A contractor or supplier with a fixed price contract generally bears the risk of increased material pricing.[1] Generally, no contractor or supplier is entitled to material cost increases, unless there is an explicit contract clause allowing price escalations.[2] There are few exceptions to this general rule. One is a breach of contract by the owner or general contractor resulting in extraordinary delay, which then causes material price increases that would not otherwise be incurred.[3] This is potential damage caused by delay and it is often important who was responsible for delays for this reason.
The Uniform Commercial Code Article 2 applies to the sale of all “goods.” Goods are “all things which are moveable.”[4] Lumber, asphalt, concrete, computers, trucks and gift shop greeting cards are all goods. Accordingly, the UCC applies to all sales by a material supplier to contractors. However, the UCC does not apply to a subcontract or general contract, where labor is a significant portion of the contract.
UCC Section 2-615(a), excuses a material supplier from delivery obligations where "performance as agreed has been made impracticable by the occurrence of a contingency, the non-occurrence of which was a basic assumption on which the contract was made. Comment 1 to the 2-615, states that “This section excuses a seller from timely delivery of goods contracted for, where his performance has become commercially impracticable because of unforeseen supervening circumstances not within the contemplation of the parties at the time of contracting.” This rule applies regardless of the existence of a written contract or the terms of it.[5] However, comment 4 under UCC Section 2-615 makes it clear that mere increased cost does not excuse performance. However, severe shortages or unavailability of materials can excuse performance.[6]
A material supplier may be able to terminate a supply contract, with reasonable notice. The right to terminate a supply contract would necessarily include the right to raise prices. Under UCC Section 2-309, where a contract provides for successive performances but is indefinite in duration it is valid for a reasonable time but unless otherwise agreed may be terminated at any time by either party.[7] If a supply contract calls for a specific quantity of materials or a specific duration of time, it would be enforceable and not of an “indefinite duration.” Otherwise, a purchase order is valid for a reasonable time but may be terminated at any time by either party. Termination does require reasonable notification to the customer.[8] In other words, this termination would only be effective for future orders after the reasonable period of time expires.
A subcontractor or general contractor with fixed price contract also bears the risk of increased material pricing, unless there is an explicit contract clause allowing price escalations or termination. If their customer has a right to claim price escalations, however, a contractor or supplier may be able to convince or even require their customer to make a claim. Conduit or pass through provisions can place this obligation on a general contractor or other upper tier contractor to “sponsor” a subcontractor or supplier’s escalation claim and allow their participation in discussions with the owner.
The terms of a contract can be modified by agreement or course of performance.[9] However, this is often a difficult case to prove. In the final analysis this will depend on the quality of the evidence about what was said and what was agreed. Because of the statute of frauds you must also have sufficient written evidence of the change, even if there was a verbal agreement.[10] Emails can act as written evidence.
It is, of course, better for a contractor or supplier to have a contractual escalation clause in their contract leaving a price increase available for additional costs. Material costs may fluctuate due to scarcity, manufacturing labor difficulties, and transportation difficulties, especially if any materials or their components are imported. An example would be:
Material Price Escalation – The Contract price has been calculated based on the current prices for the component materials. However, the market for the materials that are hereafter specified is considered to be volatile, and sudden price increases could occur. Seller agrees to use its best efforts to obtain the lowest possible prices from available building material suppliers. However, if there are increases in the prices of these materials that are purchased after execution of this Contract for use in this Project, Owner agrees to pay that cost increase to the Seller. Any claim by the Seller for payment of a cost increase shall require written notice delivered by the Seller to the Owner stating the increased cost, the materials in question, and the source of supply, supported by invoices or bills of sale.
The Contract could also say that if there are increases in the prices of these materials of more than five percent (5%) after execution of this Contract, Contractor agrees to pay that cost increase in excess of five percent (5%) to the Seller.
Another example of an escalation clause:
Some of the materials to be used or installed in the construction of this project may become unavailable, delayed in shipment and/or subject to price increases due to circumstances beyond the control of the contractor, including the Coronavirus 19 pandemic or similar epidemics. If a specified material is unavailable or shipment is delayed, contractor shall provide written notice and the parties will make a good faith effort to agree to additional time for performance and substitute products. If there is an increase in price of materials, equipment or products, the amount of this contract shall be increased to reflect the additional cost, provided that the contractor gives the owner/general contractor advance written notice and documentation of the increased costs.
Material suppliers may want to encourage their customers to include escalation terms in general and subcontracts, so that the customer can sponsor an escalation claim against the owner and protect the profits of all contractors.
It would better for a contractor or supplier to leave both a price increase and time extension available as a result of a delay:
The parties agree that delays resulting from the effects of any pathogens, contagions, the Coronavirus 19 pandemic or similar epidemics are beyond the control of the parties, and if such delays occur, the contractor will be granted a reasonable extension of time and an equitable adjustment in the contract amount for the additional costs incurred by contractor resulting from the epidemic. Contractor shall give owner/general contractor written notice of delay it experiences due to the epidemic and documentation of any additional costs it incurs due to such delay.
We hope this newsletter is helpful to you in understanding some of the recent events, concepts and issues involved in construction law. It is important to understand, however, that this law firm is not providing you legal or professional advice in supplying you this newsletter. We have generalized and simplified many legal concepts, so that the explanations are short, uncluttered and easily understandable. Many statements are only the opinion of the writer. The law changes constantly and differs from state to state. There is no guarantee that a court would agree in any particular case. Every set of facts and circumstances raises different legal issues. You should consult this firm or another attorney in dealing with any specific problem.
Readers are welcome to reprint or republish this article with the following attribution:
© (2022) James D. Fullerton, Fullerton & Knowles, P.C. Clifton, VA (703) 818-2600
[1] UCC Section 2-615; N.C. Gen. Stat. § 25-2-615 . Excuse by failure of presupposed condition (Official Comment 4: mere increase in cost does not excuse performance of seller); See Hemlock Semiconductor Operations, LLC v. SolarWorld Indus. Sachsen GmbH . 867 F.3d 692 (6th Cir. 2017) (Finding that shifts in market prices alone do not ordinarily justify non-performance, especially in a fixed-price contract for sale of goods); D.S. Simmons, Inc. v. Steel Group, LLC , 2008 U.S. Dist. LEXIS 12737 (E.D.N.C. Feb. 19, 2008) (awarding summary judgment in favor of plaintiff buyer of structural steel and against defendant seller of structural steel. A dramatic increase in the market price of steel did not excuse seller’s non-performance of contract to supply steel for building); Alamance Cty. Bd. of Educ. v. Bobby Murray Chevrolet, Inc. , 121 N.C. App. 222 (N.C. Ct. App. 1996) (defining the standard for “commercial impracticability” under N.C. Gen Stat. § 25-2-615.)
[2] See Bethlehem Steel Co. v. Turner Constr. Co. , 2 N.Y.2d 456 (1957) (In a contract for sale of steel at a fixed price, a steel escalation provision including “specific mention of the basis for computing the changes in steel price” was deemed enforceable.)
[3] See S. Seeding Serv. v. W.C. English, Inc. , 217 N.C. App. 300, 300, 719 S.E.2d 211, 212 (2011) (Subcontractor entitled to equitable adjustment of fixed unit prices for increased costs incurred after scheduled project completion date.)
[4] UCC Section 2-105(1); Ritz-Craft Corp. v. Stanford Management Group, 800 F. Supp. 1312, 1317 (D. Md. 1992) [a mobile home falls within the definition of “movable goods” and that the UCC applied].
[5] See Florida Power & Light Co. v. Westinghouse Electric Corp 826 F.2d 239, 263 (4th Cir. 1987).
[6] Also under UCC Section 2-615(b) if performance is only partially affected, the seller must allocate production and deliveries among his customers in a manner that is fair and reasonable and notice of that allocation must be provided to all customers.
[7] UCC Section 2-309 Absence of specific time provisions; notice of termination.
(1) The time for shipment or delivery or any other action under a contract if not provided in this article or agreed upon shall be a reasonable time.
(2) Where the contract provides for successive performances but is indefinite in duration it is valid for a reasonable time but unless otherwise agreed may be terminated at any time by either party.
(3) Termination of a contract by one party except on the happening of an agreed event requires that
reasonable notification be received by the other party and an agreement dispensing with notification is invalid if its operation would be unconscionable.
[8] UCC Section 2-309 (3).
[9] UCC Section 2-209 an agreement to modify a contract needs no consideration to be binding. See also the Official Comment clarifying that “[s]ubsection (4) is directed primarily toward conduct after formation of the contract which will constitute a waiver notwithstanding a provision in the contract that excludes modification or rescission except by a signed writing.”
[10] Under UCC Section 1-303. Course of performance, course of dealing, and usage of trade, subsection (f) subject to UCC Section 2-209, a course of performance is relevant to show a waiver or modification of any term inconsistent with the course of performance. However, UCC Section 2-209. Modification, rescission, and waiver, states that the requirements of the statute of frauds must be satisfied if the contract as modified is within its provisions.