Builders and Contractors Exchange
Weekly Bulletin: 12 Apr 2004
Delay Due to Steel and Other Commodity Shortages or Price Fuctuations
By: Michael Sterling
Previous articles in this series have focused on the direct economic impact of fluctuating steel and other commodity prices. This article focuses on schedule impact due to such conditions. Contractors and suppliers have used various legal theories to seek both cost recovery and schedule extensions due to severe fluctuation in prices and commodity shortages. These theories include (1) force majeure, (2) impossibility, (3) commercial impracticability, and (4) frustration of purpose. While each circumstance is unique these theories do not often succeed. The United States Court of Appeals for the Federal Circuit addressed each of these issues in connection with wild fluctuations in timber prices during the l980s. Seaboard Lumber Company v. United States, 308 F.3d 1283 (Fed.Cir.2002). With respect to each of these theories the court held that (1) as used in the force majeure clause the phrase "acts of government" did not cover changes in government fiscal or monetary policy that lead to the price fluctuations, (2) the contractor's performance was not objectively impossible, just not profitable, (3) the work was not commercially impracticable even though it could result in bankruptcy, and (4) there was no frustration of purpose since the timber could still be provided although at great economic loss. The decisions of the United States Court of Appeals for the Federal Circuit apply only to federal government contracts, but the ruling is generally consistent with the laws applicable to state, local and private contracts.
While this paints a gloomy picture keep in mind that these rules are generally the same for all parties to the bargain. Just as the construction contractor is not ordinarily excused from performance due to commodity shortages or price fluctuations, neither is the supplier. Therefore, if a supplier enters into a fixed price contract to provide steel or other commodity it will probably be required to honor the contract regardless of shortages or price fluctuations, unless special circumstances exist. One such special circumstance is the application of the Defense Production Act (DPA), 50 U.S.C. app. § 2061 et seq. The DPA is implemented by the Department of Commerce through the Defense Priorities and Allocation System (DPAS) regulation, 15 C.F.R. Part 700; see also FAR Subpart 11.6. The DPAS establishes a process to issue "rated orders," that contractors and suppliers must accept and perform on a preferential basis. Both the DPA and the DPAS regulation provide contractors and suppliers with protection from liability for damages or penalties for delay on federal government or civilian contracts caused by a rated order. Unfortunately, the DPA only excuses delay, it does not provide any monetary relief.
Another special circumstance may arise when the general contractor is unable to meet the schedule due to actions of the owner. For example, in Bedford Construction Corp. v. Plan Committee of Regional Building Systems, Inc., 320 F.3d 482 (4th Cir.2003), the court held that the owner's failure to pay the contractor caused severe cash flow problems for the contractor, such that the contractor was unable to fulfill its obligation to deliver modular housing units to its subcontractor on time. The subcontractor's delay claim in bankruptcy against the contractor was denied, however, on the basis of the New York rule that a contractor is not responsible for delays to its subcontractor unless those delays are caused by an agency or circumstance under the contractor's control. In this case the delays were ultimately caused by the owner's financial problems. While the case law is uncertain, a similar rule may apply in Virginia, and by logical extension might relieve a contractor from liability to a subcontractor for delay damages resulting from an inability to obtain materials. Of note, a local federal judge decided this case.
There is one other basket of possible legal theories that bear mention. These include actions for fraud, misrepresentation and breach of state statutes prohibiting deceptive trade practices. These theories were recently applied to award a contractor damages when a steel supplier agreed to a project delivery schedule at a time that the supplier knew it had already committed its production to another buyer. United States ex rel. CMC Steel Fabricators, Inc. v. Harrop Construction Company, Inc., 131 F.Supp.2d 882 (S.D. Texas 2000). While this case was decided under Texas law, given the proper circumstances the legal theories may apply in other jurisdictions as well. Considering current market conditions it may be advisable to attempt to negotiate express contract provisions that address the responsibility for schedule and other impact resulting from commodity shortages or extreme price fluctuations.
Questions?
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This article is meant to bring awareness to this topic and is not intended to be used as legal advice.