Tariffs can quickly change the economics of a commercial agreement. For Ontario businesses importing components, purchasing finished goods, manufacturing with foreign inputs, or supplying customers across the border, new or increased tariffs can materially raise the cost of performance.
When tariffs change after a contract has been signed, one question can become central to the commercial relationship: who has to pay?
The Contract Is the Starting Point
In many tariff-related disputes, the first place to look is the agreement itself. A contract may expressly state whether the buyer or seller is responsible for customs duties, tariffs, surtaxes, taxes, brokerage charges, or other import-related expenses.
Ontario’s Sale of Goods Act recognizes that parties can determine the price of goods through their contract and requires buyers and sellers to perform according to their agreed terms.
Clear allocation language can therefore provide greater certainty than a fixed purchase price that does not address changing government-imposed costs.
Fixed Prices Can Create Tariff Risk
A fixed-price agreement can become problematic when tariffs increase unexpectedly. For example, an Ontario business may agree to purchase U.S.-made equipment at a fixed price over two years. If the goods later become subject to a significant Canadian surtax, the parties may disagree over whether the supplier must absorb the additional cost or can pass it on to the purchaser.
Where the contract does not contain an adjustment mechanism, tariff increases can create both financial and contractual uncertainty.
Beware the “Battle of the Forms”
In routine commercial transactions, buyers and sellers frequently exchange their own standardized paperwork, such as a buyer’s Purchase Order (PO) and a seller’s Order Confirmation or Invoice. If the fine print on the buyer’s PO states that the price is fixed and inclusive of all import duties, but the seller’s confirmation boilerplate assigns new tariffs to the purchaser, a “battle of the forms” arises.
Courts will examine the sequence of documentation and the conduct of the parties to determine whose standard terms apply. Relying on fine print at the bottom of an order form creates severe legal vulnerability when trade policies shift suddenly; businesses are far better served by negotiating a formal Master Supply Agreement that explicitly overrides conflicting boilerplate.
Tariff and Price Adjustment Clauses
Businesses can address tariff risk directly through tariff allocation or price adjustment clauses. These provisions may identify which party bears existing tariffs and what happens when tariffs are introduced, increased, reduced, suspended, or removed during the contract term. They can also define whether the clause applies only to customs tariffs or more broadly to surtaxes, duties, levies, and other government-imposed trade costs.
A price adjustment clause might permit the seller to increase the contract price by the actual amount of a new tariff. Other arrangements may share increases between the parties, establish a threshold before an adjustment applies, or cap the amount that can be passed through. Clearly defining the triggering event and calculation method can reduce disputes over whether a particular government measure qualifies.
Change-in-Law Clauses May Apply
Tariffs may also fall within a contract’s change-in-law provisions. These clauses typically address new or amended laws, regulations, government orders, or regulatory requirements that affect performance. Depending on the wording, a new tariff or surtax may trigger a right to adjust prices, renegotiate terms, extend deadlines, or terminate the affected portion of the agreement.
Whether a tariff qualifies will depend on the specific language used in the contract.
Incoterms Can Affect Who Pays
Businesses engaged in international sales should also review any Incoterms® rules incorporated into their contracts. Incoterms allocate responsibilities for transportation, customs clearance, risk, and certain delivery costs.
For example, under Incoterms® 2020, Delivered Duty Paid (DDP) generally places responsibility for import duties on the seller. Under several other commonly used terms, import costs are typically borne by the buyer. The contract should identify the applicable Incoterms version and the precise delivery location or destination, since these details help determine how transportation costs, customs obligations, and delivery risks are divided between the parties. For example, a contract might specify “DDP, buyer’s warehouse in Toronto, Incoterms® 2020,” rather than referring only to “DDP.”
Watch for Sales Tax (HST/GST) Traps Under DDP
While Incoterms allocation focuses primarily on customs duties and import fees, parties selecting Delivered Duty Paid (DDP) should explicitly clarify responsibility for Canadian sales taxes (such as Ontario’s 13% HST). Foreign suppliers using DDP terms are required to pay GST/HST upon importation at the border. However, if the seller is not registered with the Canada Revenue Agency (CRA) to collect sales tax, they may be unable to claim an Input Tax Credit (ITC) to recover that money, inadvertently turning a pass-through tax into an unrecoverable operational cost.
Do Force Majeure Clauses Cover Tariffs?
A business facing sharply higher costs may also consider whether a force majeure clause applies. Some force majeure provisions refer to government action, embargoes, trade restrictions, or changes in law. However, a tariff that makes a contract more expensive does not necessarily prevent performance.
This distinction matters. A clause addressing events that make performance impossible may operate differently from one expressly addressing increased costs or government trade measures.
Renegotiation and Termination Rights
Long-term commercial agreements may also establish thresholds for major tariff changes. For example, a contract might provide that minor tariff increases do not affect the agreed price, while increases above a stated percentage trigger renegotiation or termination rights. This approach can allow parties to absorb routine fluctuations while creating a process for responding to substantial changes in trade policy.
Documentation and Tariff Relief
Where tariff costs can be passed through, the agreement may also address how those costs are verified. A buyer might require documentation identifying the tariff paid, the affected goods, tariff classification, country of origin, and calculation of the requested adjustment. This can help distinguish the actual tariff from unrelated increases in transportation, labour, currency exchange, or administrative costs.
Contracts can also address what happens if a party later receives a tariff refund, drawback, remission, or credit. The agreement may require repayment, cost sharing, or cooperation in obtaining available relief.
Country of Origin and Classification Matter
Tariff exposure does not depend solely on where a supplier is located. Country-of-origin rules, tariff classification, product composition, trade agreements, and the wording of a particular tariff measure can all affect whether additional duties apply.
Commercial agreements may therefore allocate responsibility for certificates of origin, Harmonized System classification information, customs records, and other documents needed to determine tariff treatment.
Review Existing Contracts for Tariff Exposure
Businesses do not need to wait until their next transaction to consider tariff allocation. Existing supply agreements, distribution contracts, manufacturing agreements, purchase orders, and long-term service contracts may already contain provisions dealing with taxes, duties, price adjustments, change in law, force majeure, termination, or renegotiation.
Reviewing how these provisions interact can help clarify which party bears additional costs and what contractual procedures apply before prices or performance obligations change.
Building Tariff Risk Into Future Agreements
Changing trade measures have made tariff allocation an increasingly important commercial contracting issue. Rather than assuming that the buyer or seller will automatically bear a new tariff, businesses can address the risk directly through pricing provisions, tariff clauses, Incoterms, change-in-law language, documentation requirements, and renegotiation or termination rights.
The appropriate structure will depend on the goods involved, the jurisdictions in the supply chain, the length of the contract, and the parties’ respective exposure to tariff changes.
Willis Business Law: Windsor-Essex Business Lawyers Advising Clients on Commercial Contracts and Tariff Risk
Changing tariffs and cross-border trade measures can affect pricing, supply chains, and long-term commercial relationships. Clear contractual language can help businesses address tariff pass-throughs, customs duties, price adjustments, Incoterms, change-in-law provisions, and related commercial risks.
At Willis Business Law, our experienced business lawyers assist companies with commercial contracts, supply agreements, distribution agreements, manufacturing agreements, cross-border transactions, tariff allocation clauses, and contract reviews. Contact us online or call (519) 945-5470 to discuss contractual issues involving tariffs, duties, and changing trade measures.
