Tariff Reimbursement Side Letter Generator
Tariff Reimbursement Side Letter Generator
International trade disruptions and policy changes can lead to unexpected tariff increases that weren’t contemplated in your original distribution agreements. When tariffs spike unexpectedly, this side letter provides a legal framework to allocate responsibility for these additional costs between suppliers and distributors.
As a California business attorney with over 13 years of experience working with international supply chains, I’ve created this generator to help businesses quickly adapt to changing trade environments without renegotiating entire distribution agreements.
When You Need a Tariff Reimbursement Side Letter
Unexpected Tariff Increases
When trade disputes, policy changes, or international sanctions cause significant spikes in import duties after your distribution agreement has been signed. These side letters are especially valuable when tariff increases exceed 10% of the rates in effect when the original agreement was executed.
Cost Allocation Disputes
When your existing agreement lacks clear terms on who bears responsibility for unexpected tariff increases. This is common in agreements drafted before recent trade wars and supply chain disruptions made tariff volatility a significant business risk.
Temporary Trade Measures
When you believe the tariff increases are likely temporary but need an immediate solution. The side letter provides flexibility with customizable termination periods, allowing you to revert to original terms when conditions normalize.
Key Legal Considerations
Define “Excess Tariffs” Precisely
Without a clear threshold for what constitutes an “excess tariff,” disputes can emerge about when the reimbursement obligation triggers. The generator defaults to tariffs exceeding baseline rates by 10%, but you should adjust this based on your industry volatility and risk tolerance.
Pro Tip: Reference an objective source for baseline tariff rates, such as published rates on a specific date or rates stated in your customs documentation.
Documentation Requirements
Vague documentation requirements can lead to payment delays and disputes. Specify exactly what documentation is required to prove tariff increases (e.g., customs forms, broker invoices, government notices).
Pro Tip: The party requesting reimbursement should be required to demonstrate that they took reasonable steps to mitigate excess tariffs where possible.
Payment Timeline
Payment terms that are too short may be difficult to comply with, while terms that are too long can cause cash flow issues for the party incurring the tariffs. The generator defaults to 30 days, which balances these concerns for most businesses.
Pro Tip: Consider tying payment obligations to your regular invoice payment cycle to simplify accounting.
Product Specificity
Broad product definitions can extend reimbursement obligations beyond what was intended. Be specific about which products are covered, especially if only certain items in your catalog are subject to the new tariffs.
Pro Tip: Consider referencing specific HS/HTS codes for affected products to eliminate ambiguity.
Reporting Frequency
The reporting frequency should match your business cycle. Monthly reporting works well for regular shipments, while “as-incurred” is better for irregular or seasonal business.
Pro Tip: For high-volume relationships, create a standardized tariff reporting template to streamline the process.
Term and Termination
Side letters with no clear end date or termination process can create ongoing obligations long after they’re needed. The generator allows you to specify either a fixed expiration date or a term duration.
Pro Tip: Include a periodic review clause to reassess whether the side letter is still needed as trade conditions evolve.
Strategic Implementation
Cap Your Exposure
If you’re the party responsible for reimbursement, consider adding a maximum cap amount to limit your financial exposure. This is especially important for distributors who may have limited visibility into upcoming tariff changes.
Pro Tip: Annual caps allow for budget planning while providing some protection to the other party.
Dispute Resolution
The generator offers arbitration or litigation options. For international relationships, arbitration typically provides faster resolution and better enforcement mechanisms than litigation in foreign courts.
Pro Tip: Specify the arbitration rules (e.g., ICC, AAA) and ensure they’re compatible with your main agreement’s dispute resolution provisions.
Long-Term Planning
While this side letter addresses immediate tariff issues, consider whether your future agreements should include more robust tariff adjustment provisions from the outset.
Pro Tip: The side letter can serve as a “test run” for provisions you might want to incorporate into your standard agreements going forward.
Frequently Asked Questions
This template is specifically designed for tariff increases, but the structure can be adapted for other unexpected cost increases like freight surcharges, compliance costs, or currency exchange fluctuations. However, these modifications would require careful legal review to ensure they’re appropriate for your specific situation.
I recommend using purpose-built agreements for other types of cost increases, as different cost categories may have unique legal and business considerations that aren’t addressed in this template.
Yes, a side letter is a contract modification and requires mutual agreement. Both parties must sign for it to be legally binding. Electronic signatures are generally acceptable under U.S. law (through the ESIGN Act) and in many international jurisdictions, but some countries may have specific requirements for contract modifications.
If your original agreement has specific amendment provisions (such as requiring amendments to be in writing and signed by authorized representatives), be sure to follow those procedures when executing this side letter.
The definition of “excess tariff” should be tied to objective criteria. The most common approach is to define it as tariffs exceeding those in effect at the time of the original agreement by a specific percentage (the generator defaults to 10%). You should document the baseline tariff rates when executing the side letter to avoid future disputes.
For products with complex duties structures (including anti-dumping duties, countervailing duties, etc.), you may need to specify which components are included in your definition. Being precise now can prevent costly disagreements later.
This template addresses tariff increases, not decreases. If tariffs might decrease significantly, consider adding reciprocal language that would require the importing party to pass along tariff savings when rates drop below a certain threshold.
Alternatively, if you’re expecting tariff volatility in both directions, you might consider a more comprehensive price adjustment mechanism that normalizes costs around a baseline tariff rate, with either party compensating the other when rates deviate significantly in either direction.
This side letter can work with any incoterms, but the responsibility allocation needs to align with your shipping terms. For example, under DDP (Delivered Duty Paid) terms, the supplier is already responsible for paying all import duties, so a side letter making the distributor responsible for excess tariffs would conflict with those terms.
Review your incoterms carefully and ensure the side letter complements rather than contradicts the existing duty responsibility. For DDP arrangements, the side letter might focus on reimbursement thresholds rather than shifting basic responsibility.
Need Custom Legal Advice?
While this generator creates a solid starting point for addressing tariff reimbursement between parties, international trade law is complex and constantly evolving. If your situation involves high-value products, complex supply chains, or significant regulatory concerns, schedule a consultation to discuss your specific needs.