Adapting to Tariffs: Legal Insights for Municipalities in Ontario

Introduction

The imposition of tariffs by the United States and other global trade partners has significant consequences not only for Canadian businesses and industries but also for municipalities. Recently, a board member of the Federation of Canadian Municipalities (FCM) noted that Canadian municipalities collectively procure in excess of $30 billion in goods and services annually, including approximately $4 billion procured from the United States.[i] This article will attempt to explain in brief the impact of tariffs on municipalities throughout the Province of Ontario. Tariffs, particularly on construction materials, infrastructure projects, and imported goods, can affect municipal budgets, delay essential projects, and necessitate adjustments to procurement strategies. As municipalities work to serve their communities, they must navigate the potential impacts on their ongoing projects, procurement processes, and future contracts.

Overview of Recent Tariffs

Although admittedly unpredictable, the United States imposed tariffs on a wide range of goods imported from Canada, including construction materials such as steel and aluminum. These tariffs are expected to affect municipalities in both direct and indirect ways. As a significant portion of municipal infrastructure relies on imported materials, this tariff increase will likely lead to higher construction costs, particularly for projects involving public works (wastewater, water, storm, roads) and municipal building developments. In retaliation, Canada imposed its own tariffs against America, further compounding the pressure brought on by a tariff war on municipalities. These reciprocal tariffs are expected to create a ripple effect, raising prices not only for imported materials but also for goods that municipalities rely on for day-to-day operations

Legal Implications for Municipalities in Brief:

The impact of these tariffs extends beyond cost increases. Municipalities must understand how these changes will affect their existing contracts, procurement processes, and legal obligations. The following legal considerations are vital for municipalities grappling with the challenges presented by new tariff structures.

1. Contractual Considerations

Municipalities frequently enter into contracts for construction and infrastructure projects that rely on the procurement of materials from foreign suppliers, including the United States. As tariffs increase the cost of these materials, municipalities must assess their existing contracts to determine whether provisions exist to account for such changes.

(a) Force Majeure

Municipal contracts frequently include force majeure clauses, which excuse performance under certain circumstances, such as unforeseen changes in law or regulations. When it comes to tariffs, municipalities should assess these force majeure clauses to determine if they can be invoked in response to rising tariff costs.

(b) Change of Law Clauses & Risk Allocation

Municipalities should proactively address tariff risk allocation in future contracts by including provisions that specify how tariff fluctuations—whether increases or decreases—after bid closing will impact contract prices or material costs shifting the entire burden to contractors could result in higher bids, while placing it on municipalities may lead to price adjustment requests during the project.

(c) Price Escalation Clauses

Municipalities should consider incorporating provisions in contracts that provide flexibility in the event tariffs increase project costs. These provisions could outline a process for notifying the parties, exploring alternative materials, and specifying how and when price changes will be applied. Additionally, they should address any necessary adjustments to the project schedule.

2. Procurement Challenges and Legal Compliance Considerations

Municipalities are bound by specific procurement policies, often set internally, as well as by international trade agreements like the Canada-European Union Comprehensive Economic and Trade Agreement (CETA). These regulations ensure transparency, competitiveness, and fairness in procurement processes. However, the imposition of tariffs introduces new legal and practical complexities, particularly in abiding by pre-existing legal arrangements, and in terms of cost disparities between domestic and international suppliers, making it more challenging for municipalities to acquire goods and services for municipal works projects.

(a) Transparency and Competitive Bidding

As tariffs increase the price of imported goods, municipalities may encounter challenges in maintaining competitive bidding processes. These new tariffs can create price disparities between local and international suppliers, especially for large-scale infrastructure projects. Municipalities may need to adjust their procurement processes to account for these disparities, potentially modifying tender requirements to promote Canadian suppliers or offering flexibility in bids to reflect the impact of tariffs. Adjusting tender requirements to encourage local sourcing may help mitigate these impacts where and when feasible. Furthermore, the Canada–United States–Mexico Agreement (CUSMA) does not apply to municipal procurement, allowing municipalities to adopt strategies that prioritize Canadian and other non-U.S. goods and services over those from the U.S.

(b) Local Content Requirements and Trade Agreements

To mitigate the impact of tariffs, some municipalities may encourage the use of locally sourced materials or impose local content requirements on contractors. However, such measures must align with international trade obligations. The Municipal Act, 2001,[1] also suggests that municipalities conduct procurement in a fair, open, and competitive manner, which may limit the ability to impose local content requirements that conflict with these international obligations. Municipalities must carefully assess the impact of these agreements on their procurement strategies to ensure compliance with both domestic laws and international trade commitments. Municipal procurement by-laws must align with both domestic and international trade agreements, including free trade agreements such as the CETA, which prohibit preferential treatment for goods or services based on geographic origin. However, the CETA provides specific procurement thresholds below which Canada is not required to open bidding to countries in the EU. As a result, Canadian municipalities shall lawfully incorporate local preference policies for procurements that fall under the applicable threshold values.[2]

(c) Tendering

Municipalities may consider requiring bidders to disclose any U.S.-sourced or internationally sourced materials in their bids, along with their estimated value, to better understand the impact of tariffs on project costs, especially if they rely on provincial funding and procurement guidelines. While municipalities may contemplate requiring bidders to source materials exclusively from Canadian suppliers, this approach must comply with international trade agreements, as public sector tenders may be subject to restrictions on local content requirements based on specific thresholds. While the latter point may be influential, it also appears that council has the authority to pass by-laws under sections 10 and 11 of the Municipal Act to promote the economic, social, and environmental well-being of the municipality, including financial management.[3] Notably, some municipalities are contemplating amendments to their purchasing by-laws that would prohibit U.S.-owned companies, or their subsidiaries, from participating in municipal procurement processes for the duration of the tariffs. However, municipalities should approach such measures with caution. Many U.S.-owned entities operating in Canada employ Canadian workers, and overly broad restrictions could inadvertently impact local employment. A careful, case-by-case assessment is therefore essential to ensure that any procurement response does not disproportionately harm Canadian interests

3. Budgeting and Financial Considerations

Tariffs are likely to drive up material costs, placing additional strain on municipal budgets. With often limited financial resources, municipalities may struggle to absorb these increased costs without adjusting planned projects or reallocating funds. Municipal finance departments will need to assess how to adapt to rising costs and ensure that project funding is appropriately adjusted.

(a) Reevaluating Budget Projections

In light of rising construction costs, municipalities may need to reevaluate their budget projections for ongoing and upcoming projects. These adjustments may require reallocating funds from other departments or prioritizing certain projects over others. Financial forecasting will become an essential part of municipal planning to ensure that projects remain within budget despite tariff-induced cost increases.

(b) Seeking Funding or Cost-Sharing Opportunities

Municipalities may seek to mitigate the financial impact of increased tariffs by exploring cost-sharing opportunities with provincial or federal governments. Additionally, municipalities could explore available funding programs or grants designed to offset the costs of infrastructure projects. Engaging in discussions with government stakeholders at various levels will be crucial for securing additional resources to cope with higher material costs due to tariffs.

4. Litigation Risks and Potential Legal Challenges

Given the significant impact tariffs may have on municipal operations, there is potential for legal disputes related to contract modifications, cost increases, and procurement decisions. Contractors may seek to recover additional costs through legal action, while municipalities may face challenges in enforcing contracts or adjusting project timelines.

(a) Disputes with Contractors

If contractors believe that the increased costs of materials due to tariffs are not adequately addressed in their contracts, they may pursue claims for additional compensation or delay penalties. Municipalities should be prepared for potential disputes and work closely with legal advisors to ensure that any contract modifications or claims are handled in a legally compliant manner.

(b) Judicial Review of Procurement Practices

Changes to procurement policies or the imposition of local content requirements may prompt contractors or suppliers to seek judicial review of municipal procurement decisions. Municipalities must ensure that any modifications to their procurement processes align with applicable trade agreements and regulations to minimize the risk of legal challenges.

Policy Reform Considerations

To effectively manage the legal and financial challenges posed by tariffs, municipalities should consider the following practical policy recommendations:

(a) Proactively Renegotiate Contracts

Municipalities should work closely with contractors to renegotiate terms, particularly around force majeure, price escalation, and change of law clauses. Incorporating tariff-related contingencies into future contracts will help mitigate the financial burden of unforeseen cost increases.

(b) Diversify Suppliers

In order to reduce reliance on foreign materials subject to tariffs, municipalities should consider sourcing domestically or from alternative countries with more favorable tariff structures. In addition, long-term strategic partnerships with Canadian suppliers could offer cost benefits and greater stability in pricing.

(c) Advocate for Tariff Exemptions

Municipalities should explore avenues for engaging in dialogue with trade negotiators and lawmakers to secure tariff exemptions for certain essential materials used in municipal projects, particularly those with high public value, like transportation infrastructure and emergency services facilities. In fact, on March 18, Ontario Premier Doug Ford publicly emphasized the need for Canada to shift its focus to making sure they are first in line for tariff exemptions from the U.S.A.[4]

Conclusion

Under the current American administration, the imposition of tariffs is unlikely to be a short-term issue. As global trade dynamics continue to shift, municipalities must prepare for ongoing tariff uncertainty. The long-term impact of tariffs could lead to reshaped supply chains, prompting municipalities to diversify their suppliers and become more flexible in their procurement processes.

By proactively addressing the legal complexities surrounding tariffs in applicable municipal procurement processes and agreements, municipalities with the approval of their respective councils, may be able to minimize disruptions to municipal works projects and developments, uphold fair and transparent procurement processes, and maintain budgetary control in an increasingly unpredictable global trade environment.

[1] Municipal Act, 2001, SO 2001, c 25 [Municipal Act].