By its nature, a fixed-price contract, including a unit-priced contract, allocates normal risk to the contractor. Thus, absent a contract clause favorable to the contractor, the contractor generally assumes the risk of increased material prices.
There are a few possible contractual or legal remedies available to the contractor for existing construction contracts. The primary potential contractual remedy is the force majeure clause typically included in contracts. The primary potential legal remedy is called “commercial impracticability” (impossibility or commercial senselessness).
Superior quality
Some contractors wonder whether a force majeure (literally, “superior force”) clause would excuse them from fixed-price construction contracts when liquid asphalt price increases become major problems.
The doctrine of force majeure is similar to commercial impracticability or frustration of purpose, but force majeure is more likely viewed in light of contract language. Thus, contractors should review their contracts for a force majeure clause. Nonetheless, without specific contract language, courts most likely will not consider material price increases to be a force majeure event.
A force majeure clause in a contract typically excuses all or part of contract performance by one or both parties in the event that contract performance is prohibited by an “act of God,” provided that the event was unforeseeable and the party has not failed to avoid the effects of the event by exercising due care.
A force majeure clause is not meant to reallocate normal risks. Absent necessary contract language, market price fluctuations are normal risks of a fixed-price contract.
I suspect liquid asphalt prices have increased since the Israeli-Hezbollah war. That could be a force majeure event. So could price increases resulting from hurricanes Katrina and Rita or price increases resulting from explosions at refineries. I think the challenge a contractor might face is showing that the price increases actually occurred because of a force majeure event and not as a result of the oil companies no longer wanting to sell liquid asphalt. Also, a contractor is not entitled to additional compensation for higher material prices than what the contractor had anticipated in its bid.
The impossible
In general, a contractor may be excused from contract performance obligations when an unexpected event makes performance impossible or impracticable. For example, if it was impossible to get liquid asphalt, a contractor could assert the impossibility doctrine. The more difficult situation is where it is possible, but the price has sharply increased.
In Ace Services Inc. v. General Services Administration, 1993 WL 59319, 93-2 BCA P 25848, GSBCA No. 11771, GSBCA No. 11830 (GSBCA 1993) the judge explained the doctrine of commercial impracticability:
The concept of commercial impracticability is grounded upon the assumption that in legal contemplation, something is impracticable when it can only be done at an excessive and unreasonable cost. The law excuses performance (or, in the case of government contracts, grants relief through a change order) where the attendant costs of performance amount to commercial senselessness; it does not grant relief merely because performance cannot be achieved under the most economical means.
The current environment with steeply rising liquid asphalt prices creates a complex situation. While one judge may conclude that liquid asphalt prices have not risen to the level of commercial impracticability, another may find the unprecedented rise in prices to meet the standard.
