Tag: Supply chain volatility

Supply chain volatility is nothing that a fixed-price contract can’t fix, write Sarah Rutnah, Thomas Winstanley and Sonia Vilar of Dentons Law Firm.

In times of economic and political volatility, fixed-price contracts offer welcome protection for businesses seeking certainty in and control of their supply chain costs. Such contracts are typically used in circumstances where the buyer feels there is a significant risk of price volatility, such as in the supply of certain raw materials like minerals and metals, and some soft commodities like grain, coffee, cocoa or fruit.

They may also be useful for organisations that cannot afford to run out of particular products, or for consumer-facing businesses like retailers where price certainty and availability are essential to competitive positioning and customer trust. Having been widely adopted during the Covid-19 pandemic, when supply chains were severely disrupted leading to sudden and major price spikes, the popularity of fixed-price supply chain contracts ebbed as Covid-related restrictions eased and global prices came back down.

But while many have sought ways out of fixed-price agreements, volatility has not gone away. The persistence of conflicts that have affected shipping routes, extreme weather events that have impacted harvests, and the introduction and escalation of tariffs in some international trading relationships, are among factors that have refocused attention on how contracts can be used to mitigate against unpredictability in global trade.

By their nature, fixed price contracts tend to be inflexible. They do not usually contain the price adjustment mechanisms or price escalation clauses used in standard contracts that allow for price increases by the supplier in response to rising costs of third-party elements in the supply chain.

Which party in a trading relationship is responsible for what tasks, risks and costs are generally dictated by standard International Commercial Terms – or ‘incoterms’ – agreed by parties as part of the contract. Unless the contract expressly addresses tariffs – for example in a tariff-specific adjustment mechanism – as a general principle, the legal obligation to pay import tariffs rests with the importer (buyer).

Ten of the 11 recognised incoterms place responsibility for tariffs (and other customs duties) onto the buyer, the exception being Delivered Duty Paid (DDP), which obliges the seller to cover these costs. Where contracts are silent on incoterms, the default assumption is that the buyer will bear the import costs.

Even in fixed price contracts where tariffs are explicitly covered, it is unlikely that the supplier would agree to cover the full extent of any tariff increases subsequent to the agreement of the contract – such as those on the scale seen in the US in 2025. It is more likely that the supplier will only agree to pay a fixed amount in respect of tariffs – for example covering the tariff rate in place at the time the contract is agreed – meaning the buyer would need to pay the rest if rates increase.

In contracts that do allow for flexibility in respect of who covers changes in import duties and tariffs, what is agreed will likely depend on which party has more negotiating power in a particular commercial situation. If contracts make explicit reference to the actions of governments or administrations, then importers can potentially look to invoke “change in law” provisions to argue that tariff increases qualify as governmental action entitling them to price adjustments or cost-sharing.

Parties may agree to split the cost of tariff rises if, for instance, the only alternative to sharing the impact of tariffs would be to cancel the contract altogether. From a contractual perspective, variations in tariffs and other import costs are generally treated separately from other supply chain issues – such as increases in the cost of the product or the cost of transporting it.

Such situations may arise where the source of a product is located in a country where war breaks out or is hit by a natural disaster – for example – meaning the supplier has to source from another location which may be more costly (or invoke force majeure if it is impossible to fulfil the contract). In these cases, it is usually up to the supplier to resolve their own supply chain and there is no obligation to involve the buyer unless they are changing the specifications of the product supplied.

While stretching the concept of fixed-price supply chain contracts to cover tariff instability is unlikely to be accepted by most suppliers, the broader picture of volatility means there are still advantages to fixing the costs of supply. Although locking in a guaranteed purchase price usually means paying a premium above the market rate, businesses that know the price they will be paying for a product for a specified duration can plan ahead.

Nevertheless, it is sensible to include routes to exit fixed-price contracts in case changes to the commercial context render such agreements uncompetitive. Escalation mechanisms, such as alternative dispute resolution mechanisms, can also be useful ways of getting parties to revisit terms.

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