The trade war between Canada and the United States is creating considerable uncertainty across many sectors of the countries' respective economies, and the information technology ("IT") sector is no exception.
As of writing, we are not aware of any implemented or proposed tariffs or counter-tariffs that are likely to impact the sale and purchase of IT products and services ("IT Services") – including software-as-a-service – in Canada. However, there are no guarantees the IT sector will remain unaffected in the months and years ahead.
In this article, we highlight five things your organization can do in negotiating and managing its contracts today to mitigate risks associated with tariffs and counter-tariffs tomorrow. Although we recognize the important political distinction between tariffs and counter-tariffs, for convenience we refer to both tariffs and counter-tariffs as "tariffs."
- Allocate responsibility for taxes and similar governmental charges
Most IT contracts will include a clause that allocates the responsibility for the payment of taxes and similar governmental charges between the parties. It is common for the customer to agree to pay all sales taxes and similar governmental charges (other than the vendor's income taxes) that apply in respect of the sale and purchase of the IT Services.
Whether or not tariffs are mentioned specifically in such a clause, it is possible that the clause may be interpreted as also allocating responsibility for paying tariffs. There is risk that if your organization is expressly or implicitly responsible under contract for paying tariffs that apply in respect of IT Services you purchase, Canada's imposition of tariffs on those IT Services may result in a considerable increase in the cost of those IT Services to your organization, including in the middle of a contract term.
If your organization is negotiating a contract for IT Services with a U.S. vendor, it may be beneficial to pay specific attention to what the IT contract says about responsibility for tariffs. If your organization's bargaining position permits, it may be possible to convince the vendor to accept the risks associated with tariffs to help de-risk the purchase.
If nothing else, revising the IT contract for greater clarity in allocating responsibility for tariffs may help mitigate the risk of future disputes.
- Address tariffs in force majeure clauses
Most contracts – including IT contracts – will include a force majeure clause that applies to excuse a party's non-performance of its obligations under a contract, if the non-performance is caused by some external force beyond the non-performing party's reasonable control.
From time to time, a force majeure clause will expressly indicate that a government sanction or similar issue is considered an excuse for non-performance.
Depending on the language of the force majeure clause, it may be possible for a vendor to argue that the imposition of a tariff on the vendor's IT Services – or the services of another entity in the vendor's supply chain that compromises the profitability of the vendor's IT Service offering – represents a force majeure that permits the vendor to cease providing the IT Services to your organization. This may be problematic for many reasons, especially if the force majeure clause requires your organization to continue to pay fees despite the vendor's non-performance (which is not uncommon).
If your organization is negotiating a contract for IT Services with a U.S. vendor, it may be helpful to specifically address tariffs in the force majeure clause, to protect your organization from the sudden unavailability of the IT Services for which you are contracting and from having to pay fees even in the face of vendor non-performance.
- Request the right to terminate for convenience
A "termination for convenience" clause in an IT contract permits one or both parties to terminate the contract at any time, provided certain specific rules are followed – these rules often relate to notice periods, termination fees and similar issues. The right to terminate an IT contract for convenience gives its holder the flexibility to leave the contractual relationship for any reason, and does not assign any fault in relation to the termination.
If your organization is negotiating a contract for IT Services, it may be valuable to negotiate for your organization the right to terminate the contract for convenience. This right could be general in nature and exercisable at any time at your organization's discretion. Or this right could be conditional on the imposition of tariffs or some similar triggering event.
The end goal of obtaining the right to terminate the IT contract for convenience would simply be to give your organization an "out" in the event tariffs are imposed that materially change the nature of the relationship (including the costs of the IT Services to your organization).
- Negotiate amendments to existing IT contracts
In general, IT contracts can be amended by written agreement of the parties. If your existing IT contracts do not adequately address the new risks posed by tariffs in the context of the developing trade war between Canada and the U.S., it may be useful to propose amending those IT contracts.
It goes without saying that such amendments would likely involve convincing U.S. vendors to accept the re-allocation of risk, which may put vendors in less favourable positions than they are now. However, depending on the context of the vendor relationship (and any concessions your organization may be prepared to make to compensate for the re-allocation of tariff risk), it may be possible to negotiate an amendment to an existing IT contract that satisfies both parties.
- Contact a trusted legal adviser
Above we have outlined four general things that your organization may wish to consider in navigating the risks associated with tariffs and IT Services. However, the reality is that, within each of the four items discussed in this blog and with IT contracts more broadly, there can be a considerable degree of context- and contract-specific nuance. Moreover, vendors may attempt to avoid engaging with these legitimate contractual issues by making appeals to vague notions of market norms and their own standard practices.
The Technology, Intellectual Property and Privacy group at MLT Aikins has extensive experience and skill in negotiating and drafting information technology contracts, and can give you the advice you need to navigate the uncertainty ahead.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
