Navigating Disputes on Megaprojects Amid Trump Tariffs - Part 2

Disputes on Megaprojects Arising from the Impacts of Trump Tariffs

President-elect Donald Trump plans to impose widespread tariffs when he takes office in late January 2025. He has stated that one of his first executive orders will be to impose a 25% tariff on all products imported from Canada or Mexico. Products imported from China, such as metals, coatings, plumbing components and HVAC parts, could face an additional 10% tax above current tariffs. The imposition of such tariffs will have significant implications for megaprojects, including large infrastructure developments like highways, bridges, tunnels, airports, and railways, as well as large-scale energy projects like power plants, oil and gas facilities, and renewable energy installations.

Tariffs on construction materials may increase costs, create procurement challenges, and cause delays, creating a fertile ground for disputes. When tariffs are imposed, the cost of importing essential materials such as steel, aluminum, and other construction inputs can skyrocket. Even domestically produced materials could become more expensive due to reduced competition with imports.

These increases in costs can strain project budgets and lead to financial disputes among contractors, suppliers, and project owners. Additionally, tariffs can cause delays because of material shortages, extended procurement times, and efforts to find different suppliers who do not face tariffs to save costs. This can further complicate project timelines and potentially lead to claims for extensions of time or additional compensation.

Because the imposition of tariffs will increase the potential for disputes among project stakeholders, it is important for project stakeholders to implement proactive strategies to manage cost increases and delays in megaprojects, as discussed in Part 1 of this series. But if these efforts fail, it is crucial for those involved in megaprojects to understand the types of disputes and claims that may arise to navigate the complexities and mitigate risks effectively.

Types of Disputes Arising from Tariff Impacts

Several types of disputes could arise from the impact of tariffs on megaprojects, each with unique challenges.

Disputes Over Who Bears Increased Materials Costs

One of the most common disputes project stakeholders should anticipate involves the allocation of increased costs due to tariffs. Parties may disagree on who should bear the financial burden of higher material prices. Contractual clauses, such as escalation clauses or price adjustment provisions, may address cost allocation, but their interpretation can be contentious. Clear and precise contract drafting that addresses the impact of increased costs may help avoid such disputes, but disagreements about the application of these clauses can lead to litigation or arbitration in accordance with the contract’s dispute resolution provisions.

Disputes Over Who Bears Increased Costs Resulting from Delays

Determining who should bear any increased costs when tariffs cause delays to project completion is another possible area of contention. Delays that are beyond the control of the contractor and could not have been reasonably anticipated or mitigated may be considered excusable and entitle the contractor to an extension of time to complete the project (and potentially additional compensation) without being subject to liquidated damages, penalties, liability for prolongation costs, and other consequences of delay. Common examples of excusable delays can (but do not necessarily) include force majeure events, government actions, third-party caused delays, or unforeseen site conditions. Whether delays caused by tariff impacts can be considered excusable will be dependent on the specific contract language, facts surrounding any delay, and applicable law. Disagreements about who should bear the time and financial consequences of delay often lead to litigation or arbitration.

Consequences of Changes in Scope

Tariffs can impact the scope of a project, leading to potential contract changes and disputes over additional costs and time. For example, if tariffs make certain materials prohibitively expensive, project stakeholders may need to find alternative materials or redesign aspects of the project. These changes can result in claims for additional compensation and time extensions to deal with delays caused by tariffs, requiring careful negotiation and contract management. Alternatively, stakeholders may decide to reduce the scope of the project to stay within budget. This can involve eliminating certain features or phases of the project, which can lead to disputes over the allocation of costs and responsibilities.

Contracts typically include provisions that set notice and substantiation requirements or time limitations for asserting claims related to scope changes. These provisions are crucial for ensuring that disputes are addressed promptly and do not disrupt the project. Failing to meet such requirements can impact the viability of a claim for compensation. Project managers should be aware of these limitations and ensure that claims for changes in scope are being made in accordance with all contractual requirements. However, disputes over proper and timely notice, whether there was a qualifying scope change, or entitlement to additional performance time or compensation can be inevitable.

Applicability of Force Majeure or Impossibility Doctrines

Parties may invoke legal doctrines such as force majeure and impossibility to excuse their contractual performance when serious impacts arising from tariffs occur. However, the applicability of these doctrines in the context of tariffs can be complex.

Force majeure is a doctrine that may excuse a party from performing its obligations under the contract when certain unforeseen events beyond the party’s control occur, making performance impossible. These events are typically listed in the contract and may include natural disasters, war, terrorism, pandemics, and government actions.

Similarly, the legal principle of impossibility (or impracticability) may apply if tariffs make performance of the contract impossible or impracticable. The doctrine of impossibility is a common law principle that excuses a party from performing its contractual obligations when an unforeseen event renders performance objectively impossible or impracticable.

Whether tariffs qualify as an event relieving a party from its contractual obligations based on principles of force majeure or impossibility will depend on the specific contract language, factual circumstances, and governing law. Given the significant impact that invoking these doctrines can have on a project, disputes over their applicability often arise.

Dispute Resolution Mechanisms

The resolution of disputes arising from tariff impacts can take various forms, depending on the contract’s dispute resolution provisions and governing law. A contract’s dispute resolution clause will typically lay out which method(s) must be used, but parties who have yet to draft or execute their contracts should give serious consideration to which method would best serve their interests should a dispute arise in the future. Dispute resolution can involve one or a combination of the following mechanisms:

Litigation

Litigation is a common dispute resolution mechanism, involving the formal process of taking a dispute to court. While litigation (including any appeals) can provide a definitive resolution, it can be time-consuming, costly, and is likely to be public facing. The public, adversarial nature of litigation may also strain relationships between parties and risk damaging reputations, potentially making litigation less desirable than other dispute resolution mechanisms for ongoing projects.

Arbitration

Arbitration is an alternative to litigation that involves a neutral third party, known as an arbitrator, who is jointly selected by the parties to render a binding decision. Arbitration can be faster and more flexible than litigation, and it allows parties to select arbitrators with specific expertise in construction disputes. Depending on the specific contract arbitration clause and rules of the arbitration forum, arbitration is also likely to be confidential. For cross-border disputes, arbitration also allows a party to avoid the real or perceived bias it may face in a foreign court. However, arbitration can also be expensive, and the binding nature of the decision means there is limited recourse for appeal.

Dispute Resolution and Adjudication Boards

Parties may establish a Dispute Resolution Board (DRB), Dispute Adjudication Board (DAB), or similar panel of impartial experts at the beginning of a construction project to help resolve disputes that may arise during the project. These boards typically consist of three members who are knowledgeable in construction practices and experienced in dispute resolution. The members are usually selected jointly by the contracting parties, and their role is to provide recommendations or decisions on disputes based on the contract terms and the facts presented. Utilizing this mechanism can encourage parties to resolve issues amicably before they escalate into formal disputes. These boards can provide a quicker resolution to disputes compared to litigation or arbitration, and they can help keep the project on schedule and reduce delays. Resolving disputes through a board can also be less expensive than going through lengthy legal processes. However, depending on the parties’ contract, board decisions may only be advisory and the disputes they address may be litigated or arbitrated following project completion. It is also possible that parties may consider utilization of a board to be too expensive or biased or believe that decisions are unfair or incorrect, particularly if they are binding.

Mediation

Mediation is a less formal alternative dispute resolution method where a neutral mediator helps parties negotiate a mutually acceptable solution. Mediation can preserve relationships and provide a quicker, more cost-effective resolution. It allows parties to maintain control over the outcome, but it requires cooperation and willingness to compromise.

The Importance of Understanding Contractual Rights and Obligations

It is crucial for parties involved in megaprojects to understand and proactively address tariff impacts to minimize disruptions and manage risks. Navigating the complex issues arising from the impact of tariffs on construction materials and project completion requires a thorough understanding of contractual provisions and proactive dispute resolution strategies. Clear and precise contract drafting, including provisions that address potential tariff impacts, can help mitigate risks and avoid disputes. During project performance, it is vital to proactively and consistently ensure compliance with contract provisions, including provisions to secure relief based on increased costs, project delays, and changes in the scope of work—especially provisions relating to timely notice and substantiation—to preserve rights, avoid disputes, and, if necessary, achieve success in formal dispute proceedings.