CAN I RECOVER INCREASED COSTS DUE TO THE 30% TARIFF ON SOLAR PANELS?
By Laurence P. Lubka
Lubka & White LLP
Your 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% tariff on foreign made solar panels. Suddenly a profitable project has become a loss leader.
The 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 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 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 impracticable or impossible. The doctrine of impossibility usually requires true impossibility. A thirty percent increase in one cost does not usually make a contract impracticable. In fact, a 100% tariff might not make the contract impracticable. The court would look at your capacity to complete the project notwithstanding the tariff.
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. The 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. The 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. The 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. The 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 contemplated 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.
There are a lot of 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 bear the burden of those increased costs.
Nonetheless there are a couple of options. There may be a big reduction in orders to your Chinese supplier. They 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%, to 25% in year two, 20% in year three and 15% 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.