Kent B. Scott | Babcock Scott & Babcock
In short, the answer is dependent on the terms of the specific contract. If a contract is a fixed price contract, an increase in the cost of materials likely will not be covered by a force majeure provision. Moreover, if a contract is a fixed price contract and it contains a “no damage for delay” provision, then it is very likely an increase in the cost of material will not be covered by a force majeure provision. Since it is unlikely a substantial increase in the cost of materials will trigger a force majeure provision, it is not necessary to determine what the appropriate remedy would be.
Applying Florida law, the Eleventh Circuit found that a contractor who entered into a fixed price contract with a property owner and subsequently saw a substantial increase in its costs due to effects of a series of hurricanes, which caused a shortage of labor and material, was precluded from recovering additional labor and material costs from the force majeure events – i.e., the hurricanes. S&B/BIBB Hines PB 3 Joint Venture v. Progress Energy Fla., Inc., 365 Fed. Appx. 202, 203, 205 (11th Cir. 2010). In S&B, the parties’ contract required the contractor to “provide pricing for [all material, equipment, workmanship, labor, engineering, and any other items or labor performed or furnished] at a firm fixed price.” Id.at 203. The contract further contained a “no damage for delay” provision that provided “that in no event shall Contractor be entitled to any increased costs, additional compensation, or damages of any type resulting from such Force Majeure delays” Id. at 204. The court ultimately found that:
“it would subvert the entire purpose of a fixed price contract to allow [the contractor] to recover additional labor and materials costs when the benefit of a fixed price contract is to protect against price increases, labor shortages, material shortages, and the like. In contracting for the fixed price construction job, ‘the parties thoroughly addressed and allocated the risks’ inherent in the project, and [the contractor] could have increased its prices to reflect the risks it was assuming.”
Id. at 205-06 (quoting Marriot Corp. v. Dasta Const. Co., 26 F.3d 1057, 1065-66, 1066 (11th Cir. 1994)). The court reasoned that “[t]he contract made plain that [the contractor] bore the risk of these additional expenses and could have negotiated an alternate contract containing an escalation clause, a cost-plus arrangement, or a higher fixed price to protect against unforeseen expenses or increased its contract price to account for such risks.” Id. at 206.
The Fourth Circuit similarly held that a force majeure clause does not protect against changes in market price. Langham-Hill Petroleum Inc. v. S. Fuels Co., 813 F.2d 1327, 1330 (4th Cir. 1987). In Langham-Hill, two parties entered into a fixed price contract for a lump sum number of barrels of oil, which would be purchased at the fixed contract price over four monthly installments. Id. at 1329. The first three installments concluded without dispute. Id. However, prior to the fourth and final installment there was a substantial drop in the world oil prices. Id. The purchaser invoked the contract’s force majeure clause and refused to perform any further obligations under the contract. Id. The Fourth Circuit reasoned that “[i]f fixed-price contracts can be avoided due to fluctuations in price, then the entire purpose of fixed-price contracts, which is to protect both the buyer and the seller from the risks of the market, is defeated. Id. at 1330. The Fourth Circuit adopted the Seventh’s Circuit reasoning in Northern Indiana Public Service Company v. Carbon County Coal Company, 799 F.2d 265 (7th Cir. 1986), which dealt with a utility company’s efforts to escape a fixed-price coal contract, that:
[the defendant] committed itself to paying a price at or above a fixed minimum and to taking a fixed quantity at that price. It was willing to make this commitment to secure an assured supply of low sulphur coal, but the risk it took was that the market price of coal or substitute fuels would fall. A force majeure clause is not intended to buffer a party against the normal risks of a contract. The normal risk of a fixed price contract is that the market price will change. If it rises, the buyer gains at the expense of the seller (except insofar as escalator provisions give the seller some protection); if it falls, as here, the seller gains at the expense of the buyer. The whole purpose of a fixed price contract is to allocate risks in this way. A force majeure clause interpreted to excuse the buyer from the consequences of the risk he expressly assumed would nullify a central term of the contract.
Langham-Hill, 813 F.2d at 1330 (quoting N. Ind. Pub. Serv’s., 799 F.2d at 275).
Utah courts seem to follow this reasoning. In Kilgore Pavement Maintenance, LLC v. West Jordan City, 2011 UT App 165, ¶ 2, 257 P.3d 460, a pavement contractor provided a city with a fixed price bid that was based on liquid asphalt oil being priced at $350 per ton, which the city accepted, and the two parties subsequently entered into a contract. Id. Shortly after the parties entered into the contract, the price of liquid asphalt increased to $1005 per ton. Id. at ¶ 3. The court ultimately held that the contractor “assumed responsibility for supplying all materials necessary for its performance, and therefore, assumed the risk of supply cost increaser”, which ultimately precluded the contractor from relying on a claim of impossibility or commercial impracticability. Id. at ¶8, 12. While a force majeure clause is absent from the reasoning in Kilgore, Kilgore does provide that under Utah law, a fixed price contract is prima facie evidence of an allocation of risk of the change in the contracted material’s market price.
Assuming the contract between an owner and contractor is a fixed price contract, it is likely the substantial increase in price cannot trigger the force majeure clause since the contractor assumed the risk of an increase in the market price of lumber when it entered into the fixed price contract. the contractor had the opportunity to bargain for an escalation provision, a cost-plus contract, or a higher contract price to reflect its risk. Thus, the contractor is contractually obligated to purchase lumber at the higher market price so long as lumber is available for the contractor to purchase.
It is important to note that although it is likely Burton Lumber is precluded from relying on a force majeure provision, it may still have a claim under an excuse doctrine, such as “frustration of purpose, impossibility, and commercial impracticability.” § 7:322. Relief from disruption caused by COVID-19 pandemic, 2A Bruner & O’Connor Construction Law § 7:322. However, pursuant to Kilgore, it is unlikely such a claim would be successful. 2011 UT App 165, ¶ 8, 12, 257 P.3d 460.