The recent imposition of tariffs on foreign goods and materials imposes new risks for the construction industry. Our construction attorneys have been working with clients to address these risks. The primary concern raised is how to handle price escalations after contracts have been signed, where the negotiated contract is a lump sum.
Our construction clients have hundreds of active projects where their contracts with owners have already been executed. Starting with the fundamental concept that the written contract typically governs the relationship between the parties, the terms of those contracts – which vary by project and owner – need to be examined to determine whether there is a basis in the contract language to seek additional compensation as a result of tariff-based price increases that occur after contracting.
Look for a price escalation clause. Price escalation clauses are most often of three variations: (1) “any-increase” escalation clauses, (2) threshold escalation clauses and (3) delay escalation clauses. Under the first variety, a downstream contractor or supplier is entitled to reimbursement for any price increases that occur after the signing of the contract. Threshold escalation clauses, on the other hand, only allow the downstream contractor or supplier additional compensation if significant price increases occur after signing the contract which exceed a certain percentage or dollar amount. The third type of escalation clause, known as a delay escalation clause, holds a fixed price for a limited period of time and allows the downstream contractor additional compensation if the project is delayed beyond a certain number of days or a specified date.
Contractors should check each contract where price escalation is an issue to determine if the contract includes a price escalation clause. In light of the current tariff climate, contractors should certainly consider adding such a clause in any new project contracts.
If there is no price escalation clause, relief from price escalation might be available through other contractual provisions. Some contracts allow extra compensation for changes in law that occur after the parties sign a contract.
Force majeure clauses may provide some relief. Force majeure clauses usually address delays caused by Acts of God, wars, strikes and similar events beyond the control of the downstream contractor. We have not yet seen any court decisions on whether a tariff qualifies as a force majeure event. The question is whether such tariffs, unanticipated at the time the contract was negotiated and executed, constitute a force majeure event.
Of significant importance, New York law typically requires force majeure clauses to be interpreted narrowly, meaning that performance is generally excused only where a contract clause excusing nonperformance due to circumstances beyond the control of the parties specifically includes the event that prevents performance. That means that unless the force majeure clause specifically lists imposition of unanticipated tariffs as a force majeure event, then such an event may not be deemed a force majeure event. But, tariffs as a force majeure event may still be a triggering event if the clause is expansive in scope by its own terms, or, includes an inclusive catch-all provision.
Other ways to seek compensation for tariff-based cost increases include legal or equitable arguments asserting commercial impracticability, impossibility, frustration of purpose or mutual mistake. Where a contract does not include any cost escalation or force majeure clause or other provision addressing unforeseen circumstances beyond the control of the parties, performance still may be excused under the doctrine of impossibility.
It is of course the better practice for the parties to specifically identify how they intend to handle material price escalations in the contract itself rather than to rely on uncertain legal and factual arguments after the fact. We strongly urge our clients to negotiate price escalation clauses in their new construction contracts going forward. For guidance, contact Jonathan A. Murphy at (914) 287-6165 or jamurphy@bpslaw.com.
