The Tariffs Are Coming—Are You Ready? Is Your Contract?
President Trump took office this week and his tariffs could take effect immediately, causing chaos with supply chains around the world. If the price for goods increases dramatically, will your construction contracts provide you any relief? Now is a good time to review your contracts for a few important clauses.
Escalation. Does your contract provide any remedy if the cost of materials increases? We often recommend language along the lines of:
If, during the performance of this contract, the price of significantly increases, through no fault of contractor, the contract sum shall be equitably adjusted by an amount reasonably necessary to cover any such significant price increases. As used herein, a significant price increase shall mean any increase in price exceeding ---% from the date of contract signing. Such price increases shall be documented through quotes, invoices, or receipts. Where the delivery of is delayed, through no fault of contractor, as a result of shortage or unavailability, contractor shall not be liable for any additional costs or damages associated with such delay(s).
Force Majeure. COVID allowed for a new focus on these historic clauses. Ideally, they are used to excuse strict performance after an unexpected event beyond your reasonable control. Given that the causing event may be tariffs, there is no guaranty that these clauses will provide relief. If you are drafting a contract, we recommend something like the below provision, which specifically allows for governmental acts:
Contractor will not be liable for any failure or delay in performing an obligation under this Agreement that is due to any of the following causes (which causes are hereinafter referred to as “Force Majeure”), to the extent beyond its reasonable control: acts of God, accident, riots, war, terrorist act, epidemic, pandemic (including the Covid-19 pandemic), quarantine, civil commotion, breakdown of communication facilities, breakdown of web host, breakdown of internet service provider, natural catastrophes, governmental acts or omissions, changes in laws or regulations, national strikes, fire, explosion, or generalized lack of availability of raw materials or energy.
Termination Rights. Given the potential for problems caused by tariffs, it is often best to include a termination provision that allows you to terminate the contract should certain events occur. These events may include escalation of material costs, delay of the project, shortage of labor, and the like – and there may even be a termination for convenience clause. The goal is to provide consistency throughout the contract chain and avoid one party being able to terminate for convenience, but downstream parties can only be terminated for cause.
We recommend a careful review of your current contracts and updating future contracts to address the impact of tariffs. If you would like assistance with your contract review, we are ready to assist.
