Contract Law in Times of Multiple Crises: What Companies Need to Know Now

Disrupted supply chains, new and changing tariffs, and geopolitical uncertainties are increasingly jeopardising the fulfilment of contracts. But when do such developments actually justify adjusting or suspending contractual obligations – and when does the principle “a contract is a contract” still apply? This article provides an overview of the legal tools companies should be aware of and shows how contracts can be made crisis-proof.

Extraordinary events with direct impacts on the stability of supply chains have occurred regularly in recent times (the COVID-19 pandemic, the Suez Canal blockage, the war in Ukraine, attacks on merchant ships in the Red Sea). Most recently, trade conflicts involving export restrictions and new and changing tariffs have put additional pressure on companies; the escalation in the Middle East has now been added to the mix. Those with long-term supply contracts or who rely on raw materials or intermediate products are feeling this particularly acutely right now.

Fixed-price contracts are reaching their limits – price adjustment mechanisms can help 

Many companies established their supply relationships still during a period of stable trade conditions – with fixed prices, fixed delivery quantities, and fixed deadlines. This approach offers planning security; at the same time, it can become a cost and liability trap in the face of sharply fluctuating prices for raw materials or intermediate products and challenging global transport routes.

When, for example, the customs situation changes significantly – as recently occurred with new U.S. import tariffs on European goods—the question arises for both buyers and suppliers: Who bears the additional costs? In contracts, the standard legal answer is initially: the party to whom the contract assigns the burden, which often stems from rather inconspicuous transport clauses such as the ICC Incoterms. An pass-through of such additional costs is usually not provided for—nor is it readily possible. 

The same applies to massive price increases in the procurement of raw materials and intermediate goods, as well as the creeping erosion of remuneration due to rising inflation. Here, price adjustment mechanisms can offer security or at least some relief. While they are widespread in international transport law, there are several hurdles in national legal systems that must be taken into account. At least outside the consumer sector, international standards can also help here. A commission of the International Chamber of Commerce is currently drafting relevant proposals – with my involvement.  

Force Majeure: A Powerful Term, Narrow Limits

The first instinct of many contracting parties in a crisis situation is to invoke the force majeure clause – the legal doctrine of force majeure. The logic is obvious: if external events make contract performance economically unfeasible, surely one can be released from it?

It’s not quite that simple. Classically, force majeure requires that an event was unforeseeable, originated externally, and makes contract performance objectively impossible – not merely more expensive or complicated. This is precisely where the problem lies with tariffs: A tariff generally does not make a delivery impossible. It makes it more expensive. That is not sufficient for a classic case of force majeure in most legal systems.

Added to this is the question of foreseeability. Anyone entering into a supply contract today, for example, can hardly argue that they did not have trade conflicts between the U.S. and the EU on their radar. (Arbitration) courts dealing with such cases will scrutinize such arguments critically.

Hardship clauses: The underestimated tool

More effective – and often underestimated in practice – are so-called hardship clauses. They apply not in cases of impossibility, but in cases of severe economic unreasonableness: when the underlying conditions of a contract have changed so fundamentally that adhering to the original terms becomes unreasonable for one party (see § 313 BGB).

A well-drafted hardship clause can trigger an obligation to renegotiate and, in extreme cases, even enable a contractual adjustment through the courts or arbitration. This is not a free pass – but a legitimate tool that should be taken seriously in the current situation.

The decisive factor here is what was contractually agreed upon. Many standard contracts of German companies contain no hardship provisions or only rudimentary ones. Contracts in an international context are often better equipped in this regard.

What companies should do now

The current situation is a good opportunity to review existing supply contracts and templates for future contracts to ensure they are crisis-proof. Specifically, it is advisable to examine the following points:

1. Review existing contracts

• Are the purchase or sale prices fixed, or are adjustments permitted? 
• Are customs risks particularly relevant – for example, for goods from the U.S. or China? Which party bears these risks? 
• Do the contracts contain a force majeure clause, and how is it worded? 
• Is there a hardship clause that might allow for an adjustment?

2. Draft new contracts to be future-proof

Anyone entering into new contracts today should keep the current uncertainties in mind when drafting them. 

• Are fixed-price commitments appropriate, or can price adjustment clauses help? 
• How broadly should a force majeure clause be defined? Is a force majeure clause suitable for covering the relevant risk?
• Clearly defined hardship provisions can help minimize risks – not only in international contracts. 
• Aligning with international standards often facilitates the acceptance of proposals in international transactions.  

Conclusion and Outlook

Contract law has long been characterized by stability, predictability, and the principle of pacta sunt servanda: contracts must be honored. The new geopolitical realities challenge this principle. However, contracts generally cannot be terminated at will in the event of unforeseen complications. Companies are therefore well advised to understand their contractual foundations – and to proactively shape them for the future before an emergency arises.