What are tariffs?
Tariffs are taxes levied on imported goods and services. The most common form of tariffs is ad valorem (Latin for “to value”), which are levied as a percentage of the value of imported goods. Other forms of tariffs include “specific tariffs,” which are charged as a fixed amount on an imported good regardless of its value, and “tariff-rate quotas,” which are structured to increase once a certain amount of imported goods is reached. You can read more about the United States’ tariff policy in this Congressional Research Service fact sheet.
What tariffs have been enacted?
On February 1, 2025, President Trump signed three Executive Orders imposing additional ad valorem duties, or tariffs, on goods entering the United States from Mexico, China, and Canada. These tariffs take effect at 12:01 am on February 4, 2025, and apply to a range of goods including iron and steel. (Update: Media outlets are reporting that additional tariffs on goods from Mexico and Canada will be paused for one month.)
Pursuant to the Executive Orders, there will be a 10% tariff on all goods from China. All goods from Canada and Mexico will be subject to a 25% tariff, except that energy or energy resources from Canada are subject to a 10% tariff.[1] All of these tariffs are in addition to existing tariffs on goods from these countries.
What might tariffs mean for purchasers in local governments?
According to the Council on Foreign Relations, the costs of tariffs are often passed along to consumers. However, this is not universally true. In some instances, companies affected by the tariffs successfully negotiate with suppliers to avoid incurring costs or companies choose to absorb the costs of the tariffs, and prices for consumers are not impacted.
Still, purchasers in local government should expect that companies that are already under contract to provide goods and services to their unit will seek to renegotiate their contracts. These companies will likely point to the force majeure contract clause or other defenses to excuse performance under the current terms of the contract. What are local governments’ options if they still want the goods or services from the contractor? This blog post explains how to handle a contractor’s claim of non-performance and how local governments should navigate contract price increases due to tariffs.
Handling claims of force majeure or other defenses
As my former colleague Connor Crews wrote about in the context of COVID-19, force majeure clauses vary widely, but they serve to excuse a party from performing under a contract when there are unexpected circumstances beyond the control of the parties at the time that the contract is made. In his blog post, Connor offers several practical solutions, which are still relevant for addressing the impact of tariffs on existing contracts.
To start, procurement officials and their attorneys will need to evaluate whether the tariffs qualify as a force majeure event. Commonly, force majeure clauses specify certain qualifying events (e.g., strikes, disaster, acts of God) and include catch-all language that does not limit force majeure to the enumerated events. North Carolina courts have not considered whether tariffs constitute a force majeure event. Courts generally disfavor determining that a force majeure event has occurred where there are mere increased costs or reduced profits, unless the language of the contract specifically recognizes such circumstances as force majeure events. Rather, courts have opined that a force majeure clause is “not intended to buffer a party against the normal risks of a contract,” such as fluctuations in market pricing. See Langham-Hill Petroleum Inc. v. S. Fuels Co., 813 F.2d 1327 (4th Cir. 1987). If a local government concludes that the tariffs constitute a force majeure event, it will need to ensure that the contractor is satisfying the applicable notice provisions under the contract. If desired and allowed by the agreement, the local government may also terminate the contract.
If the tariffs do not constitute a force majeure event or the contract documents do not include a force majeure clause, a contractor may have other options provided by law to excuse performance. The common law (the body of law developed through court decisions) and the Uniform Commercial Code (UCC) provide potentially viable excuses of impossibility, frustration of purpose, and impracticability. Each of these defenses are addressed briefly in Connor’s blog post.
Ultimately, the underlying question to consider regarding tariffs is whether performance under the contract can only be done at a cost that is excessive and unreasonable. This is a high bar, though, and North Carolina courts have concluded that contractors assume the risk of changes in government regulations and market conditions. See Alamance Cty. Bd. of Educ. v. Bobby Murray Chevrolet, Inc., 121 N.C. App. 222 (1996); see also D.S. Simmons, Inc. v. Steel Grp., LLC, 2008 WL 488845 (E.D.N.C. Feb. 19, 2008). Under the UCC, increased costs alone will not satisfy the requirements of the defense of impracticability, nor will a rise in the market suffice. G.S. 25-2-615, cmt. 4. However, “a severe shortage of raw materials or of supplies due to a contingency such as war, embargo, local crop failure, unforeseen shutdown of major sources of supply, or the like” would be sufficient. Id.
If a local government wants to continue the contract—can it?
Even if a contractor has a valid excuse for non-performance under a force majeure clause or the defenses discussed above, a local government may still want to continue the contract. Perhaps construction is already underway for a new school, or a purchase order has been issued for new law enforcement vehicles. Given the constraints of North Carolina’s competitive bidding law, can local governments continue existing contracts affected by price increases? Maybe, but local governments cannot pay out more than they have agreed to pay under a particular contract.
First and foremost, procurement officials and attorneys should explore possibilities that will avoid local governments assuming any increased costs. For example, can performance be delayed by allowing contractors to explore alternatives for supplies? Ideally (although, perhaps unrealistically), the parties can find a solution that allows for performance without increased costs.
If delaying performance is not feasible or worthwhile, North Carolina’s competitive bidding statutes do not seem to allow a local government to amend a contract to increase the price. Generally speaking, a local government cannot increase the cost of the contract unless that cost increase is reflected in the original contract. Additionally, if the contract was subject to competitive bidding requirements, cost escalation must have been included in the original bid specifications. Stated simply, both the local government and contractor are bound by the original solicitation and contract. So, if price escalation was not included in the original contract, a local government is only legally obligated—and authorized—to pay the original contract price.
This means that if a contractor is unwilling to perform at a current contract price, local governments will have to decide whether to pursue a breach of contract claim or cancel the existing contract and resolicit the necessary goods or services. The appropriate decision is a business decision for the local government.
Planning ahead for procurement and fluctuations in price
While the tariffs will affect many industries that supply goods and services to local governments, vendors will have varied approaches to passing along the costs of the tariffs. As local governments plan to procure in the months ahead, procurement officials and attorneys should ensure that solicitation documents and subsequent contracts include sufficient escalation clauses. Cost or price escalation clauses are useful tools that allow local governments to continue contracts where costs have increased. Cost escalation clauses often include independent benchmarks as reference points (e.g., commodity indexes) and sharing among the parties of price increases and decreases. Regardless of the details, local governments should include cost escalation clauses in their solicitations and should ensure that the clauses provide certainty and protection to the local government.
A quick note on supply chain disruption as an “emergency”
Previous tariffs have demonstrated that contractors adapt quickly to source necessary materials at lower costs. However, the market cannot always meet the demand, which can lead to temporary supply shortages, increased costs, and schedule delays. In 2023, the North Carolina General Assembly enacted amendments to the North Carolina Emergency Management Act that may provide some relief in this situation.
In the Regulatory Reform Act, Session Law 2023-137, a section entitled “Emergency Supply Chain Declaration for Local Governments” modified the definition of “emergency” in G.S. 166A-19.3 to include “a disruption in the supply chain that causes a significant threat to a local government’s ability to acquire products or services required to provide essential services such as electricity and water to the populace or required to restore such essential services in the event of widespread or severe damage to the local government system used to provide such essential services.”
Additional language in the legislation states that competitive bidding statutes do not apply to contracts for the award of goods or construction or repair work where required goods are (1) listed in an emergency declaration arising from a supply chain disruption, or (2) listed in an order or regulation issued by the federal government under the Defense Production Act.
This means that a local government may be able to make an emergency declaration of a “supply chain disruption” to exercise this competitive bidding exception. As of the date of this blog post, I am not aware of any local governments using this exception. Although the language of the amendment is focused on utilities, the amendment does not define “essential services.” This phrase could be construed more broadly than utilities. For example, if a disruption in the supply of vehicles affects the provision of law enforcement or fire protection services, it is possible that this exception could apply. Since the legislation is very recent, there is no case law providing guidance on its scope and local governments should consult with their attorney about questions of applicability and interpretation.
Questions?
If you have any questions about navigating contracts affected by tariffs, drop me a line at cuccaro@sog.unc.edu.
[1] The term “energy” or “energy resources” means crude oil, natural gas, lease condensates, natural gas liquids, refined petroleum products, uranium, coal, biofuels, geothermal heat, the kinetic movement of flowing water, and critical minerals, as defined by 30 U.S.C. 1606 (a)(3).
