A Discussion of Price Escalation Clauses

In the market for a new car? Fancy yourself a glass of Kentucky bourbon as a nightcap on a nice summer evening? If you are in the market for these items as a consumer, you are likely just starting to notice the sharp change in price due to tariffs (or in the case of bourbon, missing from your store’s shelf). If you are a business owner who relies on U.S. products and you are trying to keep your supply chain intact, or you are a supplier of U.S. products, the start of 2025 has likely been a nightmare due to tariffs.

Business loves certainty, and the first half of 2025 has been the farthest thing from certain due to ever changing tariff threats. From a contractual perspective, this puts business operations in a challenging landscape. As a supplier of U.S. products, you may be crossing your fingers that any increase in cost of goods due to tariffs can be passed off to the purchaser under a price escalation clause. As a purchaser of goods, the opposite wishful thinking is true.

What is a price escalation clause? Typically, this is a provision in goods and services contracts that allows the supplier of goods and services to adjust fixed prices if certain conditions are met. While price escalation clauses can be triggered by any number of conditions, it is not uncommon to find tariffs as a trigger. As a simple example, suppliers may rely on a price escalation clause that is triggered by a new or increased tariff on steel or aluminum to pass on the costs to the purchaser. Absent an escalation clause, suppliers must either eat the cost increase, try (possibly in vain) to negotiate a price increase with a purchaser, or possibly breach a contract if the cost of absorbing such tariffs is simply too high.

While nobody could possibly predict the whipsaw of tariffs and counter-tariffs, pauses and un-pauses, of 2025, tariffs are certainly one trigger in the minds of parties, and their counsel, when negotiating price escalation clauses in goods and services agreements. If fixed price certainty is required, price escalation clauses are usually a hard no for purchasers or are negotiated down to very limited circumstances. In some cases, it is reasonable, and industry practice, for certain goods and services agreements to contain an escalation clause due to the nature of goods.

If you are in an industry affected by tariffs, from s a seller perspective it is important to review your contract to see if: 1) there is a price escalation clause; and 2) if that clause has been properly triggered; and 3) how much of the costs can be passed on. If, as a purchaser, you have received a notice regarding the recent tariffs and a demand for a price adjustment, it is important to review your escalation clause carefully to ensure the clause has been triggered properly and that the price increase is reasonable considering the wording of the clause.

While suppliers and purchasers should be paying careful attention to their contract wording, there are several unique issues caused by the current tariff war that existing price escalation clauses may be ill equipped to handle. Existing price escalation clauses usually view a change in price with some permanency. In other words, the change will likely be reflected throughout the remainder of the contract, or become a new benchmark, versus multiple ups and downs in a short span. In light of the current tariff chaos, is it reasonable for purchasers to require vendors set prices immediately down upon a tariff decrease? Or should vendors have to prove actual cost increases versus projected cost increases? What about a requirement that vendors try to source materials that are not subject to tariffs? There may be no flexibility in existing clauses to address these types of issues; however, with the view of preserving relationships in a situation that is out of their control, suppliers and purchasers may agree to work with each other to address these topics. Further, as a reaction to turbulent times, it will not be shocking to see new contracts with price escalation clauses adapt to create certainty by addressing these types of issues.

The ultimate conclusion, whether you are a purchaser or supplier, the current tariff climate is likely not helping you sleep at night. The certainty that you spent time and money negotiating in your contract is thrown out the window. In the wake of tariffs, purchasers and suppliers must consider whether the cost can be passed on, whether the cost can be borne, or whether the parties must look at terminating the arrangement (which in the best-case scenario is a right, but at worst, forces a breach). If you find yourself affected by tariffs, grab your contract and reach out to trusted legal counsel to help discuss what options are available to you.

Cory McAuley