Navigating US-Canada Tariff Tensions: Managing Risk in Construction Contracts

Written By Brian Reid and Lily Suh

Overview

Driven by growing housing needs, clean energy policies and a high volume of telecommunications transactions, demand for Canadian infrastructure projects have been rising. However, recently announced US tariffs on Canadian goods and reciprocal Canadian tariffs (collectively, the Tariffs) threaten to undermine this positive trend.¹

Although the timing, amounts and goods that will be subject to these Tariffs remain a moving target, they are expected to complicate procurement activities, increase construction costs and potentially cause delays. These issues may also lead to project disputes with industry players potentially disagreeing over responsibility for the increased costs and other impacts associated with the Tariffs.

In this article, we provide an overview of the potential effects of the Tariffs on Canadian construction projects from a legal perspective and offer recommendations for mitigating these risks through carefully drafted contract language.

Background—the US/Canada Trade Relationship from a Construction Perspective

The reliance on US materials for Canadian construction projects will present a significant challenge for contractors and owners when the Tariffs take effect. Examples of commonly used, US sourced construction products that will be subject to Tariffs may include:²

• Base metal mountings, fittings and similar items;
• Chemical and mechanical wood pulp;
• Fiberboard, plywood and laminated wood;
• Files, plier, pipe-cutters, bolt croppers, perforating punches and similar hand tools;
• Moving, grading, levelling, scraping, excavating, tamping, compacting, extracting or boring machinery, pile-drivers/pile-extractors; snow-ploughs and snow-blowers; and
• Platinum.

In addition to these items, the second phase of Canada's reciprocal tariffs on US products may include vital materials including steel and aluminum.³

Common Legal Issues and Project Planning

Common project issues likely to arise from the Tariffs will include claims for more money, or a schedule extension. Typically, these types of claims will also trigger a discussion regarding one or more of the following contract clauses or legal principles:

1. Change-in-Law: A common contract clause that is designed to address cost increases due to Tariffs or other similar legislative impacts is a 'change-in-law' provision. Although the wording of these clauses varies significantly from contract to contract, they generally entitle the claimant to relief where there is a change in the applicable laws of Canada after the effective date of the contract. However, with the threat of Tariffs by the United States and Canada looming for some time, it may be difficult for a claimant to support a change-in-law claim if they knew or should have reasonably anticipated these Tariffs before signing the contract.
2. Taxes: Contractual tax provisions may also allocate responsibility for cost increases arising from the Tariffs. For example, the CCDC 2—Stipulated Price Contract generally categorizes taxes as either: (1) Value Added Taxes (VAT), which generally confirms that GST is excluded from the contract price; or (2) taxes and duties in effect at the time of bid closing, except VAT, which are incorporated into the contract price. Importantly, Section 10.1.2 of the CCDC 2 provides that "[a]ny 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".
3. Frustration: A contract may be considered "frustrated" at common law if an event makes it impossible for a party to fulfill its obligations. While a change in law could lead to a valid frustration claim, the impact must undermine the very foundation of the agreement, not simply create challenges or disruptions. In particular, a party claiming frustration must typically prove:⁴
   
   (a) A supervening event that occurred through no fault of either party;
   
   (b) The supervening event must not have been reasonably foreseeable when the contract was signed;
   
   (c) The supervening event must directly or indirectly impact a material element of the contract; and
   
   (d) The supervening event must alter the nature of the obligation so as to make it radically different.
   
   For example, in Fram Elgin Mills 90 Inc v Romandale Farms Limited, 2020 ONCA 201, the Court of Appeal considered whether or not government decisions that delayed a residential development for decades constituted a frustration of contract. The Court of Appeal concluded that the delay caused by the government’s decision was merely a change in the parties' expectations regarding timing, not a frustration of contract. Importantly, the Court emphasized that even if the event could be considered a supervening event, the parties could not rely on frustration because the delay and potential changes to the development were within the parties' contemplation at the time the contract was entered.
   
   Construction contracts are tailored to the specific parties involved and whether political changes significantly impact the contract to the point of frustration depends on the particular circumstances of each case. Moreover, even if the Tariffs might challenge the nature of the contract to the point of frustration, it is possible that such an event was reasonably foreseeable. In particular, this latest trade war should come as no surprise to those in the construction industry with President Trump imposing tariffs of 25 percent on steel and 10 percent on aluminum products from Canada during his first term in 2018. In response, Canada imposed a surtax on US steel and aluminum products, which took effect on July 1, 2018, and remained in place until May 20, 2019, when an agreement was reached between the two countries to lift the tariffs. Accordingly, based on the proposed Tariffs identified to date by both countries, it seems unlikely at this time that a valid claim of frustration could be advanced. However, to the extent a trade war intensifies, this may change.
4. Force Majeure: Another potential, but less likely, contract claim arising from the Tariffs is through a force majeure clause. Generally speaking, force majeure clauses provide relief where a party is prevented from performing its contract obligations due to an unforeseeable event (for example, due to a natural disaster).
   
   As a creation of contract, only a carefully worded force majeure clause will provide relief in the event of a dispute. For example, in Porter Airlines Inc. v Nieuport Aviation Infrastructure Partners, 2022 ONSC 5922, a dispute arose with Porter Airlines facing economic hardship when COVID-19 decreased the demand for its aviation services. The Court held that Porter Airlines was still obligated to pay its monthly fees to Nieuport and could not rely on the force majeure clause. Despite the significant financial strain caused by the pandemic, the Court found that COVID-19 did not qualify as force majeure.
   
   This decision underscores the principle that, while the interpretation of a force majeure clause depends on its specific wording, an increased financial burden is unlikely to excuse contractual obligations. Accordingly, although a force majeure clause could potentially be triggered by the Tariffs, the vast majority are unlikely to provide any relief.

Recommendations

Although construction industry players have no control over the Tariffs, owners and contractors should consider the following factors in order to mitigate their potential impacts:

1. For ongoing contracts, parties should carefully review and understand any change-in-law, tax, force majeure and change order provisions to ensure they understand and carefully adhere to all applicable provisions. Particular attention should be paid to any notice requirements related to a potential claim for cost increases or schedule relief as a failure to comply with these requirements can be used to defeat an otherwise valid claim.
2. Absent a clear contractual right to seek additional compensation or a schedule extension, a claimant may consider the merits of a common law claim for frustration. However, as noted above, this will be a very high bar to meet.
3. For parties negotiating a contract with knowledge of actual or potential Tariffs, it will be important to specifically address potential cost increases and other project impacts in the contract. Otherwise, a claimant may be deemed to have accepted this risk.

Properly allocating risk through careful contract drafting provisions will help manage expectations and ensure that performance proceeds as agreed, regardless of unforeseen circumstances. Ambiguity in contracts, however, leads to multiplicity of issues, leaving parties uncertain when tariff impacts occur.

If you have any questions about this decision or construction-related disputes, please contact a member of the Bennett Jones Construction or Infrastructure groups. 

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