Who should pay for material price increases?

MATERIAL PRICE increases are not new. Normally, sellers are expected to absorb and/or manage the risk of fluctuations in pricing when conducting their day-to-day business. When a material price increase comes as a result of, or in conjunction with, a natural disaster (such as, oh, let's say ... a hurricane), however, some new issues come into play. I am specifically talking about a situation in which

MATERIAL PRICE increases are not new. Normally, sellers are expected to absorb and/or manage the risk of fluctuations in pricing when conducting their day-to-day business. When a material price increase comes as a result of, or in conjunction with, a natural disaster (such as, oh, let's say ... a hurricane), however, some new issues come into play.

I am specifically talking about a situation in which a supplier can't get goods into the United States due to the shutdown of the Port of New Orleans. Or the material can't be delivered by barge because the Mississippi River is impassable. Or the local distributor for pipe products is advised, effective immediately, of a 45% price increase in its main product, plastic.

When one of these events occurs, the supplier/distributor may notify its contractor customer that it can't meet its contractual obligation. Typically, the supplier proposes one of the following:

  • That it walk away from its order entirely;
  • That it pass on its price increase to the customer;
  • That it be given more time to deliver, without penalty;
  • That the owner allows a change in specifications.

When making these proposals, suppliers will often refer to their situation as a "force majeure," an "act of God," an "impossibility," a "commercial impracticability" or other similar terms, and they tell the customer contractor that they are entitled to relief. What are the contractor's rights?

It depends on what is in the contract, of course.

One of the most common misconceptions I run into is the assumption by vendors, contractors, subs and owners that their "standard form" contracts (AIA, AGC, EJCDC, etc.) allow relief for price escalations or delays in getting products. The truth is that some do, some don't and, of those that do, the relief is generally not all that helpful.

Standard form contracts generally say that the contractor/supplier will be entitled to additional time if the delay is due to an "act of God," such as a hurricane. Some, such as the AIA, say that a contractor can get additional time for "un-usual delays in delivery, unavoidable casualties or other causes beyond the contractor's control."

Others, such as EJCDC, do not include "unusual delays in delivery" among the types of delays that will get the contractor more time. This is an important omission, because in almost all cases, the product can be obtained elsewhere, although it might be at a much higher cost.

NONE of the forms give the contractor more money, or the right to walk away, just because its prices go up or it can't get delivery of a product.

Most large manufacturers of commercial products don't take chances. They put in their standard terms and conditions language (which they insist be a part of any order they will accept) giving them the right to more time, or to cancel the order, for unusual delays in delivery.

If a contractor accepts these terms, the contractor may be caught in the middle, having to pay more money to the supplier but not being able to get reimbursed by its customer.

What if, for some reason, there is no contract that addresses the issue? If you are buying goods only — no significant labor — it could be governed by the Uniform Commercial Code, which is part of the law of every state (with some local modifications). UCC §2-615 says that "delay or non-delivery" by a seller will not be a breach of contract if performance has been made "impracticable" by the "occurrence of a contingency" that was a basic assumption on which the contract was made — as long as the seller notifies the buyer and allocates among its available supplies.

The notes to this UCC section say that "increased cost alone does not excuse performance unless the rise in cost is due to some unforeseen contingency which alters the essential nature of the performance." Not every state or judge agrees on what altering the essential nature of the performance means in real life, but it is slanted in favor of letting the vendor off the hook.

If what you are buying is not just "goods," and you don't have a contract, the outcome will be determined by state common law. That means that there is even less predictability over the outcome. States are all over the map on this. No one wants to end up rolling the dice in court.

Lessons for contractors are:

  • Get your suppliers pinned down in writing, or you end up with UCC terms that are not good for contractors.
  • Get your suppliers to agree to whatever terms you have to agree to with your customer, or you could end up bearing the loss.
  • If the supplier won't agree to your customer's terms, go to another supplier.
  • If there really is no other supplier, go back to the customer for relief before bidding.

Susan McGreevy is a partner at Husch & Eppenberger, Kansas City, Mo., e-mail to [email protected] or telephone 816/421-4800.

TAGS: Law