Canada is currently facing uncertainty regarding the new round of tariffs imposed by the United States.
These tariffs will significantly impact key sectors of the Canadian economy, particularly the automotive, steel and aluminum industries, which are highly vulnerable to such duties. The Government of Canada is closely monitoring the situation and responding with retaliatory tariffs to protect Canada’s interests and support Canadian businesses.
The tariffs will have a significant impact on contracting parties, particularly in terms of contract pricing and determining which party is responsible for paying the duties.
Contract terms: A key consideration
Contract terms will be a key factor in determining which party will bear the cost of tariffs on products imported into the U.S. or, conversely, into Canada given that retaliatory tariffs have now been announced. Even in the absence of such a clause, tariff increases are likely to drive up manufacturing costs.
Without specific contractual provisions, many companies may be uncertain about which party is responsible for the increased costs and whether the tariffs could be considered a force majeure event. If so, one party could potentially be relieved of its contractual obligations if they become too burdensome or, at the very least, have them mitigated.
Although no Québec court case has yet addressed whether new hefty tariffs can be considered a force majeure event that relieves a party of an obligation, case law arising from the COVID-19 pandemic has set an important precedent regarding force majeure.
The principle of force majeure
Force majeure allows parties to be relieved of their contractual obligations when an unforeseeable, irresistible, and external event occurs. An event is considered unforeseeable if the parties could not have foreseen it at the time the contract was signed.
Each force majeure scenario is evaluated based on its specific circumstances.
For example, the Superior Court of Québec (the “Court”) recently rejected a company’s attempt to rescind a contract based on the COVID-19 pandemic, ruling that while the pandemic made performance of the contractual obligations more difficult, it did not render them impossible. Since the pandemic was not deemed an irresistible event, the Court did not classify it as force majeure.
Québec courts construe force majeure (also referred to as “forces majeures”) narrowly, requiring truly exceptional circumstances.
An obligation is not considered impossible simply because it has become more expensive or more complex to fulfill. Moreover, in the context of tariff increases – often considered a known risk – it will be interesting to see whether courts hold that the tariffs are an unforeseeable event.
This raises the question of whether a party can legitimately invoke force majeure to excuse itself from its obligations if the event in question could have been anticipated or provided for during the contract negotiations.
For instance, the Supreme Court of Canada has previously ruled that a lack of market demand for corrugating medium and pulp does not constitute force majeure and, therefore, is not sufficient to relieve a party of its contractual obligations.
Québec courts will inevitably have to weigh in on this issue, with the specific circumstances of each case playing a decisive role in their analysis.
The force majeure clause
It is also important to check whether your contract contains a broader definition of force majeure, as this could allow you to invoke it against your contractual obligations if necessary.
The principle of force majeure is not a matter of public order, and the Québec Courts have previously held that parties are free to define the terms of a force majeure clause in their contracts. The parties can tailor the criteria to suit their contractual relationship by specifying what qualifies as a force majeure event.
For example, the Court of Appeal of Québec has deemed that market changes can constitute a force majeure event when they are specifically included in a contract and the force majeure conditions have been satisfied.
Therefore, it is essential to carefully review your contracts in order to determine whether new tariffs could be classified as a force majeure event.
How to protect yourself
It remains to be seen whether Canadian courts will consider the tariffs imposed by President Trump and the retaliatory Canadian tariffs to be a force majeure event.
Based on past decisions, the impact of these tariffs on contractual relationships will likely be analyzed on a case-by-case basis.
Your contract may also contain clauses that allow for the renegotiation of certain terms in the event of unforeseen changes, namely, provisions addressing cost increases or adjustments to contract terms due to unforeseen circumstances, or an early termination clause.
Therefore, it is crucial to thoroughly review your contracts to understand your rights and obligations.
Miller Thomson’s multidisciplinary team has expertise across Canada and is available to help you analyze your contracts and develop customized protection strategies. You can count on us for strategic advice and legal protection to safeguard your interests in these uncertain times.
