Force Majeure Application to Increase in Price of Materials

Kent B. Scott | Babcock Scott & Babcock

Is a substantial increase in the cost of materials covered by a force majeure provision? If so, what is the appropriate remedy?

Short Answer

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.

Analysis

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 delaysId. 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.

Conclusion

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.

Court of Appeals Affirms Dismissal of Owner’s Claims Based on Contractual One-Year Claims Limitations Period

Cassidy Ingram | Ahlers Cressman & Sleight

In a recent unpublished decision – Tadych v. Noble Ridge Construction, Inc.– the Washington State Court of Appeals, Division One, held that a one-year contractual claim limitations clause was valid and enforceable. The Tadych decision is important because it reiterates the strict approach courts will take to a claim limitations clause less than the statutory six years for breach of contract claims prescribed by RCW 4.16.040(1). In other words, when the parties agree to shorten the limitations period, the agreement will be enforced barring any procedural or substantive unconscionability.

In Tadych, plaintiff owners (the Tadychs) contracted with defendant contractor (Noble Ridge Construction, Inc., or NRC) for the construction of a custom home in 2012. The contract provided a one-year claim limitations clause in which claims could be raised, and that all claims not raised in the one-year period would be waived. In December 2013, as the project neared completion, the Tadychs met with NRC to identify any outstanding project issues. The Tadychs noted several, including rainwater pools at the landing at the bottom of the stairs and several nicks and cracks on the stucco exterior walls.

The Tadychs moved into the home on April 8, 2014, and the City of Seattle Department of Planning and Development conducted its final site inspection on April 15 and approved the residence for occupancy on April 23. In January or February 2015, the Tadychs began to notice a shift in their home. In February of 2015, the Tadychs engaged Construction Dispute Resolution (CDR)  to review NRC’s work. CDR raised concerns about the adequacy of the home’s construction and prepared a written report in March 2015 indicating several deviations from the architectural plans and building codes. The Tadychs sent this report to NRC, who assured the Tadychs that NRC’s work followed all requirements and rejected any claims that there were deviations from the plans. The Tadychs continued to notice issues with the home through October 2016.

In August 2017, the Tadychs filed a breach of contract action against NRC, arguing that the one-year claim limitations clause was substantively unconscionable because they could not have discovered the latent defects within that time or, alternatively, that NRC should be estopped from asserting it. NRC moved for summary judgment, arguing that the Tadychs’ lawsuit was time-barred under the one-year contractual claim period. The trial court granted summary judgment in favor of NRC and the Court of Appeals affirmed. The Court held that the claims limitation clause was not substantively unconscionable because (1) the Tadychs were not seeking to vindicate statutory rights but private contract rights, (2) the one-year claim period was sufficiently long, and (3) the claims period did not require the Tadychs to forego other statutory rights to which they were otherwise entitled. In addition, the Court held that the Tadychs were on notice of each potential latent defect before the one-year period ended, and they could have preserved their claims by initiating the action within that time.

The Court also rejected Tadychs’ claim that NRC should be estopped from relying on the one-year claim period because it misrepresented its intention to repair them. The Court held that NRC did not make any statements that could have induced the Tadychs to refrain from bringing a timely lawsuit. NRC’s mere denial of any defects was not a misrepresentation to the level of justifying estoppel.

Commentary

This opinion reiterates the importance of pursuing claims within the contracted-for period if one is provided. Courts are hesitant to find a contractual claim limitations clause unconscionable. Therefore, the best course of action for an owner is to raise latent defects in a lawsuit as soon as they are discovered.

Connecticut Superior Court Holds That “Slaughter Clauses” Cannot be Added to Public Works Subcontracts Under Connecticut General Statutes § 4b-96

Niel Franzese | Construction Law Zone

While you may not have heard the term “slaughter clauses” to describe the provisions of a construction contract before, the metaphor makes sense when one considers the provisions to which the Connecticut Superior Court recently applied the phrase. In the recent case of Electrical Contractors, Inc. v. Lawrence Brunoili, Inc., et al., Docket No: X-07 HHD CV-20-6129731, the Superior Court considered many subcontractors’ least favorite contract provisions – those that impose limits on a subcontractor’s right to recover money, like strict notice provisions, payment limitations, and damages restrictions.

The Court (Hon. Thomas Moukawsher) was recently presented with the question of whether such clauses may be included in state construction subcontracts subject to Connecticut General Statutes § 4b-96, a provision of the public works contracting scheme which specifies the statutory form of subcontracts required on covered projects. Electrical Contractors, Inc., a subcontractor to Lawrence Brunoli, Inc. on the Kaiser Hall renovations project at Central Connecticut State University, sued Brunoli and its surety, alleging that Electrical Contractors was entitled to recover additional costs incurred as a result of alleged errors, omissions, and deficiencies by Brunoli in managing the project.

During the course of the litigation, Electrical Contractors moved for summary judgment on, among other things, certain of Brunoli’s and the surety’s special defenses which collectively relied on subcontract provisions that Electrical Contractors argued were illegal and unenforceable under C.G.S. § 4b-96 in that they contradicted the terms of the statutory form of subcontract. The Court agreed with Electrical Contractors with respect to these clauses and granted it partial summary judgment on the surety’s relevant special defenses.

In its Memorandum of Decision, the Court observed that § 4b-96 mandates a specific form of subcontract and “specifies every part of the contract from the title to the signature lines.” Unlike other statutory provisions which might require agreements or contract provisions to be “substantially” in the form specified by statute, § 4b-96 contains no such room for modification. Because the statutory form of subcontract required that the contractor assume toward the subcontractor all of the obligations and responsibilities that the state assumed toward the contractor pursuant to the relevant contract documents, the Court held that a pay-if-paid provision could not be included to create a situation where “the state could owe something to the contractor that the contractor would not owe to the subcontractor.”

Faced with a less clear analysis on other specific “slaughter clauses” included in the subcontract, the Court went on to hold more broadly that additional clauses not specified in the statute may be added only to the state-controlled portion of the contract, i.e., the prime contract’s general conditions. Holding that “‘shall’ means shall,” the Court ruled that if Brunoli wanted to vary the statutory subcontract’s terms, it needed to request that the state include those varied terms in the state-controlled general conditions of the prime contract, which would then be incorporated into the subcontract as per the statutory form language. With respect to some of the provisions under review, the state did just that, and the Court did not take issue with those particular clauses. Instead, the Court confined its decision to granting summary judgment on “the special defenses invoking those impermissible clauses” which were contained only in Brunoli’s modified form of the statutory subcontract.

Although the Court’s decision in this case is not an appellate level decision, it could have a big impact on the day-to-day contracting practices of subcontractors and general contractors on public works projects in the state of Connecticut. As the Court observed, its decision was somewhat contrary to the “contemporary practices” of construction contract drafting, but it did not let those perceived practices stand in the way of a strict application of the statute’s plain language. As a result, many public works contractors seeking work in Connecticut may need to reconsider the use of their form subcontracts, complete with the typical “slaughter clauses,” on projects to which  § 4b-96 is applicable, and an increase in litigation by affected subcontractors currently subject to such provisions may follow the Court’s decision.

Five Frequently Overlooked Points of Construction Contracts

Craig O’Neill | White and Williams

There is no shortage of articles addressing the key points of construction contracts. Just enter that phrase into any internet search engine and you will find plenty. It should go without saying that a construction contract should be in writing, it should clearly identify the scope of work to be performed and the sums to be paid for that work, and it should address the parties’ rights and responsibilities with regard to termination or suspension of the contract, correcting defective work, and handling claims and disputes—just to name a few. Of course, these items should receive their due consideration. Too often, however, other important aspects of the construction contract get shortchanged. This article aims the spotlight on five often overlooked aspects of construction contracts.

PROJECT SCHEDULES

Surprisingly, many construction contracts pay little attention to a central component of any construction project: the project schedule. Many contracts provide the dates of commencement and substantial completion but not much else. With the frequent use of project management techniques such as the Critical Path Method (CPM) and the associated software, it is easier than ever to identify which tasks should be prioritized and identify potential areas of delay. The owner’s contract with the general contractor should clearly define the scheduling methods used and provide measures to keep the parties informed of the progress of the work. By including basic scheduling requirements in the contract documents—such as the submission of “Baseline Project Schedules” (consistent with the contract time provisions), “Schedule Progress Updates” (comparing the progress of the work against the Baseline Project Schedule), and “Schedule Recovery Plans” (when Schedule Project Updates indicate projected delays)—the parties can avoid or reduce disputes over project delays that often lead to litigation.

CHANGES TO THE PROJECT SCOPE OF WORK

Most construction contracts provide for written “Change Orders” to authorize changes to the contractor’s scope of work. But what happens when the parties cannot agree on the terms of a change order? Often such disputes can lead to project delays if not properly addressed in the contract. For example, the AIA A201-2017 (General Conditions) provides for the use of “Construction Change Directives,” which essentially require the contractor to proceed with the owner’s requested changes to the work within the general scope of the contract, and then later resolve any disputes over changes to the contract sum or time extension. Another way to handle change order disputes is to build into the contract a fast-track procedure for handling them. For example, the parties can designate a third-party (e.g., an architect, engineer, etc.) who will step in on short notice to resolve any disputes that arise regarding changes to the scope of work. Regardless of the mechanism you decide on, providing a method of resolving change order disputes in the contract will reduce the likelihood of unwanted delays when the inevitable disputes arise.

NOTICE PROVISIONS

Perhaps due to their simplicity, notice provisions are one of the more overlooked clauses in construction contracts. These provisions typically require parties to notify each other in certain circumstances to make them aware of any problems that might arise. Frequently, parties will review the notice provisions simply to ensure that the appropriate names and addresses are listed. They are then quickly forgotten once the project begins. But failing to comply with a contractual notice provision can be fatal to a potential claim. A few things worth considering: First, notices should always be given in writing, regardless of whether the notice requirements are prefaced by the word “written.” Second, don’t assume that electronic notice is sufficient—it typically will not be unless specifically stated in the contract. Third, certain types of notices require specialized delivery methods, such as certified or registered mail or courier. It is therefore important to be aware not only of the types of notices that are required but also how they must be delivered. The bottom line is that notice provisions come in many forms. It is important to draft custom notice provisions that suit the needs of the project and then follow those provisions to the letter.

LIEN CLAIMS

Lien claims are a primary concern of project owners on most construction projects. While many construction contracts require lien waivers from contractors and subcontractors upon payment, many do not lay out how lien claims are handled if/when such claims arise. Project owners should consider including additional protections in the event that a contractor, subcontractor or material supplier files a lien claim. For example, the owner can request language requiring the contractor to immediately take any and all steps to satisfy and/or dismiss a lien claim, or post cash or securities with the court in substitution of that claim. The contract can also specify that the owner has the right to take such steps in the event the contractor fails to do so within a specified period of time. The owner could also require the contractor to indemnify and hold it harmless from any and all claims and/or other proceedings on the lien claim and all related costs and expenses if the contractor fails to take these actions upon notice from the owner. Detailing the rights and obligations of the parties in the event of a lien claim will help to provide clarity in the event that one is later filed.

FORCE MAJEURE CLAUSES

Prior to 2020, most parties to construction contracts devoted very little time to force majeure clauses. But then 2020 brought us the global COVID-19 pandemic. Now these once overlooked clauses are taking center stage. For the uninitiated, force majeure clauses typically excuse a party’s inability to perform its obligations under the contract if an unforeseeable event prevents its performance. The applicability of force majeure clauses is very fact specific and dependent on the express language of the contract. Contractors should be aware that these clauses require more than a garden-variety delay. Generally, the event alleged must have been beyond the contractor’s control and not due to any fault or negligence by the non-performing party. Many contracts also require written notice of a force majeure event and provide that the contractor’s delay must end once the unexpected event has ended. But when clearly drafted and properly invoked, force majeure clauses provide necessary protection for contractors faced with circumstances beyond their control that make performance of the work commercially impracticable, illegal or impossible.

Understand the Dispute Resolution Provision you are Agreeing to

David Adelstein | Florida Construction Legal Updates

When negotiating a contract, do not overlook the dispute resolution provision.  It is one of the more important provisions in your construction contract.   This provision will come into play and have ramifications if there is a dispute, which is certainly not uncommon on a construction project.

In dispute resolution provisions in subcontracts on federal projects, it is not unusual for that provision to include language that requires the subcontractor to STAY any dispute that concerns actions or inactions of the owner pending the resolution of any dispute between the owner and prime contractor relating to that action or inaction.   A provision to this effect should be included for the benefit of the prime contractor.  For instance, the provision may say the subcontractor agrees to stay any such claim against the prime contractor or prime contractor’s surety pending the outcome of any pass-through claim (or otherwise) submitted under the Contract Disputes Act.

For example, in U.S.A. f/u/b/o Ballard Marine Construction, LLC v. Nova Group, Inc., 2021 WL 3174799 (W.D. Wash. 2021), a prime contractor hired a subcontractor to perform a scope of work at a naval shipyard.  A differing site condition was encountered and the subcontractor was directed to continue performance and track its costs.  The subcontractor completed its work and submitted its approximate $13 Million claim from the prime contractor and its Miller Act payment bond surety.  The prime contractor and surety refused to pay until the resolution of the pass-through differing site conditions claim to the federal government.  The prime contractor had submitted a claim under the Contract Disputes Act to the federal government.  The subcontractor was not interested in waiting until the resolution of the Contract Disputes Act claim and filed suit against the prime contractor and Miller Act payment bond surety.  The prime contractor and surety moved to stay pending the outcome of the Contract Dispute Acts claim.  The trial court agreed with the prime contractor explaining, “It is not fruitful to require [the prime contractor] to fend off [the subcontractor’s] claim against it, and the [Miller Act] sureties [the prime contractor] agreed to indemnify, while simultaneously advancing [the subcontractor’s] claim for additional payment from the government through the ongoing CDA process.  [The subcontractor] agreed to such a dispute resolution procedure, and it does not claim that the increased costs were [the prime contractor’s] fault.”  Nova Group, supra, at *8.

A subcontractor with such a provision is still required to timely perfect and preserve its rights by timely filing a lawsuit against the Miller Act payment bond surety.  However, the subcontractor is now beholden to the Contract Dispute Act procedure which requires an initial decision by the contracting officer and, then, certain appeal rights.   This is not what the subcontractor wanted because it elongates any potential resolution.  However, this is what the subcontractor agreed to in the dispute resolution provision and benefits the prime contractor so that it does not have to fight the fight on two fronts, particularly when it is supporting the pass-through claim under the Contract Disputes Act claim process.

Remember, the dispute resolution provision in your contract is important and should not be overlooked; the provision has ramifications as shown in the above case!