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Introduction
With 25% U.S. tariffs on Canadian goods expected to take effect soon, many Canadian manufacturers are asking:
Can I terminate or renegotiate my supply contracts?
Do I have the right to pass tariff costs onto my U.S. buyers?
If you’re facing these questions, you’re not alone. This guide will help you understand your legal options and practical steps to protect your business.
1. Can I Terminate an Existing Contract Due to U.S. Tariffs?
Short answer: It depends on your contract terms.
Most contracts do not automatically allow termination due to new tariffs. However, you may have options:
- Force Majeure Clause: Some contracts include a ‘force majeure’ provision covering “government action” or “trade restrictions.” If your contract includes this language, you may be able to suspend or terminate obligations.
- Hardship Clause: If your contract has a hardship clause (less common), it may allow renegotiation if the new tariffs make the agreement economically unviable.
- Regulatory Change Clause: Some contracts have a provision allowing termination or renegotiation if new laws significantly impact costs.
- Negotiated Termination: If no termination right exists, consider negotiating an exit with your buyer to avoid legal disputes.
What to Do Next:
✔ Review your contracts for force majeure or regulatory change clauses.
✔ Consult a lawyer if you think you have a valid case for termination.
✔ Open discussions with your buyer to renegotiate terms before considering termination.
2. Can I Increase Prices to Reflect the 25% Tariffs?
Short answer: Only if your contract allows price adjustments.
Contracts typically lock in pricing, and without a tariff pass-through clause, unilateral price increases may not be legally enforceable. However, you may still have options:
- Price Adjustment Clauses: Some contracts allow price modifications if government tariffs significantly increase costs.
- Negotiated Price Increase: Even if your contract is fixed-price, U.S. buyers may agree to a shared tariff burden rather than risk supply chain disruptions.
- Cost-Plus Contracts: If your contract is structured as ‘cost-plus,’ you may have room to adjust pricing based on tariff-related cost increases.
Practical Tip:
Even without a formal price adjustment clause, businesses with strong long-term relationships can often informally renegotiate pricing by demonstrating the financial impact of tariffs and offering incentives like extended contract terms.
What to Do Next:
✔ Check your contract for price adjustment clauses.
✔ Start renegotiating pricing with your buyers.
✔ Consider adding a tariff pass-through clause to future contracts.
3. Can I Unilaterally Terminate MyContract to Avoid Tariff Losses?
Short answer: Not without legal risk.
Most contracts do not allow unilateral early termination unless there’s a specific clause permitting it. If you terminate without legal justification, you may face:
- Breach of contract claims from your buyer.
- Financial penalties or damages for failing to fulfill orders.
- Reputation damage affecting future business relationships.
Alternative Dispute Resolution:
If a buyer refuses to renegotiate, consider mediation or arbitration as an alternative to litigation. Arbitration clauses in contracts can streamline disputes and offer a cost-effective resolution.
What to Do Next:
✔ Identify any termination rights in your contract.
✔ Talk to your buyer about a possible mutual exit.
✔ Explore alternative ways to mitigate losses (e.g., shifting Incoterms or supply chain adjustments).
4. Who Pays the 25% Tariff: TheCanadian Manufacturer or the U.S. Buyer?
Short answer: It depends on the Incoterms in your contract.
- DDP (Delivered Duty Paid) → You (the Canadian seller) pay the tariffs. This is common but can be renegotiated.
- FOB (Free on Board) → The U.S. buyer is responsible for tariffs. This is a better option to reduce your exposure.
- CIF (Cost, Insurance & Freight) → Tariffs are not included, but you cover shipping and insurance.
Logistics Consideration:
Switching Incoterms can also affect insurance, shipping costs, and delivery responsibilities. Before renegotiating, evaluate the broader impact on supply chain management.
What to Do Next:
✔ Check the Incoterms in your contract.
✔ Renegotiate future contracts to use FOB instead of DDP.
✔ Inform U.S. buyers about cost-sharing options.
5. Contract Review Checklist for Canadian Manufacturers
Use this checklist to ensure your contracts are ready for the upcoming tariffs:
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Tip:
Conduct contract reviews quarterly to anticipate future trade policy changes and ensure compliance.
Final Takeaways: How Canadian Manufacturers Can Protect Themselves
1️⃣ Review your existing contracts immediately. Identify any tariff-related clauses or risks.
2️⃣ Renegotiate contracts where possible. Seek price adjustments or switch to FOB terms.
3️⃣ Explore tariff mitigation strategies. Consider shifting supply chains or leveraging USMCA rules.
4️⃣ Be proactive in legal planning. Prepare for potential disputes with clear documentation.
Need Help Reviewing Your Contracts?
If you’re unsure about your contract terms or legal options, consider consulting an experienced trade lawyer. Trustiics offers direct access to vetted legal experts like Martin Aquilina (Ontario) and Dean Davison (British Columbia), who can help you navigate these tariff-related challenges.
📌 Have questions? Book a free consultation call or email support@trustiics.com to get a recommendation for an expert lawyer.