The impact of Tariffs on international contracts in Канада

As with many legal questions in Canada, a separate analysis is required for the Province of Québec, which has a civil law system, and for the country’s nine other provinces, which share a common law system inherited from England.

The Civil Code of Québec, like most civil codes, codifies the concept of force majeure.  In order to constitute a force majeure, an event or circumstance must meet three criteria. Firstly, it must be unforeseeable at the time the contract is entered into. Secondly, it must be “irresistible”, meaning that it must be absolutely impossible for the person owing the obligation to comply with it; if the event or circumstance only makes the performance of the obligation more difficult, the criterion of irresistibility will not be met.  Thirdly, the criterion of exteriority requires that the debtor must not be responsible for the event or circumstance and must not have control over it.

Without a doubt, any contract entered into when the risk of the imposition of tariffs is known (or even more so, where such tariffs are a certainty), does not meet the criterion of unforeseeability.  Moreover, it is widely recognized that the increase in a payment obligation as a result of an event or circumstance that otherwise meets the criteria for force majeure does not allow a party to be excused from performing its contractual obligations on the basis of force majeure because such an increase is not “irresistible”.  In sum, tariffs do not constitute a force majeure that reduces or eliminates the buyer’s obligation to perform the contract as agreed.

For a party to avail itself of force majeure under a contract governed by Canadian laws other than those of Québec, the contract must contain a force majeure clause.  Whether or not the buyer can be excused from paying the increased purchase price on account of a tariff will depend on the wording of such clause.  That said, while a basic force majeure clause will usually not refer to tariffs, it will refer to acts of government or the like, which would include the imposition of tariffs.

In the case of Churchill Falls (Labrador Corp.) c. Hydro-Québec, 2018 CSC 46, the Supreme Court of Canada rejected the existence of a doctrine of hardship (théorie de l’imprévision) under the law of Québec.

In the other Canadian provinces, it has long been established that the doctrine of hardship does not form part of the common law of Canada. Likewise, Canada does not have an equivalent to the American doctrine of commercial impracticability.

Accordingly, in all Canadian provinces, any hardship experienced by a contractual party owing to the imposition of tariffs is legally irrelevant unless the contract addresses the concept.

Outside of Québec, the common law doctrine of frustration may apply.  The Supreme Court of Canada has described the doctrine as follows: “Frustration occurs when a situation has arisen for which the parties made no provision in the contract and performance of the contract becomes a thing radically different from that which was undertaken by the contract” (Naylor Group Inc. v. Ellis-Don Construction Ltd., 2001 SCC 58, at paragraph 53. 

For reasons analogous to those impeding the application of force majeure to a particular case, it has traditionally been quite difficult for a party to exonerate itself from its contractual obligations by arguing that the contract is frustrated by a supervening event. In our view, in order for a Canadian court to find that tariffs frustrate a contract, it would look to the informational context in which the parties contracted and consider whether the parties accounted for the possibility that the pricing set out in their contract could change.

Unless the contract contains a revision clause (sometimes called a “hardship clause” notwithstanding the absence of such doctrine from the Canadian legal landscape), the doctrines of good faith have not yet reached a point where the parties have a stand-alone obligation to (re)negotiate their contract.  An amicable renegotiation, perhaps induced by the presence of a mediation clause in the contract, might be the parties’ best option to salvage their relationship.

Given the state of the law in Canada relative to the concepts of force majeure, frustration of contract and hardship, and the absence of a stand-alone duty to negotiate, it is imperative to include a clause addressing the renegotiation of prices in all contracts for the sale of goods across borders governed by Canadian law.