Supply Chains

As we noted in our briefing, US Tariffs: Next Steps for Irish Companies, as an initial step, companies should comprehensively review their supply chains to identify potential alternatives and minimise reliance upon affected resources.

Contractual Mechanisms

While it is important to review your contract in its entirety, some mechanisms are more likely to be relevant.

Change In Law

The risk of cost impacts arising from change in law (within the meaning of the contract) after a specified date typically sits with the employer. Whether imposition of tariffs by the EU, USA, or another non-EU country comes within scope of the clause will depend on how the clause is drafted. In the FIDIC standard form, for example, a change in law mechanism is only triggered by a legislative change at national level, whereas Public Works Contracts include EU directives and regulations. Some change in law clauses expressly include, or exclude, relief for costs or impacts on performance arising from customs duties or taxes. The clause may also be limited to changes in law which could not have been reasonably foreseen by the parties.

Conditionality around the impact of the change in law may need to be satisfied in order to trigger an entitlement to relief. Public Works Contracts provide for adjustment of the Contract Sum by the increase/decrease in the cost of performing obligations as a result of certain changes set out in the contract, which includes changes to customs or excise duties.

If conditions in a change in law clause are met, the relief is typically by way of an adjustment to the contract sum. It is possible however to suspend performance of obligations, provide additional time, or require renegotiation of the contract to preserve the intended balance of risks and benefits between the parties.

Examples of change in law mechanisms are in the following standard forms:

FIDIC (Red)	The Contract Price is adjusted to take into account the increase/decrease in Cost resulting from a number of changes, including change in Laws of the Country, which affects the Contractor in performance of obligations under the Contract. Extension of Time is also provided where the Contractor suffers delay. (Clause 13.6)
NEC4 Engineering and Construction Contracts	A Change in Law of the country in which the Site is located is a Compensation Event. A Compensation Event provides an entitlement to extension of time and adjustment to Prices. If the effect is to reduce the total Defined Cost, Prices are reduced. (Optional Clause X2 and Clause 61)
Public Works Contracts (PW-CF1 to PW-CF5)	If there is a Change in Law, the Contract Sum is adjusted by the increase/decrease in the cost of performing obligations as a result of certain changes, which include customs or excise duties. ‘Law’ is defined to include certain domestic and EU law. (Clause 15.2)
RIAI	The Contract Sum is adjusted where cost of the performance of the Contract is increased/decreased as the result of any legislative enactment, rule or order or the exercise by the Government of powers vested in it, by way of certain events which include imposition of new duties / tariffs or alteration of existing duties / tariffs. (Clause 4)

Price Adjustment

Several standard form construction contracts provide for price adjustments. These became more prevalent during the period of hyperinflation following the COVID-19 pandemic and invasion of Ukraine. Price variation clauses may be dovetailed with other provisions (including Change in Law) to avoid double recovery.

Examples of price adjustment mechanisms are in the following standard forms:

FIDIC (Red)	Amounts payable to the Contractor are adjusted in the event of rises in the costs of labour, goods or other inputs to the works, in accordance with a table of cost indexation set out in a schedule. However, this schedule of indexation must be pre-agreed by the parties. (Clause 13.7)
NEC4 Engineering and Construction Contracts	There are various options: – a cost reimbursable form of contract, whereby the Contractor is paid based on the actual costs incurred in carrying out work, along with a pre-agreed lump sum / percentage to cover overheads and profit (Option E); and – a price adjustment for inflation clause for use with Main Options A to D. As with FIDIC, this clause requires parties to pre-agree relevant indices (Option X1).
Public Works Contracts (PW-CF1 to PW-CF5)	A price variation mechanism provides for fluctuations in prices for materials and fuels, by reference to increases in the prices of categories of goods in the CSO’s Wholesale Price Indices. The mechanism is triggered by price changes for increases above a threshold set by the contracting authority (of between 3% and 10%). (Clause 15)
RIAI	Any additional price for materials, goods plant and equipment as compared to pre-agreed scheduled prices are added to the Contract Sum. The prices to be paid must be submitted to the Architect (the contractor administrator). (Clause 36)

Force Majeure

Force majeure clauses provide a mechanic to deal with events whose probability or impact could not have been contemplated or priced at the time the contract was agreed, and which neither party will have caused or been able to control, but which will impede one or more of the parties in carrying out their obligations.

Though imposition of tariffs may not entirely impede a party from complying with its obligations, it is worth reviewing how the clause in the contract at hand is drafted. Force majeure clauses will usually:

• define what constitutes a Force Majeure event,
• specify the parties’ obligations once a Force Majeure event occurs (such as obligations to give notice, keep records, and use reasonable or best endeavours to mitigate loss), and
• set out the reliefs or entitlements that flow from the occurrence of a Force Majeure event (suspension of certain obligations, extension of time for completion, protection from liability for breach of contract, or a combination of these reliefs, or termination of the contract without either party being liable for damages).

Whether the impacts flowing from the imposition of tariffs (or tariffs themselves) fall within a force majeure clause will depend entirely on how the clause has been drafted.

Force majeure may be labelled differently in various contracts. For example, FIDIC provides for Exceptional Events, defined as an event or circumstance which: (a) is beyond a party’s control, (b) could not have been reasonably provided against before entering the contract, (c) having arisen could not reasonably have been avoided or overcome, and (d) is not substantially attributable to the other party. Exceptional Events may comprise several occurrences which are expressly mentioned, but do not include tariffs.

Notice Requirements and Record Keeping

Mechanisms in construction contracts may often involve notice requirements or other obligations that act as pre-conditions to an entitlement. Once you have identified applicable clauses, check the obligations that arise. Are ‘early warning’ and ‘delay’ notices required to be given, and what triggers the requirement?  What information must the party seeking relief provide to the other party, and when and how must this be done?  If an application for extension of time has to be made, what is the process that must be followed?  It is vital to be aware of these obligations because failure to comply with them could undermine an entitlement to relief. Similarly, good record keeping may prove vital to substantiate any claim made.

Mitigation

Relief may be subject to a requirement to mitigate loss by, for example, checking if there are alternative ways to perform obligations or using reasonable or best endeavours to minimise delay, price increase, or other impacts.

Diversification of Supply Chains

Construction contracts increasingly include due diligence and reporting obligations relating, for example, to anti-slavery measures, sustainability reporting requirements, and carbon reduction requirements. Parties should ensure they remain compliant with any such obligations, failing which they should assess options to mitigate risk of breach of the contract.

Third Parties

Parties to a construction contract may have obligations under agreements with third parties to provide notice and to seek commensurate extensions of time or price adjustments. Examples of such agreements are Development Agreements, Facility Agreements, Forward Funding Agreements, Forward Purchase Agreements, and Agreements for Lease.

Public Contracts

Where an entity is managing a contract that has been awarded under EU public procurement rules, contracts may be modified without a new public procurement procedure where: (i) the need for modification has been brought about by circumstances which a diligent contracting authority could not have foreseen, and (ii) the modification does not alter the overall nature of the contract. The awarding authority should decide on a carefully reasoned course of action, taking into account the relevant regulations and case law, as well as any requirements around publication of a contract modification in the Official Journal.

Northern Ireland

Given the potential differences between the UK and the EU with respect to the tariffs, parties engaging in the movement of materials between Northern Ireland and Ireland or Great Britain should seek specific advice. While the tariff reimbursement mechanism should operate in respect of any duties paid on goods moved between Northern Ireland and Great Britain, the application of this mechanism in the context of the US tariffs and any reciprocal EU or UK tariffs is not yet confirmed.

International Commercial Terms

Although not typically included in building contracts themselves, parties to supply agreements for materials (either separately or as part of the overall delivery of the works) may wish to review whether ‘Incoterms’ (International Commercial Terms) have been incorporated into the contract. These or other terms may determine which party is responsible for fulfilling customs requirements, including liability for payment of duties. For example, in the event that Incoterm DAP (Delivery at Place) is selected, this risk is borne by the buyer at the end destination whereas, if Incoterm DDP (Delivery Duty Paid) is selected, the responsibility for import duties will lie with the seller.

Collaboration is Key

Contracts end in a variety of ways including frustration and termination. In normal circumstances, the key advantage of getting out of a contract is freedom to engage a new party considered more capable of providing the goods or services required. Given, however, that trade tensions may be felt across the economy, walking away from a contract may not assist in the way that it might when an individual project or transaction goes wrong. As with the events of the past decade, the impact of tariffs is likely a scenario in which the best course of action is constructive engagement, cooperation and preservation of your existing commercial relationships.

The authors would like to thank Enya Levy for her contribution to this briefing.