Tariffs & Existing Contracts – How Malaysian Exporters Can Renegotiate and Share the Risk

New U.S. tariffs are reshaping the playing field for Malaysian SME exporters, forcing tough conversations on pricing, delivery, and profitability. In an earlier article, we discussed how SMEs can respond in the short term. This piece focuses on the more urgent challenge: existing contracts signed under very different cost assumptions.

These agreements, often negotiated months (or even years) ago, may lock suppliers into fixed prices, rigid delivery schedules, and penalty clauses – leaving little room to absorb the sudden spike in costs. When the margin erosion from tariffs is severe enough, fulfilling the contract as originally agreed could turn what was once a profitable deal into a loss-making commitment.

This is why renegotiation is no longer an optional exercise in “relationship management” – it’s now a critical survival strategy. The challenge? Striking the right balance between protecting your bottom line and preserving valuable client relationships. That’s where renegotiation and risk-sharing tactics come in.

In this article, we’ll break down the contractual tools, negotiation strategies, and legal considerations SMEs can use to navigate the tariff shock – and we’ll explore practical case scenarios showing how these approaches work in the real world.

Understanding the Contractual Landscape

Before you can even consider renegotiating contracts under tariffs, you must know who is legally responsible for paying the tariff under your contract. The first question therefore is: what does your contract actually allow you to do? The answer lies in a few key clauses – or, in many SME contracts, the absence of them.

1. Incoterms and Tariff Responsibility

If the Incoterms apply to your contract – they are a set of globally recognized rules that define the responsibilities of buyers and sellers in international trade – they will determine who takes the risk until the goods reach the buyer’s destination, including import duties and taxes.

For instance, with FOB (free on board), the buyer takes over costs and risks once the goods are loaded onto the vessel in Malaysia. With EXW (ex works), the buyer takes all responsibility from your factory door. In contrast thereto, when DDP (Delivered Duty Paid) applies, the seller is responsible for all costs and risks until the goods reach the buyer's destination, including import duties and taxes.

Incoterms should be your first starting point. However, they are not the only point of reference as a contract may contain several key provisions that may apply in this current situation. Understanding these provisions is critical before you approach your counterparty for changes.

2. Force Majeure

Many companies instinctively turn to the “force majeure” clause when costs spike. Unfortunately, most force majeure clauses cover events like natural disasters, wars, or government prohibitions – not changes in import duties or tariffs. Unless the clause explicitly includes “government-imposed tariffs” or “changes in trade laws,” it’s unlikely to apply.

But even when included, there is one significant obstacle. Force majeure usually requires impossibility to perform. With tariffs in place, it may be economically unfeasible to perform, but this does not mean that factually impossible.

3. Hardship or Material Adverse Change (MAC) Clauses

These clauses are designed for situations where performance becomes excessively burdensome due to unforeseen events. This could be the case when profit margins are completely eroded to the extent that performance is only possible at a loss.

If your contract has such a clause, it may open the door to renegotiation or even termination. However, hardship clauses are far less common in SME agreements, and MAC clauses tend to be narrowly drafted.

4. Price Adjustment Clauses

Some contracts include escalation provisions – often linked to currency fluctuations or raw material prices. If tariffs are not already listed as a trigger, you may still be able to argue that they fall within a broader “cost of goods” or “import charges” category.

5. Termination Rights

Termination clauses set out when and how a party can end the contract. While walking away can be costly (both in penalties and lost relationships), knowing whether you could exit gives you leverage at the negotiation table. This may be just enough to get a significantly better deal.

6. Frustration

In Malaysian law, the doctrine of frustration is a vital concept for contracts that don’t contain a force majeure clause. Frustration applies when a contract becomes impossible to perform due to an unforeseen event that is not the fault of either party.

Importantly, while a sudden tariff increase may make a contract economically unfeasible or cause significant financial hardship, it doesn’t usually render performance factually impossible – it just costs more. As a result, relying on frustration as a legal basis to terminate a contract is likely very difficult.

7. The Reality for SMEs

In practice, many Malaysian SME exporters use short-form contracts – or purchase orders that rely heavily on informal understandings. These rarely contain robust protective clauses. That doesn’t mean you have no options – but it does mean that your bargaining power will often come from commercial, rather than purely legal, leverage.

Strategic Options Before You Renegotiate Contracts Under Tariffs

Jumping straight into a renegotiation over tariffs without preparation will almost certainly backfire – especially when the other side holds you to the original terms. Before you pick up the phone or send that email, it’s worth investing time in a few strategic steps to strengthen your position.

1. Conduct a Contract Audit

List every active contract affected by the new tariffs. Note the key commercial terms – price, delivery dates, penalties, and relevant clauses (force majeure, hardship, price adjustment, termination). This will help you prioritise which contracts need urgent attention.

2. Quantify the Impact

You need hard numbers to make your case credible. Calculate exactly how much the tariffs add to your landed cost per unit or per shipment. Break down the impact in percentage terms so the other side can grasp the scale quickly.

3. Model Different Scenarios

Prepare best-, mid-, and worst-case cost scenarios. For example:

• If tariffs stay at the current level
• If tariffs increase further
• If tariffs are reduced or removed after a set period

Scenario modelling helps you frame proposals that are flexible and forward-looking.

4. Gather Market Intelligence

Research how competitors and industry peers are responding. Are others increasing prices, reducing volumes, or sharing costs with customers? Benchmarking can make your proposal seem reasonable rather than opportunistic.

5. Align Internal Stakeholders

Make sure your finance, legal, and operations teams are on the same page. A united internal front avoids mixed messages and ensures that any commitments made in negotiation are actually deliverable.

6. Prepare Your “Ask” and Your “Give”

Renegotiation works best when you offer value in return. Decide upfront what you are willing to give – whether it is longer-term commitments, faster delivery, or quality upgrades – to secure cost adjustments.

7. Consider alternative sourcing

Beyond renegotiating with your customer, a crucial long-term strategy is to look at your own supply chain. This is a chance to turn a crisis into an opportunity by building a more resilient business model. Supplier diversification, re-evaluating production and exploring free trade agreements Malaysia has entered into may all be a way to improve your position and thus bargaining power.

Renegotiation Tactics That Work

Once you have audited your contracts, quantified the impact, and aligned your internal team, the next step is to turn preparation into a practical negotiation plan. The aim is to protect margins without damaging customer or supplier relationships – and to do so in a way that feels like a joint solution rather than a one-sided demand.

1. Frame the Conversation Around Mutual Survival

Instead of leading your tariff contract negotiation with “we need to raise prices”, position the discussion as a shared problem caused by external shocks. For example: “The new tariffs have added 14% to our landed costs. If we continue at the current price, we will not be able to sustain supply over the contract term – we want to explore a solution that works for both sides.”

2. Propose Tiered Adjustments

Rather than a single, sharp price increase, consider phased changes over several shipments or months. This helps the counterparty manage their own downstream pricing and builds goodwill.

3. Offer Alternative Value

If the other side resists price changes, consider offering other benefits in exchange – such as faster delivery, improved payment terms, or product enhancements – in return for partial cost relief.

4. Suggest Temporary Variations

Sometimes a short-term fix is better than locking in permanent changes. Propose a temporary variation agreement that allows a price review after a set period or once tariff levels change.

5. Be Ready with Data and Options

Bring a clear cost-impact breakdown and at least two alternative proposals. This signals that you are serious, prepared, and flexible – qualities that make it harder for the counterparty to simply say “no”.

6. Keep Communication Professional and Documented

While verbal discussions can break the ice, always confirm agreed changes in writing. A simple variation agreement or contract addendum will prevent disputes later.

Legal and Relationship Pitfalls to Avoid

Even the best preparation and negotiation tactics – whether for tariffs under contracts or any other contract negotiation – usually fail if you overlook key legal and relationship risks. Tariffs create urgency – but rushing into changes without care can expose your business to disputes, penalties, and long-term reputational damage.

1. Unilateral Changes Without Agreement

Altering prices, delivery schedules, or product specifications without the counterparty’s written consent can amount to a breach of contract. Even if the change seems minor or justified “morally,” it may give the other party the right to terminate or claim damages.

2. Overreliance on Weak Clauses

Invoking a force majeure or hardship clause without a solid legal basis can undermine your credibility in negotiations – and in court, if the matter escalates. Always get legal review before relying on these provisions.

3. Damaging Trust Through Withholding Information

If you hide the true extent of the tariff impact and the counterparty later discovers it, you risk damaging the relationship beyond repair. Transparency, backed by verifiable data, is more persuasive and builds long-term trust.

4. Ignoring Third-Party Obligations

Changes to your contract terms may have knock-on effects on financing agreements, insurance policies, or supplier contracts. Failing to align all related obligations can result in unexpected breaches elsewhere.

5. Letting Emotions Drive the Discussion

Tariff-driven cost increases can feel unfair, but aggressive or confrontational communication often hardens the other side’s position. Negotiations are more productive when framed as a shared challenge rather than a battle of wills.

6. Failing to Document Changes Properly

Verbal agreements are risky – memories fade, and interpretations differ. Always formalise changes with a variation agreement or addendum signed by both parties. This protects both sides if disagreements arise later. See our write-up on 10 best practices for contract amendments in Malaysia for further details.

Practical Steps to Take Now

If tariffs have already started eroding your margins, speed matters. The earlier you act, the more options you will have – and the less likely you are to end up in a dispute. Here is a straightforward action plan for SMEs facing existing contract tariff pressure.

1. Identify Affected Contracts

List every active contract impacted by the tariffs, starting with those that carry the greatest financial exposure.

2. Review Key Clauses

Check for any clauses that may help – force majeure, hardship, price adjustment, termination rights – and note their exact wording.

3. Calculate the Financial Impact

Put numbers to the problem. Show exactly how the tariffs affect landed cost, margin, and overall profitability for each contract.

4. Prepare Your Proposal

Decide what changes you need and what value you can offer in return. Have at least two options ready so the other side has room to agree.

5. Engage Early

Initiate discussions before payment deadlines or delivery dates become critical. Early engagement signals professionalism and gives more time to explore solutions.

6. Keep It Documented

Confirm all proposals and agreements in writing – even if the initial conversation is verbal – and follow up with a signed variation agreement.

7. Align Your Internal Teams

Make sure sales, operations, finance, and legal are aware of the revised terms so implementation is smooth and consistent.

8. Liaise with External Counsel

Before finalising any changes, have an experienced lawyer review the proposed terms and the variation agreement. This ensures compliance with the original contract and relevant laws – and helps you avoid unintended liabilities. Make sure that your lawyer is well-versed with supply chain matters and international contract dealings.

Case Scenarios from our practice

Case 1 – The Failed Renegotiation

A Malaysian electronics exporter faced a sudden 12% increase in landed costs due to new tariffs. Without preparing data or a concrete proposal, the sales team simply informed the U.S. buyer that prices had to go up “across the board”. The buyer refused, citing the fixed-price clause in their agreement, and threatened legal action if the supplier failed to deliver. With no documented variation and no tariff cost-sharing arrangement, the exporter either had to absorb the loss or risk being sued for breach.

Lesson: Entering negotiations without preparation or legal grounding leaves you with little leverage and high exposure.

Case 2 – The Win-Win Renegotiation

A furniture manufacturer supplying to a European chain quantified the tariff impact – showing that margins would turn negative within two months – and proposed a phased 6% price increase over three months. In return, they committed to faster delivery times and extended the contract by one year. The buyer agreed, seeing the proposal as a reasonable way to secure continuity of supply.

Lesson: Presenting clear data, offering value in return, and structuring changes to reduce the buyer’s pain increases the chances of a positive outcome.

Case 3 – The Hybrid Outcome

A textile exporter to the U.S. negotiated a temporary tariff-sharing agreement: the buyer absorbed half the tariff cost for six months, after which both parties would review market conditions. While this did not fully cover the exporter’s losses, it prevented a total breakdown of the relationship and bought time to explore alternative sourcing.

Lesson: A partial solution can still protect relationships and cash flow while you work on longer-term fixes.

Conclusion – Act Before the Damage Is Done

Tariffs can turn a once-profitable contract into a loss-maker overnight – and for SMEs, the impact can be swift and severe. While it may be tempting to hope the situation improves, inaction is often the most expensive choice.

The businesses that fare best in a tariff shock are those that:

• Understand exactly what their contracts say (and do not say)
• Prepare a data-backed, commercially reasonable proposal
• Engage counterparties early, before defaults or disputes arise
• Document changes properly, with legal input where needed

Whether the outcome is a price adjustment, a cost-sharing arrangement, or a temporary variation, the goal is the same – to protect your margins without burning bridges. Acting now gives you options; waiting limits them.

If tariffs are already eating into your contracts, start the review process today. The earlier you move, the stronger your position will be – and the more likely you are to secure a solution that works for both sides.

Don’t let tariffs turn your hard work into a loss. Get a clear understanding of your legal and commercial options with a professional consultation. We can help you navigate this new landscape. Book a free 15-minute consultation today to secure your business’s future and build a strategy for success, not just survival.

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