By: Stewart Maier
The recent imposition of 25% tariffs on imports between Canada and the United States has sent shockwaves through the business community. These tariffs will result in a significant impact on the cost of goods and services, and the performance of cross border commerce. Companies previously relying on predictable trade flows are now facing steep cost increases that may undermine profitability—or, in extreme cases, the viability of certain contracts.
For businesses caught in the middle, one question quickly arises: can these new tariffs provide grounds for terminating or adjusting current arrangements? In this post, we offer a perspective on how the newly imposed tariffs might affect contractual relationships, and explores the potential avenues for relief.
The New Tariffs
On February 1, 2025, United States President Donald Trump announced the imposition of significant tariffs on imports from Canada, Mexico, and China, citing concerns over illegal immigration and drug trafficking. The tariffs, effective February 4, 2025 for Canada, include a 25% levy on imports from Canada, with a reduced 10% tariff specifically on Canadian energy products.
In response, Canadian Prime Minister Justin Trudeau declared retaliatory measures, implementing 25% tariffs on $30 billion worth of U.S. goods starting February 4, 2025, with plans to extend these tariffs to an additional $125 billion. The initial measures target specific goods including a wide range of consumer products such as orange juice, peanut butter, wine, spirits, beer, coffee, appliances, apparel, footwear, motorcycles, cosmetics, and pulp and paper. Canada’s plans for further tariffs are subject to a public comment period, and includes significant items like passenger vehicles, trucks, electric vehicles, steel, aluminum, various fruits and vegetables, aerospace products, beef, pork, dairy, and recreational vehicles.
Responsibility for Tariff Payments
In cross-border transactions, the responsibility for paying tariffs is typically determined by the terms of the contract and the agreed-upon delivery terms. Generally, the importer is responsible for paying tariffs imposed by the importing country. This is particularly relevant in contracts where goods are shipped internationally, and it is crucial for parties involved to understand and acknowledge their respective obligations regarding tariff payments.
Importer's Obligation: The party that imports goods into a country is typically responsible for paying the applicable tariffs. This responsibility arises from national customs regulations, which require the importer to declare and pay duties upon entry of goods.
Contractual Terms: The responsibility for tariffs may be influenced by the delivery terms specified in the contract. For instance, terms such as Free on Board (FOB) or Cost, Insurance, and Freight (CIF) can determine which party bears the risk and the cost of tariffs. Under FOB, the buyer usually assumes responsibility for tariffs once the goods are on board the shipping vessel/vehicle.
Pre-existing Contracts: In contracts established prior to the imposition of these new tariffs, it is essential to revisit the terms to determine who bears the additional costs. If the contract does not explicitly address tariff changes, parties may need to negotiate amendments or rely on existing clauses that address unforeseen economic changes.
For businesses relying heavily on imports from either side of the Canada/U.S. border, these tariffs will have a direct impact on supply chains and profitability for businesses reliant on cross-border commerce. In practice, companies may choose to pass these costs downstream to consumers, while others attempt to renegotiate with suppliers or customers. If such negotiations fail, the question becomes whether there are options to modify or outright terminate a contract that has suddenly become far less attractive. While Canadian courts have historically been reluctant to excuse performance simply because a deal turns out to be more expensive than anticipated, businesses can be proactive in mitigating tariff-related risks. A diligent step is to conduct a thorough review of existing commercial agreements to identify any clauses that allocate risk for changes in government policy or international trade barriers.
Contractual Clauses and Risk Allocation
A fundamental starting point in determining whether relief is possible involves reviewing any relevant clauses within existing agreements. Many contracts include force majeure provisions intended to excuse non-performance when unforeseeable events—ranging from natural disasters to government actions—make it impossible or unreasonably difficult to fulfill contractual promises. If a force majeure clause expressly references “tariff changes,” “government interventions,” or broader “supply chain interruptions,” then the newly imposed duties may fall within its scope. It becomes important to scrutinize exactly how the provision is worded, since force majeure clauses generally do not cover mere economic hardship and only excuse performance when external forces prohibit compliance.
Many force majeure clauses focus on calamities like natural disasters or wars, and do not explicitly list ordinary commercial risks such as higher tariffs. Even if governmental action is mentioned, a force majeure event usually requires that the event has made performance nearly impossible, rather than merely more expensive or less convenient. If specifically drafted to address regulatory shifts, a force majeure clause can provide a route for renegotiation or temporary relief, but seldom grants a blanket exemption from economic adversity.
Businesses must also analyze the contract’s use of supply and delivery obligations, as these will often dictate who bears the customs and transport risk and whether unexpected tariffs might trigger a right to suspend or renegotiate performance. Other delivery terms, such as FOB and CIF, generally require the buyer/importer to clear goods through customs and pay the applicable duties. In either scenario, the party responsible for paying duties must factor them into the overall cost of doing business. If duties now included a 25% increase, this can result in a very unpleasant surprise for the affected party if they are not aware of their responsibilities.
Frustration, Impossibility and Impracticability
In Canadian contract law, frustration (along with doctrines resembling impossibility or impracticability in other jurisdictions) discharges contractual obligations if an unforeseen event defeats the contract’s underlying purpose. Although high tariffs can deeply affect the economic basis for a deal, courts generally disfavour using frustration for circumstances that merely make performance more expensive, as straightforward cost increases generally do not justify releasing one or both parties from their commitments.
To succeed with a frustration argument, a party must demonstrate that neither side assumed the risk of the supervening event and that the contract itself did not allocate that risk to one party. For instance, if the parties contemplated changes in trade regulations at the time of drafting—and either explicitly or implicitly assigned responsibility for any resulting cost increases—then frustration will almost certainly fail. A tariff that cuts deeply into profit margins, though significant, often remains in the realm of commercial risk. Contract law generally treats such situations as foreseeable fluctuations in international commerce. For frustration to apply, the change must be so severe that it effectively destroys the bargain on which the contract rests. If either party could have anticipated the risk—especially in the context of global trade tensions—attempting to claim frustration is likely to be unsuccessful.
In addition, frustration might not serve as a strong defence when goods can still be imported, albeit with a higher duty rate than initially expected. In such cases, the party not liable for the duty payments (such as an FOB seller) would probably maintain that the risk of duty rate fluctuations was accepted by the other party. Therefore, the buyer cannot invoke frustration merely because increased duties have raised operational costs or diminished profit margins on goods meant for resale. Conversely, the buyer might contend that both parties assumed duty rates would remain constant at the time of contracting, and the duty rate at that time was a foundational premise of their agreement.
Material Adverse Change or Effect
Some commercial transactions, particularly high-value deals or long-term arrangements, include material adverse change or effect (MAC) clauses. These allow a party to withdraw or seek adjustments if an extraordinary event undermines the deal’s fundamental premise. In principle, a substantial tariff might qualify if it strikes at the core economics of the transaction, but courts are often cautious about interpreting MAC clauses too broadly. A party seeking to invoke a MAC clause must generally prove that the adverse change is significant, unexpected, and durationally meaningful. A short-term tariff or one that does not truly destroy the transaction’s value might fail to meet this test, even if it creates inconvenience or higher costs.
A practical solution for businesses expecting the possibility of changing trade conditions is to include a price adjustment or escalation clause in their contracts. Such clauses allow the parties to redistribute or pass on unforeseen tariff expenses to the other side, either wholly or partially, thereby spreading risk. These provisions can be particularly valuable in longer-term supply contracts where unpredictability in trade policy is higher. By establishing predetermined triggers—such as tariffs exceeding a certain percentage or customs regulations changing beyond a certain threshold—parties can address rising costs without jeopardizing the entire arrangement.
Takeaways
Companies involved in cross-border transactions should consider performing a thorough review of their contractual arrangements to identify existing language on tariffs, force majeure, frustration of purpose, and price adjustment. Where gaps emerge, it may be prudent to negotiate revisions that explicitly account for sudden changes in trade policy. This includes defining whether suspension, termination, or cost renegotiation is permissible when a tariff or other government measure significantly shifts the economic balance of the deal.
Another straightforward approach is to handle tariff risks similar to how parties manage foreign exchange volatility, fluctuations in commodity prices, or interest rate changes: by incorporating them into new contracts. The parties can agree to reconsider the price if the duty rate surpasses a predetermined threshold. For instance, a contract might stipulate that if the duty rate increases by 5% or more, the buyer would receive a corresponding price reduction. In longer-term agreements, prices might be periodically adjusted in response to changes in tariff rates. Such clauses effectively transfer or share, in a mutually agreeable manner, the risk of increased duties on goods. Most existing agreements lack these provisions, so they should be drafted with careful consideration.
With escalating trade tensions and the potential for ongoing retaliatory measures, tariff volatility appears to be the current trend for cross-border commerce. Businesses can protect themselves by reviewing and, where necessary, updating the legal mechanisms within their contracts to manage the risks posed by sudden regulatory shifts. If tariffs are affecting your business, consider consulting with legal experts for strategies to handle risks and disputes efficiently. By taking a proactive approach that allocates trade risks clearly, companies stand a stronger chance of maintaining profitable relationships and avoiding costly litigation under these rapidly evolving conditions.
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