Boss Moves: How to negotiate contracts in a time of tariff uncertainty

Here’s what to consider while navigating the shifting realities of trade in North America.

In this series we tackle the thorniest questions facing business leaders today.

The question:

Help! My company is in negotiations with an American firm for a new contract. And given all the uncertainty and volatility around tariffs, I am worried that any misstep could deep-six this partnership. What should I keep top of mind and what do I need to include in the fine print?
– Anxious executive, Ajax

The answer:

After weeks of will-they-or-won’t-they tariff discussions, the trade war has officially begun: the U.S. has imposed tariffs on steel and aluminum imports with threats of adding it to more products, and Canada has responded, rolling out $155 billion in tariffs on U.S. goods in the coming weeks. If there’s comfort in numbers, know you’re not alone in your concerns. Business leaders across the country are struggling to effectively respond to the anticipated fallout from this new economic volatility, which is likely to trigger price increases, a rise in unemployment rates and waning demand.

While your worries are warranted, panic-based decisions are unlikely to result in positive long-term outcomes. It’s extremely difficult to find solid footing in such a shifting landscape, but establishing a solid foundation, one that accounts for a variety of potential swerves down the road, is a key element in ensuring future success. Plan, evaluate and give yourself a bit of flexibility. Fine print matters.

For advice, we turned to Elena Balkos and Megan Shaw, who are colleagues in the Toronto office of Blakes, a renowned Canadian corporate law firm with an international portfolio. Because the two have complementary areas of expertise — Balkos specializes in customs, international trade and sales and commodity taxes, while Shaw advises clients about commercial agreements, multifaceted contracts and complex cross-border logistics — they frequently work together. When it comes to tariff-related uncertainties, their collaborative guidance is to be proactive. Here’s what they recommend:

Get the lay of the land

How well do you know your company’s inventory? You need to quickly establish what is currently crossing the border, including raw materials, product inputs and final products from both a sales and purchase perspective. Then think through all points when goods could potentially travel between countries down the road — don’t just focus on currently listed or discussed items. Given the rapidly changing scope of proposed tariffs, you want to have a handle on all possible cross-border interactions, say Balkos and Shaw. “So as the list of affected items or countries changes, businesses are not surprised by a cost input that can have a dramatic effect on their bottom line.”

Assess existing agreements

You can’t effectively plan for what is to come without a clear sense of where you are right now. Business owners should start by conducting a thorough review of all current contracts, flagging any area where tariffs at various points of the supply chain might have ramifications. In terms of key criteria, Balkos and Shaw suggest looking at “how existing pricing works (including whether there is price variability based on market inputs), what suspension rights might exist, the duration of existing agreements and auto-renewal mechanisms, and termination rights.” Having a solid understanding of those contractual rights means you can properly determine which levers to push and pull as market dynamics change.

Gauge how much time you have

Make sure you are up to speed on all timelines for both existing and new contracts, so that you can act quickly — if the need arises. Shaw and Balkos recommend asking yourself a few key questions such as: How long would it take to pivot any portion of the business that could be affected by the tariffs? What are your obligations in existing contracts — how much notice is required to terminate a contract or request a change? How long would it take you to move any existing goods across the border? Once you have determined those answers, carefully plan out various scenarios, so that your company “is acting rather than reacting,” they say.

Know your negotiation strategy

Going forward, be candid about tariff-related concerns — current realities and projected possibilities — in any business dealing. Key considerations include mitigating the financial risks caused by cost fluctuations (it may be worth including price-adjustment mechanisms or supply-related contingencies), the possibility of suspending activity (rather than completely cancelling a deal) to give both parties the opportunity to wait for more stable regulatory conditions, and building in termination clauses that clearly state options for termination in the case of unreasonable cost increases or red-tape-related hiccups. Although no two deals are alike, Balkos and Shaw say unexpected delays in the negotiation process should be carefully considered, as they may signal that the other party has unexpressed concerns about shifting policies. “Ultimately, it is better to raise these types of risks up front,” they note. “A pragmatic conversation while parties are flexible leads to more predictable and considered results when the market or regulatory landscape takes a sharp turn.”

Prep carefully for new contracts

The current turbulence isn’t likely to subside any time soon, so it’s important that you are strategic about how you structure any new contracts. The key, Balkos and Shaw say, is flexibility. So, before you start to negotiate, “it is imperative to understand your company’s particular risk tolerance, including liability, price exposure and the ability to terminate,” they add. That way you can determine which details are critical to create the necessary conditions to fulfill the contract or to exit, if needed. The work doesn’t end there. You’ll need to commit ongoing resources to keep up to date with the shifting regulatory landscape and how your company could be affected.

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Photo illustration: Stephen Gregory; Photographs: Unsplash