LEGAL NEWS
Navigating the Added Cost Factor of New Tariff on Solar Panels
By Laurence P. Lubka, Lubka & White LLP Y
our company submitted a proposal several months ago to build a solar array project and
there was great excitement when the owner accepted your offer. Five months ago, you and the owner signed a firm, fixed price contract for the solar array. Fifty percent of the material costs are for the cost of the Chinese-made solar panels. On January 22, 2018 the President announced a 30 percent tariff on foreign-made solar panels. Suddenly a profitable project became a loss leader. Te question is, are you entitled to
a price adjustment to cover the tariff? Although there are several
arguments that can be made, the short answer is probably not. Certainly, if you have a clause that
allows for increases in U.S. tariffs, that would do the trick. Such a clause is a true rarity. Even a clause that allows for recovery of increased taxes would likely not be applicable to a tariff as terminology is all important to most courts. Nonetheless, if you had a clause providing for recovery of increased taxes, at least you have a shot.
What About an Escalation Clause?
What if you have that rarity of a
contract with an escalation clause. Unfortunately, a tariff is not
escalation to the price of an item. It is not an increase to the price of the item by the supplier. A tariff is an added cost imposed by a government entity, not an increase in price by the supplier. If you have such a clause, check the definition of the word “escalation” in the contract. It just may be phrased broadly enough. You then argue, the specific panel
was required from a specific source, you may be able to claim the impact
20 March/April 2018
of the tariff. It may be that if you can purchase a solar panel with equivalent specifications from a US manufacturer, you can save most of that tariff. You should argue to the owner that they need to mitigate the price and allow you to switch suppliers. However, you may have a cancellation fee with the manufacturer that more than offsets any savings from going to a U.S. supplier. Further, the Chinese supplier might have a breach of contract action against you, if the purchase order does not allow you to cancel the purchase. If you were not directed to use a
U.S. source, an owner would likely tell you that you elected to use a Chinese supplier and with that you took on the risk of tariffs being assessed. Some might think to argue that
the contract has become impracti- cable or impossible. Te doctrine of impossibility usually requires true impossibility. A 30 percent increase in one cost does not usually make a contract impracticable. In fact, a 100 percent tariff might not make the contract impracticable. Te court would look at your capacity to complete the project notwithstanding the tariff.
Can you Argue Force Majeure? Well then, how about arguing force
majeure? Force majeure clauses are read narrowly. If “tariff” is not on the list of force majeure events, then you likely have no argument that force majeure applies. If “governmental action” is listed, you can argue force majeure. Te biggest challenge is that force majeure clauses typically give you more time to perform, not an increase in the contract amount. It is unlikely the force majeure clause covers tariffs and if it does, it won’t get you increased dollars. One of the issues with any force
majeure argument is that it will be difficult to prove that you could not have anticipated the tariff issue.
Te President has been speaking of applying tariffs on solar panels since he was running for office. You knew or should have known of the risk before you signed the contract. Te owner will likely argue that the contractor should have considered that risk of tariffs in the contract terms or contract pricing before signing the contract. Te would argue that tariffs were a risk you could have reasonably anticipated. In fact, most contracts say the
contractor will pay all taxes and fees. One might argue that tariffs are neither taxes nor are they fees, so perhaps you can argue the issue was not contem- plated in the contract. Unfortunately, that probably leaves you with the fact that the firm, fixed price contract shifts the risk to the contractor and away from the owner.
Costs Likely on the Contractor Tere are many arguments that
can be made to obtain compensation for the increased costs for solar panels caused by the new tariffs, but at the end of the day the contractor will likely pay those increased costs. Nonetheless there are a couple of
options. Tere may be a big reduction in orders to your Chinese supplier. Tey may be willing to renegotiate in order to maintain a flow of business if the alternative is to lose the order. Also, the tariff amount drops every
year (from 30 percent in year one to 25 percent in year two, 20 percent in year three, and 15 percent in year four). Perhaps it might be possible to delay the order to obtain a lower tariff. Finally, the first 2.5 gigawatts of
solar panels and modules imported each year may be free of any tariff. If your order falls within that exemption, problem solved. Good luck.
Laurence P. Lubka is partner with Lubka & White LLP, Monrovia, CA.
California Constructor
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