Construction contracts must consider impact of Trump’s tariffs

With high levels of uncertainty and the position changing daily, parties need to work together to consider how to manage the risk of price fluctuations and potential supply chain delays and agree contingency plans that might need to be deployed as the global picture develops.

For construction contracts already executed prior to the tariffs coming into effect, companies will be required to consider which party takes the risk for the impact of tariffs.

For fixed price contracts, the burden of price increases will sit with the contractor unless, as is more common in complex infrastructure and energy projects, the contract contains a price adjustment mechanism  which responds to supply chain cost increases. Parties should consider what early warning obligations and notice requirements they have in relation to an impact on their ability to deliver on their obligations under the contract and early engagement with contracting parties and the supply chain will assist in understanding and mitigating this risk.

Change in law clauses typically address the impact of new laws and amendments to existing laws on the contract. Careful attention should be given to whether they limit the change in law to the law of the contract or territory in which the contract is delivered and whether there is a limit to changes in law that are “unforeseeable”.

For future contracts, a consideration should be given to what “unforeseeable” means. Specific carve-out for future tariff changes may be sought to either expressly bring them within the category of a change in law that will entitle the contractor to claim increased costs or to  expressly exclude them.

Whether a force majeure clause – entitling a party to suspend performance of the contract – is triggered will depend on the exact wording in the clause. For instance, whether it is a closed list or open list of events that may be considered a force majeure event and whether the imposition of tariffs or their impact on a party’s ability to fulfil their contractual obligations would be considered “beyond their reasonable control” will be relevant considerations. Importantly, the English courts have held that a change in economic circumstances, or the ease in which contractual obligations can be performed, is not a force majeure event in and of itself which may make a force majeure claim difficult, particularly if it relies on a broad definition of force majeure.

The common law doctrine of frustration may also be considered. Applied narrowly by the courts, frustration discharges contracts when unforeseen events make performance impossible, illegal, or radically different from what was initially agreed upon. However, this is a high threshold to meet, and the courts have previously held that a contract is not simply “frustrated” because it becomes more expensive or onerous to perform, or if an alternative method of performance exists.

Following similar market shocks such as the impact of Covid-19 and the Russia-Ukraine war, we have seen construction contract parties seeking to agree to renegotiate the contract terms to help maintain business relationships and keep deals intact. This involves finding a compromise and adjusting contract provisions to adapt to new circumstances, providing a practical way forward to ensure continued collaboration and mutual benefit.

For construction contracts under negotiation now or in the future, it is likely that parties will pay more particular attention to how the risk of changes in tariffs and the potential for uncertainty in the global supply chain will impact each party. Parties will want to consider various types of clauses - namely any price adjustment, force majeure or change in law clause - in detail and ensure that it addresses the risk of the current impact and potential future impact of ongoing trade negotiations globally.