost of imported goods, leading to higher prices for essential supplies. This can strain the agency budget and may require seeking alternative suppliers or renegotiating existing contracts. The uncertainty surrounding tariffs can also lead to delays in delivery and production, further complicating your procurement efforts.

Here are a few optional clauses that you may choose to add to your supply contracts. These clauses aim to provide the municipality with maximum flexibility to adapt to changing conditions, while ensuring a fair and cooperative relationship with our suppliers.

Optional Contract Clauses – Request for Equitable Price Adjustment

• Price Adjustment Clause, Tariff-Based Price Adjustment:
  In the event that new tariffs or changes to existing tariffs are imposed by any governmental authority after the effective date of this contract, and such changes materially increase the cost of goods or materials necessary for performance, the supplier may request a price adjustment. The request must include documentation demonstrating the tariff’s impact on unit cost. The parties shall negotiate in good faith to reach a fair adjustment not to exceed [X]% of the original contract price
   
• Collaborative Price Adjustment Clause:
  The parties recognize that the imposition of tariffs or trade restrictions may impact the supplier's ability to maintain pricing. In such instances, the supplier may notify the agency of the impact, supported by credible cost data. The parties agree to engage in good-faith negotiations within 15 days to consider price modifications, substitute goods, or alternative sourcing arrangements, with the goal of minimizing disruption to public services and maintaining the continuity of supply.
   
• Force Majeure. Neither Party shall be liable for failure or delay to perform under this Agreement if such failure or delay is due to circumstances beyond the reasonable control of the applicable Party. Such circumstances include, without limitation, acts of God; communicable diseases, epidemics, and pandemics (including without limitation the coronavirus or COVID-19); fire; flood; government acts or orders; interruption of utility services; local, regional, or state emergencies; quarantines; severe weather; war, and other causes, whether similar in kind to the foregoing or otherwise, beyond the applicable Party’s reasonable control (“Force Majeure”). The Party claiming a Force Majeure must take reasonable steps to minimize the impact thereof.  The Party claiming a Force Majeure must give the other Party written notice within 10 days of the Force Majeure commencing, which notice shall describe the Force Majeure and the actions taken to minimize the impact thereof. If a Force Majeure continues for more than 15 consecutive days, either Party may terminate this Agreement on written notice to the other Party with no further liability or penalty to either Party other than liabilities or obligations accrued prior to the termination.

Collaboration and Strategic Partnership

It is important that we approach these challenges as strategic partners rather than adversaries. Open communication and cooperation are key to maintaining a steady supply chain and avoiding undue interruptions. We should work together to identify and implement solutions that benefit both the agency and your suppliers.

Documentation

If a supplier claims that tariffs have caused a price increase, you have every right (and duty) to ask for verifiable documentation to ensure the price change is legitimate and justified. Here’s a breakdown of what you should request:

Examples:

• Copy of the official tariff schedule or notice (e.g., from the U.S. International Trade Commission, or Customs and Border Protection (CBP)
• Federal Register notice showing the imposition of the tariff with effective dates and Harmonized Tariff Schedule (HTS codes)
• Reference to the Harmonized Tariff Schedule (HTS) number for the product

Product Classification (HTS Code)

Request the Harmonized Tariff Schedule (HTS) code used for the product being imported.

Harmonized Tariff Schedule Information

Why: This ensures the product is subject to the tariff claimed.

Ask the supplier for:

• The HTS code classification for the item
• Documentation showing that the item falls under the tariff-affected category

Customs Entry Forms or Import Documentation

This is your best proof that the supplier actually paid the tariff.

Key documents include:

• CBP Form 7501 (Entry Summary): This shows tariff duties paid upon entry to the U.S.
  • CBP Form 7501
• Commercial invoice showing the importation of goods
• Bill of lading or shipping documents indicating international sourcing

Look for:

• Duty or tariff amounts listed
• Supplier name as importer of record or a third-party customs broker

Conclusion

Addressing the challenges posed by pending and impending tariffs requires a proactive and flexible approach. By incorporating the proposed optional clauses into your supply contracts, you can provide your agency with the necessary tools to adapt to changing conditions, while maintaining a fair and cooperative relationship with your suppliers.