Navigating Trade Wars: Perspectives from India

India plays a critical role in facilitating global trade, leveraging its large and growing economy, strategic geographic location, and dynamic policy reforms. As one of the world’s fastest-growing economies, India's transformation into a global economic powerhouse is marked by remarkable achievements in its export landscape.

India has made significant progress in diverse sectors ranging from petroleum, energy and agrochemicals to semiconductors and precious stones - consolidating its position as a key supplier to global markets. At the same time, global trade has experienced heightened uncertainty following the inauguration of the new United States (US) administration in January 2025. With its “America First Trade Policy” which prioritises domestic investment and manufacturing through decisive tariff sanctions, the international trade environment has grown increasingly complex.

Taking effect from August 27, the recent imposition of 50% tariffs by the US on imports from India could shrink Indian exports and gravely impact the ecosystem of commercial and trade ties between both nations. Notably, the 50% tariff includes a punitive 25% tariff due to India's increased purchasing of Russian oil. Prior to these tariffs, the US was India’s single largest export partner; nearly 20% of exports arriving to the US. India’s total exports to US stood at about $86.51 billion in the year ended March 2025. The imposition of new tariffs on India presents a serious headwind to several sectors, including gems and jewellery, garments and textiles, marine and dairy products, steel and aluminium, and tea.

See our Tariff Tracker to help you stay up to date:

See our Tariff Tracker

Setting the stage for renewed trade pressure

In 2018 geopolitical tensions between the two nations intensified, when US imposed tariffs on Indian steel and aluminium imports under Section 232 of Trade Expansion Act, prompting India to retaliate by levying additional duties on a range of US products. This triggered multiple World Trade Organisation (WTO) disputes between the two countries. After years of trade negotiations, a settlement was reached in 2023 under which India agreed to withdraw its retaliatory tariffs and restore normal duty rates, while the US approved several exclusion requests for Indian-origin products. Since January 2023 that allowed 29,000 metric tons of Indian aluminium to enter the US duty-free. The US further committed to continue reviewing such requests with an aim to maintain similar access levels for Indian exporters and establishing a Joint Monitoring Mechanism to exchange information on a bi-annual basis for as long as the Section 232 measures remain in effect, marking a step toward resolution of their longstanding trade frictions. While this created some breathing space for Indian exporters, the relief was limited in scope and did not fully offset the broader tariff measures, leaving many sectors vulnerable to volatility.

With the resurgence of tariff tensions between the US and India, it is likely that India’s export-oriented industries will be directly impacted. Early developments suggest that President Donald Trump’s second term is likely to bring even sharper tariff hikes and stricter trade barriers, heightening the risk of an extended global trade conflict.

Commercial arrangements amidst trade tension

The tensions arising from tariff wars have a direct bearing on contractual obligations under commercial arrangements. An unexpected or uncertain escalation in tariffs compels parties to revisit critical contractual provisions, particularly those relating to Force Majeure and Material Adverse Change (MAC). The interpretation and applicability of these clauses assume significance in determining the allocation of risk between parties. These considerations, and the past treatment by the Indian courts of these clauses in similar situations, have been discussed below.

Doctrine of Frustration and Force Majeure Clause

A Force Majeure Clause is designed to safeguard contracting parties when any unforeseen event occurring beyond their control results in suspension of the performance of contract, allowing parties to obtain relief under the terms of the contract. Under Indian law, the principles governing force majeure events are primarily reflected in Section 32 and Section 56 of the Indian Contract Act 1872 (Contract Act). These provisions lay down the framework for determining whether a party may be excused from performing its contractual obligations due to unforeseen occurrence of events. They are similar to the provisions Under Article 180 of the Chinese Civil Code discussed in our Navigating Trade Wars insight on China.

When the contract contains an express or implied force majeure clause, it is governed under Chapter III of the Contract Act, specifically under Section 32. In such cases, the “doctrine of frustration” contained in Section 56 does not apply and the court must interpret the force majeure clause agreed between the parties.[1] On the other hand, Section 56 embodies the doctrine of frustration, which applies when no such clause exists. In such cases, if an unforeseen event renders the performance of the contract impossible or unlawful, the contract stands discharged by operation of law.

It is a settled position of law that in order to assess whether the doctrine of frustration applies to a case, it is pertinent to examine the nature and terms of the contract to determine whether the disturbing element/intervening event has substantially prevented the performance of the contract as a whole or not.[2] These statutory provisions/clauses ensure that the affected parties are not unfairly bound to perform legal obligations under a contract that have become impossible due to events beyond their reasonable control, striking a balance between performance of the contract and equitable relief.

Increase in Tariff as a Force Majeure Event

In terms of Section 56 of the Contract Act, Indian courts have maintained that not every imposition of tariffs or trade restrictions would discharge a contract. The primary test in such cases is whether the embargo so fundamentally alters the nature of the contract that its performance would amount to something entirely different from the original undertaking.[3] If the contract merely becomes more expensive or commercially burdensome (for instance, due to increased tariffs), the doctrine of frustration will not apply. Only when a legal embargo makes the performance impossible in a practical sense, such as prohibiting import or export of the very goods contracted for, then the event can be said to strike at the root of the contract and justify the discharge of the obligations under the contract.

The doctrine of frustration as under section 56 of the Contract Act is not designed to relieve parties from bad bargains or unforeseen hardships that may still allow performance, even if such performance is more expensive or less advantageous than originally anticipated. Instead, the doctrine of frustration applies only in situations where an unforeseen event, beyond the reasonable control of the parties, makes the performance of the contract impossible in a practical sense,^[4] or by a reason of ‘supervening impossibility or illegality’.^[5]

That said, the imposition of a legal embargo, such as tariffs or trade restrictions, may in certain cases qualify as a force majeure event, provided that the contract itself specifically included within the force majeure events, these kinds of regulatory changes, embargoes, or alterations in law. In such situations, the obligations of the parties are determined strictly by the agreed terms, and the affected party may be excused from performance to the extent that the embargo renders the contract either impossible to perform or unlawful to execute.

Through a series of judicial decisions Indian courts have laid down clear principles on the invocation of force majeure clause. The Supreme Court in the Energy Watchdog v Central Electricity Regulatory Commission[6] judgment established a general principle that a rise in the cost of raw materials or inputs, such as coal, does not constitute either force majeure or frustration of a contract, if the contract expressly excludes increased costs from force majeure events. If there are alternative ways to perform the contract, even at higher expense, the contract is not frustrated, and obligations remain.

In the case of a sudden imposition of tariffs, it may be arguable whether such measures are truly “unforeseen.” This is particularly relevant in sectors such as steel, automobiles, and textiles, where long-term contracts are common and the history of global trade tensions and tariff fluctuations makes such governmental actions reasonably foreseeable. In such circumstances, the foreseeability of tariffs may itself operate to defeat a claim under force majeure clause or doctrine of frustration, as the event cannot be said to fundamentally alter the nature of the contract beyond what the parties could have anticipated.

Whether the claim ultimately succeeds will, however, depend on the precise wording of the force majeure clause (if present) and on whether performance was rendered impossible (under Section 56), as opposed to merely more expensive or commercially inconvenient, in line with the principles affirmed by the courts.

Change in Law and price variation clauses

The “Change in Law” clause is designed to safeguard the interests of the contractor by restoring it to the same position as it would have been if such a change would not have occurred.

In Jaipur Vidyut Vitaran Nigam Ltd v Adani Power Rajasthan Ltd,[7] the Supreme Court held that the “Change in Law” clause embodies a restitution principle. This means that the party impacted by a legal change is entitled to be restored to the same financial position as if no such change had occurred. The Court further clarified that any adjustment in monthly tariff under a long-term Power Purchase Agreement must take effect from the actual date on which the change in law comes into force.

In Energy Watchdog, the Supreme Court clarified that changes in foreign law, such as the tariffs imposed by Indonesia, do not fall within the ambit of a “change in law” clause under Indian law, unless expressly provided. By extension of the same principle, it may be inferred that the applicability of US tariffs to Indian contracts would depend entirely on the wording of the clause in such contracts. Where the clause does not expressly contemplate foreign legislative action, the imposition of consequential foreign tariffs is unlikely to qualify as a “change in law” event.

A “Price Variation” clause, on the other hand, is a contractual provision that allows the agreed price to be adjusted if costs of materials, labour, or tariffs change during the contract period.

A well drafted “Price Variation” or a “Price Fluctuation” clause can protect parties from the impact of tariffs by allowing costs to be adjusted when market conditions or laws change. In fixed-price contracts, the risk of rising costs usually falls on the importer or contractor, and courts rarely step in to change the bargain simply because prices have gone up.[8] This is because fixed prices are meant to bring certainty and reduce the risk of fluctuation. However, in large infrastructure and energy projects, contracts often include clauses that allow adjustments when input costs rise. Such clauses give flexibility to share or pass on tariff-related increases, helping parties avoid disputes or termination and keeping the contract fair and workable during market disruptions.

Material Adverse Change (MAC) clauses

The Material Adverse Change (MAC) clause is likely to assume greater significance in Indian trade contracts given the sudden tariff impositions by the US. As discussed in first of our Navigating Trade Wars series, these clauses are designed to protect the parties when the performance of a contract is adversely affected by the unforeseen circumstances. They provide a window to the affected party for renegotiating or terminating the contract if such materially adverse changes occur. Indian jurisprudence on these clauses and their interpretation remain limited to certain instances of mergers and acquisitions and therefore it is presently difficult to foresee whether sudden changes to tariffs would be construed as a material adverse change in the context of trade contracts.

Reducing risk with contractual safeguards

In view of recent global trade disruptions, including rising trade tensions and tariff hikes, parties are advised to revisit their contractual frameworks to ensure adequate protection against current and emerging risks. Parties to a commercial contract may adopt the following measures while navigating regulatory and other trade risks:

1. Parties should expressly review and, where necessary, amend Force Majeure clauses to clarify whether foreign governmental actions such as tariffs, sanctions, or embargoes qualify as Force Majeure events. Timely notice, documentary support, and mitigation steps should be strictly observed, as courts and tribunals consistently require a demonstrable causal link between the Force Majeure event and non-performance.
2. Contracts should clearly state whether “Change in Law” covers only Indian laws or also foreign measures that directly affect the performance of the contract. If foreign tariffs are meant to be included, this must be written in clear terms under the contract.
3. Parties should introduce/calibrate MAC clauses to identify tariff measures, sanctions, or sudden regulatory actions as qualifying events only where they cause substantial and enduring impact on the operation of contracts. Remedies under MAC clauses may be tailored to permit renegotiation, deferment, or termination.
4. It is important to follow proper procedures as it may not only help in establishing the legal right to relief but also shows good faith and increases the chances of reaching a fair solution through negotiation.

For businesses operating in India, contractual resilience is no longer a good idea – it is essential. By proactively reviewing and refining key clauses such as Force Majeure, Change in Law, Price Variation, and MAC, parties can better safeguard their commercial interests and navigate the legal complexities arising from further regulatory shifts. Clear drafting, foresight, and procedural discipline will be critical in mitigating risk and ensuring continuity in cross-border trade relationships.

Authors
	Sumeet Lall Partner, CSL Chambers Sumeet.Lall@cslchambers.com
Additional authors: Siddharth Mishra (Legal Director) and Vanshika Ashu (Associate)
**CSL Chambers, is an associated firm of Clyde & Co LLP, a Full Service Global Law Firm. For any inquiries, please feel free to contact the authors.

Subscribe to the Tariff Tracker