Following the April 3 announcement by the U.S. Donald Trump presidential administration of a global baseline 10 percent tariff on all goods coming into the U.S., now is the time those in the produce industry should review their business contracts. "Because some contracts have provisions that you forget about or you don't realize could be used at this moment," says Tiffany Comprés, founding partner and co-chair of the International Practice & the International Disputes Practice at Pierson Ferdinand LLP.
After all, the fresh produce industry is an industry of low margins, meaning even a 10 percent tariff could have a significant impact on business. "There are a couple of things that importers and exporters can do, including renegotiating–or even just looking at the contract," Comprés says.
Reviewing just in case
To begin with, this may be reviewing contracts for force majeure or hardship clauses. "If those clauses are in your contract, great. However, even if you don't have a contract or you have one that doesn't have any of those clauses, the underlying law governing the agreement could provide an out," she notes.
In the U.S., for example, there's the Uniform Commercial Code section 2-615, which refers to non-performance under an agreement to sell/buy goods. Under this section, if a seller is complying with the agreement to sell, but suddenly a "basic assumption" on which the contract was made evaporates–such as, in this case, duty-free trade–then the affected party may be excused from continuing to comply with the agreement.
However, the details are crucial. "For produce, to take advantage of this part of the statute in certain circumstances, you have to have a contract that designates where the product is to be grown," she says. "I tell people regularly to remember to put this in your contract. Especially sellers because usually they're the ones that typically have a force majeure issue."
That said, there are also other laws, such as the U.N. Convention on Contracts for the International Sale of Goods (CISG) and Article 1195 of the French Civil Code, for example, that have provisions about unforeseen changes that burden one party disproportionately. "Companies that export or import produce to the U.S. created a business model on the basis of the existing tariff regime with low or zero duties, and did not take into consideration the possibility, because it felt so remote, that there would ever be an administration that would change that. In many situations, you could apply these kinds of laws to minimize the damage," she says, adding that the question is–how can a company be forced to comply with a contract that will force it out of business because the contract is now too expensive to comply with?
Considering clauses of other industries
She also recommends considering clauses other industries have used in their contracts–energy contracts, for example, sometimes have clauses allowing for price adjustments based on agreed metrics and/or events. Hardship and economic equilibrium clauses also allow parties to renegotiate key terms, like price or volume of goods, when contractually defined events occur that fundamentally alter the economic balance.
"It's not like these mechanisms are unheard of," says Comprés. "They're just not really used in our industry. Businesses need to take these options into consideration."
For more information:
Tiffany Comprés
Pierson Ferdinand LLP
Tel: +1 (786) 577.8913
[email protected]
https://pierferd.com/