President Trump’s tariffs: Staying competitive by shedding unwanted contracts

Torys’ Canadian and New York offices will be providing regular briefs on the legal ramifications of the tariffs and other cross-border policy developments on the horizon.

Canadian companies that expect to experience financial distress as a result of tariffs should begin planning now, with those Canadian businesses that are able to move quickly and nimbly being best positioned to withstand the impact of tariffs. On the heels of President Trump’s announcement on February 10, the Canadian steel and aluminum industries may be the first to feel the effects of 25% tariffs starting on March 12. The reprieve for other industries does not appear to be permanent, with further tariffs looming as distinct possibilities in the near future.

Any tariffs imposed on Canadian goods by the United States will decrease the competitiveness of Canadian companies compared with their competitors located in the United States. Companies that sell into the United States will of course see the most obvious impacts of this policy but secondary and tertiary impacts will reverberate through supply chains, starting with the steel and aluminum and adjacent industries.

By design, Canadian businesses, including steel and aluminum producers, have been provided with the necessary tools to restructure, whether under corporate statutes such as the Canada Business Corporations Act or under restructuring statutes such as the Companies’ Creditors Arrangement Act (CCAA). The balance of this bulletin highlights the tools that can be used by companies to terminate unfavourable or uneconomic contracts in CCAA restructurings, with a view toward enhancing competitiveness¹.

Under the CCAA, a company may, on notice to the other parties to an agreement and the court-appointed monitor, terminate any agreement to which the company is a party, which termination can become effective as soon as 30 days after the day on which the company gives notice if not disputed.

In the event of a dispute, the court will decide whether to approve the contract termination and will consider, among other things:

• whether the monitor approved the proposed termination;
• whether the termination would enhance the prospects of a viable compromise or arrangement or restructuring; and
• whether the termination would likely cause significant financial hardship to the contract counterparty.

There will typically be alignment between a debtor company and a monitor, meaning that a court’s determination of any dispute will turn on the second and third considerations. A judge will employ intricate, fact-specific, real-time decision making in making this determination. In assessing these considerations, courts will take into account:

• the current economic crisis faced by the company and its effect on the company’s industry;
• whether and how the contract had become prejudicial to the company’s business and if its termination will improve operations and profitability;
• the totality of what the company is attempting to accomplish in its restructuring and if the termination will enhance the prospects of that restructuring;
• whether refusing to terminate the contract would imperil the restructuring;
• an examination of the individual characteristics and circumstances of the contractual counterparty to assess whether the financial hardship is “significant”; and
• the need for fair and equitable treatment of all stakeholders (including other creditors) and the relative equities among the parties.

Companies, boards and management will be judged by markets and lenders according to how well they are able to deal with the potential impact of tariffs, with, by all indications, the steel and aluminum industries to be tested first and other industries to potentially follow. There may not be room for all companies within particular industries to do the restructuring that may be necessary, making first-mover advantage important with potential rewards for companies that get up the curve on contingency planning early. This may require an assessment of operations and a review of key contracts, with a view to enhancing competitiveness.

 
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