Canada: CBSA Dumping Duties: Unforeseen Cost Increases And The Consequences For Parties To Construction Contracts

Last Updated: December 29 2016
Article by Jordan Otrhalek and Mark MacAulay

Background

In April 2016, CertainTeed Gypsum Canada Inc. (CertainTeed Canada) filed a complaint with the Canada Border Services Agency (CBSA) alleging that imports of U.S. gypsum board were being dumped1 in Western Canada and causing injury to the domestic drywall manufacturing industry.2 As a result of its preliminary investigation, CBSA determined that dumping was occurring and that significant duties should be imposed to safeguard the Western Canadian drywall manufacturing industry.

These provisional duties, combined with limited domestic production in Western Canada, have resulted in significant increases in the price of drywall, which has important practical implications and raises questions as to who is contractually required to pay those costs.

CBSA Complaint and Investigation Process

CBSA has a mandate to help protect Canadian industry from unfair foreign competition in the Canadian marketplace under the Special Import Measures Act [SIMA].3 To fulfill this mandate, CBSA investigates dumping complaints and has authority to offset dumping by imposing anti-dumping and countervailing duties under SIMA.4 The complaint process begins when a Canadian producer of goods suspects that competing imported goods are being dumped or subsidized and causing injury or threatening to cause injury to the Canadian industry.

If the complaint is properly documented, and the complainant has the support of at least 25 per cent of the industry, the CBSA will evaluate the complaint and decide whether to launch a formal investigation. At the same time, the Canadian International Trade Tribunal (CITT) begins an independent preliminary inquiry into whether the Canadian industry has been injured.

CertainTeed Canada's Complaint

In April 2016, CertainTeed Canada filed a complaint with the CBSA alleging that imports of U.S. drywall were being dumped in Western Canada.5 Interestingly, CertainTeed Canada is the only active producer of gypsum board in Western Canada.

CBSA determined that 99.9% of gypsum board imports into Western Canada came from the U.S. These imports were being sold in Canada at a "margin of dumping" ranging from 105% to potentially as high as 276.5%. CBSA's preliminary conclusion meant U.S. imports were being sold at a price well below the estimated domestic selling price of gypsum board in the U.S.

On September 6, 2016, CBSA imposed provisional duties on gypsum board imported from the U.S. into Canada; the provisional duties based on the margin of dumping for each responding U.S. exporter.

If a preliminary determination finds a margin of dumping of 2% or lower, the complaint is not material enough to merit further investigation. In this case, the margin of dumping was well beyond the threshold for further investigation. Therefore, the CBSA continued its investigation, and made a final determination of dumping on December 5, 20166 with the Statement of Reasons due December 20, 2015. The Notice of Final Determination contains adjusted estimated margins of dumping ranging from 94.6% to 324.1%. CITT will issue its findings by January 4, 2017. In the interim, the provisional duties remain and the construction industry is forced to deal with the resulting increased costs.

Dealing with Increased Duties under Construction Contracts

Assuming all contracting parties have used industry accepted standard form construction contracts, the increased drywall costs resulting from the CBSA's decision will lead to an increase in the contract price but the contractor and drywall subcontractor will be able to pass the increased cost on to the owner. Specifically, both the CCDC2 Stipulated Price Contract7 and the CCA1 Stipulated Price Subcontract8 deal with taxes and duties under Part 10: Governing Regulations.

For example, GC10.1.1 in the CCDC2 Stipulated Price Contract states that the Contract Price includes all taxes and duties in effect at the time of the bid closing, except for Value Added Taxes, which are payable by the Owner to the Contractor. GC10.1.2 then states that any increase or decrease in costs to the Contractor due to changes in the included taxes and duties after the closing of the bid will increase or decrease the Contract Price accordingly. In turn, if the general contractor and drywall subcontractor's contractual relationship is governed by a CCA1 Stipulated Price Subcontract, all increased costs will flow up to the owner. Accordingly, assuming industry accepted standard form construction contracts are used, the risk of increased duties falls on the owner.

However, drywall subcontractors who have signed subcontracts that are unique to a particular general contractor, and general contractors who have signed contracts unique to an owner, may find they do not have the same price adjustment protections. In fact, the unique contractual relationships of any given project will ultimately determine who pays this cost, and it is possible for it to fall on the drywall subcontractor, the general contractor, or the owner. For any given project, legal advice on the specific contractual relationship could determine where such costs may lie.

Regardless of whether contractors and subcontractors have such protections available, unforeseen increases to import duties will still create the problem that contractors or subcontractors will need to incur upfront procurement costs for products necessary for performance of the work.9 The limited advance warning of the imposition of duties combined with the severity of the resulting cost increases can have implications for contractors that cannot be remedied immediately under the terms of the contract. The reality is that many small contractors operate under tight budgets and have limited credit with suppliers. A sudden and drastic increase in product pricing can leave contractors and subcontractors that have limited resources unable to procure the necessary products and force them to have to terminate the contract or risk default. Increased duties could also affect schedules if products become unavailable or subcontractors lack the resources to procure products at increased cost. Hence, significant import duties on project critical products could ultimately be debilitating to a project regardless of contractual entitlements. Dealing with such increases is both a practical and legal challenge and negotiating appropriate contractual amendments or concessions may still be necessary.

Conclusion

While CITT has yet to make its final determination, the import duties on drywall will continue to have significant impacts for projects in progress when the duties were imposed. Parties to construction contracts have been given a vivid reminder of the importance of the taxes and duties provisions of the agreement. While contractors and subcontractors can take comfort in knowing they are generally protected by these provisions, the lack of advance warning and severity of the duties means all of the parties to a construction contract can be significantly impacted. Owners risk significant budget overruns that could affect project financing, while contractual protections provide little solace for construction contractors with limited resources.

Contractors using standard form construction documents that protect them from increases in taxes and duties should ensure these protections are not reduced through supplemental conditions.10 Owners should be aware of these clauses when planning projects and issuing bid documents and where possible ensure contractors and suppliers account for any current or potential import duties that may affect a project's bottom line.11 For parties that do not use the standard form agreements, taxes and duties are a critically important component of any construction agreement and must be addressed prior to entering the agreement.

Footnotes

1 Dumping occurs when goods are exported from another country and are sold to importers in Canada at lower prices than the price of comparable goods in the country of export, or when goods are sold to Canada at unprofitable prices.

2 CBSA Statement of Reasons: Concerning the preliminary determination with respect to the dumping of Gypsum Board from the Unites States of America, Imported Into Canada for Use or Consumption in the Provinces of British Columbia, Alberta, Saskatchewan, and Manitoba, as well as the Yukon and Northwest Territories (21 September 2016), Ottawa, online: <http://www.cbsa-asfc.gc.ca/sima-lmsi/i-e/gb2016/ preliminary determination with respect to the dumping of Gypsum Board from the Unites States of America, Imported Into Canada for Use or Consumption in the Provinces of British Columbia, Alberta, Saskatchewan, and Manitoba, as well as the Yukon and Northwest Territories (21 September 2016), Ottawa, online: gb2016-pd-eng.html>.

3 RSC 1985, c S-15.

4 For background on the CBSA investigative process, see: "Overview of Canada's Anti-Dumping and Countervailing Investigative Process" (7 January 2015), online: <http://www.cbsa-asfc.gc.ca/sima-lmsi/brochure-eng.html>.

5 Section 1.1 of SIMA allows Canada to be divided into regional markets and the domestic producers of like goods in those markets are considered a separate domestic industry where the market is not supplied by producers of like goods located elsewhere in Canada.

6 GB 2016 IN, Certain Gypsum Board: Notice of Final Determination, (5 December 2016), online: <http://www.cbsa-asfc.gc.ca/sima-lmsi/i-e/gb2016/ Final Determination, (5 December 2016), online: gb2016-nf-eng.html>.

7 Canadian Construction Documents Committee, CCDC 2 2008: Stipulated price Contract, online: <http://www.ccdc.org/documents/set/contract-forms/>.

8 Canadian Construction Association, CCA1 Stipulated Price Subcontract 2008, online: <http://www.cca-acc.com/documents/cca-documents/>.

9 See: CCDC2 at GC3.8. See also: CCA1 at Article 1B 1.1.

10 For recommended supplementary conditions to be added to GC 10.1.1 and 10.1.2, see: Canadian Construction Documents Committee, CCDC20 Guide to the use of CCDC2, online: <http://www.ccdc.org/ documents/set/guide-documents/>. CCDC20 states that a procedure should be established and included in the bid documents where a project qualifies for sales tax or customs duty refunds or exemptions. CCDC20 also states that the owner and consultant should clarify how any announced tax changes that do not take effect until after the bid closes will be dealt with.

11 The CBSA lists all ongoing complaints online at <http://www.cbsa-asfc.gc.ca/sima-lmsi/menu-eng. html>.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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