When Input Costs Move: The Contract Clauses That Decide Who Pays, and How to Find Your Exposed Agreements
When customs duty, the rupee or a GST rate moves, the question is who bears it. Indian courts will not rescue a party from a bad bargain, so the contract has to say. The clauses that allocate input-cost risk, what the Supreme Court held in Energy Watchdog, and how to find exposed contracts across a portfolio.
A tariff change, a sharp currency move or a GST rate revision lands on every supply contract at once. Whether your company absorbs it or passes it on depends on clauses most teams never read until the invoice arrives. This guide explains how Indian law treats cost shocks, the clauses that allocate them, and a method for finding exposed contracts across hundreds of agreements. Position as of October 2026.
What Indian law will not do
Indian courts do not rewrite contracts because performance became expensive. Section 56 of the Indian Contract Act, 1872 (frustration) applies only where performance has become impossible or unlawful, not merely onerous. In Energy Watchdog v. Central Electricity Regulatory Commission (Supreme Court, 2017), a steep rise in the price of imported coal after a change in Indonesian regulation was held not to frustrate power purchase agreements: "an unexpected rise in the price of coal will not absolve the generating companies" from performing, and the doctrine of frustration "cannot apply to these cases as the fundamental basis of the PPAs remains unaltered". The Court also applied the long-standing rule from Satyabrata Ghose v. Mugneeram Bangur & Co. (1954) that where the contract itself provides for the event, section 32 (contingent contracts) governs rather than section 56. And it read the PPAs' "change in law" clause as covering Indian law only, not foreign regulation.
The lesson: if you want relief for a cost shock, the contract must grant it expressly.
The clauses that allocate cost risk
Price adjustment / escalation. Ties price to an index (a published commodity index, a currency reference rate, a government price index) with a formula, a threshold below which no adjustment applies, a cap, and a review frequency. The most reliable protection because it operates mechanically.
Change in law. Defines "law" (Indian central and state law; whether it includes tax rates, customs duty and regulatory orders), the trigger (a change after the signing date that increases cost of performance), the remedy (price adjustment or renegotiation), and the process (notice within a fixed period with evidence). After Energy Watchdog, say expressly whether foreign law changes count.
Tax clause. State whether prices are exclusive of GST and that GST is charged at the rate applicable on the date of supply; address customs duty and cess for imports; allocate the effect of a rate change between the parties. Note that under the CGST Act, 2017 the applicable rate is determined by the time of supply rules, so a rate change mid-contract affects supplies made after the change regardless of what the contract says about price.
Currency. For import-dependent supply, fix the pricing currency, the reference rate and date, and a band outside which the price is adjusted or either party may renegotiate.
Force majeure. Lists events, requires notice and mitigation, suspends obligations and allows termination after a defined period. It is not a cost-shock clause: a price rise is not a force majeure event unless the clause says so, and courts read such clauses narrowly, as Energy Watchdog shows.
Renegotiation and termination. A hardship clause that obliges the parties to negotiate in good faith if costs move beyond a threshold, with a termination right if no agreement is reached, is the fallback where mechanical adjustment is not possible.
MSE suppliers
If the supplier is a registered micro or small enterprise, renegotiating payment terms to absorb a shock cannot push the agreed period beyond 45 days from acceptance (section 15, MSMED Act, 2006), and late payment defers the buyer's deduction under section 43B(h) of the Income-tax Act, 1961.
Finding exposed contracts across a portfolio
When a duty or rate changes, run these queries across the live contracts:
- Supply contracts with no price-adjustment or change-in-law clause (fixed price, full exposure).
- Contracts whose change-in-law clause excludes tax changes or foreign law.
- Import-dependent contracts with no currency clause.
- Contracts with a renegotiation trigger that the shock has now crossed, and the notice deadline.
- Customer contracts where you have a pass-through right and must give notice to exercise it.
This is a metadata exercise if the clauses were tagged at signature; otherwise it is a reading exercise, which is why tagging on the way in pays off.
Drafting positions by side
- Buyer: fixed price with a narrow change-in-law clause limited to Indian statutory changes; no currency adjustment; supplier bears customs duty changes.
- Supplier: indexed price with a threshold and no cap; change-in-law including tax and foreign regulation; currency band; hardship renegotiation with termination.
Most negotiated outcomes sit between: a threshold-and-cap adjustment, change-in-law limited to Indian tax and regulatory changes, and a currency band.
Where Legatio fits. Legatio tags price-adjustment, change-in-law, tax, currency and force majeure clauses at signature and lets you query the portfolio when a shock arrives, with notice deadlines in the obligation register. The allocation itself is negotiated by your team.
Position stated as of October 2026. General information, not legal or tax advice.