By: Chad Eggerman and Craig Zawada, K.C.

It is well-known that Donald Trump is threatening to levy tariffs of up to 25% on goods entering the United States when he assumes the Presidency. Canada is on the list of potential targets. While it is still a question whether or how far this might extend (the United States-Mexico-Canada Agreement (USMCA)) is an obvious impediment), there are obvious dangers for Canadian businesses selling goods into the U.S.. To mitigate the legal risks, businesses must take proactive measures. A critical first step is reviewing your contracts.

1. Confirm if Your Contract Has a Taxes and Duties Clause

A Taxes and Duties clause or similarly titled provision in a contract assigns clear responsibility for payment of taxes, duties, customs, and tariffs. For example:

The Buyer shall pay all taxes, duties, customs, tariffs, and any other fees applicable in the Buyer’s jurisdiction to permit the importation of the Goods into the Buyer’s country.

The above clause clearly allocates responsibility for payment of tariffs. If your contract lacks this or a similar provision addressing payment of tariffs, you may face disputes over who bears the added costs of U.S. tariffs. Identifying such gaps now can help you address them proactively.

2. Confirm if Your Contract Uses Incoterms

Many international contracts use International Commercial Terms (Incoterms) to allocate responsibilities for costs and risks associated with international trade. Incoterms, such as EXW (Ex Works) and DDP (Delivered Duty Paid), specify which party pays for tariffs and when.

For example:

• EXW: The buyer is responsible for tariffs once the goods leave the seller’s facility;
• DDP: The seller is responsible for tariffs until the goods are delivered to the buyer’s location.

Review your Contract’s Incoterm if applicable and understand its implications on current and future tariffs which might be imposed on Canadian goods. Note that the applicable Incoterm may not explicitly reference tariffs, so you must review the specific Incoterm further to make that determination.

3. Review the Force Majeure Clause in Your Contract

Force majeure clauses allow contracts to be suspended or terminated if unforeseen events make performance impossible or impractical. Some clauses may define significant regulatory changes, such as new tariffs, as force majeure events. For instance:

Neither party shall be liable for failure to perform any obligation under this Contract due to events beyond its control, including acts of government.

While this is not standard in all contracts, such provisions may provide relief if tariffs drastically impact performance. Check whether your contract’s force majeure clause, if applicable, includes regulatory changes by governments and allows for suspension or termination.

4. Review the Material Adverse Change Clause in Your Contract

Some contracts, particularly those related to financing – but not exclusively – include a material adverse change clause that addresses a significant or “material” change to a borrower’s ability to repay a loan, such as the unforeseeable imposition of tariffs. These clauses might provide:

• Termination rights for one or either party;
• Obligations to renegotiate terms; or
• Payment of termination fees if the contract becomes uneconomical due to the tariffs.

Enforcing a material adverse change clause may affect the ability of a U.S. buyer to pay for Canadian goods. As a Canadian seller, you may not have visibility on financing which might be required by the U.S. buyer to purchase the goods from Canada, but early enquiries might assist to address this situation if it materializes.

5. Negotiate Payment of Tariffs if You Lack a Written Contract

If you do not have a written contract with your U.S. customer, you must negotiate responsibility for payment of the tariffs directly with them. Without clear terms, U.S. customers may refuse to absorb these costs, potentially leading to disputes or strained relationships. Consider the following steps:

• Negotiate and draft a written agreement with clear terms on tariffs with your U.S. customer;
• Communicate proactively with your U.S. customers to manage expectations related to tariffs;
• Seek legal advice to avoid disputes or litigation.

Failing to address this issue now, could jeopardize your business relationships and expose you to additional legal and financial risks later.

Broader Considerations for Canadian Businesses

In addition to reviewing contracts, Canadian businesses could consider a strategy to diversify their customer base to reduce reliance on the U.S. market. Consider expanding to regions like the European Union (EU), where the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) provides reduced or eliminated tariffs. CETA offers greater predictability and stability than the U.S. market, where unilateral tariff changes seem increasingly more likely. You can also explore other trade arrangements in Asia through the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) which Canada is a party to, in order to diversify your customer base.

Of course, there is also the option of establishing or expanding operations in the United States so your products originate from that country. One of Trump’s goals is obviously to consolidate production and manufacturing in the U.S., and tariffs might be avoidable through that strategy. It is not something to undertake lightly, however, and there are numerous considerations before embarking on this path. At a minimum you will want to discuss this with legal and financial advisors beforehand.

How Procido LLP Can Help

At Procido LLP, we have decades of experience advising Canadian and foreign companies on international trade and cross-border contracts. Our team also includes seasoned litigators skilled in resolving international commercial disputes.

Contact us today to:

• Review your contracts for clauses addressing tariffs, Incoterms, and regulatory changes related to tariffs;
• Negotiate new agreements or amend existing ones to mitigate risks related to tariffs;
• Assist with resolving disputes arising from U.S. tariffs.

Taking proactive steps now can protect your business and preserve key relationships as the trade environment in North America evolves.

Disclaimer

This publication is provided as an information service and may include items reported from other sources. We do not warrant its accuracy. This information is not meant as legal opinion or advice. Contact Procido LLP (www.procido.com) if you require legal advice on the topics discussed in this article.