As you are no doubt aware, we are facing a new world of trade relations with the United States. The imposition of substantial tariffs on Canadian resources and products shipped to the U.S. has already or has the potential to affect your business. With many of our clients being small to medium size businesses, we wanted to provide our insights relating to issues concerning commercial transactions.
Trade War Considerations
At McCuaig Desrochers LLP, our Business Lawyers believe that many of these issues will boil down to contractual considerations.
Examples of agreements which may be affected by tariffs include, but are not limited to:
- product purchase and supply agreements
- purchase orders
- manufacturing and supply agreements
- merger and acquisition agreements
- construction contracts
- leases (re Tenant and Landlord improvements and operating costs)
- service agreements
- management agreements
Your specific business may have further examples. It should also be noted that tariff and trade war consequences are not limited to cross border transactions. For example, a Canadian supplier selling to a Canadian buyer, but relying on supply chain inputs from the U.S. could discover that Canadian reciprocal tariffs (or delivery bans) may be imposed. These developments could then impact such seemingly “all Canadian” contracts, whether by increasing costs or making supply impossible.
Contract Considerations
Delving a little bit deeper, it may be useful to outline a few considerations. There are undoubtedly many more. As a general principal, work on contracts will involve risk management relating to the “what if’s” with the imposition of tariffs.
- Contractual Clauses to Consider
- You may wish to include conditions precedent or subsequent dealing with escape from contracts where tariffs arise.
- Consideration should be given to the allocation of responsibility for tariffs, if escape from a contract is less desirable.
- Force majeure clauses as currently written do not contemplate tariffs as a force majeure. They should be revised to contemplate this, but wording must be carefully considered to ensure there is both an adequate definition of unreasonable and/or punitive tariffs, as well as some likelihood of enforceability.
- Contracts also often include material adverse effect clauses. These should be updated to allow a party to cancel or renegotiate a contract in the event of significant change in economic circumstances arising from tariffs. These clauses will need careful scrutiny and appropriate drafting to be useful and enforceable.
- It is unlikely that informal email transactions and purchase orders will suffice in the face of erratic and arbitrary tariff changes.
- Incoterms
- At the international level, you can consider “Incoterms” – short for international commercial terms.
- These “are a set of globally, recognized trade terms developed by the international chamber of commerce (ICC)”. A glance at the link below will allow you to reflect on such issues as required.
- The link explains many terms, including DDP – delivered duty paid – which provides that the party selling the goods covers all costs associated with delivery of them. Obviously, this is undesirable without an escape clause, where tariffs may unexpectedly arise.
- Your business lawyers should also consider any further terms that may be useful.
While we are not able to advise on such issues as cross-border taxation and transfer pricing, in many cases you may need to review existing or future contractual terms relating to areas such as the purchase or sale of products, manufacturing, and business acquisitions.
With the Covid-19 Pandemic, we saw contracts start to incorporate provisions to deal with many Covid contingencies. The imposition of tariffs and commencement of a trade war should likewise lead to consideration of steps to deal with trade related issues.
If you require any assistance on contractual matters, please do not hesitate to contact us.
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