By Meghan Douris
In March, under Section 232 of the Trade Expansion Act of 1962, President Donald Trump announced tariffs of 25 percent on imported steel and 10 percent on imported aluminum, ostensibly to protect domestic industries. Soon thereafter, temporary waivers were granted to many U.S. allies, including Canada (the largest supplier of steel and aluminum to the U.S.), as well as Mexico, Argentina, Australia, Brazil and the European Union. South Korea earned a “permanent exemption” from the steel tariffs as part of a larger trade agreement, in exchange for reducing its steel exports to the United States by approximately 30 percent. Russia, Turkey, Japan and China received no temporary waivers and have been subject to the tariffs since March 23, 2018. The temporary waivers were set to expire on May 1, but Trump extended those temporary waivers until at least June to negotiate further trade concessions from those countries. The temporary waivers expired on June 1, with no future permanent waivers, subjecting the EU, Canada, Mexico, etc. to the tariffs. In the interim, what impact will these tariffs have on the construction industry?
Concerns for the industry According to Bloomberg, the construction industry uses 40 percent of the 100 million tons of steel used by American businesses (see www.bloomberg.com/view/articles/2018-03-07/trump-s-tariffs-on-steel-aluminum-will-do-more-harm-than-good). As any contractor that has executed a fixed-price contract knows, sudden developments like these tariffs have the potential to derail a contractor on existing contracts, as there is little contractual ability to recover these cost increases. Contractors will be forced to take losses if they cannot work with the owners or find a contractual right to increase their price.
AGC’s own chief economist, Ken Simonson, cautioned “(s)teel service centers and other suppliers are warning there is not enough capacity at U.S. mills or in the trucking industry to deliver orders on a timely basis.” This could mean further increased prices and potential delivery delays, which has the potential to affect ongoing projects, as well as influence the viability of projects in the planning stages.
Force Majeure: A contractual protection against tariffs?
Most construction contracts contain a force majeure clause, which is intended to spread the risk among the parties for issues that are outside the control of the parties. Contractors are asking whether this “get out of jail free” card clause could save them from the economic hit of the tariffs on existing contracts. While it depends on the specific language of the clause in question, the answer is likely no. By and large, state and federal courts have held that a party cannot avoid its contractual obligations solely because the government action referenced in a force majeure clause results in an economic loss to the contractor. “The normal risk of a fixed-price contract is that the market price will change” and whether that market price is due to a national tariff or a traditional supply and demand issue has not persuaded the Courts to provide relief to contractors under the force majeure clause. Instead, courts have only permitted the use of force majeure in instances of true impossibility of performance.
Rays of light: What is not subject to the tariffs?
There is still some hope. While arguments have been advanced that the tariffs would impose a tax on “every foreign shipment of steel and aluminum” into the United States, a careful reading of the Harmonized Tariff Schedule chapters and the presidential proclamation reveal that certain elements of steel and aluminum common to the construction industry are not included in the tariffs. Specifically, fabricated structural steel is not in the products covered by the tariff. For example, a raw plate, which is not “post-processed” prior to shipment from a country subject to the tariff, would in fact be taxed. However, that same plate, if fabricated into the designed element, is considered post-processed and thus not subject to the tariff. So long as the component is shipped to the United States as fabricated steel instead of mill-rolled steel, it would not be subject to the tariff.
In addition, in March 2018, the Commerce Department announced procedures for excluding products from the tariffs, which will allow domestic industries to “apply for exclusions through a fair and transparent process run through Commerce’s Bureau of Industry and Security.” See more at www.commerce.gov/news/press-releases/2018/03/us-department-commerce-announces-steel-and-aluminum-tariff-exclusion. Specifically, any individual or organization using steel or aluminum articles defined in Presidential Proclamations 9704 and 9705, and which are engaged in business activities in the United States, may apply for exclusions. A separate request must be made for each “unique” steel or aluminum product import. The Commerce Department advises that the processing of these requests “normally” will not exceed 90 days. However, as of the end of April more than 1,300 applications for waivers were submitted for exemptions from both the steel and aluminum tariffs, fewer than 50 of which had been posted for the public review portion of the process. It seems unlikely at this point that Commerce will process these in a timely way.
In the unpredictability of this administration, contractors may look to negotiate additional protections in future contracts, negotiating with owners for clauses that permit a modification to contract price for significant price increases because of “government action,” propose alternate pricing contingencies that cover the risk, but allow for a give-back to the owner should the prices remain consistent, or use allowances to cover this item in future contracts. For now, a thorough review of existing contracts should be undertaken if the tariffs have significantly impacted pricing. Because contract interpretation is focused so carefully on the exact wording in the contract in question, there just may be language in a changes clause, contingency clause, a materials escalation provision, etc. that provide an avenue to recover. Contractors should be sure to put the owner on notice of any impacts, whether to pricing or schedule, and pass through any subcontractor notices due to the tariffs in a timely manner.
This column provides information about the law designed to help users safely cope with their own legal needs. But legal information is not the same as legal advice — the application of law to an individual’s specific circumstances. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a lawyer if you want professional assurance that our information, and your interpretation of it, is appropriate to your particular situation.
Meghan Douris is a partner in Oles Morrison’s Seattle office where she provides her clients — the nation and region’s leading general contractors and subcontractors — legal counsel on the diverse issues impacting their construction projects.