Legal: Could tariffs impact your business?

By Julie Weller

Since March of 2018, companies doing business in the United States have been dealing with a shifting tariff environment different from what anyone has seen in several generations.  With talk of changed tariffs in the news every week or two — all while a tri-party agreement between the United States, Canada and Mexico is in the works; bilateral trade discussions are taking place between the United States and Canada; Brexit negotiations between the United Kingdom and the European Union are frontpage news; and the new African Continental Free Trade Agreement is going into effect — now is a good time to review how tariffs affect your business and are addressed in your contracts. As examples, consider the following:

• Understand your pricing. How is your pricing impacted by goods or software you acquire from other sources? The impact of tariffs has a substantial flow-down potential — your suppliers, regardless of location, may be impacted in their contracts with sub-suppliers, and so on, located in tariff-impacted areas. If you anticipate that your work would be impacted by an increase in tariffs, how will those increases be handled? Consider your market — how do your prices currently compare to your competitors and will your competitors be equally impacted by tariffs?

• Determine when tariffs are your responsibility. It is typical for a contract to contain provisions regarding the responsibility for taxes and whether those costs may be passed on to the customer. However, there is no standard industry provision on whether tariffs always are considered taxes for this purpose. (Of course, if your business is responsible for taxes under the contract and you cannot pass them on to the customer, you would make the argument that tariffs are not taxes.) It may be worth speaking specifically to the responsibility for tariffs when negotiating your next contract.

• Know what necessitates a change order. Review your contracts to determine what changes in circumstances or laws may permit you to obtain a change order for the work. If a contract allows it, a change in tariffs that substantially impacts the contract price may be worthy of submittal of a change-order request to the customer. This should also be kept in mind for any contracts you have in place with subcontractors or suppliers, as you could be on the receiving end of such a change order. At the least, you want your contract to have tariff terms that are aligned with one another. For example, if your pricing with your customer is fixed, you would not want to be responsible for substantially increased tariff expenses with respect to your suppliers for the relevant project.