Solar panel import duties: contract minefield

Solar panel import duties: contract minefield

April 27, 2022 | By Sameer Ghaznavi in Chicago, Luke Edney in Dallas, Jesse Hollingsworth in Dallas, Jeremy Tripp in Houston and Dylan Gera in Los Angeles

The risk that anti-circumvention duties will have to be paid on Chinese-branded solar panels entering the United States from Vietnam, Malaysia, Thailand and Cambodia is creating a minefield for solar companies negotiating contracts.

The US Department of Commerce has until August 29 to make a preliminary decision on the duties.  A final decision may not come until as late as April 3, 2023.

Any duties could apply retroactively to panels imported as far back as November 4, 2021.  Another possible retroactive date is February 8, which is the date that Auxin Solar, Inc. petitioned Commerce to open an investigation.

The US has been collecting countervailing and anti-dumping duties on solar panels imported directly from China since late 2012 to offset the effects of Chinese export subsidies and of Chinese manufacturers dumping product on the US market at lower prices than the panels are sold for in China.

US duties vary depending on the panel supplier. The China-wide rates are 238.95% in anti-dumping duties and 17.10% in countervailing duties. Some companies qualify for lower rates after presenting evidence to Commerce.

Contract Structure

Some solar companies are abandoning full engineering, procurement and construction contracts in favor of a split-scope structure, with the owner taking on the responsibility for procuring and timely delivering major equipment to the project site for installation by a contractor.  

Solar companies that are using this structure must then try to avoid any action related to the supply agreement that could be seen as a breach of the installation and construction contract.  For example, a failure by the owner to deliver the equipment on time could result in potential legal and financial repercussions, including the contractor’s right to terminate the construction contract for damages or receive schedule and cost relief.  Significant liquidated damages might have to be paid to a utility or corporate customer for delays starting electricity deliveries under a power purchase agreement or build-transfer agreement. 

Early notice and mitigation will be key to re-sequence work, store equipment and demobilize unnecessary workers to ensure that the impact of any delay is minimized. A significant number of solar companies have been able to re-negotiate the schedule terms under a PPA or BTA.  Not all have.  As many as 30% of solar PPAs have been cancelled due to escalating costs, according to some estimates.  

Some developers may exercise their suspension rights, but these rights can give the counterparty a right to terminate the contract if the suspension is extended for an extended period of time.  Anyone looking to exercise a suspension right should take into account the potential delays in the anti-circumvention proceeding that could extend deliveries beyond the permissible suspension period and permit the construction contractor to terminate the agreement. It may be wise to rely upon a change-in-law provision (especially if it allows the owner to place all or part of the risk on the contractor). Developers should also consider any relief available to them under the terms of the construction contract to excuse their performance under the agreement and the remedies available under the equipment supply agreement either to require specific performance (timely delivery) or to extract liquidated damages from the supplier.

Force Majeure and Change in Law

The obvious mechanisms for relief for potential new tariffs lie within the force majeure and change-in-law provisions of the agreement.

Many agreements lump tariffs into the definition of “Taxes” and handle the apportionment of risk in the general tax provision.

However, the risk of tariffs is best handled with explicit language in the change-in-law section, where the risk for tariffs can be assigned to the contractor or split between the owner and contractor.  Some contractors are starting to seek relief under force majeure provisions, instead.

This serves as an important reminder that permutations of force majeure language are limitless, and so, too, are the ways new tariffs can be included in the concept. To avoid any interpretation issues, it is best to have a closed list of events constituting force majeure or -- at the very least – explicitly to  exclude change in laws (and change in tariffs), and specifically limit force majeure relief to the traditional market position where the claiming party only receives schedule relief.

Change-in-law (or change-in-tariff) provisions often expressly allocate the risk of new tariffs between the parties. When drafting these provisions, the golden rule of drafting applies: if there is a known risk, and the parties are aligned with who bears the risk, then it should be handled in a clear and concise manner.  By doing this, the parties can come to a commercial arrangement for splitting the cost exposure, instead of the traditional all-or-nothing approach that is common for force majeure and change-in-law provisions.  Some recent variations include splitting the cost 50/50 or having the developer take responsibility for the cost of new tariffs after a threshold amount is reached (with the contractor taking responsibility for costs up to the threshold).

Owners should also ensure that change-in-law or change-in-tariff provisions contemplate changes to tariffs across all jurisdictions -- not just the United States. Certain tariffs (or the withdrawal of tariffs) can result in a significant and unanticipated increase in the supplier’s production costs, which could be imposed on an unwary owner that has not carefully drafted around this concern. For example, the electricity tariffs provided by the provincial government of Yunnan, China are set to be withdrawn in September 2022, which will lead to a significant increase to the cost of manufacturing silicon wafers.

Incoterms

The use of Incoterms in supply and construction agreements can also create issues for consideration.

Incoterms are commercial terms that can be used as a standard set of definitions and rules to be applied in contracts for the sale of goods. Their primary purpose is to allocate responsibility for activities, costs and risks associated with the transportation and delivery of goods.

This responsibility extends from the physical acts of loading and unloading, to the point of transfer of risk of loss, and the obligation to pay insurance costs and import duties and taxes. It is this last point that can frequently cause conflicting terms in agreements. It is common for parties to use references to “DDP” or “DAP,” such as “the Equipment shall be delivered to the Delivery Point DDP/DAP,” often as an exercise in identifying where risk of loss transfers.

An issue arises when the agreement contains separate tax provisions, which typically allocate liability for costs, such as insurance, taxes and duties. Depending on how the Incoterms are used, there could be an argument that the Incoterms conflict with the tax provisions, such as provisions related to allocation of liability for insurance and import duties and taxes. Further conflict can arise where there is a change-of-law provision that grants relief for changes in taxes and duties, which might also conflict with how responsibility for such items are covered by Incoterms. As a result, care should be taken to review the various tax terms against the chosen Incoterms and consider any conflict that might arise.