The impact of tariffs on UK construction contracts

Taxes and duties regimes in standard form contracts

Standard form contracts

In the UK, the most commonly used standard form contracts in the construction industry are the JCT, NEC, and FIDIC suites of contracts. The standard forms are usually heavily amended by the parties to meet the specific needs of the project and to shift the allocation of risk between the parties.

For the purposes of this note, we will focus on the standard form JCT and NEC contracts.

Risk allocation for taxes and duties

• Before the contract is entered into:

Before a contract is signed, the risk of taxes and duties lies with the party responsible for procuring materials and services. This is typically the contractor, who must account for these costs in their tender.

• After the contract is entered into:

Once the contract is in place, the allocation of risk for changes in taxes and duties will depend on the specific terms of the contract, and there is no “one size fits all” approach.

Under the JCT and NEC standard forms, at the time the contract is entered into, the risk for taxes and duties sits with the Contractor. However, both the JCT and NEC suites of contracts include provisions which would encompass changes in taxes and duties and may provide a valuable entitlement where they are included in the contract.

 

Relief for changes in taxes and duties

Standard form contracts

• Change in law:

Many standard form contracts include clauses that provide relief if there is a change in law after the contract is signed. In the JCT Design and Build Contract, for example, change in law is addressed at clause 2.15.2, which provides as follows:

“If after the Base Date there is a change in the Statutory Requirements which necessitates an alteration or modification to the Works, such alteration or modification shall be treated as a Change.”

Note, that a change in law is treated as a Change only if it directly effects the Works.

The JCT contracts also include optional fluctuation provisions that allow for adjustments in certain circumstances. Option A in the JCT fluctuation provisions allows for adjustments to the contract sum in respect of changes to taxes, levies, and contributions that the contractor is required to pay. This means if there is a change in law that affects these costs, the contractor can claim additional sums.

The NEC suite of contracts include provision for changes in law at Option X2. This option clause allows for changes in law to be treated as a compensation event, meaning that if a change in law affects the contract, the contractor may be entitled to additional time and/or money:

“A change in the law of the country in which the Site is located is a compensation event if it occurs after the Contract Date. The Project Manager may notify the Contractor of a compensation event for a change in the law and instruct him to submit quotations. If the effect of a compensation event which is a change in the law is to reduce the total Defined Cost, the Prices are reduced.”

• Force majeure:

Force majeure clauses are often included in construction contracts however these won’t usually be a source of relief if new taxes or duties are imposed. These clauses typically cover unforeseen events like natural disasters. Generally, the event must prevent a party from performing their contractual obligations, not just make it more expensive. Courts typically view cost increases, including those due to tariffs, as foreseeable risks and are unlikely to accept force majeure claims based solely on increased costs.

Laws – statutes and case law

We are not aware of statutes or case law in the UK that would automatically provide relief in the event that tax duties change after a contract is entered into. The usual position under English law is that parties are free to negotiate the terms of their contracts and the courts won’t step in to make the outcome fairer or more commercial for one party or another, even if it means that the bargain is a bad one for one of the parties.

 

Recent changes in risk allocation

In response to recent geopolitical events and economic volatility, including the imposition of new tariffs, there have been notable changes in risk allocation in UK construction contracts:

• Increased use of price adjustment clauses: Contractors and employers are incorporating price adjustment clauses to account for fluctuations in material costs due to tariffs.
• Collaborative approaches: Some employers and contractors are adopting more collaborative approaches, similar to those used during the COVID-19 pandemic, to share the risks associated with new tariffs and duties. 
• Enhanced risk management: There is a greater emphasis on risk management strategies, including more detailed risk assessments and contingency planning to mitigate the impact of tariffs.

 

Conclusion

The imposition of tariffs has introduced new challenges for the UK construction sector. By understanding the allocation of risks in standard form contracts and leveraging available relief mechanisms, stakeholders can better navigate these complexities. Recent trends indicate a shift towards more flexible and collaborative approaches to risk management, ensuring that projects can proceed smoothly despite economic uncertainties.