Steel and aluminum tariffs: time to dust off the price adjustment clause? | Bracewell LLP

The continued and controversial imposition of tariffs has not only resulted in global economic and political fallout, but has also had negative effects on contractual relationships for suppliers, manufacturers, contractors and project owners far downstream from the government. Whether you’re the fabricator of products incorporating steel or aluminum that’s losing profits due to a fixed-price contract, or a building owner that’s being hit with cost change orders from your contractor , the impact of tariffs has been significant.

In the first two articles of our series, we focused on whether you can use a force majeure clause to remedy price gouging, and important considerations when deciding whether to invoke or fight against the invocation of a force majeure clause.1 Now that tariffs are a reality and the likely reluctance of courts to declare tariffs force majeure becomes more evident, we decided to look at how to protect your business now and in the future against tariffs.

One of the most effective tools to guard against drastic price fluctuations, whether due to tariffs or other economic forces, is to use price adjustment clauses, sometimes called escalation clauses. A price adjustment clause is a contractual provision that allows price increases or decreases under certain conditions. These clauses also have the advantage of allowing for longer-term contracts that do not have to be frequently renegotiated. Sophisticated price adjustment clauses between parties are usually enforced by the courts. However, dusting off that old price adjustment clause isn’t as simple as it sounds. The main challenge of inserting a price adjustment clause into an existing or new contract is to get your existing or potential contract partner to agree to its terms. There must be give and take, and it is important that the party with the most influence in the negotiations recognizes that in the future the hoof could be on the other foot.

The important consideration for negotiating a price adjustment clause is to ensure that the adjustment is conditional on a reliable and well-established price index, and that it is only triggered by significant changes in the market, that is to say., the price will remain fixed unless there is a large price fluctuation over a short period of time. Moreover, it is important to provide a floor and a ceiling that define the limits of adjustment to avoid unfair consequences during drastic long-term market events. In many cases, these limits may be contractually linked to early termination or force majeure clauses. Additionally, consulting experienced attorneys is always an important consideration when drafting and negotiating these clauses.

In the long term, negotiating a price adjustment clause that protects both parties from drastic price fluctuations is best practice because it provides a mutually beneficial and collaborative long-term relationship with your customer or supplier that withstands a meltdown or a short-term market peak. and minimizes the likelihood of a breach or default during difficult times.

1 https://bracewell.com/blog/steel-and-aluminium-tariffs-can-you-turn-your-force-majeure-clause

Eleanor C. William