Tariff Crisis: Navigating Contractual Challenges and Remedies for Businesses operating in Germany

The recent escalation of US tariffs on imports from around the world, and tariff retaliation from (so far) China and Canada, and potentially the EU as well, has introduced considerable uncertainty and disruption into global trade. For businesses operating in Germany, US tariffs of up to 25% on automobiles, steel and aluminium (and products containing steel and aluminium) as well as automotive components, machinery, electronics, and chemicals create substantial financial and operational challenges. These tariffs have not only increased immediate costs but have also disrupted international supply chains and contractual relationships, leading to massive price crashes on stock markets worldwide. 

While the EU is drawing up plans for how to respond to the tariffs (see our recent blog post here), this blog post outlines the key contractual risks posed by tariffs under German law, and potential proactive strategies for effectively adapting long-term commercial and supply contracts for businesses operating under German law.

A.    Key Contractual Risks Arising from Tariff Increases under German Law

I.    Cost Escalations and Contractual Adjustments
The sudden imposition of high tariffs can drastically increase costs, jeopardizing profitability, and potentially making continued contractual performance financially untenable. Therefore, businesses should thoroughly review their long-term contracts to manage these cost increases effectively. An adequate understanding of the various legal options is crucial in order to avoid unnecessary disputes and financial losses:

• Price Adjustment and Hardship Clauses: Do the contracts provide for automatic price adjustments (e.g., index-based adjustments) or clauses that allow for renegotiation in the event of significant economic stress to restore the economic balance?
• Incoterms and Duty Obligations: Is there an agreement on delivery, particularly one that includes Incoterms (e.g., EXW, DDP, FOB, FCA, CIF) which clearly specify which party bears additional tariff costs? 
• Negotiation Provisions : Check whether contracts contain clauses (sometimes in miscellaneous sections of the contract) that require the parties to negotiate terms in response to significant and unforeseen economic changes. Could these clauses give rise to a claim for specific performance of the contract?
• Adaptation or cancellation rights in the event of material changes in circumstances under statutory law: Review whether there are statutory rights to amend or cancel the contract in the event of material changes in circumstances. Could the newly imposed tariffs be covered by these circumstances?

II.    Supply Chain Disruptions and Performance Issues for businesses operating in Germany

As a collateral consequence, increased tariffs and stricter customs inspections frequently disrupt supply chains, causing delays and logistical complications. To mitigate legal risks from such disruptions, businesses should assess their contractual risks, rights, and obligations in the following areas:

• Force Majeure Clauses: Do the tariffs or resulting extra scrutiny by customs, which lead to slowing shipments, qualify as force majeure events under contract terms, potentially excusing (temporary) non-performance? For that purpose, it is important to look at the wording whether tariff increases are either explicitly mentioned or can be assumed to be covered by broader language such as “changes in law”, “regulatory changes”, “export restrictions”.
• Alternate Sourcing Opportunities and Responsibilities: Identify whether contracts mandate or allow flexibility for sourcing alternative suppliers when deliveries are delayed or become impractical or whether shipments can be rerouted. 
• Exclusivity Clauses or Volume Guarantees: Consider whether the contract specifies a minimum supply commitment and whether it is readily enforceable. Is there a possibility that tariff-induced rerouting of trade flows to other markets undercut exclusivity commitments?
• “Sandwich Position” Risks: Recognize the heightened risk of facing simultaneous claims from customers due to delayed deliveries while also pursuing similar claims against suppliers affected by tariff disruptions. Managing these simultaneous obligations requires careful strategic planning.

B.    Remedies Available under German Statutory Law

In cases where contracts do not explicitly address tariff impacts, German statutory law offers various potential remedies: 

• First, the mechanism behind Section 275 para 2 of the German Civil Code (“Leistungsverweigerungsrecht bei grobem Missverhältnis” or “right to refuse performance in the event of gross disproportion”) could be considered. Pursuant to this provision, one party may refuse performance to the extent that performance requires an expenditure of time and effort that, taking into account the subject matter of the obligation, is grossly disproportionate to the other party’s interest in performance. However, Section 275 para 2 of the German Civil Code will not be applicable in case of purely “economic impossibility” of one party.
• Further, Section 313 of the German Civil Code (“Wegfall der Geschäftsgrundlage” or “frustration of contract”) enables parties to renegotiate or, in severe circumstances, terminate contracts if circumstances fundamentally alter the original economic assumptions underlying the agreement, making continued performance unreasonable. Understanding the application and limitations of this remedy is essential for effective dispute management. For example, proving the need to protect against mistaken expectations is often complicated, and frustration of contract is a subsidiary rule to ensure that parties are not burdened with obligations they would not have hypothetically agreed to had they foreseen the disruption.
• The concept of contributory negligence (“Mitverschulden”) of Section 254 of the German Civil Code could be applied if there is a failure to take reasonable steps to mitigate the damage caused by tariffs; for example, if an importer did not seek alternative suppliers or routes to minimise the impact of high tariffs. Consequently, their claim for damages could be reduced in proportion to their contribution to the damage. 

C.    Recommended Practical Steps 

1. Detailed Contract Review: Identify clauses related to price adjustments, force majeure, and hardship that could be triggered by tariff-related developments. A proper understanding of your legal position must be the basis for the negotiation strategy.
2. Comprehensive Documentation: Maintain detailed records documenting tariff impacts, including cost increases, supply disruptions, delivery delays, and mitigation efforts. As the burden of proof typically rests on the claiming party, thorough documentation is critical.
3. Institutional Knowledge Preservation: Ensure that departing key employees (“knowledge bearers”) thoroughly document relevant insights and experiences. This practice safeguards critical information for future reference and potential disputes.
4. Proactive Communication: Engage proactively with business partners to discuss and negotiate commercially sensible adjustments to contracts. Early dialogue reduces the risk of disputes and fosters collaborative solutions. At the same time, ensure that no involuntary or unconsidered concessions are made.
5. Early Legal Consultation: Consult legal advisors promptly to effectively manage emerging risks, maintain strong business relationships, and ensure compliance with contractual obligations and applicable laws. Timely legal advice can significantly mitigate dispute risks.
6. Future-Proofing Contracts: Include clear provisions in future contracts that specifically address tariffs and related economic events. Proactive contractual drafting can mitigate vulnerabilities to future tariff disruptions.
7. Risk Assessment and Mitigation Planning: Conduct ongoing risk assessments to anticipate future disruptions and implement robust mitigation strategies. Proactive risk management is vital for sustaining business operations amid tariff uncertainties.

D.    Effective Dispute Resolution

• Negotiation and Settlement: Initially prioritize negotiation and amicable resolution methods to maintain valuable commercial relationships. Constructive engagement typically results in faster and less costly solutions compared to formal disputes. Such engagement should, however, be diligently prepared.
• Injunctive Relief pursuant to German civil procedural law: In urgent situations, pursuing injunctive relief (Sections 935 and 940 of the German Code of Civil Procedure) such as specific performance orders might be necessary. However, enforcing these orders internationally can present considerable challenges due to jurisdictional and procedural complexities.
• Dispute Resolution: If push comes to shove, for resolving disputes regarding contract adjustments arbitration is frequently preferred due to its procedural flexibility, specialized expertise, efficiency, and confidentiality. Even if arbitration is not initially agreed upon, parties may later consent to arbitration as a dispute resolution method.
• Forum Options: Both German courts and international arbitration tribunals can effectively address tariff-induced contractual disputes, granting appropriate relief or awarding damages for breaches. If opting for state court proceedings, parties should consider Germany's newly established commercial courts designed to handle complex disputes more expeditiously.

E.    Key Take aways

Tariffs will have a significant impact on long term contractual relationships between trading partners for businesses operating in Germany. At the very minimum, the recent escalation of tariffs has introduced significant additional uncertainty and disruption into global trade. The additional costs introduced by the tariffs will have to be borne by one party or another. Together with delays and logistical complications this will put high pressure especially on long term contracts with fixed prices. Parties to those contracts may be looking for relief by contractual adjustment options, such as Price Adjustment and Hardship Clauses, Incoterms or cancellation rights under German contract law. Where contracts fail to explicitly address tariff impacts, German law also offers remedies under Section 313 of the German Civil Code. Finding the best solution via negotiations is only possible if businesses are prepared to take formal action, such as injunctive relief or arbitration if necessary. German courts and international arbitration tribunals can address tariff-related disputes effectively.