Contract Strategies for Canadians Amid Potential U.S. Tariffs

With the recent imposition of tariffs by the Trump administration on various goods, businesses operating in Canada should carefully consider how these trade policies may impact their contractual relationship with clients in the United States. Whether drafting supply agreements, distribution contracts, or service agreements, addressing the potential risks associated with tariffs is crucial. Here are key considerations when drafting contracts that consider these economic shifts.

1. Price Adjustment Clauses

Tariffs can significantly impact the cost of goods and materials. Contracts should include price adjustment clauses to allow for renegotiation if tariffs increase costs beyond a certain threshold. A well-drafted price escalation clause should specify:

• The circumstances under which price adjustments apply (e.g., tariff increases above a set percentage).
• The method for calculating the adjustment.
• The process for notifying the other party and seeking renegotiation.

2. Force Majeure Provisions

Contracts typically include force majeure clauses to address unforeseen events. While tariffs are government-imposed, they may not automatically be considered force majeure events unless explicitly included. Consider:

• Defining tariff impositions or changes in trade policies as qualifying force majeure events.
• Outlining remedies such as suspension of obligations or termination rights.
• Specifying whether force majeure relief applies to pricing, delivery timelines, or contract performance.

3. Termination and Renegotiation Clauses

If tariffs make performance commercially unfeasible, parties should have the ability to renegotiate or terminate the agreement. Include provisions that:

• Allow parties to reopen price discussions when external economic conditions change.
• Define clear exit strategies if tariffs substantially impact profitability.
• Outline notice periods and any penalties for early termination due to economic hardship.

4. Governing Law and Dispute Resolution

Given the cross-border nature of tariffs, dispute resolution clauses should specify:

• Be clear about what jurisdiction and governing law will apply.
• Whether arbitration or mediation is preferred over litigation.
• The venue for resolving disputes, particularly if the counterparty is in the U.S.

5. Supply Chain Considerations and Indemnity

Canadian businesses that rely on U.S. imports or exports should assess supply chain risks. Contracts should:

• Clarify which party bears the financial burden of tariff-related increases.
• Include indemnity provisions where one party agrees to absorb tariff costs in certain scenarios.
• Specify whether alternative suppliers may be sourced if costs become prohibitive.

6. Currency and Payment Terms

Tariffs may influence currency fluctuations, which may affect contract pricing. To mitigate currency risk:

• Specify whether payments will be made in Canadian or U.S. dollars.
• Consider including currency adjustment clauses to address exchange rate volatility.
• Determine whether additional fees (such as duties) are included in the contract price or passed on to the buyer.

7. Import/Export Compliance and Regulatory Changes

Businesses engaging in cross-border trade should ensure their contracts:

• Require compliance with all applicable trade regulations.
• Include obligations for parties to keep each other informed of regulatory changes.
• Address potential costs related to additional compliance measures resulting from tariff changes.

Conclusion

U.S. imposed tariffs serve as a reminder that global trade policies can have a direct impact on local businesses here in Canada. When drafting contracts, businesses must proactively address tariff-related risks through price adjustment clauses, force majeure provisions, termination rights, and dispute resolution mechanisms. By taking these factors into account, Canadian businesses can better protect themselves from financial uncertainty and ensure smoother contractual relationships in a volatile trade environment.

For tailored legal advice on contract drafting, please contact Peter Gottschlich at peter.gottschlich@millsandmills.ca or any of our Business Law lawyers at Mills & Mills LLP.

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