How will tariffs impact on construction contracts?
Following Trump's announcement on US tariff policy, uncertainty in the global market is rife. The construction industry is no different to any other – equipment, materials and goods will all be impacted. Here we discuss the impact of tariffs on existing contracts and who will be responsible for additional costs as well as how best to mitigate the uncertainty in future contracts.
What are tariffs?
Simply put tariffs are taxes charged on goods bought from other countries, typically expressed as a percentage of a product's value. They are imposed by governments and are often used as a way to protect domestic industries but they can also be used as a tool for negotiation or retaliation in trade disputes.
In terms of construction contracts, tariffs will mean that there are likely to be price fluctuations, potential supply chain issues and increased planning uncertainty. It will be even more important that parties work together to manage the risks and ensure contingency plans are put in place to protect the delivery of ongoing projects.
The impact on existing contracts
Tariffs will almost certainly have a challenging impact on construction contracts, causing some disruption on many levels. The impacts will all increase the cost of completing construction contracts and in providing timely project delivery.
Who will be responsible for increasing costs?
The default position under a contract with a fixed price will be that the burden of increased costs will lie with the contractor however this is not always the case and will invariably be subject to contract.
Ultimately in an existing building contract responsibility will hinge on the specific wording of the contract and the inclusion of certain mechanisms and clauses. Are there price adjustment mechanisms, force majeure or changes in law clauses included and how exactly are they drafted?
Price adjustments
Price adjustment mechanisms are provided for in several standard forms of construction contracts, such as JCT Construction Contracts and NEC4 Engineering and Construction Contracts. Clauses like these have become far more widespread following instability during the COVID-19 pandemic, Brexit and the war in Ukraine.
It will be necessary to assess the specific wording but generally the aim is to respond to supply chain cost increases. It is likely that this mechanism will be subject to early warning obligations and service of notices so careful attention should be paid to these requirements as laid out in the contract. From a commercial perspective early notification to the employer not only ensures compliance with obligations it also serves as a way to keep open and honest dialogue between the parties, necessary for good, ongoing relationships.
Force majeure events
Force majeure clauses are standard in most contracts. They provide a mechanism to deal with events outside the control of either of the parties, such as terrorism, war, pandemics or natural disasters. As with price adjustments the detailed drafting of the clause will be important here.
It would first be necessary to assess what constitutes a force majeure event and the definition will be found in the contract itself. It has, however, been held by the English Courts that a change in economic circumstances or anything that makes performance of contractual obligations more difficult is not necessarily a force majeure event, the wording of the clause is therefore of great importance.
If tariffs do indeed fall under the definition of a force majeure event it will be necessary to take account of the parties obligations following such event. This may include the need to give notice, keep records and use reasonable or best endeavours to mitigate loss - these will all need to be complied with. There may be certain reliefs or entitlements such as suspension of certain obligations, extension of time for completion, protection from liability for breach of contract or termination of the contract without either party being liable for damages.
Changes in law
Changes in law clauses may also provide relief following price increases due to tariffs. These clauses typically seek to address the impact of new laws on the contract. It may be that the clause itself is limited to changes of law in the country where the contract is delivered and so this should be checked. It will also be important to understand whether there is a limit to changes in law that are 'unforeseeable'.
Frustration
It may also be possible to invoke the common law principle of frustration. This is where a serious event occurs after formation of the contract which is unexpected and beyond the control of the parties, which means that the contract is physically or commercially impossible to fulfil or transforms the obligation to perform into a radically different obligation. This would be a challenge to prove though especially as the courts have generally held that a contract is not frustrated if it becomes more expensive to perform.
The future of construction contracts and tariffs
As we have seen above, the impact of careful and considered drafting will be key in future contracts. It will be ever more important to ensure protections are put in place to combat the negative impact of tariffs. Tariffs may discourage or stagnate the construction industry but there are plenty of ways to mitigate the cost tariffs and ensure that projects can be delivered.
Consideration should be given to the inclusion of cost sharing or risk management mechanisms. The aim would be to spell out the liabilities of either party in circumstances of cost increases. Given that they would be codified in the contract there would be a level of transparency for the parties that would mean they would be able to plan or account for these unexpected events.
The future has never been easily predicted and we live in ever more unpredictable times. The most important take away is that those that are prepared, flexible and have a collaborative approach will be the best prepared for Trump tariffs and any other unexpected events that will undoubtedly come our way!
