In light of recent disputes, international construction firms are rethinking how they draft force majeure and price escalation provisions to better address tariff-induced cost increases. While traditional force majeure clauses often focus on physical impossibility or natural disasters, they should now explicitly include governmental actions such as the imposition or increase of tariffs.
Legal and Contractual Repercussions
For contractors and suppliers, the tariff resurgence has triggered a cascade of legal and commercial consequences. First, fixed-price contracts are now high-risk instruments. Without robust material escalation clauses, contractors face margin compression or even breach scenarios. Additionally, in existing contracts and for new projects alike, force majeure and hardship clauses are under renewed scrutiny. Parties are increasingly invoking these provisions to renegotiate terms or seek relief from performance obligations.
Of importance to consider are the dispute resolution mechanisms. These—especially arbitration clauses—are being tested as parties seek remedies for tariff-induced cost overruns and delays.
Strategic Responses for Resiliency
To mitigate exposure, those involved in the development and construction of projects in the U.S. are adopting several strategic measures to respond to the tariff turbulence that apparently is going to continue for some time to come.
First, companies are revisiting supply chain structures to prioritize tariff-exempt or domestic sourcing where feasible.
In addition, when possible, companies are embedding tariff risk into preconstruction due diligence, including scenario modeling and legal stress testing. Some are also using AI tools to try to model and mitigate risks.
Finally, when needed, parties are looking at renegotiating joint venture and subcontractor agreements to allocate tariff-related risks more equitably.
Tips For Drafting Force Majeure Clauses To Address Tariff Turbulence:
Considerations to include in contracts to assist in the management of these tariff-related risks include addressing tariffs through by using broad government action language, considering a tiered risk sharing mechanism, evaluating the change in law clauses, and substitution clauses. In addition, consideration should be given to supplementing the termination clause or adding in language to address termination due to tariff increases, to ensure that any impossibility argument can be bolstered.
- Define "governmental action" broadly to include tariffs, trade restrictions, and import/export controls.
- Include a materiality threshold, such as a percentage increase in cost, to trigger relief.
- Specify remedies, such as renegotiation, suspension, or termination rights.
- Coordinate with price escalation clauses to avoid overlap or ambiguity.
Sample clause language:
"If, after the Effective Date, any governmental action—including but not limited to the imposition of new tariffs or duties, or the increase of existing tariffs—results in a cumulative increase of more than [10%] in the cost of materials required for the Work, the Contractor shall be entitled to an equitable adjustment in the Contract Price. The first [10%] of such increase shall be borne by the Contractor, and any increase beyond that threshold shall be subject to cost-sharing or reimbursement by the Owner, as mutually agreed."
This approach balances risk by encouraging contractors to manage moderate fluctuations while providing relief for extraordinary cost surges. It also fosters transparency and collaboration between parties when navigating unpredictable trade environments. The tariff turbulence in U.S. trade is expected to continue and savvy parties in the construction industry will do well to plan ahead, consider the terms of their current contracts, and seek to ensure tariff turbulence risks are covered in negotiating new contracts.
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