The Interaction between Contracts and Tariff Uncertainty

• Hannah
  Schmakeit

  Hannah
  Schmakeit

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With recent political turbulence, certain businesses are now facing drastically higher costs for imported materials, including steel and aluminum products, various types of wood, plastic floor coverings, and other materials. However, when quoting for work initially, a business might not have foreseen these tariffs being in effect. So, how can businesses make sure they’re not losing money on their work due to tariffs? There are a few areas to check in your contracts with customers.

First, the pricing structure of contracts. Even if the title, header, and preamble of a contract specifies that the contract is a “cost-plus” contract, the clauses that set out the price and how adjustments to the price may be done are what matter. In a typical “cost-plus” contract, there is an additional amount to the actual costs the business incurs in completing a project. The additional amount can be a set fee or a percentage of the total cost of the project. The actual costs that the business incurs in completing a project can be including or excluding taxes and qualified by or restricted with a variety of qualifiers like “reasonable costs.” There also might be a price adjustment or pass-through clauses in your contracts that specifically contemplate that increases or decreases of the price of goods due to tariffs.

Second, a change in law clause for contracts. Generally, change in law clauses are seen in construction contracts, long-term contracts, and contracts in which both parties aren’t in the same county. Ideally, these clauses are drafted to specifically contemplate the addition or reduction of any sorts of tariffs.

Third, a force majeure clause. Force majeure clauses can protect businesses from liability or performance if certain things happen that are outside of the control of either party. Force majeure clauses often list flood, fire, government restriction, government regulation, government insurrection, and other events as triggers for the clause. However, force majeure clauses are only invokable often if the events fully prevent performance of the contract, not just make the performance of the contract expensive.

Fourth, a selection of law clause. Most contracts have a clause that selects which country’s or province’s laws will apply to the contract. However, these clauses may only select the law at the time of the agreement or the law, as amended from time to time.

While these four areas in your contracts provide you with a starting point to consider, each industry and contract can have surrounding circumstances or judicial consideration that can provide businesses with areas of relief, ambiguity, or recourse.

_{This post is meant to provide information only and is not intended to provide legal advice. Although every effort has been made to provide current and accurate information, changes to the law may cause the information in this post to be outdated.}