Inflation and Material Price Fluctuations Due to Supply and Demand

Performance Issues: 

The Force Majeure clause in a contract is the standard clause that can address  disruptions due to severe weather or war and typically says that if “performance becomes  impossible due to act of God, the Law or the other party to the agreement, then  performance is excused”. 

• this is not as broad as it may seem at first blush 
• the level of impossibility required is “objective impossibility” not “subjective impossibility” 

Objective = “nobody can do it” 

• objective is war broke out and trade embargos on Chinese goods were imposed.  The Law prevents you from importing your materials from China and there is no  other source or they were specified by that source, so you are excused. 
• objective in the seminal SC case was a contract to purchase “new crop Texas  blackeyed peas grown in Dilley, Texas.” A rain storm drowned all the peas raised  in Dilley Texas that year, so performance was excused by act of God. P.Y.A. v.  Charles R. Allen (1948). 
• SC has an earlier case excusing performance of an agreement due to the invasion  of the colonies by the British during the Revolutionary War, excusing performance  by act of an enemy. Ordinary of Charlestown v. Corbett & Lightwood (1793). 

Subjective = “I can’t do it” or “it’s now too expensive to do it” or “too much trouble” 

• if it can be done, you have to do what you promised.  
• unforeseen difficulty, no matter how great, will not excuse performance. -unforeseen expense, no matter how great, will not excuse performance. -the loss remains where the agreement leaves it. 
• your losses may be less to cover the cost and move on to the next job. 

That is why the bid qualifications are so important, once you have an agreement,  later changes in the market price whether by supply and demand issues or by  the inflation rate will not entitle a court to let you out of the contract. 

Might you convince the other party that their losses will be less if they make a  different arrangement with you and move forward? Share the loss with you?  -Sure, but that is dependent on the mercy or self-interest of the other party. -The Courts will not help you.

Drafting Issues: 

1. If a relatively short performance time and you feel you can predict the increase   accurately or if it is a relatively small part of an overall bid: 

• build the additional projected cost into the bid to cover the cost. 
• not effective if longer project performance or volatile market prices.  -down side is you have inflated your price and may have a hard time being low bidder. 

2. Qualify the bid: 

• to reserve the right to re-price the specific problem materials if the project schedule  slips more than a specified amount of time – ie.: 3 mos. or 6 mos.: 
• to include a right to re-price if the specific problem materials increase by more than  a specified amount such as 5% or 10% above the costs at bid, whatever amount  you can stand. 
• to include an escalation clause for the specific problem materials by an index, such  as an published industry association index or a published market index. 
• to require the accelerated purchase of and payment for the specific problem  materials within a relatively short period of time (whatever you can get from your  supplier) and then store it until needed (assuming space is available at reasonable  cost). 
• -qualifications must be included in the bid proposal 
• -all proposal terms and conditions must be included expressly in any subcontract  awarded, or else the conditions may not apply any longer 
• -down side is that qualifications may cause your bid to be rejected by the GC in  favor of one that is not qualified. 

3. Have the conversation before bid day about where the “common good” lies: -a “sale” has to be made as to the mutual benefit of both the sub/supplier and GC.  -is one way more acceptable than the other? 

• -can the GC convince the Owner that such is in their best interest too? 
• -if you are not successful selling your qualification up the line, you at least don’t  get awarded the bid on a project you cannot afford to complete. 
• -as always the risk one is willing to absorb becomes a business decision and not  a legal one. 

4. Can you disclaim responsibility for pricing and supply chain, both?   Perhaps treating it like a cost-plus proposal and insisting you will pass through both   issues: 

• “This proposal is expressly conditional on the materials being available when required at  the pricing we were quoted for this bid. As discussed before this bid was submitted, we  do not agree to be responsible for material unavailability or price increases occurring after  the date this bid is submitted. We reserve the right to adjust any resulting subcontract  agreement as to our schedule for performance to accommodate the availability of the  materials, and as to any price increase or decrease to accommodate such price changes.” 
• -must be included in the bid proposal 
• -all proposal terms and conditions must be included expressly in any subcontract  awarded, or else the conditions may not apply any longer 

Caution: 

The content of this memo is not intended to be legal advice. You should consult  your attorney and inform him, or her, of all the facts surrounding the particular bid  and project before attempting to implement any of the suggestions contained  herein.