On February 1, 2025, a trade war between Canada and the US began. President Donald Trump announced that the US will impose a 25% tariff on virtually all Canadian goods imported into the US. In retaliation, Prime Minister Justin Trudeau announced that Canada will do the same to many US goods imported into Canada. So from a legal perspective, what could this mean for your business?
A tariff is essentially a tax or fee that a government places on imported or exported goods. Its purpose is to make imported goods more expensive, encouraging consumers to buy locally produced products instead. It can also be used as a way to raise government revenue or protect local industries from foreign competition. In simple terms, it increases the cost of goods coming in or going out of a country. Historically, Canada and the US enjoyed a free-trade arrangement. Unfortunately this has come to an end, and while the exact scope and nature of these tariffs remains to be seen, their impact could be extensive.
From a legal perspective, one area of impact will be existing contractual relationships which rely (directly or indirectly) on the import/export of goods. If your business involves importing or exporting goods directly, this impact will be obvious. However what if you do not import or export directly, but do rely on a supplier for certain goods or components who in turn relies on goods imported from the US at a certain cost and within a certain timeframe? All of a sudden these tariffs make it so that your supplier is unable to supply what you need at the cost or within the timeframe you previously agreed to, and as a result you find yourself in the position of not being able to satisfy your contractual obligations to your customers. Not only is this obviously bad for business, but it could expose you to a claim for damages for breach of contract.
The specific impact will depend on the terms of the contract, the industry involved, and the nature of the tariff being imposed, but here are some potential areas to be aware of:
Cost Increases
One of the most direct impacts of tariffs is the increase in the cost of goods. If a tariff is imposed on goods coming from another country, this can increase the price of those goods, which will likely lead to higher costs for businesses and consumers. In contracts, this could affect pricing terms which have already been agreed to, potentially leading to renegotiations or even disputes if the cost increases were not anticipated in the contract.
Supply Chain Disruptions
Tariffs can disrupt supply chains, especially if they target specific goods or raw materials. If a contract depends on the timely delivery of materials from another country, the imposition of a tariff may also delay such delivery, which may then delay the project or otherwise affect timelines, milestones or delivery dates set out in your contract.
Renegotiation of Terms
Contracts may include clauses that allow for renegotiation or adjustment of prices in the event of changes due to tariffs or trade regulations. If tariffs are imposed or raised unexpectedly, parties may need to revisit the terms to reflect the new economic reality, particularly if the costs associated with the tariff make the deal less viable. However unless your contract specifically provides for changing prices or other terms as a result of tariffs, you will only be able to renegotiate if both parties agree, and you may instead find yourself between a rock and a hard place!
Uncertainty and Risk Allocation
The business world loves certainty. However the imposition (or even threat) of tariffs introduces a high level of uncertainty, especially if they are part of an ongoing trade dispute. Contracts that involve international trade may include provisions to address the risk of future tariffs, shifting the burden of those risks between the contracting parties, but many contracts only indirectly impacted likely will not include such terms.
“Force Majeure”
Many contracts include as a standard term a “force majeure” clause. This clause essentially provides that if one party or the other to a contract is not able to fulfil their obligations due to something completely beyond their control (which may include changes in government policy) then that party is relieved from having to perform such obligation. While force majeure clauses generally exclude monetary reasons (and accordingly the imposition of tariffs may not fall within such a provision), the parties to contracts impacted by tariffs may argue otherwise, creating further uncertainty and potential disputes.
Impact on Profitability
The additional costs imposed by tariffs can reduce the profitability of a business, especially if the tariff affects critical components or raw materials. At best this could force a company to try to pass on these cost increases to its customers, which may strain relationships or impact price competitiveness. However if your contract does not allow you to pass along such cost increases, you may end up in a situation where you are simply forced to “eat” those increased costs, reducing your profits or even resulting in losses.
Breach of Contract
While it is always the hope when situations like this arise that the parties will work together to find a solution, that is not always the case. Accordingly as a result of the impact of these tariffs you may be in a position where you have no choice but to commence legal proceedings against a supplier who can no longer comply with the terms of their contract with you, or worse you may find yourself defending a legal action against you by a customer because you are no longer able to satisfy your contractual obligations to them.
Ultimately, these tariffs may significantly impact the terms, pricing, and execution of a variety of contracts. As such, businesses should thoroughly review existing contractual arrangements, whether to proactively address potential changes required, or at least to identify (and if possible mitigate) potential risks.
Whether it’s assessing such potential risks, renegotiating terms, or resolving disputes which arise, if you are concerned that these tariffs may impact your business – or even if you are unsure and need guidance – Baker Newby’s experienced team of business lawyers is here to help!
Jessie Ramsay and Ben Lorimer are both partners and part of Baker Newby’s commercial dispute resolution team.
