Trump tariffs: Cost impacts for project agreements

Torys’ Canadian and New York offices will be providing regular briefs on the legal ramifications of the proposed tariffs and other cross-border policy developments on the horizon.

How would U.S. tariffs impact projects being built in Canada?

Canadian projects will generally incorporate goods and services that originate both in Canada and the United States. The biggest direct impact that U.S. tariffs will have on Canadian projects will not come from U.S. tariffs themselves, but rather Canadian retaliatory tariffs that may be imposed. If Canada imposes retaliatory tariffs, Canadian projects that incorporate those goods and services will be impacted. Short-term impacts will include increased costs—and in some cases, supply chains may be disrupted, which may result in delays.

What issues do tariffs pose at the procurement stage?

Parties will address the possibility of tariffs in different ways. If there is a real risk that tariffs could impact the supply chain for a project, parties may decide to include a relief mechanism in the project agreement allowing parties to defer the potential impact of tariffs until the situation becomes clearer. In some circumstances, schedule relief may be appropriate to allow any trade war between Canada and the U.S. to resolve. In other circumstances, parties may look at cost relief mechanisms to capture direct cost impacts of tariffs imposed on goods and services required to construct the project.

How would tariffs be addressed at the construction stage?

Where project agreements are already in place, parties will need to determine whether the impacts of a trade war qualify for relief under existing contract provisions. Many Force Majeure and Supervening Event clauses provide relief for a “change in law.” Whether U.S. tariffs or retaliatory Canadian tariffs qualify for relief will depend on the wording of the clause. Many “change in law” clauses are limited to legislative or regulatory action directed at a project specifically or enacted by a specific level of government (e.g., state or provincial rather than federal).

Where relief may be available under existing contractual clauses, parties will generally need to consider six components, in addition to contract-specific requirements, when assessing the availability of any contractual relief in response to a trade war:

• Type of relief: many Force Majeure clauses only provide relief for schedule impacts, not price relief for increased costs.
• Foreseeability: Force Majeure clauses typically require the event to be unforeseen such that the parties could not reasonably have accounted for it in their agreement. Given that President Trump imposed numerous tariffs during his first administration, some of which remained in place during President Biden’s term, foreseeability could pose a hurdle. Publicly stated intentions to impose fresh U.S. tariffs and Canadian counter-tariffs in 2025 also raise questions as to whether such tariffs would be considered unforeseeable.
• Requisite level of impact: contractual clauses typically impose a threshold for the level of impact that must exist before the clause is triggered. Typical phrases include “prevents,” “renders impossible,” and “substantially hinders.”
• Causal link: a direct causal link between a supervening event and its impact is generally required. Whether contracts provide relief for impacts beyond the direct price increase caused by the imposition of a tariff will depend on the clause. Complicated issues may arise from indirect impacts to supply chains or increased prices for goods and services that are not themselves subject to tariffs (but which incorporate other goods and services that are subject to tariffs).
• Mitigation: where relief is available, parties will need to determine whether mitigation obligations require them to source alternate goods or services (including at a higher price but lower than tariff-impacted prices). If alternate goods and services can be obtained, impacts to existing supply agreements will need to be evaluated.
• Notice: relief clauses typically require timely notice. Parties should consider whether supporting documentation or evidence of impacts and mitigation efforts is also required. Even where there is no formal requirement to provide evidence or documentation, parties will be well served—including in the event of a dispute—by documenting the impacts of a trade war on their ability to meet contractual obligations as well as efforts to avoid and mitigate potential impacts.

 
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