The United States and Canada have a close trading relationship, with each being the other’s largest trading partner. Indeed, the two countries trade over C$3.5 billion worth of goods and services each day and share a highly integrated supply chain.
On February 1, 2025, President Trump signed an executive order imposing 25% tariffs on goods originating in Canada (with a 10% tariff on Canadian energy), Canada subsequently announced that it will implement retaliatory tariffs on certain goods originating in the United States.
The implementation of tariffs on some or all goods by either country will have a dramatic impact on business relationships between businesses trading across the border and materially disrupt existing supply chains. Businesses may seek to re-evaluate existing cross-border contractual commitments,[1] including terminating existing contracts now that the financial incentives have shifted. Even where content, businesses nevertheless may face cross-border counterparties who wish to modify the existing relationship or extricate themselves entirely.
This bulletin provides an overview of certain legal considerations for businesses on either side of the border with cross-border contractual commitments, through the lens of Canadian jurisprudence.[2]
Review Your Contracts for Key Provisions
Payment and/or Pricing Terms
One means of evaluating the direct impact of potential tariffs is to closely examine any applicable contractual provisions covering pricing. Contractual provisions delineating responsibility for import taxes or duties and fees can shed light on the possible impact of tariffs. Certain contracts also include express references to tariffs (for example, by stipulating that the delivery price is inclusive of all taxes, duties, or tariffs), permit the parties to amend when certain conditions are met, provide for automatic price adjustments depending on external factors (often tied to an industry benchmark), or contain change of law provisions that may be triggered by tariffs.
Even where the direct impact may be minimal, tariffs may nevertheless impact supplier pricing and/or the cost of goods up and down the supply chain, thus resulting in possible disruption.
Termination Clauses
For businesses or contractual counterparties considering extracting themselves from contractual commitments, whether and how a contract may be terminated is often expressly delineated within the contract.
Under Canadian law, parties are free to negotiate express conditions that would permit parties to terminate their contract, including (1) for convenience, (2) upon the occurrence of certain events, and/or (3) for cause.
In the event a contract contains a clause permitting termination for convenience without any required conditions, a business is free to terminate the contract subject to any express or implied notice requirements and/or common law duties (both of which are discussed in greater detail below).
In the event a contract contains a clause permitting termination upon the occurrence of certain events and/or for cause, parties need to carefully consider whether new tariffs, any resulting actions taken in response, and/or changing market conditions, could constitute the requisite grounds to terminate.
Force Majeure Clauses
Other Considerations in Contract Law
When considering whether to terminate a contract, or whether concerned that a counterparty may do so, there are two primary additional considerations to keep in mind. Specifically, whether and how notice is required, and the common law duty of good faith in contract.[3]
Notice
As indicated above, many contracts include provisions delineating the required notice within any applicable termination clauses. However, in the absence of an express notice provision, parties are typically required to provide reasonable notice before terminating a contract.
Determining what constitutes reasonable notice is a heavily fact-specific inquiry involving the consideration of the circumstances of each relationship, including, for example, how long the parties have been doing business together, and any established practices in the applicable industry.
It is rare for Canadian courts to impose a notice period of fewer than a few months, and often they range around twelve months.
The Duty of Good Faith
Canadian courts have established multiple duties of good faith that apply to contractual relationships.
One is the duty of honest performance, which consists of a simple requirement to act honestly and not knowingly mislead (including via omission) counterparties when performing contractual obligations.
Another is the duty to exercise contractual discretion reasonably, which requires parties to a contract to exercise any contractually-conferred discretion in a manner connected with the purpose underlying the grant of discretion (determining the “purpose” is a matter of contractual interpretation).
A third is the general duty to cooperate to meet the goals of any contractual agreement.
Despite the development of such duties in Canadian jurisprudence, Canadian courts nevertheless recognize that parties must be permitted to put their interests ahead of a counterparty’s and thus have made it clear that these duties do not require contracting parties to “subordinate” their interests to the other party.
Ultimately, parties must keep these duties in mind when considering whether to terminate a contract and how to terminate a contract.
What to Do if Your Cross-Border Counterparty Fails to Perform
- whether first pursuing alternative dispute resolution (including those referenced above) would be worthwhile;
- whether any possible court order (whether for specific performance of the contract or damages) is worth incurring the cost of pursuing litigation, which can often be extensive;
- whether the counterparty has the requisite assets to pay any resulting damages award;
- where to initiate a legal claim (which can include consideration of which court has jurisdiction over the counterparty, whether any applicable jurisdiction takes a more favourable approach to any expected claims, where the counterparty’s assets are located, etc.); and
- whether seeking an injunction at the outset would be worthwhile (to, for example, restrain a counterparty from terminating the contract or continuing to non-perform).
Conclusion
