How does your construction contract protect you from the adverse impacts of the United States tariffs and Canada’s response to them?

President Trump is imposing tariffs on goods exported by Canada to the United States. Canada has responded with tariffs on U.S. goods imported into Canada. As we describe in our previous article, the impacts on the Canadian construction industry and construction projects will be significant both immediately and over the long-term.

What does your construction contract say about tariffs, if anything? Are you protected? How do the industry standard form contracts published by the Canadian Construction Documents Committee (“CCDC”) deal with increases in taxes, duties and tariffs?

What to look for in your construction contracts

Most construction contracts have provisions that address how increases in taxes and duties (including tariffs) are to be dealt with.

Usually, the contract provides that the owner bears this price risk. CCDC contracts work this way, for example. CCDC contracts with a fixed or stipulated price allow the contractor to increase the contract price. CCDC contracts with a cost-plus or other cost flow-through pricing model allow the contractor to pass along the cost of the increase to the owner. Contracts for larger construction and infrastructure projects will typically have complex change of law and tax provisions that should be considered and the parties to these contracts should have a fresh look at these provisions with tariffs in mind.

The bottom line is that the contract terms agreed to by the parties will govern.

Are tariffs a force majeure event?

Many construction parties wonder if the imposition of unexpected tariffs and other trade measures constitutes an event of “force majeure.” Should we expect to see force majeure claims based on what’s happening in the trade environment, and if so, are those claims likely to succeed?

An event of “force majeure” is typically described as an event outside of the control of a party that prevents that party’s performance of its obligations under a contract. Since neither party to a construction contract has any control over the trade policy of any country, or the impacts of those trade policies on the cost of the work , it is not unreasonable to ask whether these impacts constitute a force majeure event.

Other than in Québec, force majeure relief is only available if the contract says it is, and only on the terms set out in the contract. In a typical construction contract, an unexpected increase in costs for any reason, including as a result of new or increased tariffs, does not count as an event of force majeure. It is common in most construction contracts to define force majeure to be limited to events that prevent a party from performing their obligations. Canadian courts have consistently taken the view that higher costs do not prevent a party from performing its obligations—they only makes it more expensive to perform to obligations—and so relief is not available.

Even in Québec, the Civil Code takes the same approach as the common law provinces and provides relief for force majeure events only when a party is actually prevented from performing its obligations.

Standard force majeure clauses sometimes do, however, recognize the unexpected unavailability of materials, products and other supplies as a possible grounds for relief. If a contractor cannot complete its work because some new trade measure make certain supplies unavailable – blocked at the border, for example – and not simply more expensive, contractual relief may be available.

In all cases, the party considering making a force majeure claim, and the party in receipt of a force majeure claim, must carefully review the relevant terms of the contract to determine whether the claim has merit. 

Reviewing CCDC standard language

Stipulated price contracts

CCDC publishes several “stipulated price” or “fixed price” contracts with an agreed contract price for all of the scope of work. These “stipulated price” contracts, including CCDC 2 (Stipulated Price Contract) and CCDC 14 (Design-Build Stipulated Price Contract), expressly address increases and decreases in taxes and duties (which would include tariffs) in GC 10.1 – TAXES AND DUTIES.

10.1.1    The Contract Price shall include all taxes and customs duties in effect at the time of the bid closing except for Value Added Taxes payable by the Owner to the Contractor as stipulated in Article A-4 of the Agreement – CONTRACT PRICE.

10.1.2    Any increase or decrease in costs to the Contractor due to changes in taxes and duties after the time of the bid closing shall increase or decrease the Contract Price accordingly.

In CCDC stipulated price contracts, therefore, the contractor is entitled to an increase in the contract price if its costs are increased because of tariffs.

Cost-plus contracts

CCDC also publishes several “cost-plus” contracts. In contracts such as CCDC 3 (Cost Plus Contract) and CCDC 5B (Construction Management Contract – for Services and Construction), the owner must pay the contractor its costs of performing the work plus a fee.

How do CCDC “cost-plus” contracts deal with increases in tariffs? Cost increases that arise from any change in customs, taxes, and duties (which would include tariffs) are addressed expressly in GC 10.1 – TAXES AND DUTIES.

10.1.1    The Construction Manager shall pay all customs, taxes and duties during the performance of the Work. The amount incurred shall be included in the Cost of the Work in accordance with paragraph 7.1.14 of Article A-7 of the Agreement – COST OF THE WORK.

In CCDC cost-plus contracts, the contractor is entitled to pass along all customs, taxes, and duties to the owner. This includes any amount on account of new or increased in tariffs.

Other forms of contracts

Every contract is treated as a negotiated bargain between two parties. Although most construction contracts follow the CCDC approach and allocate the risk of new and increased tariffs to the owner, some allocate the risk differently, and others are silent on this topic. The specific terms need to be reviewed carefully to consider which party carries the risk of unexpected tariffs and resulting higher costs.

You should review your existing construction contracts and ask the following questions:

  • Does the contract include provisions that deal specifically with the possibility of changes to taxes, duties, or tariffs?
  • If so, does the contract follow the CCDC approach in allocating the risk of increased costs to the owner?
  • Does the contract define “force majeure” in a typical way that excludes increases in the cost of goods and materials?
  • Since new tariffs and increases to existing tariffs come about through changes in laws and regulations, does the contract include a “change of law” provision that applies? Consider carefully whether and how these provisions apply to U.S. tariffs imposed on goods and materials imported from Canada, then incorporated into American-made finished goods and equipment (such as an HVAC), and finallyexported to Canada at a higher price.
  • If you expect to see adverse impacts on project delivery, consider all mitigation measures that may avoid or minimize those impacts. This could include sourcing alternatives or putting procurement milestones in a different order. Even if there is no avoiding the impacts, it will still be important to have made an effort to mitigate.
  • If there are contractual provisions that could provide some relief, be sure to review and comply with all notice requirements, and follow all required  procedures in order to preserve your right to relief. For example, if a contractor waits too long to make a claim after learning that its costs will increase as a result of tariffs, the time period for making that claim may expire.

What to consider in drafting

If you expect to enter into a construction contract, or want to be prepared to enter into one if the need arises, consider the following in respect of new and increased tariffs:

  • Who carries the price risk? Ensure that the risk of increased or decreased tariffs is clearly addressed. CCDC contracts make this price increase an owner risk, but you may want to deal with the risk differently. The important point is to be clear so that parties can respond accordingly, and disputes are avoided.
  • Who gets relief from? Do the tariff relief provisions of the contract apply only to goods and products imported by the contractor itself and sold to the owner? Or do they apply to any subcontractor of any tier?
  • What tariffs are addressed? Tariffs on goods, materials and services crossing the border into Canada are fairly easy to identify. What about indirect cost impacts? How (if at all) do the parties want to address the scenario where goods are more expensive not because of the application of Canadian tariffs, but because they incorporate parts or materials that crossed from Canada into the US at an earlier stage in the manufacturing process and were hit with U.S. tariffs at that time? As with the overall price risk, the important point is to be clear in the contract.
  • Are the prices and materials traceable? If the cost of source materials goes up for a trade contractor, is it automatically entitled to a price increase? If a contractor has multiple suppliers to choose from, how does it demonstrate that it used the higher priced materials in the goods they provided for the particular project?

    In other words, how do you trace the specific increased cost back to a specific cause? Owners may want to consider including special audit rights into the underlying pricing of trades and materials suppliers in the case of claim based on increased costs due to tariffs.
  • Good record-keeping. Effective tracing requires robust and clear record-keeping obligations in the contract. From the bid stage onward, contractors should be required to keep and maintain full and detailed records of the taxes, duties, and tariffs included in the contract price or the cost of the work. This includes anticipated amounts as well as amounts actually incurred or paid..

This is particularly important if tariffs are imposed during execution of a project, and then later reduced or removed altogether. The parties need to have good and contemporary information in order to be able to properly assess the impacts of tariffs.

  • What are the mitigation obligations? Most construction contracts require the parties to make some level of effort to avoid or mitigate the impact of increased costs. Consider drafting specific tariff-related mitigation requirements. For example, should a contractor only be entitled to a price increase if it has not demonstrated that it has explored alternative suppliers or an alternative procurement strategy? Further, should contractors be required to consider all available tariff review and relief measures such as tariff classifications, exception applications, and availability of remission of duties or duty drawbacks?

Review active procurements

Do not forget about your procurement documents.

If you are requesting bids for construction work, you should provide clear instructions to bidders about how tariffs are to be addressed in the bid price. This is particularly important given how unpredictable, uncertain and fluid the actual tariff situation continues to be.

Parties seeking bids should ensure that all bidders submit bid prices that are based on the same, consistent set of assumptions relating to the trade environment, in order to facilitate “apples to apples” comparisons.

You should treat with extreme caution any bid price that is qualified with respect to the impact of tariffs, or that is not based on the required assumptions. If the price risk will ultimately be borne by the owner, it is prudent to clarify this point in the procurement documents by pointing to the included form of contract, and direct that bids should not include any “risk premium” or similar amount in respect of tariffs, since the contract will deal with them.

Conclusion

We are in unprecedented times of uncertainty and disruption. Tariffs will increase the costs of construction projects, as well as construction industry exports to the United States. The sudden imposition and almost-as-sudden withdrawal of tariffs and other trade threats itself is causing greater uncertainty about the construction industry and the economy. That uncertainty and disruption is equally damaging to the construction industry and construction projects in Canada.

There are some actions we can take to protect our businesses and our projects. It is prudent for parties to consider carefully how their existing contracts address unanticipated price increases from tariffs, both direct and indirect, and what their next contracts need to include in order to minimize any adverse impacts.

How Gowling WLG can help

Gowling WLG tariff resources hub. Our tariff hub to assist clients navigate the disruption to their businesses caused by the US tariffs and related Canadian tariffs. The site offers news, analysis, articles, upcoming events and other tools and resources to help clients through these challenging economic times. This includes our article on Preparing for tariffs: A guide for North American importers and exporters.

In addition to the Gowling WLG tariff resources hub, the Infrastructure and Construction Sector Group is also working a number of articles and events:

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We would be happy to meet with you or your organization to discuss your questions and concerns about how the US tariffs and trade disruption is impacting your construction business and projects, and how to mitigate against those adverse impacts. If you have any questions, please contact any member of our Infrastructure and Construction Industry Group.