The high tariffs are up blowing up supply contactors. Here's how to protect your company.
Bullets:
Contractors are struggling to pass higher input costs to their customers.
For companies which are suppliers to governments, it is very difficult to raise prices to cover the cost increases, even if the higher costs directly resulted from the tariff hikes.
The federal government commonly invokes the "Sovereign Acts Doctrine", which says that the government itself is not liable for higher costs due to the government exercising its sovereign power.
Higher tariffs are in this category, and legal precedent holds that suppliers must accept the risk of high losses, and even bankruptcy, resulting from tariffs that are enacted after the contract is signed.
Contract attorneys strongly urge companies to never sign a "fixed price" contract, especially with governments at any level. Further, they advise that companies explicitly write "force majeure" clauses into their contracts, and include other cost triggers that will cause the entire contract to be renegotiated.
The Bonded Warehouse business in Foreign Trade Zones is booming, and trade attorneys advise their corporate clients to have lease options in FTZ's to better manage their tariff exposures.
This is a transcript, for the video found here:
Report:
Good morning.
The trade wars and tariffs are making contract law exciting again. Companies and their law firms are trying to figure out how to legally pass on the big price increases. A retail company can pay the tariff and raise the price. But for companies with contracts, especially with the government, it’s not that simple, at all.
Howmet is a major supplier to Airbus and Boeing, and they didn’t waste any time in declaring force majeure in the face of suddenly higher costs, and their inability to get components from upstream suppliers. Force Majeure is a legal technique that allows parties in a contract to void their obligations to perform if they’re hit by external forces outside their control, or their ability to predict them. That second part is the problem, as we’ll see. In the case of Howmet, though, industry insiders understand that if it’s successful, lots of other companies are going to do the same thing. The question is here, though—given that Trump promised that higher tariffs were on the way, can companies really claim that the tariffs could not be foreseen?
And so lawyers are busy, carefully going through outstanding contracts to find escape clauses for their clients, or to close them if they’re working for a downstream company. The tariffs are resulting in significant and unforeseen cost increases, and supply chain disruptions. But the fight is going to be on the contracts that were in effect before the new tariffs were announced. Even then, it’s a problem. As we saw with COVID, just because damages to companies were significant, and unforeseen, courts typically required companies to comply with what the contracts said.
For the companies that have contracts with the government itself, attorneys conclude in these pieces that it’s a waste of time to even try to get out of them. Fixed-price contracts are just what they sound like, and if costs go up it’s very difficult to pass them on to the government. General Electric and Northrup Grumman are large Pentagon contractors, and have already disclosed big hits to their profits. Smaller companies in the defense industry will struggle to survive, which will harm the entire sector. DoD supply chains will be weakened, the department’s purchase power will be damaged, and the Senate wants to know if anyone at the Pentagon has worked out how much everything is going to cost now.
Companies with cost-plus contracts are much better off, and the implication here, in all this advice we are linking to, is that a business executive is out of his mind to sign a fixed-price contract, and especially one with the federal government. That’s because any change to the compensation structure of a fixed-price contract needs to meet all three of these requirements in the FAR language involving federal taxes, which tariffs are. The first two are fairly straightforward, and somewhat easily met. The third one is the problem. The increase in costs must result from a tariff that the contractor is required to pay. Most of the tariff costs are borne by others—subcontractors, customs agents, wholesalers—they’re usually the ones who pay the tariffs, and then pass them down the supply chain. There is precedent in case law, whereby contractors can not recover price increases that are indirectly attributable to the tariffs, even if we all know that higher tariffs caused the costs to go up.
What’s more, in the case of a fixed-price contract where the counterparty is a government, the Sovereign Acts Doctrine says that contractors still need to perform their duties, and the government is not liable for the higher costs if those higher costs resulted from the government acting as a sovereign entity. Contractors sued for relief during COVID, in a recent example, where costs to do anything skyrocketed. The government told companies that employees weren’t allowed to even go to work, and supply chains froze up and prices went crazy, but the government invoked the Sovereign Acts Doctrine and the lawsuits went nowhere.
The COVID pandemic set another precedent, which is the United States is not liable for losses that come after the contract was signed, which is based on another precedent, Deming vs the United States, which specifically involved tariffs that raised the costs of a supplier for rations to the Marines. The company argued that they lost money because Congress raised tariffs on the supplies called for, after the contract was signed. The court held, again, that the government was exercising sovereign power, and dismissed the case.
We must conclude, again, that no company should ever, ever sign a fixed-price contract at all, and especially not with a government, at any level. But Howmet’s situation with Boeing and Airbus is different. Boeing is the prime contractor with the federal government, with thousands of sub-contractors, including Howmet. This is Boeing’s contract with its suppliers, and it specifically includes this language, in 13b, as a way out. Sellers are not liable for excess costs that arise from the acts of the Government acting as a sovereign. Acts of God is 13A, acts of the government is B, then come natural disasters, or anything else that is beyond the control and without the negligence of the party who suffered the loss. Boeing is likely in the same boat as Grumman and GE, as the direct government contractor. But attorneys for their suppliers, like Howmet, are pointing to this clause, and saying that the contract is specifically written to give them a way out when the prices of components or raw materials shoot up, or they can’t be found at all.
The Harvard Business Review has some practical advice that a business manager might want to pay close attention to, from now on. Force Majeure needs to be written in every contract, and the contract language needs to explicitly say that tariffs and trade restrictions can trigger Force Majeure. Some pushback should be expected by counterparties, so they suggest putting a floor on what the tariff increase needs to be. HBR calls out Howmet again, as a precedent-setting move for firms to emulate, in how their contracts are written up.
Suggestion 2, a price escalation clause that calls for the entire contract to be renegotiated, if tariffs raise costs past a certain level. Three, allow for flexibility of sourcing, if tariffs push up costs of products from one country but not another, and suppliers can source elsewhere without penalty. Four, executives should constantly find new strategies, such as foreign trade zones, to protect themselves from sudden moves, up and down, in tariff rates. Having their warehouse facilities in FTZ’s provides business executives more time and space to manage their tariff exposure, and delay or negotiate down the higher costs from tariffs. Advice number five was working until recently, probably not anymore, which is to nearshore supply chains to Canada or Mexico to reduce higher tariff exposure from Europe and Asia. Again, not likely to work given the tariffs we’ve put now on Canada and Mexico.
Foreign Trade Zone bonded warehouses. Procurement contract lawyers with a specialization in Force Majeure. These guys used to get five incoming calls in a whole year, and now everybody wants to be their best friend.
Resources and links:
US importers race to create bonded warehouses amid Trump tariffs
https://www.reuters.com/world/china/importers-race-turn-us-warehouses-into-tariff-free-zones-2025-05-21/
Harvard Business Review, How Contracts Can Help Firms Navigate the Uncertainty of Global Tariffs
https://hbr.org/2025/04/how-contracts-can-help-firms-navigate-the-uncertainty-of-global-tariffs
Do President Trump’s Tariffs Constitute Force Majeure?
https://www.dentons.com/en/insights/alerts/2025/april/8/do-president-trumps-tariffs-constitute-force-majeure
Tariffs: Howmet Declares Force Majeure; Nintendo, Jaguar Impact
https://www.investors.com/news/tariffs-trump-howmet-aerospace-jaguar-jlr-nintendo-order-stops-delays/
Reuters Exclusive: Aircraft supplier Howmet may halt orders if hit by Trump tariffs, letter says
https://www.reuters.com/business/aerospace-defense/aircraft-supplier-howmet-may-halt-orders-if-hit-by-trump-tariffs-letter-says-2025-04-04/
The Trump Tariffs and Federal Contractors: In These Taxing Times, Contractors Have a Duty To Know These Five Things
Deja Vu All Over Again: Trump’s Tariffs and their Impact on Government Contractors
https://govcon.mofo.com/topics/deja-vu-all-over-again-trump-s-tariffs-and-their-impact-on-government-contractors
Feeling the Tariff Squeeze on Your Government Contracts? Relief is Available, But Only for Some
THE BOEING COMPANY GENERAL PROVISIONS GP4 (Cost Reimbursement Contract Under U.S. Government Prime Contract)
Are US tariffs the next force majeure event for trade and supply relationships?
US importers race to create bonded warehouses amid Trump tariffs
https://www.tbsnews.net/worldbiz/usa/us-importers-race-create-bonded-warehouses-amid-trump-tariffs-1147976
It's surprising how cheaply one can buy insurance from a US Congressman or Senator.
Cory Booker voted to confirm convicted felon Charles Kushner to a diplomatic post, who was given a presidential pardon on tax evasion charges.
Here's a point on "Force Majeure", from https://lawofcontract.com.au/force-majeure/
To the extent that the Force Majeure Event prevents a party from performing Works the Agreement will be suspended. Neither party shall be liable for loss or damage directly arising out of a Force Majeure Event.
If a Force Majeure Event continues for a period exceeding 180 consecutive days, the Company may terminate this Agreement.
So there's the element of time, Trump has suspended the tariffs for 90 days which is half this length of time, unfortunately. But here's the rub, points of law are fine but that won't stop businesses from becoming insolvent which results in cessation of trading. The provisions for trading insolvent are onerous with directors in Australia facing charges under the law.