Strategies to Address the Impact of Tariffs in Construction in Canada: An Article and a Webinar
The Canadian construction industry is bearing the weight of both tariffs applied and threatened by the United States and Canadian retaliatory tariffs applied by both federal and provincial governments. In the context of an ongoing trade war, circumstances are at once complicated and ever-changing. In this article, we will discuss who is likely to bear the brunt of the additional costs and principles of contract interpretation to tariff-related provisions of common standard form contracts, before delving into practical strategies construction stakeholders can use to manage tariff-associated risks. We will also discuss these strategies in a one-hour free webinar scheduled for April 1, 2025, from 8:30-9:30 am. For a list of our upcoming webinars, and to register, please visit click on our webinar page.
As a starting point, owners generally want their chosen design, and they want it built on time and to budget. To address the impact of tariffs, parties can (and perhaps should) consider reallocating their priorities between design/quality, cost and schedule. Parties may also, at times, be better off foregoing the strict enforcement of their contractual rights in favour of working together to address problems that may arise. This is particularly the case when strict enforcement might trigger defaults, delays, claims or potential insolvencies – any of which can drive the parties toward litigation. Parties will, nevertheless, want to understand their contractual rights, options and obligations before deciding on tariff-related strategies.
Contract Clauses
We firstly note that contractual interpretation follows several general principles. The starting point is a straightforward reading of the contract’s words, using their natural and ordinary meaning. The contract should be interpreted as a whole [1], avoiding isolating individual provisions and considering the effect of the entire agreement.[2] The interpretation should reflect sound commercial principles and good business sense. While negotiations are not usually taken into account, surrounding circumstances known to the parties at the time of contract formation might be considered – but would not override the words of the agreement. In reconciling inconsistencies, specific terms supersede general terms. Courts will imply a term into a contract (i) only if it is so obvious that “it goes without saying” or it is necessary to give business efficacy to the contract or (iii) if the term is implied by common law or statute. If ambiguity remains after applying the above principles, the interpretation that benefits the party who did not draft the ambiguous clause is favoured. There are exceptions to the general principles of interpretation, so if a straightforward reading of the contract does not provide certainty about who bears the risk of an increase in costs due to tariffs, then care should be taken to read provisions in the context of the overall contract, the surrounding circumstances and their commercial context, as called for by the Supreme Court, and parties are encouraged to seek legal advice.
Where it is difficult to confidently say how a court would interpret the existing contractual provisions vis-à-vis the risk and impact of tariffs, parties should be wary about taking hard-line positions. Few assumptions should be made about how non-standard terms should be interpreted in any circumstance. This might be good news for some, as uncertainty over whether contractual relief is available might allow parties to negotiate common-sense solutions.
Many Canadian standard form prime contracts appear to expressly allocate the risk of cost increases due to tariffs and generally it is the owner who bears the risk of the increased cost. Under the CCDC2 and CCDC 14, for example, GC 10.1.2 provides that “Any 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”. Similar provisions are contained in the CCDC17 trade and the contract CCA-1 subcontract, while under the CCDC3 and CCDC5B contracts the contractor is paid in part for the cost of the work, which includes “customs, taxes and duties” incurred. The OPSS General Conditions of Contract for Roads and Public Works (November 2019), at GC 8.02.08, takes a slightly different approach: it provides for a change in the contract price (either up or down) where there is a change in Canadian federal or provincial taxes which “could not have been anticipated at the time of Tender”. Although these various provisions don’t mention “tariffs”, tariffs are generally understood to be a form of “tax” inextricably tied to “duties”. Contractors should accordingly be entitled to rely on them to claim price increases equal to what they have paid in additional tariffs. While the owner bears the risk under many Canadian standard-form prime contracts, Canadian contractors who enter into bespoke prime contracts, or participate in P3 projects, or projects on foreign soil may find the risk allocation under their contracts less favourable.
Subcontractors and suppliers tend to have a wider variety of subcontract forms ranging from single page purchase orders to the CCA1 standard subcontract, to a broad incorporation of the provisions of the prime contract. While the CCA1 documents follow the CCDC documents in assigning risk for changes in taxes and duties upward to the contractor, other subcontacts and supply contracts vary widely and may not expressly allocate the risk to any party. References to “exclusive of applicable taxes” are usually intended to refer only to value-added taxes like HST, for example.
Even where additional compensation is available under the contract, anyone seeking that compensation will still have to show how, and to what extent, additional tariff costs were incurred. This can be difficult in many circumstances, for example where the tariff impact is hidden in the cost of products or materials purchased from suppliers who themselves paid the tariffs at first instance. Or, where a product crosses the border multiple times during its manufacturing process, thereby incurring multiple applications of tariffs before reaching its final form for use on an improvement. Players in the construction pyramid should work with their subcontractors and suppliers (and their manufacturers) to develop a practice of separately identifying what tariffs have been applied and the cumulative tariff amount for each product on invoices. Companies would also be wise to visit the Canada Revenue Agency website to confirm and record the dates on which tariffs are applied (or disapplied) over the coming months.
Additionally, it is anticipated that tariffs will cause overall inflation. Thus, while it might appear clear that increased costs are attributable to tariffs, it may be impossible to show precisely how or to what extent, this is so. Accordingly, parties should consider whether they have in existing contracts, or should have in new contracts, price escalation/adjustment clauses which are tied to more identifiable criteria, such as the consumer-price index, a posted inflation rate, or the cost of one or more specific products or materials. In addition, contracts might be drafted to include products and materials subject to tariffs as allowance items, so that the owner (or payer above in the ladder) will pay the actual cost regardless of fluctuation. Allowing for the adjustment in both directions, as is done in the OPSS (referenced above) might be preferred. Parties using that approach will need to be aware of exactly what tariffs are imposed on the date the contract is formed, and that the contract is priced to reflect the status on that date.
Another type of contract clause – so-called “change in law” provisions – might also provide relief to contractors or subcontractors with respect to project costs or time. Although these clauses are generally inserted to provide relief where codes or standards for the work are changed after the contract price is agreed to, they might nonetheless apply to changes in the law vis-à-vis tariffs (depending on how they are worded). Prudent parties may want to expressly revise future contracts to expressly include that tariffs qualify as a change in the law.
Other clauses might provide relief in other ways. For example, the application of “force majeure” clauses should be considered. These usually provide schedule relief where specified circumstances beyond the control of one of the parties arise (such as fires, strikes, insurrection, etc). Often, they expressly include for circumstances beyond the control of one or both of the parties. They also often expressly exclude circumstances caused by the hired party or circumstances that result solely in an increased cost of the work. However, there is no “common law” concept of force majeure. Other than in Quebec (where the Civil Code applies), what is and is not a force majeure event, and whether relief is available to either party when such an event occurs, will depend solely on the wording of the clause in question (interpreted in the context of the entire contract and the surrounding circumstances, etc., as above). These clauses should be reviewed carefully by parties seeking relief, to see if they can be relied on in the particular circumstances of the project in question. We have come across force majeure clauses which appear to give the contractor additional compensation upon a force majeure event occurring. In other circumstances, the relief might be limited to a schedule extension – which might nonetheless provide a partial solution to a tariff problem. In this regard, schedule relief might allow parties to wait out the ‘trade war’, in the expectation (or hope) that sanity prevails, and the tariffs are rolled back. Also, schedule relief might allow parties to source alternative suppliers which are not subject to tariffs.
Clauses permitting changes and substitutions may also assist the parties. Owners can typically require changes while contractors and subcontractors usually have a right to propose alternative materials and products.[3] In some cases, the owner is compelled to consent to a substitution if the proposed alternate is ‘as good or better’ than what is specified. Where proposed alternatives are accepted by the owner, this should typically be recorded as a change. Again, how changes and substitutions are dealt with will depend upon what the contract or subcontract says. We note that processing changes or alternates/substitutions will likely have an impact on schedule, such that clauses dealing with schedules and delay (including, potentially, force majeure clauses) will have to be considered.
Owners faced with the prospect of significantly increased costs due to tariffs might also consider whether they are better off canceling or postponing the project. In this regard, termination clauses might be looked to. An existing ‘termination for convenience’ clause might be particularly useful to owners in such a circumstance. Care should be taken to read these, to determine what payment obligations the owner will attract if it exercises its option under the clause. Often, the owner will have to pay the contractor for the value of the work up until the date of the termination. It is also common for the owner to have to pay for any lost deposit and (not insignificantly) reimburse any compensation which the contractor has to pay to subcontractors and suppliers. Accordingly, the risk of exercising such a clause will vary from circumstance to circumstance and contract-to-contract. Parties entering into new contracts may wish to ensure that there is an option to terminate for convenience and negotiate appropriate compensation packages in such circumstances.
Parties who wish to rely on a contractual provision to claim relief should ensure that they meet any notice provisions and requirements set out in the contract. These vary significantly from contract to contract and are generally enforced by the courts (subject to a party establishing ‘waiver’, which can be difficult to do). Where a party to an existing contract believes it might be impacted by tariffs, they should consider these clauses immediately, as in many cases they will be required to give notice long before the impacts are actually realized.
In relation to future contracts and subcontracts, parties will want to take care in drafting, negotiating and reviewing the contract documents they will agree to. Parties drafting contracts will want to consider their project/contract models and explore all of the aforementioned types of clauses to allocate the risk of tariffs. Those being asked to sign the other side’s form of contract will need to understand how the risks are being allocated and consider the price of the contract in that context.
Relevant Legal Principles
Non-contractual legal principles like “frustration” and “mitigation” may also play a role in determining who will bear the additional costs associated with newly implemented tariffs.
Unlike force majeure, frustration is a legal principle that does not depend on a contractual term. It will relieve a party of its obligation to perform the contract if its ability to do so has been “frustrated” due to circumstances beyond its control. The remedy comes from common law (legal cases setting precedent) and from legislation. Generally speaking, frustration will not be available where the performance of the contract is merely more difficult or more expensive than what was originally bargained for. As the 2001 Supreme Court of Canada confirmed in Naylor Group Inc. v. Ellis-Don Construction Ltd., 2001 SCC 58, “[f]rustration occurs when a situation has arisen for which the parties made no provision in the contract and performance of the contract becomes ‘a thing radically different from that which was undertaken by the contract…’. It might be difficult to establish that the obligation to supply materials or products now subject to tariffs is “radically different” than what was bargained for, however whether or not the test is met will vary in the circumstances. In addition, the doctrine should be kept in mind as tariff-related circumstances evolve. We saw, for example, an increase in frustration claims generated by supply-chain issues arising during the Covid-19 pandemic. In this regard, a decision from the Ontario Court of Appeal, Croke v. VuPoint System Ltd. 2024 ONCA 354, allowed an employer to escape a “frustrated” employment contract, when the employer’s sole customer prohibited unvaccinated workers from supplying services. In doing so, the Court of Appeal applied the above passage from the Supreme Court of Canada in Naylor’. As regards the relief available for frustration, Ontario has the Frustrated Contracts Act, which provides a framework for resolving the rights and obligations of the parties to frustrated contracts. Other provinces have similar legislation.
A second, and perhaps more significant, legal principle is mitigation: parties claiming compensation will be expected to have mitigated their losses. Parties will more particularly be expected to assess whether, for example, there will be less of an overall cost impact by extending the schedule to await for tariff relief, or seek substitutions of alternative products and materials, rather than strictly insisting on the installation of the products on the original contract schedule. From this perspective also (and as above) it may be better in the long run for parties to work together and “share the risk”, so to speak, to address tariff issues where defaults, claims, terminations, insolvencies and/or litigation might be the logical alternative outcome.
Non-Legal Tariff Risk Management
There are, finally, non-legal strategies that construction participants can explore to better manage the risk of tariffs. An obvious one includes obtaining or giving quotes for material and product supply that are good for certain periods of time (allowing purchasers to ‘lock in’ prices and vendors to limit their exposure to future tariffs). Another involves the early procurement and storage of product and materials into inventory, so as to avoid future tariffs. As touched on briefly above, a more focused strategy can involve asking suppliers to break down their invoices, so that the tariffs portion is identified, making it easier to claim relief for the increased costs at a later date. Also, American suppliers might be asked to ‘split’ their invoices to separate the services portion of their supply. In this regard, for example, if a large refrigeration unit is coming from a US supplier, that supplier may have put a lot of engineering work into the production of the unit. This will be especially true where the unit is to be custom-fabricated. If the supplier can be encouraged to invoice for the engineering services separately (given that services do not presently appear to be subject to tariffs), the overall cost of the tariff-subjected-supply might be reduced. Finally, participants in construction will want to be on the lookout for relief programs which might be available through the federal or provincial government. Although it appears that in the short-run the relief might be focused on employees, some kind of relief for businesses as a whole is likely to follow.
Bonds and Insurance
To round out our discussion we will turn our focus to insurance and surety-related issues. From discussions with those in the industry, we believe parties can expect rates to increase across the board for construction related insurance and surety products. For example, since the cost of materials and products will inevitably rise, rates for builder’s risk policies may increase given the increased cost of replacement work. This, and other changes, represent an effort by insurance companies to make up for foreseeable losses, given the expectation of an uptick in claims impacting their policies, and performance and payment bond positions. Similarly, we believe owners, contractors and subcontractors will be exposed to heightened requirements related to their financial health, in relation to lines of credit, lending rates, and bonding facilities, etc..
Overall, the construction industry in Canada will certainly suffer impacts from tariffs for the immediate, and undeterminable, future. We believe that common sense and cooperative solutions will prove key to mitigating the impacts of tariffs on Canadian construction projects in the short to medium-term. In addition, the importance of paying extra attention to how current agreements are administered and on how future agreements are structured and negotiated cannot be overstated.
Rob Kennaley, Paige Crewson and Joe O’Hearn
Kennaley Construction Law
[1] Sattva Capital Corp. Creston Moly Corp., 2014 SCC 53, at para. 47.
[2] Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4 at para. 64.
[3] An exception will often be under design-build contracts where the contractor is entitled to install a design of its choosing, so long as it meets the owner’s ‘Statement of Requirements’
