Trade lawyers scramble to help companies write new contracts, reshape cross-border deals to account for tariffs

In the tense weeks leading up to U.S. President Donald Trump’s tariff deadline, Washington-based lawyer James Wholey heard from two clients who were having second thoughts about an acquisition deal, because the parties involved would be subject to the threatened 25-per-cent tariffs.

That Canada has been given a 30-day reprieve will likely do little to assuage his clients’ reticence, said Mr. Wholey, a senior counsel with U.S.-based Phillips Lytle LLP.

“Right now, it’s a time of unprecedented uncertainty,” he said. “It might freeze things for a little while until people feel a little more confident. … I think some deals in progress are going to be ‘wait and see.’ ”

Mr. Wholey, who spent more than a decade as a senior staff member to several U.S. senators, said that given the level of integration between the economies of Canada and the U.S., business will be loath to unravel those relationships. However, he added, prudent companies will find ways to manage the risk going forward through measures such as ensuring that contracts specifically spell out what happens in the event of tariffs.

But not everyone is so optimistic.

For some, the latest tariff threat marks a turning point in the Canadian-American business dynamic. Relationships that have, in some cases, been forged over decades will be fundamentally altered given the lack of predictability. For trade lawyers on both sides of the border, it’s been one of the busiest stretches of their careers.

William Pellerin, an international trade lawyer with McMillan LLP, says he and the rest of the 11-member team fielded calls and questions from more than 100 clients last weekend. Most of the conversations dealt with two questions. First, are they captured by the Trump tariffs or the retaliatory tariffs? Second, if they are, who is responsible for the cost and how can it be mitigated?

In some cases, said Mr. Pellerin, contracts have clear clauses that deal with these issues. “Incoterms” are globally standardized terms that define the responsibilities between buyers and sellers. For example, DDP – delivered duty paid – means that whoever is selling the goods covers all costs associated with delivering them, which becomes important if there are duties.

“But in other cases, frankly, we’re seeing contracts that are very informal. We’ve seen relationships that have been in place for 30-plus years and the contract is effectively an e-mail between a salesperson and a buyer,” Mr. Pellerin said. “The fact is that that’s the nature of the relationship that we’ve taken for granted.”

He said that so far, he hasn’t seen any of these long-standing cross-border relationships turn sour. Everyone is trying to work together to find a solution that works for both sides.

However, in the future, informal contracts probably aren’t going to cut it, he said.

Sabrina Bandali, an international trade and investment lawyer with Bennett Jones LLP, said that what’s clear is that the Trump administration views tariffs and trade as an attractive foreign-policy tool. This means businesses need to both weigh how much uncertainty they can weather and take steps to protect themselves.

Some of her clients have already done a lot of this work, because of recent events such as COVID-19 and last year’s modern slavery in supply chains legislation, which forced businesses to take a larger look at their operations and consider alternatives should they be necessary.

“Those businesses, if they did that work before, can now execute on some of those contingency plans,” she said.

On Monday, Mr. Trump agreed to postpone his threatened 25-per-cent tariffs on Canadian goods – and 10-per-cent tariff on Canadian energy – after Prime Minister Justin Trudeau agreed to enhanced border-security measures. But no matter what happens next month, Ms. Bandali said it’s clear that Canada and the United States are on a fundamentally different trajectory when it comes to greater integration and lower trade barriers.

“One of the real questions is: Is this volatility going to make businesses think about whether the United States is a country that is too volatile,” she said. “I don’t think that’s what Canadian businesses have any desire to do. That’s the message: We don’t want to be here. We don’t want to be asking these questions. We don’t want to be making these changes.”

From Mr. Wholey’s perspective, the next phase is going to involve a lot of “plain old lawyering.” Contracts may need to be renegotiated. New agreements will need to account for new risks.

“One way to do it is just add very specific provisions,” he said. For example, “Is there a provision in the contract where you can adjust prices, if the parties agree the contract is still worth it, where you allocate responsibility for the tariffs,” he said.

(Contracts often already include a “force majeure” clause, which releases parties from fulfilling their obligations in the event of a major unforeseeable event, such as an act of God. But tariffs would almost certainly not qualify given Mr. Trump has long threatened to impose them on Canada.)

Already, mergers-and-acquisitions deals often include what are called material adverse effect (MAE) clauses, which allow buyers to walk away from a transaction when the target’s economic circumstances drastically change. Last week, Fasken Martineau DuMoulin LLP released a report warning that some companies may invoke these clauses now to pull out of deals.

“History instructs that periods of abrupt macroeconomic uncertainty – see 9/11, the 2008 financial crisis, and the COVID-19 pandemic – increase the incidence of MAE disputes in M&A,” the report said. “The next chapter of similar turbulence may soon be upon us.”